Item 2. Trustees’ Discussion and Analysis of Financial Condition and Results of Operations.

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This discussion should be read in conjunction with the condensed financial statements and notes presented in this Quarterly Report on Form 10-Q and the financial statements and notes in the last filed Annual Report on Form 10-K filed for the year ended January 31, 20202021 for a full understanding of Mesabi Trust’s financial position and results of operations for the three month periodmonths ended April 30, 2020.2021.

COVID-19 Update

Our royalties have been, and may continue toin the future be, adversely affected by the coronavirus (COVID-19) outbreak.  Thepandemic. During the second quarter of 2020, the spread of COVID-19 has led to the disruption of the business operations of Cliffs and its wholly-owned subsidiary, Northshore, upon which we are dependent for our royalties. Cliffs has indicated that the COVID-19 pandemic will adversely impact its sales ofAlthough steel and customized iron ore pellets.  In particular,production have been considered “essential” by the automotive industry,states in which Cliffs relies on for a significant amountoperates, certain of its sales, has been significantly disrupted.  As previously announced, Cliffs has temporarily shut downfacilities and construction activities at its HBI production plant in Toledo, Ohio in March 2020,were temporarily idled certain steelduring the second quarter of 2020. Nearly all of these temporarily idled facilities were restarted as of June 30, 2020, with the exception of the Dearborn hot-end operations and Mansfield operations, which were restarted in March and AprilJuly 2020, and idled its Northshore mine in mid-April 2020.  Although the Northshore mine, is idled, Cliffs has continued to ship limited amounts of stockpiled iron ore products from Northshore for which we receive a royalty.  We are unable to predict if and to what degree these shipments will continue.  In addition, although Cliffs has indicated that its expects its Northshore mine to restartwas restarted in August 2020, it noted2020. In its most recent quarterly report on Form 10-Q (filed April 28, 2021), Cliffs disclosed that itthe fundamentals for its business have rebounded strongly since the COVID-19 disruption that occurred during 2020. Mesabi Trust cannot predict when itwhether Northshore’s operations will be able to restart construction of its HBI production plant, when its production facilities and/or mines will be able to resume operations or whether any other production facilities and/or mines will experience additional disruptions in the future, or whether Cliffs will experience supply chain disruptions or operational issues with its vendors, suppliers and contractors if faced with similar pandemic challenges in the future.

Background

Background

Mesabi Trust, (“Mesabi Trust” or the “Trust”), formed pursuant to anthe Agreement of Trust, dated July 18, 1961 (the “Agreement of Trust”), is a trust organized under the laws of the State of New York. Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”), including all right, title and interest in the Amendment of Assignment, Assumption and Further Assignment of Peters Lease (the “Amended Assignment of Peters Lease”), the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease (the “Amended Assignment of Cloquet Lease” and together with the Amended Assignment of Peters Lease, the “Amended Assignment Agreements”), the beneficial interest in a trust organized under the laws of the State of Minnesota to administer the Mesabi Fee Lands (as defined below) as the trust corpus in compliance with the laws of the State of Minnesota on July 18, 1961 (the “Mesabi Land Trust”) and all other assets and property identified in the Agreement of Trust. The Amended Assignment of Peters Lease relates to an Indenture made as of April 30, 1915 among East Mesaba Iron Company (“East Mesaba”), Dunka River Iron Company (“Dunka River”) and Claude W. Peters (the “Peters Lease”) and the Amended Assignment of Cloquet Lease relates to an Indenture made May 1, 1916 between Cloquet Lumber Company and Claude W. Peters (the “Cloquet Lease”).

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The Agreement of Trust specifically prohibits the Trustees from entering into or engaging in any business. This prohibition applies even to business activities the Trustees may deem necessary or proper for the preservation and protection of the Trust Estate. Accordingly, the Trustees’ activities in connection with the administration of Trust assets are limited to collecting income, paying expenses and liabilities, distributing net income to the holders of Certificates of Beneficial Interest in Mesabi Trust (“Unitholders”) after the payment of, or provision for, such expenses and liabilities, and protecting and conserving the assets held by the Trust.

