**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM10-Q**

** **
| **(Mark  One)** |
|-----------------|
| ** **      |
| **ý**      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **      | ** ** |
|            | **For the  quarterly period ended October 31, 2004** |
| ** **      | ** ** |
| ** **      | **or** |
| ** **      | ** ** |
| **o**           | **TRANSITION REPORT PURSUANT TO  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  Trust & Securities 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 reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.              Yes   ý     No   o

 

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

 

As of December20, 2004, there were 13,120,010 Units of Beneficial Interest in Mesabi Trustoutstanding.

 

 

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**PART I - FINANCIAL INFORMATION**

 

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

 

**A.****    CondensedStatements of Income**

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **October 31,**        | ** ** | **October 31,**       | ** ** |
| ** **                      | ** ** | **2004**               | ** ** | **2003**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                        |       |                   |       |                  |       |   |   |   |   |
| Royalty income                  |       | $                      | 3,295,828  |                  | $          | 2,389,268 |   | $ | 6,897,024 |   | $ | 3,851,324 |   |
| Interest income                 |       | 10,942                 |       | 12,227                |       | 31,250 |   | 35,013 |   |
|                            |       | 3,306,770              |       | 2,401,495             |       | 6,928,274 |   | 3,886,337 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Expenses                        |       | 130,822                |       | 116,912               |       | 412,301 |   | 386,305 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Net income                      |       | $                      | 3,175,948  |                  | $          | 2,284,583 |   | $ | 6,515,973 |   | $ | 3,500,032 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Number of units outstanding     |       | 13,120,010             |       | 13,120,010            |       | 13,120,010 |   | 13,120,010 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Net income per unit (Note 2)    |       | $                      | 0.242069   |                  | $          | 0.174130 |   | $ | 0.496644 |   | $ | 0.266771 |   |
|                            |       |                   |       |                  |       |   |   |   |   |
| Distributions declared per unit |       | $                      | 0.25       |                  | $          | 0.12 |   | $ | 0.475 |   | $ | 0.19 |   |
|                                 |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Financial Statements.

 

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**B.****    CondensedBalance Sheets**

 
| ** **                                                                 | ** ** | **October 31, 2004** | ** ** | **January 31, 2004** | ** ** |
|----------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                 | ** ** | ** **           | ** ** | ** **           | ** ** |
| **Assets**                                                                 | ** ** | ** **           | ** ** | ** **           | ** ** |
|                                                                       |       |                 |       |                 |       |
| Cash                                                                       |       | $                    | 3,512,853  |                 | $          | 98,692 |   |
|                                                                       |       |                 |       |                 |       |
| U.S. Government securities, at amortized  cost (which approximates market) |       | 751,114              |       | 4,826,046            |       |
|                                                                       |       |                 |       |                 |       |
| Accrued income                                                             |       | 739,439              |       | 449,780              |       |
| Prepaid expenses                                                           |       | 25,980               |       | 15,560               |       |
|                                                                       |       | 5,029,386            |       | 5,390,078            |       |
|                                                                       |       |                 |       |                 |       |
| 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                    |       |
|                                                                       |       |                 |       |                 |       |
|                                                                       |       | $                    | 5,029,389  |                 | $          | 5,390,081 |   |
|                                                                       |       |                 |       |                 |       |
| **Liabilities, Unallocated Reserve and Trust  Corpus**                     | ** ** | ** **           | ** ** | ** **           | ** ** |
|                                                                       |       |                 |       |                 |       |
| Liabilities                                                                |       |                 |       |                 |       |
| Distribution payable                                                       |       | $                    | 3,280,002  |                 | $          | 3,936,003 |   |
| Accrued expenses                                                           |       | 56,831               |       | 45,491               |       |
|                                                                       |       | 3,336,833            |       | 3,981,494            |       |
|                                                                       |       |                 |       |                 |       |
| Unallocated Reserve (Note 3)                                               |       | 1,692,553            |       | 1,408,584            |       |
| Trust Corpus                                                               |       | 3                    |       | 3                    |       |
|                                                                       |       |                 |       |                 |       |
|                                                                       |       | $                    | 5,029,389  |                 | $          | 5,390,081 |   |

 

See Notes to Financial Statements.

