**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **For the quarterly period ended October 31,  2009**                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **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 FileNumber:  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)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the Registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe Registrant was required to submit and post such files).  Yes  o No  o*

 

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*The registrant has not yet been phased into the interactive data requirements.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act:

 
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

Asof December 3, 2009, there were 13,120,010 Units of Beneficial Interest inMesabi Trust outstanding.

 

 

 

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** **

**PART I- FINANCIAL INFORMATION**

** **

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

 

**MesabiTrust**

**CondensedStatements of Income**

**Three andNine Months Ended October 31, 2009 and 2008**

** **
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **October 31,**   | ** ** | **October 31,**  | ** ** |
| ** **                                                    | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | **(unaudited)**        | ** ** | **(unaudited)**       | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **A.    Condensed  Statements of Income** | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Revenues                                                      |       |                   |       |                  |       |   |   |   |   |
| Royalty income                                                |       | $                      | 5,041,525  |                  | $          | 11,778,367 |   | $ | 6,482,372 |   | $ | 32,392,640 |   |
| Interest income                                               |       | 1,214                  |       | 17,749                |       | 8,185 |   | 37,086 |   |
|                                                          |       | 5,042,739              |       | 11,796,116            |       | 6,490,557 |   | 32,429,726 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Expenses                                                      |       | 141,870                |       | 138,805               |       | 567,629 |   | 562,446 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Net income                                                    |       | $                      | 4,900,869  |                  | $          | 11,657,311 |   | $ | 5,922,928 |   | $ | 31,867,280 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Number of units outstanding                                   |       | 13,120,010             |       | 13,120,010            |       | 13,120,010 |   | 13,120,010 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Net income per unit (Note 2)                                  |       | $                      | 0.3735     |                  | $          | 0.8885 |   | $ | 0.4514 |   | $ | 2.4289 |   |
|                                                          |       |                   |       |                  |       |   |   |   |   |
| Distributions declared per unit (Note 3)                      |       | $                      | 0.2200     |                  | $          | 1.2500 |   | $ | 0.6000 |   | $ | 2.3700 |   |

 

See Notes to CondensedFinancial Statements.

 

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**MesabiTrust**

**Condensed Balance Sheets**

**October 31, 2009 and January 31,2009**

 
| ** **                                                                 | ** ** | **October 31, 2009** | ** ** | **January 31, 2009** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                 | ** ** | **(unaudited)**           | ** ** | ** **                | ** ** |
| **B.    Condensed  Balance Sheets**                    | ** ** | ** **                | ** ** | ** **                | ** ** |
|                                                                       |       |                      |       |                      |       |
| **Assets**                                                                 | ** ** | ** **                | ** ** | ** **                | ** ** |
|                                                                       |       |                      |       |                      |       |
| Cash and cash equivalents                                                  |       | $                         | 3,912,151  |                      | $          | 2,254,107 |   |
|                                                                       |       |                      |       |                      |       |
| U.S. Government securities, at amortized cost (which  approximates market) |       | 1,053,613                 |       | 340,421                   |       |
|                                                                       |       |                      |       |                      |       |
| Accrued income receivable                                                  |       | 2,024,528                 |       | 2,721,978                 |       |
| Prepaid expenses                                                           |       | 53,637                    |       | 30,423                    |       |
|                                                                       |       | 7,043,929                 |       | 5,346,929                 |       |
|                                                                       |       |                      |       |                      |       |
| 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                         |       |
|                                                                       |       |                      |       |                      |       |
|                                                                       |       | $                         | 7,043,932  |                      | $          | 5,346,932 |   |
|                                                                       |       |                      |       |                      |       |
| **Liabilities, Unallocated Reserve  and Trust Corpus**                     | ** ** | ** **                | ** ** | ** **                | ** ** |
|                                                                       |       |                      |       |                      |       |
| Liabilities                                                                |       |                      |       |                      |       |
| Distribution payable                                                       |       | $                         | 2,886,402  |                      | $          | 1,443,201 |   |
| Accrued expenses                                                           |       | 64,425                    |       | 111,547                   |       |
| Deferred royalty revenue (Note 4)                                          |       | 2,250,000                 |       | —                    |       |
|                                                                       |       | 5,200,827                 |       | 1,554,748                 |       |
|                                                                       |       |                      |       |                      |       |
| Unallocated Reserve (Note 5)                                               |       | 1,843,102                 |       | 3,792,181                 |       |
| Trust Corpus                                                               |       | 3                         |       | 3                         |       |
|                                                                       |       |                      |       |                      |       |
|                                                                       |       | $                         | 7,043,932  |                      | $          | 5,346,932 |   |

 

See Notes to CondensedFinancial Statements.

