**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý**                               | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                     |
|                                     | **For the quarterly period ended  July 31, 2003, or**                                                                                                                                                                                                                                                                                                                                            |
|                                     |
| **o**                                    | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                               |
|                                     |
|                                     | **For the transition period from                                 to                              ** |
|                                     |
| **Commission File Number:  1-4488** |

 

| **MESABI  TRUST**                                                                                                                                           |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                                                                                                     |
|                                                                                                                                                        |
| **New York**                                                                                                                                                |   | **13-6022277** |
| (State or other  jurisdiction of  incorporation or organization)                                                                                            |   | (I.R.S. Employer  Identification No.) |
|                                                                                                                                                        |   |   |
| **c/o Deutsche Bank Trust Company  Americas****Corporate  Trust & Agency Services – GDS****60 Wall  Street****27th  Floor****New York,  New York** |   | **10005** |
| (Address of principal  executive offices)                                                                                                                   |   | (Zip code) |
|                                                                                                                                                        |
| **(615) 835-2749**                                                                                                                                          |
| (Registrant’s telephone  number, including area code)                                                                                                  |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.        Yes   ý    No   o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).       Yes   o    No   ý

 

As of August 29, 2003, there were 13,120,010 Units of BeneficialInterest in Mesabi Trust outstanding.

 

 

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**PART I -FINANCIAL INFORMATION**

 

**Item 1.****           FinancialStatements (Note 1).**

 

**A.****            Condensed Statementsof Income**

 
|                            |   | **Three Months Ended  July 31,** |       | **Six Months Ended  July 31,** |       |
|---------------------------------|--------|---------------------------------------|------------|-------------------------------------|------------|
|                            |   | **2003**                              |       | **2002**                            |       | **2003** |   | **2002** |   |
|                            |   |                                  | ** ** |                                | ** ** |   | ** ** |   | ** ** |
| Revenues                        |   |                                  |       |                                |       |   |   |   |   |
| Royalty income                  |   | $                                     | 1,095,964  |                                | $          | 738,788 |   | $ | 1,462,055 |   | $ | 994,992 |   |
| Interest income                 |   | 10,713                                |       | 14,602                              |       | 22,786 |   | 24,916 |   |
|                            |   | 1,106,677                             |       | 753,390                             |       | 1,484,841 |   | 1,019,908 |   |
|                            |   |                                  |       |                                |       |   |   |   |   |
| Expenses                        |   | 141,231                               |       | 126,692                             |       | 269,393 |   | 198,082 |   |
|                            |   |                                  |       |                                |       |   |   |   |   |
| Net income                      |   | $                                     | 965,446    |                                | $          | 626,698 |   | $ | 1,215,448 |   | $ | 821,826 |   |
|                            |   |                                  |       |                                |       |   |   |   |   |
| Number of units outstanding     |   | 13,120,010                            |       | 13,120,010                          |       | 13,120,010 |   | 13,120,010 |   |
|                            |   |                                  |       |                                |       |   |   |   |   |
| Net income per unit (Note 2)    |   | $                                     | 0.073586   |                                | $          | 0.047767 |   | $ | 0.092641 |   | $ | 0.062639 |   |
|                            |   |                                  |       |                                |       |   |   |   |   |
| Distributions declared per unit |   | $                                     | 0.07       |                                | $          | 0.05 |   | $ | 0.07 |   | $ | 0.05 |   |

 

See Notes to Financial Statements.

 

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**B.****            Condensed BalanceSheets**