 

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**C.****    CondensedStatements of Cash Flows**

 
| ** **                                                                     | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                     | ** ** | **October 31,**       | ** ** |
| ** **                                                                     | ** ** | **2004**              | ** ** | **2003** | ** ** |
| ** **                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash flows from operating activities                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Royalties received                                                             |       | $                     | 6,598,170  |   | $ | 2,960,398 |   |
| Interest received                                                              |       | 40,444                |       | 41,238 |   |
| Expenses paid                                                                  |       | (411,380              | )          | (415,462 | ) |
|                                                                           |       |                  |       |   |   |
| Net cash provided by operating activities                                      |       | 6,227,234             |       | 2,586,174 |   |
|                                                                           |       |                  |       |   |   |
| Cash flows from investing activities                                           |       |                  |       |   |   |
| Maturities of U.S. Government Securities                                       |       | 7,489,505             |       | 2,063,971 |   |
| Purchases of U.S. Government Securities                                        |       | (3,414,573            | )          | (2,123,861 | ) |
|                                                                           |       |                  |       |   |   |
| Net cash provided by (used for) investing  activities                          |       | 4,074,932             |       | (59,890 | ) |
|                                                                           |       |                  |       |   |   |
| Cash flow from financing activities                                            |       |                  |       |   |   |
| Distributions to Unitholders                                                   |       | (6,888,005            | )          | (3,411,203 | ) |
|                                                                           |       |                  |       |   |   |
| Net change in cash                                                             |       | 3,414,161             |       | (884,919 | ) |
|                                                                           |       |                  |       |   |   |
| Cash, beginning of year                                                        |       | 98,692                |       | 2,515,457 |   |
|                                                                           |       |                  |       |   |   |
| Cash, end of quarter                                                           |       | $                     | 3,512,853  |   | $ | 1,630,538 |   |
|                                                                           |       |                  |       |   |   |
| **Reconciliation of net income to net cash provided  by operating activities** |       |                  |       |   |   |
|                                                                           |       |                  |       |   |   |
| Net income                                                                     |       | $                     | 6,515,973  |   | $ | 3,500,032 |   |
| Increase in accrued income                                                     |       | (289,659              | )          | (884,701 | ) |
| Increase in prepaid insurance                                                  |       | (10,420               | )          | (11,919 | ) |
| Increase (Decrease) in accrued expenses                                        |       | 11,340                |       | (17,238 | ) |
|                                                                           |       |                  |       |   |   |
| Net cash provided by operating activities                                      |       | $                     | 6,227,234  |   | $ | 2,586,174 |   |

 

See Notes to Financial Statements.

 

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**MESABI TRUST**

** **

**NOTES TOFINANCIAL STATEMENTS**

** **

Note 1.          Thefinancial statements included herein have been prepared without audit (exceptfor the balance sheet at January 31, 2004) in accordance with the instructionsto Form 10-Q pursuant to the rules and regulations of the Securities andExchange Commission.  Certain informationand footnote disclosures normally included in financial statements prepared inaccordance with generally accepted accounting principles have been condensed oromitted pursuant to such rules and regulations. In the opinion of the Trustees, all adjustments, consisting only ofnormal recurring adjustments, necessary for a fair statement of (a) the resultsof operations for the nine months ended October 31, 2004 and 2003, (b) thefinancial positions at October 31, 2004 and January 31, 2004, and (c) the cashflows for the nine months ended October 31, 2004 and 2003, have been made.

 

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

 

Note 3.          TheTrustees have determined to maintain an Unallocated Reserve of at least$1,000,000 in liquid assets.  The actualamount of such Unallocated Reserve may vary from quarter to quarter dependingupon conditions in the industry and the judgment of the Trustees.  At October 31, 2004, the Unallocated Reservewas represented by $953,114 in unallocated cash and U.S. Government securities,and $739,439 of accrued revenue primarily representing royalties not yetreceived by the Trust but anticipated to be received in January 2005 fromNorthshore Mining Company as part of the royalty due with respect to the fourthfiscal quarter, based upon reported lessee shipping activity for the month ofOctober 2004.

 

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

** **

**Forward-LookingInformation**

 

Certain statements contained in this documentare forward-looking, including specifically those statements estimatingcalendar year 2004 and 2005 production or shipments and comments related to thecommencement of construction and opening of additional plants in 2005 andbeyond.  All such forward-looking statementsare based on input from Northshore Mining Company (“Northshore”), which is thelessee/operator and a wholly-owned subsidiary of Cleveland-Cliffs Inc (“CCI”),and published announcements of CCI.  TheTrust has no control over the operations or activities of Northshore, nor anyinfluence on the decision of whether Northshore’s facilities would be used tosupply CCI’s demonstration or commercial nugget modules (presently in theplanning stages), except within the framework of current agreements.  Actual results could differ materially fromthose indicated in such statements. Important factors that could cause actual results to differ materiallyinclude those listed below under the heading “Important Factors AffectingMesabi Trust”.