 

3

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**Mesabi Trust**

**Condensed Statements of Cash Flows**

**Nine Months Ended October 31,2009 and 2008**

 
| ** **                                                                        | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **October 31,**  | ** ** |
| ** **                                                                        | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **(unaudited)**       | ** ** | **(unaudited)** | ** ** |
| **C.    Condensed  Statements of Cash Flows**                 | ** ** | ** **            | ** ** | ** ** | ** ** |
|                                                                              |       |                  |       |   |   |
| Cash flows from operating activities                                              | ** ** | ** **            | ** ** | ** ** | ** ** |
| Royalties received                                                                |       | $                     | 9,422,228  |   | $ | 31,795,442 |   |
| Interest received                                                                 |       | 15,779                |       | 39,785 |   |
| Expenses paid                                                                     |       | (637,965              | )          | (623,987 | ) |
|                                                                              |       |                  |       |   |   |
| Net cash provided by operating activities                                         |       | 8,800,042             |       | 31,211,240 |   |
|                                                                              |       |                  |       |   |   |
| Cash flows from investing activities                                              |       |                  |       |   |   |
| Maturities of U.S. Government Securities                                          |       | 208,000               |       | 368,954 |   |
| Purchases of U.S. Government Securities                                           |       | (921,193              | )          | (390,012 | ) |
|                                                                              |       |                  |       |   |   |
| Net cash provided by (used for) investing activities                              |       | (713,193              | )          | (21,058 | ) |
|                                                                              |       |                  |       |   |   |
| Cash flow used for financing activities                                           |       |                  |       |   |   |
| Distributions to Unitholders                                                      |       | (6,428,805            | )          | (21,451,216 | ) |
|                                                                              |       |                  |       |   |   |
| Net change in cash and cash equivalents                                           |       | 1,658,044             |       | 9,738,966 |   |
|                                                                              |       |                  |       |   |   |
| Cash, beginning of year                                                           |       | 2,254,107             |       | 6,959,701 |   |
|                                                                              |       |                  |       |   |   |
| Cash, end of period                                                               |       | $                     | 3,912,151  |   | $ | 16,698,667 |   |
|                                                                              |       |                  |       |   |   |
| **Reconciliation of net income to net  cash****provided by operating activities** |       |                  |       |   |   |
|                                                                              |       |                  |       |   |   |
| Net income                                                                        |       | $                     | 5,922,928  |   | $ | 31,867,280 |   |
| Decrease (increase) in accrued income receivable                                  |       | 697,450               |       | (591,949 | ) |
| Increase in prepaid expenses                                                      |       | (23,214               | )          | (28,846 | ) |
| Decrease in accrued expenses                                                      |       | (47,122               | )          | (35,245 | ) |
| Increase in deferred royalty revenue                                              |       | 2,250,000             |       | — |   |
|                                                                              |       |                  |       |   |   |
| Net cash provided by operating activities                                         |       | $                     | 8,800,042  |   | $ | 31,211,240 |   |

 

See Notes to CondensedFinancial Statements.

 

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**MESABI TRUST**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**October 31, 2009 (Unaudited)**

 

Note1.                           The financialstatements included herein have been prepared without audit (except for thebalance sheet at January 31, 2009) in accordance with the instructions to Form 10-Qpursuant to the rules and regulations of the Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave 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 thethree months and nine months ended October 31, 2009 and 2008, (b) thefinancial position at October 31, 2009 and (c) the cash flows for thenine months ended October 31, 2009 and 2008, have been made.  For further information, refer to thefinancial statements and footnotes included in Mesabi Trust’s Annual Report on Form 10-Kfor the year ended January 31, 2009.

 

The Trust evaluated theeffects of all subsequent events through December 4, 2009, whichrepresents the date of financial statement issuance.

 

Note2.                           Net income perunit includes accrued income receivable. As reflected on the Condensed Balance Sheet for the three months ended October 31,2009 (unaudited), the Trust recorded $2,024,528 of accrued incomereceivable.  Accrued income receivable isaccounted for and reported for the Trust’s third fiscal quarter based onshipments during the month of October even though such accrued incomereceivable is not available for distribution to unitholders until it isactually received by the Trust at the end of January 2010.  Net income per unit is based on 13,120,010units outstanding during the period.