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The Trustees do not intend to expand their responsibilities beyond those permitted or required by the Agreement of Trust, the Amendment to the Agreement of Trust dated October 25, 1982 (the “Amendment”), and those required under applicable law. Mesabi Trust has no employees, but it engages independent consultants to assist the Trustees in, among other things, monitoring the volume and sales prices of iron ore products shipped from Silver Bay, Minnesota, based on information supplied to the Trustees by Northshore, the lessee/operator of the lands leased under the Peters Lease and Cloquet Lease (the “Peters Lease Lands” and “Cloquet Lease Lands,” respectively) and the 20% fee interest of certain lands that are particularly described in, and subject to a mining lease under, the Peters Lease (the “Mesabi Fee Lands,” and together with the Peters Lease Lands and Cloquet Lease Lands, the “Mesabi Trust Lands”), and its parent company, Cliffs. References to Northshore in this quarterly report, unless the context requires otherwise, are applicable to Cliffs as well.

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Leasehold royalty income constitutes the principal source of the Trust’s revenue. The income of the Trust is highly dependent upon the activities and operations of Northshore. Royalty rates and the resulting royalty payments received by the Trust are determined in accordance with the terms of the Trust’s leases and assignments of leases.

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Three types of royalties, as well as royalty bonuses, comprise the Trust’s leasehold royalty income:

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The current royalty rate schedule became effective on August 17, 1989 pursuant to the Amended Assignment Agreements, which the Trust entered into with Cyprus Northshore Mining Corporation (“Cyprus NMC”). Pursuant to the Amended Assignment Agreements, overriding royalties are determined by both the volume and selling price of iron ore products shipped. In 1994, Cyprus NMC was sold by its parent corporation to Cliffs and renamed Northshore Mining Company. Cliffs now operates Northshore as a wholly owned subsidiary.

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Under the relevant agreements, Northshore has the right to mine and ship iron ore products from lands other than Mesabi Trust Lands. Northshore alone determines whether to conduct mining operations on Mesabi Trust Lands and/or such other lands based on its current mining and engineering plan. The Trustees do not exert any influence over mining operational decisions. To encourage the use of iron ore products from Mesabi Trust Lands, Mesabi Trust receives royalties on stated percentages of iron ore shipped from Silver Bay, whether or not the iron ore products are from Mesabi Trust Lands. Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped that were mined from Mesabi Trust Lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped from Silver Bay that were mined from any lands, such portion being 90% of the first four million tons shipped from Silver Bay during such year, 85% of the next two million tons shipped during such year, and 25% of all tonnage shipped during such year in excess of six million tons. The royalty percentage paid to the Trust increases as the aggregate tonnage of iron ore products shipped, attributable to the Trust, in any calendar year increases past each of the first four one-million ton volume thresholds. Assuming a consistent sales price per ton throughout a calendar year, shipments of iron ore product attributable to the Trust later in the year generate a higher royalty to the Trust, as total shipments for the year exceed increasing levels of royalty percentages and pass each of the first four one-million ton volume thresholds.

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During the course of its fiscal year, some portion of royalties expected to be paid to Mesabi Trust is based in part on estimated prices for iron ore products sold under the Cliffs Pellet Agreements. The Cliffs Pellet Agreements use estimated prices which are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year. Even though Mesabi Trust is not a party to the Cliffs Pellet Agreements, these adjustments can result in significant variations in royalties payable to Mesabi Trust (and, in turn, the resulting amount available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis, and these variations, which can be positive or negative, cannot be predicted by the Trust. In either case, these price

According to Cliffs’ Form 10-Q for its quarter ended March 31, 2020,recent SEC filings, certain of Cliffs’ supply agreements specify provisional price calculations, where the pricing mechanisms generally are based on market pricing, with the final revenue rate based on certain market inputs at a specified period in time in the future, per the terms of the supply agreements. Market inputs are tied to indexed price adjustment factors that are integral to the iron ore supply contracts and vary based on the agreement. The pricing mechanisms typically include adjustments based upon changes in the Platts 62% Price, Atlantic Basin pellet premiums and Platts international indexed freight rates. The pricing adjustments generally operate in the same manner, with each factor typically comprising a portion of the price adjustment, although the weighting of each factor varies based upon the specific terms of each agreement. The price adjustment factors have been evaluated to determine if they qualify as embedded derivatives. The price adjustment factors share the same economic characteristics and risks as the host sales contract and are integral to the host sales contract as inflation adjustments; accordingly, they have not been separately valued as derivative instruments.