** **

**Background**

 

Leasehold royalty income constitutes theprincipal source of the Trust’s revenue. Royalty rates are determined in accordance with the terms of MesabiTrust’s leases and assignments of leases. Three types of royalties, as well as royalty bonuses, comprise the Trust’sleasehold royalty income:

 

•              Baseoverriding royalties, which historically constitute the majority of MesabiTrust’s royalty income, are determined by both the volume and selling price ofiron ore products shipped.  Northshore isobligated to pay Mesabi Trust base overriding royalties in varying amounts,based on the volume of iron ore products shipped.  Base overriding royalties are calculated as apercentage of the gross proceeds of iron ore products produced at Mesabi Trustlands (and to a limited extent other lands) and shipped from Silver Bay,Minnesota.  The percentage ranges from2-1/2% of the gross proceeds for the first one million tons of iron oreproducts so shipped annually to 6% of the gross proceeds for all iron oreproducts in excess of 4 million tons so shipped annually.

 

•              Royaltybonuses are earned when iron ore products shipped from Silver Bay are soldat prices above a threshold price.  Theroyalty bonus is a percentage of the gross proceeds of product shipped fromSilver Bay and sold at prices above a threshold price.  The threshold price is adjusted (but notbelow $30.00) on an annual basis for inflation and deflation (the “AdjustedThreshold Price”).  The AdjustedThreshold Price was $40.61 per ton for calendar year 2002, $41.13 per ton forcalendar year 2003, and is $41.76 per ton for calendar year 2004.  The royalty bonus percentage ranges from 1/2of 1% of the gross proceeds (on all tonnage shipped for sale at prices betweenthe Adjusted Threshold Price and $2.00 above the Adjusted Threshold Price) to3% of the gross proceeds on all tonnage shipped for sale at prices $10.00 ormore above the Adjusted Threshold Price. During the quarter ended October 31, 2004, Northshore paid a royaltybonus of $539,896 to the Trust.  This isthe first royalty bonus paid to the Trust in several years.  (See the section entitled “RoyaltyComparisons” below for more information.)

 

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•              Feeroyalties, which historically constitute a smaller component of the Trust’sroyalty income, are payable to Mesabi Land Trust, a Minnesota land trust ofwhich Mesabi 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.

 

•              Minimumadvance royalties: 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 (but not below $500,000 per annum) forinflation and deflation.  Advanceroyalties payable were $676,814 for calendar year 2002, $685,630 for calendaryear 2003, and are $696,161 for calendar year 2004.  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 royalties and royalty bonuses earned each year, any advance minimumroyalties paid in a fiscal quarter are recouped by credits against baseoverriding royalties and royalty bonuses earned in later fiscal quarters duringthe year.  Historically, advance minimumroyalties have been paid in the first fiscal quarter and recouped in the secondfiscal quarter.

 

Northshore is obligated to make quarterlyroyalty payments 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 maymine and ship 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,85% 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.  As noted above, theinformation regarding amounts and sales prices of shipped iron ore products isused to compute the royalties payable to Mesabi Trust by Northshore.  Deutsche Bank Trust Company Americas, theCorporate Trustee, also performs certain administrative functions for MesabiTrust.

 

**Comparison ofThree Months Ended October 31, 2004 and October 31, 2003**

 

Net income for the quarter ended October 31,2004 was $3,175,948, an increase of 39% over the quarter ended October 31,2003.  This increase was primarily due tocontinued increases in pellet shipments and prices, and a higher applicableroyalty rate, as compared to the comparable prior period.  Expenses increased from the comparable priorperiod, primarily due to increases in general and

 

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administrative expenses.  Following is a summary of results for thethree months ended October 31, 2004 and October 31, 2003, respectively.

 

| ** **           | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------|------------|------------------------------------|------------|
| ** **           | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Total royalty income |       | $                                  | 3,295,828  |   | $ | 2,389,268 |   |
| Interest income      |       | 10,942                             |       | 12,227 |   |
| Gross income         |       | 3,306,770                          |       | 2,401,495 |   |
|                 |       |                               |       |   |   |
| Expenses             |       | 130,822                            |       | 116,912 |   |
| Net income           |       | $                                  | 3,175,948  |   | $ | 2,284,583 |   |

 

**Comparison ofNine Months Ended October 31, 2004 and October 31, 2003**

 

Net income for the nine months ended October31, 2004 was $6,515,973, an increase of 86% over the nine months ended October31, 2003.  This increase was primarilydue to increases in pellet shipments and prices, and a higher applicableroyalty rate, as compared to the comparable prior period.  Following is a summary of results for thenine months ended October 31, 2004 and October 31, 2003, respectively.