 
|                                                                       |   | **July 31, 2003** |       | **January 31, 2003** |       |
|----------------------------------------------------------------------------|--------|------------------------|------------|---------------------------|------------|
|                                                                       |   |                   |       |                      |       |
| **Assets**                                                                 |   |                   | ** ** |                      | ** ** |
|                                                                       |   |                   |       |                      |       |
| Cash                                                                       |   | $                      | 1,146,229  |                      | $          | 2,515,457 |   |
|                                                                       |   |                   |       |                      |       |
| U.S. Government securities, at amortized cost (which approximates  market) |   | 791,824                |       | 891,243                   |       |
|                                                                       |   |                   |       |                      |       |
| Accrued income                                                             |   | 357,554                |       | 175,978                   |       |
| Prepaid insurance                                                          |   | —                 |       | 11,421                    |       |
|                                                                       |   | 2,295,607              |       | 3,594,099                 |       |
|                                                                       |   |                   |       |                      |       |
| Fixed property, including intangibles, at nominal values                   |   |                   |       |                      |       |
|                                                                       |   |                   |       |                      |       |
| Amended Assignment of Peters Lease                                         |   | 1                      |       | 1                         |       |
|                                                                       |   |                   |       |                      |       |
| Assignment of Cloquet Lease                                                |   | 1                      |       | 1                         |       |
|                                                                       |   |                   |       |                      |       |
| Certificate of beneficial interest for 13,120,010 units of land trust      |   | 1                      |       | 1                         |       |
|                                                                       |   | 3                      |       | 3                         |       |
|                                                                       |   |                   |       |                      |       |
|                                                                       |   | $                      | 2,295,610  |                      | $          | 3,594,102 |   |
|                                                                       |   |                   |       |                      |       |
| **Liabilities, Unallocated Reserve and Trust Corpus**                      |   |                   | ** ** |                      | ** ** |
|                                                                       |   |                   |       |                      |       |
| Liabilities                                                                |   |                   |       |                      |       |
| Distribution payable                                                       |   | 918,401                |       | $                         | 2,492,802  |   |
| Accrued expenses                                                           |   | 14,110                 |       | 35,249                    |       |
|                                                                       |   | 932,511                |       | 2,528,051                 |       |
|                                                                       |   |                   |       |                      |       |
| Unallocated Reserve (Note 3)                                               |   | 1,363,096              |       | 1,066,048                 |       |
| Trust Corpus                                                               |   | 3                      |       | 3                         |       |
|                                                                       |   |                   |       |                      |       |
|                                                                       |   | $                      | 2,295,610  |                      | $          | 3,594,102 |   |

 

See Notes to Financial Statements.

 

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**C.****            Condensed Statementsof Cash Flows**

 
|                                                                           |   | **Six Months Ended  July 31,** |       |
|--------------------------------------------------------------------------------|--------|-------------------------------------|------------|
|                                                                           |   | **2003**                            |       | **2002** |   |
|                                                                           |   |                                |       |   |   |
| Cash flows from operating activities                                           |   |                                | ** ** |   | ** ** |
| Royalties received                                                             |   | $                                   | 1,277,556  |   | $ | 769,790 |   |
| Interest received                                                              |   | 25,710                              |       | 25,652 |   |
| Expenses paid                                                                  |   | (279,112                            | )          | (216,478 | ) |
|                                                                           |   |                                |       |   |   |
| Net cash provided by operating activities                                      |   | 1,024,154                           |       | 578,964 |   |
|                                                                           |   |                                |       |   |   |
| Cash flows from investing activities                                           |   |                                |       |   |   |
| Maturities of U.S. Government Securities                                       |   | 964,124                             |       | 384,571 |   |
| Purchases of U.S. Government Securities                                        |   | (864,704                            | )          | (532,664 | ) |
|                                                                           |   |                                |       |   |   |
| Net cash provided by (used for) investing activities                           |   | 99,420                              |       | (148,093 | ) |
|                                                                           |   |                                |       |   |   |
| Cash flow from financing activities                                            |   |                                |       |   |   |
| Distributions to Unitholders                                                   |   | (2,492,802                          | )          | (1,049,601 | ) |
|                                                                           |   |                                |       |   |   |
| Net change in cash                                                             |   | (1,369,228                          | )          | (618,729 | ) |
|                                                                           |   |                                |       |   |   |
| Cash, beginning of year                                                        |   | 2,515,457                           |       | 1,223,246 |   |
|                                                                           |   |                                |       |   |   |
| Cash, end of quarter                                                           |   | $                                   | 1,146,229  |   | $ | 604,517 |   |
|                                                                           |   |                                |       |   |   |
| **Reconciliation of net income to net cash provided by  operating activities** |   |                                |       |   |   |
|                                                                           |   |                                |       |   |   |
| Net income                                                                     |   | $                                   | 1,215,448  |   | $ | 821,826 |   |
| (Increase) in accrued income                                                   |   | (181,576                            | )          | (224,467 | ) |
| Decrease in prepaid insurance                                                  |   | 11,421                              |       | 4,347 |   |
| Increase (Decrease) in accrued expenses                                        |   | (21,139                             | )          | (22,742 | ) |
|                                                                           |   |                                |       |   |   |
| Net cash provided by operating activities                                      |   | $                                   | 1,024,154  |   | $ | 578,964 |   |

 

See Notes to Financial Statements.

 

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**MESABITRUST**

 

**NOTES TOFINANCIAL STATEMENTS**

 

Note 1.                             Thefinancial statements included herein have been prepared without audit (exceptfor the balance sheet at January 31, 2003) in accordance with theinstructions to Form 10-Q pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted pursuant to such rules andregulations.  In the opinion of theTrustees, all adjustments, consisting only of normal recurring adjustments,necessary for a fair statement of (a) the results of operations for the sixmonths ended July 31, 2003 and 2002, (b) the financial positions atJuly 31, 2003 and January 31, 2003, and (c) the cash flows for thesix months ended July 31, 2003 and 2002, have been made.