 

Note3.                           The Trustdeclares distributions each year in April, July, October and January.  Distributions are declared after receivingnotification from Northshore Mining Company (“Northshore”) as to the amount ofroyalty income that is expected to be paid to the Trust based on shipmentsthrough the end of each calendar quarter. The Trust’s financial statements are prepared on an accrual basis andpresent the Trust’s results of operations based on each fiscal quarter whichends one month after the close of each calendar quarter.  Because distributions are declared based onroyalty income that is payable as of the end of each calendar quarter and theTrust’s Net Income is calculated as of the end of each fiscal quarter, thedistributions declared by the Trust are not equivalent to the Trust’s NetIncome during the periods reported in this quarterly report on Form 10-Q.

 

Note4.                           In April, theTrust received its quarterly distribution payment from Northshore ofapproximately $5,200,000. In accordance with the Trust’s revenue recognitionpolicy, the Trust recognized revenue related to tons of iron ore that wereshipped by Northshore, but for which Northshore has indicated that finalpricing is not yet known.  As a result ofdecreases in estimated pellet pricing subsequent to January 31, 2009, thecash proceeds received by the Trust in April 2009 exceeded the royaltyrevenue recognized by the Trust for the nine month period ended October 31,2009.  Accordingly, the Trust hasestimated a $2,250,000 liability in the form of deferred royalty revenue basedon current pricing estimates provided by Northshore. Deferred royalty revenuewill be adjusted in accordance with the Trust’s revenue recognition policy eachquarter as updated pricing information is received.  It is possible that deferred royalty revenuemay reduce future royalty payments to be received from Northshore beginning inthe first quarter of 2010 when pricing related to these tons of iron ore thatwere previously shipped by Northshore is expected to be finalized.

 

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Note5.                           The UnallocatedReserve consisted of $2,068,574 (unaudited) in unallocated cash and U.S. Governmentsecurities, and $2,024,528 (unaudited) of accrued revenue primarilyrepresenting royalties not yet received by the Trust but anticipated to bereceived in January 2010, less estimated deferred royalty revenue of$2,250,000.  Pursuant to the Agreement ofTrust, the Trust makes cash distributions to Unitholders based on the royaltypayments it receives from Northshore when received, rather than as royaltyincome is recorded in accordance with the Trust’s revenue recognitionpolicy.  Refer to Note 4 for furtherinformation.

 

Asof October 31, 2009 and January 31, 2009, the Trust’s UnallocatedReserve was comprised of the following components:

 
| ** **                           | ** ** | **October 31, 2009** | ** ** | **January 31, 2009** | ** ** |
|--------------------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                           | ** ** | **(unaudited)**           | ** ** | ** **                | ** ** |
| Cash and U.S. Government  securities |       | $                         | 2,068,574  |                      | $          | 1,070,203 |   |
| Accrued income receivable            |       | 2,024,528                 |       | 2,721,978                 |       |
| Deferred royalty revenue             |       | (2,250,000                | )          | -0-                       |       |
|                                 |       |                      |       |                      |       |
| Unallocated Reserve                  |       | $                         | 1,843,102  |                      | $          | 3,792,181 |   |

 

Areconciliation of the Trust’s Unallocated Reserve from January 31, 2009 toOctober 31, 2009 is as follows:

 
| Unallocated Reserve,  January 31, 2009             |       | $          | 3,792,181  |   |
|---------------------------------------------------------|------------|------------|------------|--------|
|                                                    |       |       |       |
| Net income                                              |       | 5,922,928  |       |
| Distributions declared and  paid                        |       | (7,872,007 | )          |
| ** **                                              | ** ** | ** ** | ** ** |
| Unallocated Reserve,  October 31, 2009 (unaudited) |       | $          | 1,843,102  |   |

 

TheTrustees have determined that the unallocated cash and U.S. Governmentsecurities portion of the Unallocated Reserve should be maintained at a prudentlevel, usually within the range of $500,000 to $1,000,000, to meet present orfuture liabilities of the Trust.  As aresult of the $2,250,000 deferred royalty revenue recorded by the Trust, theTrustees have determined that it is prudent to increase the unallocated cashand U.S. Government securities portion of the Unallocated Reserve above therange of $500,000 to $1,000,000.

 

Note6.                           Effective August 1,2009, the Trust adopted the FASB Accounting Standards CodificationTM (“Codification”).The Codification is the source of authoritative U.S. GAAP recognized by theFASB to be applied by nongovernmental entities. The content of the Codificationcarries the same level of authority, thereby modifying the previous GAAPhierarchy to include only two levels of GAAP: authoritative andnonauthoritative. The Codification is effective for financial statements issuedfor interim and annual periods ending after September 15, 2009. Adoptionof the Codification did not result in a change in current accounting practice.