 

| ** **           | ** ** | **Nine Months Ended October 31,** | ** ** |
|----------------------|------------|-----------------------------------|------------|
| ** **           | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Total royalty income |       | $                                 | 6,897,024  |   | $ | 3,851,324 |   |
| Interest income      |       | 31,250                            |       | 35,013 |   |
| Gross income         |       | 6,928,274                         |       | 3,886,337 |   |
|                 |       |                              |       |   |   |
| Expenses             |       | 412,301                           |       | 386,305 |   |
| Net income           |       | $                                 | 6,515,973  |   | $ | 3,500,032 |   |
|                      |            |                                   |            |  |  |  |  |  |  |

 

**UnallocatedReserve**

 

Unallocated Reserve as of October 31, 2004was $1,692,553, a decrease of 18% over the prior year.  This decrease is primarily due to increasesin distributions paid.  The Trusteesanticipate that the amount of Unallocated Reserve will fluctuate from time totime, depending upon a number of factors, including but not limited to theincome for a particular period, the amount and timing of distributions,uncertainty about future royalty income and the uncertainty of futureexpenses.  Following is a comparison ofUnallocated Reserve over the past year.

 

| ** **          | ** ** | **As of October 31,** | ** ** |
|---------------------|------------|-----------------------|------------|
| ** **          | ** ** | **2004**              | ** ** | **2003** | ** ** |
| Unallocated Reserve |       | $                     | 1,692,553  |   | $ | 2,073,278 |   |
|                     |            |                       |            |  |  |  |  |

 

**RoyaltyComparisons**

 

Royalties received in October 2004 included aroyalty bonus payment, reflecting prices of pellets shipped that exceeded thecurrent Adjusted Threshold Price of $41.76 per ton.  This royalty bonus payment resulted frompricing adjustments by Northshore that affected shipments made throughoutcalendar year 2004.  The following chartsummarizes Mesabi Trust’s royalty income for the three months ended October 31,2004 and October 31, 2003, respectively:

 

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| ** **                              | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| Base overriding royalties               |       | $                                  | 2,684,273  |   | $ | 2,296,889 |   |
| Bonus royalties                         |       | 539,896                            |       | 0 |   |
| Minimum advance royalty paid (recouped) |       | 0                                  |       | 0 |   |
| Fee royalties                           |       | 71,659                             |       | 92,379 |   |
| Total royalty income                    |       | $                                  | 3,295,828  |   | $ | 2,389,268 |   |
|                                         |            |                                    |            |  |  |  |  |  |  |

 

The following chart summarizes Mesabi Trust’sroyalty income for the nine months ended October 31, 2004 and October 31, 2003,respectively:

 

| ** **                              | ** ** | **Nine Months Ended October 31,** | ** ** |
|-----------------------------------------|------------|-----------------------------------|------------|
| ** **                              | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| Base overriding royalties               |       | $                                 | 6,089,504  |   | $ | 3,574,097 |   |
| Bonus royalties                         |       | 539,896                           |       | 0 |   |
| Minimum advance royalty paid (recouped) |       | 0                                 |       | 0 |   |
| Fee royalties                           |       | 267,624                           |       | 277,227 |   |
| Total royalty income                    |       | $                                 | 6,897,024  |   | $ | 3,851,324 |   |
|                                         |            |                                   |            |  |  |  |  |  |

 

**CurrentDevelopments**

 

***General***.  CCI indicated in its Form 10-Q filed October28, 2004 that production for the first nine months of 2004 for Northshore was3.7 million tons of iron ore pellets. This represents an increase of 100,000 tons over the first nine monthsof 2003.  CCI continues to forecastNorthshore production at 5.0 million tons for calendar year 2004.

 

Northshore has not provided the Trust with anestimate for total calendar year 2004 shipments of iron ore pellets.  (See description of the uncertainty of marketconditions in the iron ore and steel industry under “Important FactorsAffecting Mesabi Trust” below.)  Duringcalendar years 2003, 2002, 2001, 2000, and 1999, the percentage of shipments ofiron ore products from Mesabi Trust lands was approximately 95.5%, 97.5%,99.2%, 99.8%, and 98.9%, respectively, of total shipments.  Northshore has not advised the Trustees as tothe percentage of iron ore products from Mesabi Trust lands it anticipatesshipping in calendar year 2004.