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As also described elsewhere in this report, the Trust receives a bonus royalty equal to a percentage of the gross proceeds of iron ore products (mined from Mesabi Trust lands) shipped from Silver Bay and sold at prices above the Adjusted Threshold Price. Although 93.2%96.8% of all the iron ore products shipped from Silver Bay during calendar 20192020 was sold at prices higher than the Adjusted Threshold Price, the Trustees are unable to project whether Cliffs will continue to be able to sell iron ore products at prices above the applicable Adjusted Threshold Price, entitling the Trust to any future bonus royalty payments.

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Deutsche Bank Trust Company Americas, the Corporate Trustee of Mesabi Trust, performs certain administrative functions for Mesabi Trust. The Trust maintains a website at www.mesabi-trust.com. The Trust makes available (free of charge) its annual, quarterly and current reports (and any amendments thereto) filed with the SEC through its website as soon as reasonably practicable after electronically filing or furnishing such material with or to the SEC.

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Results of Operations

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Comparison of Iron Ore Pellet Production and Shipments for the Three Months Ended April 30, 20202021 and April 30, 20192020

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As shown in the table below, during the three months ended April 30, 2020,2021, production of iron ore pellets at Northshore from Mesabi Trust Lands totaled 1,187,4641,129,383 tons, and shipments over the same period totaled 558,634547,704 tons. By comparison, pellet production and shipments for the comparable period in 2019 was 1,253,6632020 were 1,187,464 ton and 524,706,558,634 tons, respectively. The decrease in production is attributable to the anticipated future demand from Northshore’s customers as compared to the prior period. The increasedecrease in shipments is attributable to the anticipated current demand from Northshore’s customers as compared to the prior comparable period. For the three months ended April 30, 2020,2021, approximately 98.8%89.4% of shipments from Silver Bay, Minnesota originated from Trust lands.

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Comparison of Royalty Income for the Three Months Ended April 30, 20202021 and April 30, 20192020

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As reflected in the table below, the Trust’s total royalty income for the three months ended April 30, 2020 decreased2021 increased by $3,226,296$7,266,673 to $2,135,494$9,402,167 as compared to the three months ended April 30, 2019.2020. The decreaseincrease in total royalty income is due to a decreasean increase in pricing of iron ore during the three months ended April 30, 2020,2021, as compared to the three months ended April 30, 2019.2020.

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The table below shows that the base overriding royalties decreased $1,886,007increased $4,457,141 and the bonus royalties decreasedincreased by $1,327,245$2,792,629 for the three months ended April 30, 2020,2021, as compared to the three months ended April 30, 2019.2020. Fee royalties decreasedincreased by $13,044$16,903 over the same period. The decreaseincrease in the base overriding royalties and bonus royalties is attributable to a decreasean increase in pricing in the current periodof iron ore as compared to the prior comparable period. The decreaseincrease in the fee royalty amount is due to a decreasean increase in the pricing for the tons of iron ore mined under the Peters Lease in the current fiscal quarter as compared to the prior comparable period.

Comparison of Net Income, Expenses and Distributions for the Three Months Ended April 30, 20202021 and April 30, 20192020

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Net income for the three months ended April 30, 20202021 was $1,611,621, a decrease$8,573,870, an increase of $3,298,667$6,962,249 as compared to the three months ended April 30, 2019.2020. The decreaseincrease in net income for the three months ended April 30, 20202021 was primarily the result of a decreasean increase in pricing of iron ore, pellets, as compared to the three months ended April 30, 2019.2020. The Trust’s expenses for the three months ended April 30, 20202021 were $557,142,$828,781, an increase of $557$271,639 compared to the expenses for the three months ended April 30, 2019.2020. The increase in expenses was primarily attributable to an increase in legal fees and expenses related to the pending arbitration for the three months ended April 30, 2021, as compared to the three months ended April 30, 2020. See Part II, Item 1 “Legal Proceedings” in this Quarterly Report on Form 10-Q. The table below summarizes the Trust’s income and expenses for the three months ended April 30, 20202021 and April 30, 2019,2020, respectively.

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