Item 7.01Regulation FD.
Quarterly Royalty Report and Royalty Payment
On July 30, 2020, the Trustees of Mesabi Trust received the quarterly royalty report of iron ore shipments out of Silver Bay, Minnesota during the quarter ended June 30, 2020 (“Royalty Report”) from Cleveland-Cliffs Inc. (“Cliffs”), the parent company of Northshore Mining Company (“Northshore”), as well as the royalty payment from Cliffs, as summarized below.
As reported to Mesabi Trust by Cliffs in the Royalty Report, based on shipments of iron ore products by Northshore during the three months ended June 30, 2020, Mesabi Trust was credited with a base royalty of $2,792,731. Also for the three months ended June 30, 2020, Mesabi Trust was credited with a bonus royalty in the amount of $2,932,348. After applying a reduction of $1,477,192 resulting from negative pricing adjustments carried over from the first quarter 2020 and netted against positive pricing adjustments of $71,957 to base and bonus royalty calculations related to changes in price estimates made in prior quarters, Cliffs paid Mesabi Trust a royalty of $4,319,844 for shipments during the quarter ended June 30, 2020. In addition, a royalty payment of $29,986 was paid to the Mesabi Land Trust. Accordingly, the total royalty payments received by Mesabi Trust on July 30, 2020 from Cliffs were $4,349,830.
The royalties paid to Mesabi Trust are based on the volume of shipments of iron ore pellets for the quarter and the year to date, the pricing of iron ore product sales, and the percentage of iron ore pellet shipments from Mesabi Trust lands rather than from non-Mesabi Trust lands. In the second calendar quarter of 2020, Cliffs credited Mesabi Trust with 1,073,446 tons of iron ore shipped, as compared to 1,545,242 tons shipped during the second calendar quarter of 2019.
The volume of shipments of iron ore pellets (and other iron ore products) by Northshore varies from quarter to quarter and year to year based on a number of factors, including the requested delivery schedules of customers, general economic conditions in the iron ore industry, and weather conditions on the Great Lakes. Further, the prices under the term contracts among Northshore, Cliffs, and certain of their customers (the “Cliffs Pellet Agreements”), to which Mesabi Trust is not a party, are subject to interim and final pricing adjustments, dependent in part on multiple price and inflation index factors, some of which are not known until after the end of a contract year. The factors that could result in price adjustments under Cliffs’ customer contracts include changes in the Platts 62% Price, hot-rolled coil steel price, the Atlantic Basin pellet premium, published Platts international indexed freight rates and changes in specified producer price indices, including those for industrial commodities, fuel and steel. These multiple factors can result in significant variations in royalties received by Mesabi Trust (and in turn, the resulting funds available for distribution to Unitholders by Mesabi Trust) from quarter to quarter and from year to year. These variations, which can be positive or negative, cannot be predicted by the Trustees of Mesabi Trust. Royalty payments anticipated to be received during fiscal 2021 will continue to reflect pricing estimates for shipments of iron ore products that will be subject to positive or negative pricing adjustments pursuant to the Cliffs Pellet Agreements. Based on the above factors, and as indicated by Mesabi Trust’s historical distribution payments, the royalties received by Mesabi Trust, and the distributions paid to Unitholders, if any, in any particular quarter are not necessarily indicative of royalties that will be received, or distributions that will be paid, if any, in any subsequent quarter or full year.
With respect to calendar year 2020, Northshore has not advised Mesabi Trust of its expected shipments of iron ore products or what percentage of 2020 shipments will be from Mesabi Trust iron ore. In the Cliffs’ Royalty Report, Cliffs stated that the royalty payments being reported were based on estimated iron ore pellet prices under the Cliffs Pellet Agreements, which are subject to change. It is possible that future negative price adjustments could offset, or even eliminate, royalties or royalty income that would otherwise be payable to Mesabi Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to Mesabi Trust’s Unitholders in future quarters.
Other Recent Developments
In its Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 (filed July 30, 2020), Cliffs disclosed that it plans to restart the previously idled Northshore mine in early August 2020.
In the same quarterly report, Cliffs also disclosed that in response to the COVID-19 pandemic, it made various operational changes to adjust to the demand for its products. Although steel and iron ore production have been considered “essential” by the states in which Cliffs operates, certain of its facilities and construction activities were temporarily idled during the second quarter of 2020. Nearly all of these temporarily idled facilities were restarted as of June 30, 2020, with the