 

***CapacityExpansions***. In a November 9, 2004 press release, CCI’s chief executive officerstated that pellet demand for 2005 appears to exceed CCI’s production capacityand, further, that iron ore production does not appear to be keeping up withanticipated global demand, despite industry-wide capacity expansions.  As part of its efforts to capitalize on theanticipated demand, CCI had previously announced in a September 14, 2004 pressrelease that its board of directors approved the planned reactivation of anidled furnace at Northshore.  Accordingto CCI, the reactivated furnace is expected to begin production in mid-2005 andwill increase Northshore’s annual pellet production capacity by approximately800,000 tons.  CCI’s board simultaneouslyapproved the planned restart of an idled pellet furnace at United Taconite, CCI’smine in Eveleth, Minnesota.  CCI statedin its Form 10-Q filed October 28, 2004 that a further expansion at UnitedTaconite is being evaluated.  In additionto the planned

 

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furnace reactivation, CCI announced in itsOctober 28, 2004 earnings conference call that its board approved the restartof an additional 1,000,000 tons of concentrate capacity at Northshore, whichcould be sold to independent third parties.  At this time the Trustees are unable to make any projections as to theextent to which CCI’s planned capacity expansions may impact future royaltiespayable to the Trust.

*** ***

***MesabiNugget Project***. ** **CCI is participating in the MesabiNugget Project with Kobe Steel, Ltd. (“Kobe Steel”), Steel Dynamics, Inc.,Ferrometrics, Inc. and the State of Minnesota. The project’s objective is to develop and apply a new iron makingtechnology (Kobe Steel’s Itmk3 process) for converting iron ore into nearlypure iron nugget form.  CCI has indicatedthat if the Mesabi Nugget Project successfully achieves commercialization, ironnuggets from this new process would be used as an alternative to steel scrap asa raw material for electric steel furnaces and blast furnaces or basic oxygenfurnaces of integrated steel producers.

 

A pilot plant to test the Itmk3 process wasconstructed at the Northshore facility and operated through August 2004.  CCI stated in its Form 10-Q filed October 28,2004 that the third operating phase of the pilot plant test confirmed thecommercial viability of the Itmk3 technology, and that four electric furnaceproducers and one foundry had used the nugget product with favorable results.

 

In May 2004, the Minnesota state legislatureenacted legislation to shorten the environmental permitting timeline for thedevelopment of a nugget plant at Cliffs Erie, another site owned by CCI in HoytLakes, Minnesota.  On September 23, 2004,the Iron Range Resources board approved a $10 million loan to Mesabi Nugget,LLC, a joint venture in which CCI holds a minority equity position, to supportthe development of a 600,000 metric-ton-per-year commercial nugget plant atCliffs Erie.  In addition, St. LouisCounty, Minnesota is considering issuing $8 million in revenue bonds to supportthe plant’s development.

 

In its Form 10-Q filed October 28, 2004, CCIstated that preliminary construction engineering and environmental permittingactivities had been initiated for two potential commercial plant locations, andthat earliest environmental approval was expected in the first half of2005.  (CCI had previously indicated in aSeptember 9, 2004 press release that it was proceeding with plans toparticipate in the development of a 500,000 ton nugget demonstration plant atCliffs Erie and that efforts to permit commercial nugget modules at theNorthshore facility had been terminated.) However, CCI stated in the same Form 10-Q that a decision to proceed onconstruction of a commercial plant had not been made.

 

CCI announced in its September 9, 2004 pressrelease that any future Minnesota construction of commercial nugget moduleswould be at CCI’s Cliffs Erie facility, and added that Northshore would becapable of supplying iron concentrates to the initial iron nugget demonstrationplant expected at Cliffs Erie, as well as subsequent commercial modules.  CCI’s chief executive officer stated in CCI’sOctober 28, 2004 earnings conference call that no decision had been made as towhich of the two locations would be used for the first nugget plant, but ineither case that plant would be supplied with concentrate from Northshore.

 

Although Mesabi Trust is not a party to theMesabi Nugget Project and its involvement in this project was not solicited,iron ore from Mesabi Trust lands is likely to be used to supply concentrate tothe iron nugget demonstration plant or commercial modules.  At this time, however, the Trustees areunable to make projections as to whether any possible future royalties might bepayable to the Trust with respect to any commercial nugget plants.

*** ***

***ISGAcquisition***. On October 25, 2004, Ispat International N.V. (parent company of IspatInland Inc. (“Ispat Inland”)) announced plans to acquire LNM Holdings N.V. andInternational Steel Group, Inc. (“ISG”), which, once completed, will result inthe world’s largest steel company.  Theacquisition is

 

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subject to shareholder and regulatoryapprovals, and is anticipated to be completed in the first quarter of2005.  ISG and Ispat Inland aresignificant customers of CCI, accounting for fifty percent of CCI’s salesvolume for the first nine months of 2004, and each receive shipments of ironore products from Mesabi Trust lands. CCI stated in its Form 10-Q filed October 28, 2004 that it currentlydoes not expect the merger to affect its relationships with ISG and IspatInland for the foreseeable future.  TheTrustees are unable to determine what, if any, impact the planned merger mayhave on royalties payable to the Trust in the current fiscal year and beyond.