 

Note 2.                             Earningsper unit are based on weighted average number of units outstanding during the period(13,120,010 units).

 

Note 3.                             TheTrustees have determined to maintain an Unallocated Reserve of at least$1,000,000 in liquid assets.  The amountof the Unallocated Reserve has been increased over approximately the pasttwenty-seven (27) months reflecting concern over the uncertainties in the steeland iron ore industry.  The actualamount of the Unallocated Reserve may vary from quarter to quarter dependingupon conditions in the industry and the judgment of the Trustees.  At July 31, 2003, the UnallocatedReserve was represented by $1,005,542 in unallocated cash and U.S. Governmentsecurities, and $357,554 of accrued revenue primarily representing royaltiesnot yet received by the Trust but anticipated to be received inOctober 2003 from Northshore Mining Company as part of the royalty duewith respect to the second fiscal quarter, based upon reported lessee shippingactivity for the month of July 2003.

 

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

 

**Forward-Looking Information**

 

Certain statements contained in this document areforward-looking, including specifically those statements estimating calendaryear 2003 production or shipments and comments related to the commencement ofconstruction and opening of additional plants in 2003 and beyond.  All such forward-looking statements arebased on input from Northshore Mining Company (“Northshore”), which is thelessee/operator and a wholly-owned subsidiary of Cleveland-Cliffs Inc(“CCI”).  The Trust has no control overthe operations or activities of Northshore except within the framework ofcurrent agreements.  This document alsocontains forward-looking statements based on the general political climate asit currently exists concerning the possible current and future effects ofUnited States government tariffs. Actual results could differ materially from those indicated in suchstatements.  Important factors thatcould cause actual results to differ materially include those listed belowunder the heading “Important Factors Affecting Mesabi Trust”.

 

**Background**

 

Leasehold royalty income constitutes the principalsource of the Trust’s revenue.  Royaltyrates are determined in accordance with the terms of Mesabi Trust’s leases andassignments of leases.  Three types ofroyalties comprise the Trust’s leasehold royalty income:

 

•                  Overridingroyalties, which historically constitute the majority of Mesabi Trust’s royaltyincome, are determined by both the volume and selling price of iron oreproducts shipped.

 

•                  Fee royalties,which historically constitute a smaller component of the Trust’s royaltyincome, are payable to Mesabi Land Trust, a Minnesota land trust of whichMesabi Trust is the sole beneficiary and for which US Bank N.A. acts astrustee, and are based on the amount of crude ore mined.  Currently, the fee royalty on crude ore isbased on an agreed price per ton, subject to certain indexing.  Crude ore is the source of iron oxides usedto make iron ore pellets and other products.

 

•                  Minimum advanceroyalties, the third type of royalty, are discussed below.

 

With respect to the volume component of royaltycalculation, Northshore is obligated to pay Mesabi Trust base overridingroyalties in varying amounts.  The volumecomponent of overriding royalties constitutes a percentage of the grossproceeds of iron ore products produced at Mesabi Trust lands (and to a limitedextent other lands) and shipped from Silver Bay, Minnesota.  The percentage ranges from 2-1/2% of thegross proceeds for the first one million tons of iron ore products so shippedannually to 6% of the gross proceeds for all iron ore products in excess of 4million tons so shipped annually.

 

With respect to the selling price component of theoverriding royalty calculation, Northshore is obligated to pay to Mesabi Trustroyalty bonuses.  The royalty bonus is apercentage of the gross proceeds of product shipped from Silver Bay and sold atprices above a threshold price.  Thethreshold price is adjusted on an annual basis for inflation and deflation (butnot below $30) (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $39.82 per ton for calendar year2001, $40.61 per ton for calendar year 2002, and is $41.13 per ton for calendaryear 2003.  The royalty bonus percentageranges from 1/2 of 1% of the gross proceeds (on all tonnage shipped for sale atprices between the Adjusted Threshold Price and $2.00 above the AdjustedThreshold Price) to 3% of the gross proceeds on all

 

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tonnage shipped for sale at prices $10.00 or more above the AdjustedThreshold Price.  No royalty bonus hasbeen paid to the Trust for several years.