 

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

 

**Forward-Looking Statements**

 

Certain information included in this Quarterly Report on Form 10-Qcontains “forward-looking statements” within the meaning of Section 21E ofthe Securities Exchange Act of 1934 and Section 27A of the Securities Actof 1933.  All such forward-lookingstatements, including those statements estimating iron ore pellet production orshipments, are based on information from the lessee/operator (and its parentcorporation) of the mine located on the lands owned and held in trust for thebenefit of the holders of units of beneficial interest of Mesabi Trust.  These statements may be identified by the useof forward-looking words, such as “may,” “will,” “could,” “project,” “predict,”“intend,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,”“plan,” “should,” “assume,” “forecast” and other similar words.  Such forward-looking statements areinherently subject to known and unknown risks and uncertainties.  Actual results and future developments coulddiffer materially from the results or developments expressed in or implied by theseforward-looking statements.  These risksand uncertainties include volatility of iron ore and steel prices, productsupply and demand, competition, regulation or government action, litigation anduncertainties about estimates of reserves. Further, substantialportions of royalties earned by Mesabi Trust are based on estimated prices thatare subject to interim and final adjustments which can be positive or negativeand are dependent in part on multiple price and inflation index factors underagreements to which Mesabi Trust is not a party and that are not known untilafter the end of a contract year.  It ispossible that future negative price adjustments could partially or evencompletely offset royalties or royalty income that would otherwise be payableto the Trust in any particular quarter, or at year-end, thereby potentiallyreducing cash available for distribution to the Trust’s Unitholders in futurequarters.  For a discussion of the factors, including, without limitation, thosethat could materially and adversely affect Mesabi Trust’s actual results andperformance, see “Risk Factors” in Part I — Item 1A of Mesabi Trust’sAnnual Report on Form 10-K for the year-ended January 31, 2009, asupdated by Part II — Item 1A of Mesabi Trust’s Quarterly Report on Form 10-Qfor the quarter ended April 30, 2009. Mesabi Trust undertakes no obligation, other than that imposed by law,to make any revisions to the forward-looking statements contained in thisfiling or to update them to reflect circumstances occurring after the date ofthis filing.

 

This discussion should be read in conjunction with the condensedfinancial statements and notes presented in this Form 10-Q and thefinancial statements and notes in the last filed Annual Report on Form 10-Kfiled for the period ending January 31, 2009 for a full understanding ofMesabi Trust’s financial position and results of operations for the nine monthperiod ended October 31, 2009.

 

**Background**

 

Mesabi Trust (“Mesabi Trust”or the “Trust”), formed pursuant to an Agreement of Trust dated July 18,1961 (the “Agreement of Trust”), is a trust organized under the laws of theState of New York.  Mesabi Trust holdsall of the interests formerly owned by Mesabi Iron Company (“MIC”), includingall right, title and interest in the Amendment of Assignment, Assumption andFurther Assignment of Peters Lease (the “Amended Assignment of Peters Lease”),the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease(the “Amended Assignment of Cloquet Lease” and together with the AmendedAssignment of Peters Lease, the “Amended Assignment Agreements”), thebeneficial interest in the Mesabi Land Trust (as such term is defined below)and all other assets and property identified in the Agreement of Trust. TheAmended Assignment of Peters Lease relates to an Indenture made as of April 30,1915 among East Mesaba Iron Company (“East Mesaba”), Dunka River Iron Company (“DunkaRiver”) and Claude W. Peters (the “Peters Lease”) and the Amended Assignment ofCloquet Lease relates to an Indenture made May 1, 1916 between CloquetLumber Company and Claude W. Peters (the “Cloquet Lease”).

 

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The Agreement of Trustspecifically prohibits the Trustees from entering into or engaging in anybusiness.  This prohibition applies evento business activities the Trustees may deem necessary or proper for thepreservation and protection of the Trust Estate.  Accordingly, the Trustees’ activities inconnection with the administration of Trust assets are limited to collectingincome, paying expenses and liabilities, distributing net income to the holdersof Certificates of Beneficial Interest in Mesabi Trust (“Unitholders”) afterthe payment of, or provision for, such expenses and liabilities, and protectingand conserving the assets held.

 

The Trustees do not intendto expand their responsibilities beyond those permitted or required by theAgreement of Trust, the Amendment to the Agreement of Trust dated October 25,1982 (the “Amendment”), and those required under applicable law.  Mesabi Trust has no employees, but it engagesindependent consultants to assist the Trustees in, among other things,monitoring the volume and sales prices of iron ore products shipped from SilverBay, Minnesota, based on information supplied to the Trustees by NorthshoreMining Company (“Northshore”), the lessee/operator of the Mesabi Trust lands,and its parent company Cliffs Natural Resources Inc (“Cliffs”).  References to Northshore in this quarterlyreport, unless the context requires otherwise, are applicable to Cliffs aswell.