*** ***

***SecuritiesRegulation***. The Trust is a publicly-traded trust listed on the New York StockExchange (“NYSE”) and is therefore subject to extensive regulation under, amongothers, the Securities Act of 1933, the Securities Exchange Act of 1934, NYSErules and regulations and the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  Issuers failing to comply with suchauthorities risk serious consequences, including criminal as well as civil andadministrative penalties.  In most instances,these laws, rules and regulations do not specifically address theirapplicability to publicly-traded trusts such as Mesabi Trust.  In particular, Sarbanes-Oxley provides forthe adoption by the Securities and Exchange Commission (the “SEC”) and NYSE ofcertain rules and regulations that may be impossible for the Trust to literallysatisfy because of its nature as a pass-through trust.  During fiscal 2004, the SEC and NYSE adoptedrules and regulations pursuant to Sarbanes-Oxley that require a publicly-tradedcompany’s board of directors, audit committee or executive directors (orsimilar body) to act with respect to certain corporate governance matters.  The Trust does not have, nor does theAgreement of Trust provide for, a board of directors, an audit committee or anyexecutive officers.  Moreover, the Trusthas no employees at all.  Therefore, theTrust cannot literally comply with many of these rules and regulations.  The Trustees intend to follow the SEC’s andNYSE’s rulemaking closely and attempt to comply with such rules and regulationswhere possible.

** **

**ImportantFactors Affecting Mesabi Trust**

 

The Agreement of Trust dated July 18, 1961(the “Agreement of Trust”) specifically prohibits the Trustees from enteringinto or engaging 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 ishighly dependent upon the activities and operations of Northshore, and theterms and conditions of the Amendment of Assignment, Assumption and FurtherAssignment of Peters Lease (the “Amended Assignment of Peters Lease”), the Amendmentof Assignment, Assumption and Further Assignment of Cloquet Lease (the “AmendedAssignment of Cloquet Lease”), and the Assumption and Assignment of MesabiLease (together with the Amended Assignment of Peters Lease and the AmendedAssignment of Cloquet Lease, the “Amended Assignment Agreements”).  The Trust and the Trustees have no controlover the operations and activities of Northshore, except within the frameworkof the Amended Assignment Agreements.

 

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.  Factorswhich can impact the results of the Trust in any quarter or year include:

 

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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 Trust arebased on shipments made in a calendar quarter. Because there ordinarily is little or no shipping activity in the firstcalendar quarter, the Trust typically receives only the minimum royalty (orslightly 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.  In addition, as noted in CCI’s November 9,2004 press release, the planned reactivation of a previously idled furnace atNorthshore may be impacted by such factors as failure to obtain requiredenvironmental permits for or otherwise implement planned capital expansions, aninability to generate sufficient concentrate to support the reactivatedfurnace, an inability of the planned expansions to achieve expected additionalproduction, and increases in the cost and length of time required to completethe capacity expansions.

 

3.          IncreasingRoyalties.  As described elsewhere inthis Report, the royalty percentage paid to the Trust increases as theaggregate tonnage of iron ore products shipped, attributable to the Trust, inany calendar 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, as total shipments for the year exceed increasing levelsof royalty percentages and pass each of the first four one-million ton volumethresholds.

 

4.          IncreasingPrices.  As described elsewhere inthis Report, the Trust receives a royalty bonus equal to a percentage of thegross proceeds of product shipped from Silver Bay and sold at prices above theAdjusted Threshold Price ($41.76 per ton for calendar year 2004).  Although Northshore was able to sell someproduct at prices higher than the Adjusted Threshold Price in 2004, theTrustees are unable to make projections as to whether Northshore will continueto be able to sell pellets at prices above the Adjusted Threshold Price, entitlingthe Trust to any future royalty bonus payments.

 

5.          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 were95.5%, 97.5%, 99.2%, 99.8%, and 98.9% in calendar years 2003, 2002, 2001, 2000,and 1999, respectively.

 

6.          Uncertaintyof Market Conditions in the Steel and Iron Ore Industry.  ** **Although CCI reported in its Form10-Q for its quarterly period ending September 30, 2004 that it experiencedrecord third quarter iron ore pellet sales and is projecting an overallincrease in total 2004 pellet sales (as compared to 2003), CCI cautioned insuch Form 10-Q that significant risks and uncertainties may impact itsforecast, including, but not limited to, changes in customer demand, anincrease in steel imports, a decrease in iron ore production in North Americadue to global overcapacity of steel and

 

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uncertaintyrelating to customer restructuring and financial difficulty.  Furthermore, there exists consolidation andintense competition in the domestic steel market.