 

Generally, Northshore’s obligation to pay baseoverriding royalties and royalty bonuses with respect to the sale of iron oreproducts accrues upon the shipment of those products from Silver Bay.  However, regardless of whether any shipmenthas occurred, Northshore is obligated to pay to Mesabi Trust a minimum advanceroyalty.  Each year, the amount of theminimum advance royalty is adjusted for inflation and deflation (but not below$500,000 per annum).  Advance royaltiespayable were $663,682****for calendar year 2001, $676,814 forcalendar year 2002, and are $685,630 for calendar year 2003.  Until overriding royalties (and royaltybonuses, if any) for a particular year equal or exceed the minimum advanceroyalty for the year, Northshore must make quarterly payments of up to 25% ofthe minimum advance royalty for the year. Because advance minimum royalties are essentially prepayments of baseoverriding and bonus royalties earned each year, any advance minimum royaltiespaid in a fiscal quarter are recouped by credits against base overriding andbonus royalties earned in later fiscal quarters during the year.  Historically, advance minimum royalties havebeen paid in the first fiscal quarter and recouped in the second fiscalquarter.

 

Northshore is obligated to make quarterly royaltypayments in January, April, July and October of each year.  In the case of base overriding royalties androyalty bonuses, these quarterly royalty payments are to be made whether or notthe related proceeds of sale have been received by Northshore by the time suchpayments become due.

 

Under the relevant documents, Northshore may mine andship iron ore products from lands other than Mesabi Trust lands.  To encourage the use of iron ore productsfrom Mesabi Trust lands, Mesabi Trust receives royalties on stated percentagesof iron ore shipped from Silver Bay, whether or not the iron ore products arefrom Mesabi Trust lands.  Mesabi Trustreceives royalties at the greater of (i) the aggregate quantity of iron oreproducts shipped that were from Mesabi Trust lands, and (ii) a portion of theaggregate quantity of all iron ore products shipped that were from any lands,such portion being 90% of the first four million tons shipped during such year,90% of the next two million tons shipped during such year, and 25% of alltonnage shipped during such year in excess of six million tons.

 

Mesabi Trust has no employees, but it engagesindependent consultants to assist the Trustees in monitoring, among otherthings, the amount and sales prices of iron ore products shipped by Northshorefrom Silver Bay, Minnesota.  As notedabove, the information regarding amounts and sales prices of shipped iron oreproducts is used to compute the royalties payable to Mesabi Trust byNorthshore.  Deutsche Bank Trust CompanyAmericas, the Corporate Trustee, also performs certain administrative functionsfor Mesabi Trust.

 

**CurrentDevelopments**

 

***General***.  Northshore has advised the Trustees that total calendar year 2003production from Mesabi Trust lands may be approximately 4.5 million tonsof iron ore pellets.  Although CCIpreviously announced in its January 29, 2003 press release that it hadthen expected to operate all five of its mines (which are located in EasternCanada and the United States) at capacity levels in calendar year 2003, CCIreported in its July 30, 2003 press release that it was reducing itscurrent 2003 production estimate by approximately 1.6 million tons to 18.3million tons.  CCI attributed thisreduction in its production estimate to production losses which were caused bythe power interruption resulting from flooding and lower plant throughput atCCI’s Empire and Tilden mines.  CCI hasnot reported any reduction in its 2003 production estimate at Northshore.

 

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CCI also announced in its July 30, 2003 pressrelease that it was further decreasing its 2003 pellet sales forecast toapproximately 18 million tons as a result of a reduction in CCI’s expectedsales to International Steel Group (ISG). This reduction follows CCI’s May 20, 2003 announcement that itwould reduce its initial pellet sales forecast of 20 million tons by fivepercent due to a reduction in its customers’ pellet sales requirements.  CCI has not indicated the impact that thesereductions in its 2003 pellet sales forecast may have on shipments from Northshoreor from any other particular mine that it operates.

 

Northshore has not provided the Trust with an estimatefor total calendar year 2003 shipments. (See description of the uncertainty of market conditions in the iron oreand steel industry under “Important Factors Affecting Mesabi Trust”below.)  During calendar years 2002,2001, 2000, 1999, and 1998, the percentage of shipments of iron ore productsfrom Mesabi Trust lands was approximately 97.5%, 99.2%, 99.8%, 98.9%, and99.3%, respectively, of total shipments. Northshore has not advised the Trustees as to the percentage of iron oreproducts it anticipates shipping from Mesabi Trust lands in calendar year 2003.

 

***Mesabi Nugget Project***.  On November 14, 2001, CCI announcedthat it entered into a Memorandum of Understanding with Mesabi Nugget LLC andother parties to participate in the Mesabi Nugget Project.  The project’s objective is to develop a newiron making technology (Kobe Steel’s Itmk3 process) for converting iron oreinto nearly pure iron nugget form (the term “nugget” is apparently used todifferentiate the product from lower-iron content pellets and from other typesof direct reduction products produced from current technology).  The project’s initial phase, Phase I, wascompleted in the early part of the last fiscal year.  On April 4, 2002, IronUnits LLC, a subsidiary of CCI,signed an agreement to commit itself through Phase II, which involvesconstruction of a pilot plant at Northshore to test the Kobe Steel Itmk3process and its ability to convert iron ore into nearly pure iron.  Furthermore, as reported by Skillings MiningReview on March 2, 2002, the Iron Range Resources and Rehabilitation Boardand the Minnesota Department of Trade and Economic Development have eachapproved loans of $8.0 million to assist in the funding of Phase II of theMesabi Nugget Project.