 

Leasehold royalty incomeconstitutes the principal source of Mesabi Trust’s revenue.  Royalty rates are determined in accordancewith the terms of Mesabi Trust’s leases and assignments of leases.  Three types of royalties, as well as royaltybonuses, comprise the Trust’s leasehold royalty income:

 

·                                          Base overridingroyalties.  Baseoverriding royalties have historically constituted the majority of Mesabi Trust’sroyalty income.  Base overridingroyalties are determined by both the volume and selling price of iron oreproducts 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 ore productsin excess of 4 million tons so shipped annually.  Base overriding royalties are subject toprice adjustments under the Cliffs Pellet Agreements and, as describedelsewhere in this report, such adjustments may be positive or negative.

 

·                                          Royalty bonuses.  The Trust earns royalty bonuses when iron oreproducts shipped from Silver Bay are sold at prices above a threshold price perton.  The royalty bonus is based on apercentage of the gross proceeds of product shipped from Silver Bay and sold atprices above a threshold price.  Thethreshold price is adjusted (but not below $30.00 per ton) on an annual basisfor inflation and deflation (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $47.43 perton for calendar year 2008 and is $48.48 per ton for calendar year 2009.  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). Royalty bonuses are subject to price adjustments under the Cliffs PelletAgreements and, as described elsewhere in this report, such adjustments may bepositive or negative.

 

·                                          Fee royalties.  Fee royalties have historically constituted asmaller component of the Trust’s total royalty income.  Fee royalties are payable to the Mesabi LandTrust, a Minnesota land trust, which holds a 20% interest as fee owner in theAmended Assignment of Peters Lease. Mesabi Trust holds the entire beneficial interest in the Mesabi LandTrust for which U.S. Bank N.A. acts as the corporate trustee.  Mesabi Trust receives the net income of theMesabi Land Trust, which is generated from royalties on the amount of crude oremined after the payment of expenses to U.S. Bank N.A. for its 

 

8

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services as corporate trustee.  Crude ore is the source of iron oxides usedto make iron ore pellets and other products. The fee royalty on crude ore is based on an agreed price per ton,subject to certain indexing.

 

·                                          Minimum advanceroyalties.  Northshore’sobligation to pay base overriding royalties and royalty bonuses with respect tothe sale of iron ore products generally accrues upon the shipment of thoseproducts from Silver Bay.  However,regardless of whether any shipment has occurred, under the terms of the AmendedAssignment Agreements, Northshore is obligated to pay to Mesabi Trust a minimumadvance royalty.  Each year, the amountof the minimum advance royalty is adjusted (but not below $500,000 per annum)for inflation and deflation in accordance with the Amended AssignmentAgreements.  The minimum advance royaltywas $790,721 for calendar year 2008 and is $808,177 for calendar year2009.  Until overriding royalties (androyalty bonuses, if any) for a particular year equal or exceed the minimumadvance royalty for the year, Northshore must make quarterly payments of up to25% of the minimum advance royalty for the year.  Because minimum advance royalties areessentially prepayments of base overriding royalties and royalty bonuses earnedeach year, any minimum advance royalties paid in a fiscal quarter are recoupedby credits against base overriding royalties and royalty bonuses earned inlater fiscal quarters during the year.

 

Under the relevantdocuments, Northshore may mine and ship iron ore products from lands other thanMesabi Trust lands.  Northshore isobligated to make quarterly royalty payments in January, April, July and October ofeach year based on shipments of iron ore products from Silver Bay, Minnesotaduring each calendar quarter.  In thecase of base overriding royalties and royalty bonuses, these quarterly royaltypayments are to be made whether or not the related proceeds of sale have beenreceived by Northshore by the time such payments become due.  Northshore alone determines whether to mineoff Trust and/or such other lands, based on its current mining and engineeringplan.  The Trustees do not exert anyinfluence over mining operational decisions. To encourage the use of iron ore products from Mesabi Trust lands,Mesabi Trust receives royalties on stated percentages of iron ore shipped fromSilver Bay, whether or not the iron ore products are from Mesabi Trustlands.  Mesabi Trust receives royaltiesat the greater of (i) the aggregate quantity of iron ore products shippedthat were from Mesabi Trust lands, and (ii) a portion of the aggregatequantity of all iron ore products shipped from Silver Bay that were mined fromany lands, such portion being 90% of the first four million tons shipped fromSilver Bay during such year, 85% of the next two million tons shipped duringsuch year, and 25% of all tonnage shipped from Silver Bay during such year inexcess of six million tons.