 

In light ofthe current steel industry environment, uncertainties arising from war andother global events, and the above-mentioned risks and factors, it is uncertainwhether prices on domestic steel products will be maintained at these currentrelatively higher levels, and whether steel mills will be able to continueoperating at capacity levels for the remainder of 2004 and beyond.  Furthermore, although overall there appearsto have been an increase in the demand for domestic steel products over thelast fiscal year, it is nevertheless uncertain whether this increase in demandwill continue and the extent to which it will impact royalties paid to theTrust in fiscal year 2005 and beyond.

** **

**CriticalAccounting Policies**

 

The preparation of financial statements inconformity with generally accepted accounting principles requires the Trusteesto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk.**

 

Not applicable.

** **

**Item4.  Controls and Procedures.**

 

***Evaluation ofDisclosure Controls and Procedures***.  The Trustees maintain disclosure controls andprocedures designed to ensure that information required to be disclosed by theTrust in the reports that it files or submits under the Securities Exchange Actof 1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the rules and regulations of the Securities andExchange Commission.  Disclosure controlsand 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 thisReport, the Trustees carried out an evaluation of the Trust’s disclosurecontrols and procedures.  The Trusteeshave concluded that the disclosure controls and procedures are effective, whilenoting certain limitations on disclosure controls and procedures as set forthbelow.

 

Due to the contractual arrangements of theAgreement of Trust and the Amendment to the Agreement of Trust dated October25, 1982 (the “Amendment”), there are certain potential weaknesses that maylimit the effectiveness of disclosure controls and procedures established bythe Trustees and their ability to verify the accuracy of certain financialinformation.  The contractual limitationscreating potential weaknesses in disclosure controls and procedures may bedeemed to include:

 

•      Northshorealone controls (i) historical operating data, including iron ore productionvolumes, marketing of iron ore products, operating and capital expenditures asthey relate to Northshore, environmental and other liabilities and the effectsof regulatory 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

 

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procedures, the Trustees do not control this information, and they relyon Northshore to provide accurate and timely information for use in the Trust’sreports filed with the Securities and Exchange Commission.  Moreover, while each quarter Northshorefurnishes shipment and royalty calculations to the Trustees, Northshore hasdeclined to support this information with a written certification attesting towhether Northshore has established disclosure controls and procedures andinternal controls sufficient to enable it to verify that the informationfurnished to the Trustees is accurate and complete.  Northshore is not required either by contractor by governmental laws or regulations to provide such a certification.

 

•      Gordon,Hughes and Banks, LLP, which serves as the Trust’s independent accountants hasdelivered a report to the Trust concluding that based upon its review of thefinancial statements of the Trust for its quarter ended October 31, 2004 (the “FinancialStatements”), it is not aware of any material modifications that should be madeto the Financial Statements in order for the Financial Statements to be inconformity with generally accepted accounting principles.

 

•      Underthe terms of the Agreement of Trust and the Amendment, the Trustees areentitled to, and in fact do, rely upon certain experts in good faith, including(i) the independent 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 InternalControl Over Financial Reporting***.  To the knowledge of the Trustees, there hasbeen no significant change in the Trust’s internal control over financialreporting that occurred during the Trust’s last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, the Trust’sinternal control over financial reporting. The Trustees note for purposes of clarification that they have noauthority over, and make no statement concerning, the internal control overfinancial reporting of Northshore.

 

Subsequent tothe end of the Trust's last fiscal quarter and prior to the filing of this Form10-Q, Eide Bailly LLP ("Eide Bailly") resigned as the Trust'sindependent accountants due to Eide Bailly’s de minimis involvement in thepreparation of the Trust's financial statements. (See Item 5, "OtherInformation" below for more information.) The Trust has changed itsinternal control over financial reporting with respect to the preparation ofits financial statements. Specifically, the Trustees engage a certified publicaccountant, other than its independent accountants, to prepare the Trust'sfinancial statements.

** **

**PARTII - OTHER INFORMATION**

# ** **

# **Item 1.**       LegalProceedings.

 

None.

# ** **

# **Item 2.**       UnregisteredSales of Equity Securities and Use of Proceeds.

 

None.

# ** **

# **Item 3.**       DefaultsUpon Senior Securities.

 

None.

# ** **

# **Item 4.**       Submissionof Matters to a Vote of Security Holders.

 

None.

 

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# **Item 5.**       OtherInformation.