 

Construction of the pilot plant at the Northshorefacility was completed in May 2003. As reported by Skillings Mining Review on May 30, 2003, the firstbatch of iron nuggets was successfully completed in a one-hour test run onMay 24, 2003.  According to thisreport by Skillings Mining Review, Mesabi Nugget LLC plans to continueconducting test operations at the pilot plant over the next nine months usingiron ore concentrate from Northshore, and will then continue such testoperations for an additional three months using concentrate from other iron oresources.  According to earlier publishedreports of CCI, if this pilot plant is successful, construction of acommercial-sized facility capable of producing within a range of 300,000 to700,000 tons of iron nuggets could commence as early as 2004.  Although CCI has chosen to locate the pilotplant at Northshore, it is not certain that if CCI decides to build a fullyoperational facility, it will do so at Northshore.

 

Although Mesabi Trust is not a direct party to theMesabi Nugget Project and its involvement in this project was not solicited, itappears that in the event that the fully-operational plant is located at theNorthshore facility, the project may involve the use of iron ore from theMesabi Trust lands.  Nevertheless,because it is still uncertain as to whether the Mesabi Nugget Project willsuccessfully achieve commercialization (in addition to the uncertaintysurrounding whether CCI will elect to locate any such fully-operational plantat Northshore and use iron ore from the Mesabi Trust lands for the Project),the Trustees are unable to make projections as to any future royalties thatmight be payable to the Trust.

 

CCI has indicated that if the Mesabi Nugget Projectsuccessfully achieves commercialization, iron nuggets from this new processwould be used as an alternative or supplement to pig iron in the steel makingprocess.

 

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***Other Information***.  On March 20, 2002, a three-year tariffschedule adopted by President Bush took effect, imposing tariffs ranging fromeight percent to thirty percent on a significant number of imported steelproducts.  The Trustees are unable, however,to quantify the effect that such tariffs may ultimately have had on royaltiespaid to the Trust.  In addition,although the tariffs may have also had a favorable impact on the amount of theTrust’s income by providing an impetus to sales of iron ore pellets by reasonof increased domestic demand, the Trustees are unable to verify such an effector to quantify it.  The Trustees do nottransact business directly with steel producers and accordingly lack informationas to the extent to which iron ore pellets may be in demand by steel producersfor the production of various steel products and the degree to which productionof such products (and the prices of such products) may be affected by thetariffs and the various tariff exemptions that have been adopted by thePresident to date.

 

On March 21, 2003, the Bush Administrationannounced that the President’s original three-year tariff schedule would bemodified to lower the top tariff rate from thirty percent to twenty-fourpercent, and the lower tariff rate from eight percent to seven percent.  Furthermore, the President has previouslywarned the nation’s steelmakers that he would cut short the three-year tariffsif he determined that the steel industry was not wisely using the tariffs toimprove their competitive position in the world marketplace.

 

On July 11, 2003, the World Trade Organization(WTO) made public its final ruling that the steel tariffs imposed by PresidentBush are in violation of global trade rules. According to online reports of the Associated Press, on August 11,2003, the United States filed an appeal to the WTO’s final decision.  These online reports have stated that afinal ruling by a WTO appeals panel may not be reached until the end of thiscalendar year. A U.S. trade official has indicated, however, that the UnitedStates will leave the tariffs in place in the meantime.  At this time, in view of the United States’appeal of this final ruling, the Trust is unable to determine the extent towhich the final WTO ruling will affect the steel tariffs and the impact, ifany, it will have on royalties payable to the Trust during the current fiscalyear and beyond.

 

The Trustees are therefore not in a position todetermine what, if any, reductions in tariffs may take place or the extent towhich the tariffs and modifications to, or elimination of, the tariff schedulemay impact the demand and pricing of iron ore pellets mined from the MesabiTrust lands.  In addition, in light ofthe Presidential exemptions and the uncertain future of the tariffs in light ofthe International Trade Commission’s ongoing reviews and the WTO ruling, theTrustees are unable to determine at this time whether the tariffs willultimately have any material impact on the demand for, and prices of, iron orepellets during the current fiscal year and beyond.