 

Deutsche Bank Trust CompanyAmericas, the Corporate Trustee, performs certain administrative functions forMesabi Trust.  The Trust maintains awebsite at www.mesabi-trust.com. The Trust makes available (free of charge) itsannual, quarterly and current reports (and any amendments thereto) filed withthe Securities and Exchange Commission (the “SEC”) through its website as soonas reasonably practicable after electronically filing or furnishing such materialwith or to the SEC.

 

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**Results of Operations**

 

**Comparison of Iron Ore Pellet Production and Shipments for the Threeand Nine Months Ended October 31, 2009 and October 31, 2008**

 

As shown in the table below, production ofiron ore pellets at Northshore from Mesabi Trust lands during the fiscalquarter ended October 31, 2009 totaled approximately 1.1 million tons andactual shipments over the same period totaled approximately 1.3 milliontons.  By comparison, actual pelletproduction and actual shipments for the comparable period in 2008 wereapproximately 1.0 million tons and 1.5 million tons, respectively.

 

The 13% increase in production for the fiscalquarter ended October 31, 2009, as compared to the prior comparableperiod, is primarily the result of reduced mining operations due to scheduledmaintenance and repairs at Northshore during the three months ended October 31,2008.  The increase in production is alsothe result of Northshore’s decision to resume mining operations, and make upfor deferred production, after operations were idled from April 2009through early July 2009.   The 13%decrease in shipments from Trust lands, during the three months ended October 31,2009 as compared to the three months ended October 31, 2008, is primarilyattributable to a decline in orders from Cliffs’ customers because of loweranticipated demand from customers that Cliffs’ customers serve.

 
| **Fiscal Quarter Ended** | ** ** | **Pellets Produced from  Trust Lands********(tons)** | ** ** | **Pellets Shipped from Trust  Lands********(tons)** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| October 31, 2009    |       | 1,122,020                                            |       | 1,307,915                                           |       |
| October 31, 2008    |       | 995,398                                              |       | 1,503,256                                           |       |

 

As shown in the table below,during the nine months ended October 31, 2009, production of iron orepellets at Northshore from Mesabi Trust lands totaled approximately 2.08million tons, and actual shipments over the same period totaled approximately1.82 million tons.  By comparison, actualpellet production and actual shipments for the comparable period in 2008 wereapproximately 3.69 million tons and 5.09 million tons, respectively.

 

Production for the ninemonths ended October 31, 2009 fell short of production during the sameperiod ended October 31, 2008 by approximately 43.5%.  Shipments for the nine months ended October 31,2009 decreased 64.2% compared to the nine months ended October 31,2008.  The decrease in production atNorthshore is primarily the result of the mining operations at Northshore beingshutdown from April 2009 through early July 2009.  The significant decrease in shipments duringthe nine months ended October 31, 2009, as compared to the same period in2008, is due to the lower demand from Cliffs’ customers as they continue toadjust their purchases based on anticipated demand from their customers.

 
| **Nine Months Ended** | ** ** | **Pellets Produced from  Trust Lands********(tons)** | ** ** | **Pellets Shipped from Trust  Lands********(tons)** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| October 31, 2009 |       | 2,082,085                                            |       | 1,823,812                                           |       |
| October 31, 2008 |       | 3,685,182                                            |       | 5,092,258                                           |       |

 

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**Comparison of Royalty Income for the Three and Nine Months Ended October 31,2009 and October 31, 2008**

 

Total royalty income for thethree months ended October 31, 2009 was $5,041,525. This represents adecrease of approximately 57.2% as compared to the comparable priorperiod.  Base overriding royaltiesdecreased 66.0% to $2,628,313 and bonus royalties decreased 41.5% to$2,307,608.

 

The decrease in baseoverriding royalties for the three months ended October 31, 2009 is theresult of the lower volume of shipments of iron ore pellets from Trustlands and a decrease in the average sales price per ton of iron ore pellets, both ascompared to the same period in 2008.  Similarly, the decrease inbonus royalties is primarily due to lower contract prices for shipped iron oreproducts and fewer tons shipped, resulting in a decreased bonus royalty amount,which is calculated by multiplying the applicable royalty rate by thedifference between the sales price per ton and the adjusted threshold price for2009 of $48.48 per ton.