 

Effective December 15, 2004, Eide Bailly LLP(“Eide Bailly”) resigned as independent certified public accountants to MesabiTrust (the “Trust”) due to Eide Bailly’s de minimis involvement in thepreparation of the Trust’s financial statements.  On that same date, the Trust engaged Gordon,Hughes & Banks, LLP (“GHB”) to act as independent certified publicaccountants for the Trust for each of the quarters and year-to-date periodsended April 30, 2004, July 31, 2004 and October 31, 2004.  The decision to change accountants wasunanimously made by the Trustees of the Trust. The Trustees are in the process of evaluating public accounting firms toengage as the Trust’s independent certified public accountants for its fiscalyear ending January 31, 2005.

 

The reports of Eide Bailly on the Trust’s financial statements for thepast two fiscal years contained no adverse opinion or disclaimer of opinion andwere not qualified or modified as to uncertainty, audit scope or accountingprinciples.

 

During the Trust’s two most recent fiscal yearsand during any subsequent interim periods preceding this change in accountants:

 

| **•** | ** ** | **There have been no disagreements with Eide  Bailly on any matter of accounting principles or practices, financial  statement disclosure, auditing scope or procedure, which disagreements, if  not resolved to the satisfaction of Eide Bailly, would have caused it to make  reference to the subject matter of the disagreements in connection with its  report on the financial statements for such years.** |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                        |
| **•** | ** ** | **There have been no “reportable events” as  described in Item 304(a)(1)(v) of Regulation S-K under the Securities Act of  1933; and**                                                                                                                                                                                                                                                                  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                        |
| **•** |       | Neither  the Trust nor anyone on its behalf has consulted GHB regarding either the  application of accounting principles to a specific transaction, whether  completed or proposed, or the type of audit opinion that might be rendered on  the Trust’s financial statements.                                                                                                                                |
| ** ** |       |                                                                                                                                                                                                                                                                                                                                                                                                              |

In connection with these events, the Trust will be filing today aCurrent Report on Form 8-K pursuant to Section 13 of the Securities ExchangeAct of 1934.  The Trust has provided acopy of the disclosure on the Form 8-K to Eide Bailly and has requested thatEide Bailly furnish it with a letter addressed to the Securities and ExchangeCommission stating whether Eide Bailly agrees with the above statements.  A copy of this letter, dated December 17,2004, will be filed as an Exhibit to the Form 8-K.

The Trust was also advised by Eide Bailly onDecember 15, 2004 that the Independent Accountant’s Review Reports filed inconjunction with the Trust’s Quarterly Reports on Form 10-Q for each of thequarters ended April 30, 2004 and July 31, 2004 should no longer be relied uponas Eide Bailly was not “independent” due to its de minimis involvement in thepreparation of the Trust’s financial statement for these two quarters.

 

Neither the Trustees nor Eide Bailly are aware ofany inaccuracies or errors in the financial statements for the quarters endedApril 30, 2004 and July 31, 2004, and therefore neither has concluded that suchfinancial statements cannot be relied upon. Rather, Eide Bailly’s review of such financial statements cannot berelied upon as being “independent” due to Eide Bailly’s de minimis involvementin their preparation.

 

The Trustees have discussed with Eide Bailly andGHB the above matters.  In connectionwith its engagement as independent accountants to the Trust for the first threequarters of its fiscal year ending January 31, 2005, GHB will be reviewing thefinancial statements for each of the quarters and year-to-date periods endedApril 30, 2004 and July 31, 2004.  TheTrust expects to file GHB’s Independent Accountant’s Review Reports asamendments to the respective Quarterly Reports on Form 10-Q for these twoquarters once they have been provided by GHB.

 

The Trust has provided a copy ofthis disclosure to Eide Bailly and has requested that Eide Bailly furnish itwith a letter addressed to the Securities and Exchange Commission statingwhether Eide Bailly agrees with the above statements.  A copy of this letter, dated December 17,2004, will be filed as an Exhibit to the Form 8-K.

 

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# **Item 6.**       Exhibits.

 

31            Certification ofCorporate Trustee of Mesabi Trust pursuant to Rule 13a-14 of the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-OxleyAct of 2002.

 

32            Certification ofCorporate Trustee of Mesabi Trust pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.1         Report dated December 20,2004 of Gordon, Hughes and Banks, LLP regarding its review of the un-auditedinterim financial statements of Mesabi Trust for its quarter ending October 31,2004.

 

**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:  December 20, 2004 | By:    | /s/ Rodney  Gaughan                   |
|--------------------------|--------|---------------------------------------|
|                     |   | Name: Rodney  Gaughan                 |
|                     |   | Title:  Assistant Vice President |

 

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* There are no principalexecutive officers or principal financial officers of the registrant.

 

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