 

**Important Factors Affecting MesabiTrust**

 

The Agreement of Trust dated July 18, 1961 (the“Agreement of Trust”) specifically prohibits the Trustees from entering into orengaging in any business.  Thisprohibition seemingly applies even to business activities the Trustees deemnecessary or proper for the preservation and protection of the TrustEstate.  Accordingly, the Trustees’activities in connection with the administration of Trust assets are limited tocollecting income, paying expenses and liabilities, distributing net income tothe Trust’s Certificate Holders after the payment of, or provision for, suchexpenses and liabilities, and protecting and conserving the assets held.

 

Accordingly, the income of the Trust is highlydependent upon the activities and operations of Northshore, and the terms andconditions of the Amendment of Assignment, Assumption and Further Assignment ofPeters Lease (the “Amended Assignment of Peters Lease”), the Amendment ofAssignment, Assumption and Further Assignment of Cloquet Lease (the “AmendedAssignment of Cloquet Lease”), and the Assumption and Assignment of MesabiLease (together with the Amended

 

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Assignment of Peters Lease and the Amended Assignment of Cloquet Lease,the “Amended Assignment Agreements”). The Trust and the Trustees have no control over the operations andactivities of Northshore, except within the framework of the Amended AssignmentAgreements.

 

Due to winter weather, and the increasing royaltypercentages based on tonnage shipped in a calendar year, results for aparticular calendar quarter are typically not indicative of results for futurequarters or the year as a whole. Factors which can impact the results of the Trust in any quarter or yearinclude:

 

1.                             ShippingConditions in the Great Lakes. Shipping activity by Northshore is dependent upon when the Great Lakesshipping lanes freeze for the winter months (typically in January) and whenthey re-open in the spring (typically late-March or April).  Base overriding royalties to Mesabi Trustare based on shipments made in a calendar quarter.  Because there ordinarily is little or no shipping activity in thefirst calendar quarter, the Trust typically receives only the minimum royalty(or slightly more than the minimum) for that period.

 

2.                             Operationsof Northshore.  Because the primaryportion of the Trust’s revenues derive from iron ore product shipped byNorthshore from Silver Bay, Northshore’s processing and shipping activitiesdirectly impact the Trust’s revenues in each quarter and for each year.  In turn, a number of factors affectNorthshore shipment volume.  Thesefactors include, among others, the economic conditions in the iron oreindustry, pricing by domestic and international competitors, long-term customercontracts or arrangements by Northshore or its competitors, availability of oreboats, production at Northshore’s mining operations, and production at thepelletizing/processing facility.  If anypelletizing line becomes idle for any reason, production and shipments (and,consequently, Trust income) could be adversely impacted.

 

3.                             IncreasingRoyalties.  As described elsewherein this Report, the royalty percentage paid to the Trust increases as the aggregatetonnage of iron ore products shipped, attributable to the Trust, in anycalendar year increases.  Assuming aconsistent sales price per ton throughout a calendar year, shipments of ironore product attributable to the Trust later in the year generate a higherroyalty to the Trust.

 

4.                             Percentageof Mesabi Trust Ore.  As describedelsewhere in this Report, Northshore has the ability to process and ship ironore products from lands other than Mesabi Trust lands.  In certain circumstances, the Trust may beentitled to royalties on those other shipments, but not in all cases.  In general, the Trust will receive higherroyalties (assuming all other factors are equal) if a higher percentage ofshipments are from Mesabi Trust lands. The percentages of shipments that came from Mesabi Trust lands were97.5%, 99.2%, 99.8%, 98.9%, and 99.3% in calendar years 2002, 2001, 2000, 1999,and 1998, respectively.

 

5.                             Uncertaintyof Market Conditions in the Steel and Iron Ore Industry.  Although CCI reported in its Form 10-K forits fiscal year ending December 31, 2002 that it experienced a record yearin iron ore pellet sales and has projected a further increase of pellet salesfor its fiscal year 2003, CCI also stated in such Form 10-K that it continuesto face a significant number of business risks and other potentially adversefactors.  Such risks and factorsinclude, among others, lower customer demand, an increase in certain steelimports and iron ore substitutes, a decrease in iron ore production in NorthAmerica, customer failure, and customer or potential customer restructuring andfinancial difficulty (which could result in reduced production capacity overtime).  Furthermore, despite theintended ameliorative effects of the Presidential tariffs on the price anddemand for domestic steel products, there still exists a high degree ofuncertainty and significant consolidation and restructuring in the domesticsteel market.  Moreover, as reported inCCI’s July 30, 2003 press

 

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release, it currently expects that its initial pelletsales forecast of 20 million tons will decrease to approximately 18 milliontons primarily as a result of a reduction in CCI’s expected sales to ISG.