 

Fee royalties paid to theMesabi Land Trust decreased for the three months ended October 31, 2009,as compared to October 31, 2008. The following table summarizes the components of the total royaltyincome received by Mesabi Trust during the three months ended October 31,2009 and October 31, 2008.

 
| ** **                               | ** ** | **Three Months Ended October 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| Base overriding royalties                |       | $                                       | 2,628,313  |   | $ | 7,722,825 |   |
| Bonus royalties                          |       | 2,307,608                               |       | 3,940,960 |   |
| Minimum advance royalty  paid (recouped) |       | —                                  |       | — |   |
| Fee royalties                            |       | 105,604                                 |       | 114,582 |   |
| Total royalty income                     |       | $                                       | 5,041,525  |   | $ | 11,778,367 |   |

 

Total royalty income for thenine months ended October 31, 2009 decreased 80.0% from the priorcomparable period to $6,482,372. Base overriding royalties decreased 83.4% to$3,257,669 and bonus royalties also decreased 75.5% to $3,032,278 for the ninemonths ended October 31, 2009.  Thedecrease in base overriding royalties received by the Trust is the result oflower contract prices for shipped iron ore products and significantly lowervolume of total shipments of iron ore from Trust lands through October 31,2009, each as compared to the prior comparable period.  The decrease in bonus royalties received bythe Trust is also due to lower contract prices for shipped iron ore resultingin a decrease in the bonus royalty amount, which is calculated by multiplyingthe applicable royalty rate by the difference between the sales price per tonand the adjusted threshold price for 2009 of $48.48 per ton.

 

Fee royalties paid to theMesabi Land Trust decreased approximately 52.6% to $192,425 for the nine monthsended October 31, 2009, as a result of fewer gross tons of crude taconitemined.  The following table summarizesthe components of Mesabi Trust’s total royalty income for the nine months endedOctober 31, 2009 and October 31, 2008.

 
| ** **                               | ** ** | **Nine Months Ended  October 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                               | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| Base  overriding royalties               |       | $                                       | 3,257,669  |   | $ | 19,635,564 |   |
| Bonus  royalties                         |       | 3,032,278                               |       | 12,350,997 |   |
| Minimum advance royalty  paid (recouped) |       | —                                  |       | — |   |
| Fee royalties                            |       | 192,425                                 |       | 406,079 |   |
| Total royalty income                     |       | $                                       | 6,482,372  |   | $ | 32,392,640 |   |

 

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** **

**Comparison of Trust Income, Expenses and Distributions for the Threeand Nine Months Ended October 31, 2009 and October 31, 2008**

 

Net income for the fiscalquarter ended October 31, 2009 was $4,900,869, a decrease of approximately58.0% as compared to the quarter ended October 31, 2008.  The decrease in net income is the result ofdecreased base overriding royalties and bonus royalties.  Interest income received by Mesabi Trust decreased93.2% as compared to the prior comparable period primarily due to a decrease inthe amount of royalties received and held by Mesabi Trust prior to paying thequarterly distribution.  Expensesincreased 2.2% from the prior comparable period to $141,870, as a result ofslightly higher general operating expenses incurred in the administration ofthe Trust.  The following is a summary ofMesabi Trust’s income and expenses for the three months ended October 31,2009 and October 31, 2008.

 
| ** **           | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| Total royalty income |       | $                                       | 5,041,525  |   | $ | 11,778,367 |   |
| Interest income      |       | 1,214                                   |       | 17,749 |   |
| Gross income         |       | 5,042,739                               |       | 11,796,116 |   |
|                 |       |                                    |       |   |   |
| Expenses             |       | 141,870                                 |       | 138,805 |   |
| Net income           |       | $                                       | 4,900,869  |   | $ | 11,657,311 |   |

 

Net income for the ninemonths ended October 31, 2009 was $5,922,928, a decrease of approximately81.4% as compared to the nine months ended October 31, 2008.  This decrease is primarily attributable tolower base overriding royalties and bonus royalties, as compared to the ninemonths ended October 31, 2008. Interest income received by Mesabi Trust decreased 77.9% from the priorcomparable period due to a decrease in the amount of royalties received andheld by Mesabi Trust prior to paying the quarterly distributions.  Expenses increased 0.9% from the priorcomparable period to $567,629.  Thefollowing table summarizes Mesabi Trust’s income and expenses for the ninemonths ended October 31, 2009 and October 31, 2008.