 

In light of the currentsteel industry environment, uncertainties arising from war and other globalevents, and the above-mentioned risks and factors, it is uncertain whetherprices on domestic steel products will be at relatively higher levels, andwhether steel mills will be able to operate at capacity levels in the currentfiscal year and beyond.  Furthermore,although overall there appears to have been a modest increase in the demand fordomestic steel products over the last fiscal year, it is nevertheless uncertain(in light of CCI’s July 30, 2003 announcement of its reduction in its 2003pellet sales forecast and given the other risks and factors referenced in thisReport) whether this increase in demand will continue and the extent to whichit will impact royalties paid to the Trust in the current fiscal year andbeyond.

 

**Comparison of three months endedJuly 31, 2003 and July 31, 2002**

 

Mesabi Trust’s net income increased to $965,446 forthe three months ended July 31, 2003, as compared to net income of$626,698 for the three months ended July 31, 2002.  Mesabi Trust’s gross income for the threemonths ended July 31, 2003 was $1,106,677, consisting of $0 in minimumadvance royalty income, $997,740 in overriding royalty income, $98,224 in feeroyalty income and $10,713 in interest income, as compared to gross income of$753,390, consisting of $0 in minimum advance royalty income, $650,216 inoverriding royalty income, $88,572 in fee royalty income and $14,602 ininterest income, for the three months ended July 31, 2002.  The increase in royalty income was primarilydue to increased pellet shipments as compared to the comparable priorperiod.  Mesabi Trust’s expenses for thethree months ended July 31, 2003 were $141,231, compared to expenses of$126,692 for the three months ended July 31, 2002.

 

**Comparison of six months endedJuly 31, 2003 and July 31, 2002**

 

Mesabi Trust’s net income increased to $1,215,448 forthe six months ended July 31, 2003, as compared to net income of $821,826for the six months ended July 31, 2002. Mesabi Trust’s gross income for the six monthsended July 31, 2003 was $1,484,841, consisting of $1,322,296 inoverriding royalty income less $45,089 of recouped minimum advance royaltyincome, $184,848 in fee royalty income and $22,786 in interest income, ascompared to gross income of $1,019,908, consisting of $985,392 in overridingroyalty income less $148,539 of recouped minimum advance royalty income,$158,139 in fee royalty income and $24,916 in interest income, for the sixmonths ended July 31, 2002.  Theincrease in royalty income was primarily due to increased pellet shipments ascompared to the comparable prior period. Mesabi Trust’s expenses for the six months ended July 31, 2003 were$269,393, compared to expenses of $198,082 for the six months endedJuly 31, 2002.  The increase inexpenses is primarily attributed to increases in legal fees.

 

Mesabi Trust’s Unallocated Reserve aggregated$1,363,096 at July 31, 2003, as compared with an Unallocated Reserve of$1,260,547 at July 31, 2002.  Theincrease of $102,549 was due to the net effect of (i) the increase in pelletshipments, and (ii) increased expenses. The Trustees anticipate that the amount of Unallocated Reserve willfluctuate from time to time, depending upon a number of factors, including butnot limited to the income for a particular period, the amount and timing ofdistributions, uncertainty about future royalty income and the uncertainty offuture expenses.

 

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**Royalty Comparisons**

 

The following chart summarizes Mesabi Trust’s royaltyincome for the six months ended July 31, 2003 andJuly 31, 2002, respectively:

 
|                                     |   | **Six months  ended July 31,** |      |
|------------------------------------------|--------|-------------------------------------|-----------|
|                                     |   | **2003**                            |      | **2002** |   |
|                                     |   |                                |      |   |   |
| Base overriding  royalties               |   | $                                   | 1,322,296 |   | $ | 985,392 |   |
| Bonus royalties                          |   | 0                                   |      | 0 |   |
| Minimum advance  royalty paid (recouped) |   | (45,089                             | )         | (148,539 | ) |
| Fee royalties                            |   | 184,848                             |      | 158,139 |   |
| Total royalty  income                    |   | $                                   | 1,462,055 |   | $ | 994,992 |   |

 

**Item3.  Quantitative and QualitativeDisclosure About Market Risk.**

 

Not applicable.

 

**Item4.  Controls and Procedures.**

 

***Evaluation of Disclosure Controls and Procedures***.  The Trustees maintain disclosure controlsand procedures designed to ensure that information required to be disclosed bythe Trust in the reports that it files or submits under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the rules and regulations of the Securities andExchange Commission.  Disclosurecontrols and procedures include controls and procedures designed to ensure thatinformation required to be disclosed by the Trust is accumulated andcommunicated by Northshore, and the Trust’s independent auditors andconsultants to the Trustees as appropriate to allow timely decisions regardingrequired disclosure.

 

As of the end of the period covered by this Report,the Trustees carried out an evaluation of the Trust’s disclosure controls andprocedures.  The Trustees have concludedthat the disclosure controls and procedures are effective, while noting certainlimitations on disclosure controls and procedures as set forth below.

 

Due to the contractual arrangements of the Agreementof Trust and the Amendment to the Agreement of Trust dated October 25,1982 (the “Amendment”), there are certain potential weaknesses that may limitthe effectiveness of disclosure controls and procedures established by theTrustees and their ability to verify the accuracy of certain financialinformation.  The contractuallimitations creating potential weaknesses in disclosure controls and proceduresmay be deemed to include:

 

•                  Northshore alonecontrols (i) historical operating data, including iron ore production volumes,marketing of iron ore products, operating and capital expenditures as theyrelate to Northshore, environmental and other liabilities and the effects ofregulatory changes; (ii) plans for Northshore’s future operating and capitalexpenditures; (iii) geological data relating to reserves; and (iv) projectedproduction of iron ore products.  Whilethe Trustees request material information for use in periodic reports as partof their disclosure controls and procedures, the Trustees do not control thisinformation, and they rely on Northshore to provide accurate and timelyinformation for use in the Trust’s reports filed with the Securities andExchange Commission.  Moreover, whileeach quarter Northshore furnishes shipment and royalty calculations to theTrustees, Northshore has declined to support this information

 

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with a written certification attesting to whetherNorthshore has established disclosure controls and procedures and internalcontrols sufficient to enable it to verify that the information furnished tothe Trustees is accurate and complete. Northshore is not required either by contract or by governmental laws orregulations to provide such a certification.

 

•                  Eide Bailly LLP,which serves as the Trust’s independent accountants (“Eide Bailly”), hasdelivered a report to the Trust concluding that based upon its review of thefinancial statements of the Trust for its quarter ended July 31, 2003 (the“Financial Statements”), it is not aware of any material modifications thatshould be made to the Financial Statements in order for the FinancialStatements to be in conformity with generally accepted accounting principles.

 

•                  Under the termsof the Agreement of Trust and the Amendment, the Trustees are entitled to, andin fact do rely, upon certain experts in good faith, including (i) theindependent consultants with respect to monthly production and shipmentreports, which include figures on crude ore production and iron ore pelletshipments and discussions concerning the condition and accuracy of the scalesand plans regarding the development of the Trust’s mining property; and (ii)the independent auditors they have contracted with respect to reviews offinancial data related to shipping and sales reports provided by Northshore.

 

The Trustees do not intend to expand theirresponsibilities beyond those permitted or required by the Agreement of Trust,the Amendment, and those required under applicable law.

 

***Changes in Internal Control Over Financial Reporting***.  To the knowledge of the Trustees, there havebeen no significant changes in the Trust’s internal control over financial reportingthat occurred during the Trust’s last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, the Trust’s internalcontrol over financial reporting.  TheTrustees note for purposes of clarification that they have no authority over,and make no statement concerning, the internal control over financial reportingof Northshore.

 

**PART II- OTHER INFORMATION**

 

# **Item1.**                     LegalProceedings.

 

None.

 

# **Item2.**                     Changesin Securities and Use of Proceeds.

 

None.

 

# **Item3.**                     DefaultsUpon Senior Securities.

 

None.

 

# **Item4.**                     Submissionof Matters to a Vote of Security Holders.

 

None.

 

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# **Item5.**                     OtherInformation.

 

None.

 

# **Item6.**                     Exhibitsand Reports on Form 8-K.

 

(a)                                  Exhibits.

 

31.1                           Certificationof Corporate Trustee of Mesabi Trust pursuant to Rule 13a-14 of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1                           Certificationof Corporate Trustee of Mesabi Trust pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.1                           Reportof Eide Bailly LLP regarding its review of the unaudited interim financialstatements of Mesabi Trust for its quarter ending July 31, 2003.

 

(b)                                 Reportson Form 8-K.

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                                 | MESABI TRUST                                                      |
|--------------------------------------|-------------------------------------------------------------------|
|                                 | (Registrant)                                                      |
|                                 |
|                                 | By:                                                               | DEUTSCHE BANK TRUST COMPANY  AMERICAS |
|                                 | Corporate Trustee                                                 |
|                                 | Principal Administrative Officer and duly authorized  signatory:* |
|                                 |
|                                 |
| Date:   September 15, 2003 | By:                                                               | /s/ Rodney Gaughan |
|                                 |                                                              | Name: | Rodney Gaughan |
|                                 |                                                              | Title: | Assistant Vice President |
|                                      |                                                                   |  |  |  |

 

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* There are no principal executive officers or principal financialofficers of the registrant.

 

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