 
| ** **           | ** ** | **Nine Months Ended  October 31,** | ** ** |
|----------------------|------------|-----------------------------------------|------------|
| ** **           | ** ** | **2009**                                | ** ** | **2008** | ** ** |
| Total royalty income |       | $                                       | 6,482,372  |   | $ | 32,392,640 |   |
| Interest income      |       | 8,185                                   |       | 37,086 |   |
| Gross income         |       | 6,490,557                               |       | 32,429,726 |   |
|                 |       |                                    |       |   |   |
| Expenses             |       | 567,629                                 |       | 562,446 |   |
| Net income           |       | $                                       | 5,922,928  |   | $ | 31,867,280 |   |

 

As presented on the Trust’s CondensedStatements of Income on page 2 of this quarterly report, the Trust’s netincome per unit decreased $0.515 to $0.3735 for the three months ended October 31,2009 and decreased $1.9775 to $0.4514 for the nine months ended October 31,2009 as compared to the three and nine months ended October 31, 2008,respectively. The Trust declared cash distribution of $0.22 per unit for thethree months ended October 31, 2009. Comparatively, the Trust declared and paid a distribution of $1.25 perunit for the three months ended October 31, 2008.  For the nine months ended October 31,2009, and October 31, 2008, the Trust declared distributions of $0.60 and$2.37, respectively.

 

Distributions are declared after receivingnotification from Northshore as to the amount of royalty income that isexpected to be paid to the Trust based on shipments through the end of eachcalendar quarter and such royalty payments may include pricing adjustments withrespect to shipments during

 

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priorperiods.  The Trust accounts for andreports accrued income receivable based on shipments during the last month ofthe Trust’s fiscal quarter (April, July, October and January) and priceadjustments under the Cliffs Pellet Agreements (which can be positive ornegative and can result in significant variations in royalties received byMesabi Trust and cash available for distribution to Unitholders).  The Trust accounts for these amounts by usingestimated prices and reports such amounts even though accrued income receivableis not available for distribution to Unitholders until it is received by theTrust.  Accordingly, distributionsdeclared by the Trust are not equivalent to the Trust’s Net Income during theperiods reported in this quarterly report on Form 10-Q.

 

**Comparisonof Unallocated Reserve as of October 31, 2009, October 31, 2008 and January 31,2009**

 

The Unallocated Reserve, which is comprised of accrued incomereceivable, cash reserves for potential fixed or contingent future liabilities,and, with respect to the nine months ended October 31, 2009, deferredroyalty revenue, decreased from $2,432,878 as of October 31, 2008 to$1,843,102 as of October 31, 2009. A significant component of the Trust’s Unallocated Reserve as of October 31,2008 and October 31, 2009, was the accrued income receivable of $1,551,874and, $2,024,528, respectively.  Theincrease in the accrued income receivable portion of the Unallocated Reserve isthe result of higher shipments during the month of October 2009 as comparedto October 2008 but has been partially offset by lower royalty rates onthose tons and generally lower pellet prices. The Trust’s cash reserve for potential fixed or contingent futureliabilities, represented on the Trust’s balance sheet by unallocated cash andU.S. Government securities, increased 135% to $2,068,574 as of October 31,2009 from $881,004 as of October 31, 2008. The increase in the cash reserve for potential fixed or contingentfuture liabilities is due to the Trustees’ decision to not declare adistribution during the quarter ended July 31, 2009, because of the Trust’sdeferred royalty revenue liability and the uncertainty surrounding the volatileglobal economic climate that continues to impact the iron ore and steelindustries.

 

The decline in the Trust’s Unallocated Reserve as of October 31,2009 from October 31, 2008, is the result of an estimated $2,250,000liability, which is represented on the Trust’s balance sheet as deferredroyalty revenue, and which was offset by the increases in accrued incomereceivable, unallocated cash and U.S. Government securities noted above.  Because of declines in the estimated pricingof iron ore pellets subsequent to January 31, 2009, the royalty paymentreceived by the Trust in April 2009 includes approximately $2,250,000 ofcash proceeds that were received by the Trust, but have not been recognized asrevenue in accordance with the Trust’s revenue recognition policy.  Because of slight increases in currentpricing estimates provided to the Trust by Northshore, the deferred royaltyrevenue decreased approximately 12.5% from $2,570,000 as of July 31, 2009to $2,250,000 as of October 31, 2009. The Trust did not have any deferred royalty revenue as of October 31,2008.  Depending on future adjustments toiron ore pellet pricing, if any, the deferred royalty revenue could cause acumulative negative price adjustment related to shipments of pellets duringprior periods, which could partially or even completely offset future royaltyincome to be received by the Trust.

 

The Trust’s Unallocated Reserve as of October 31, 2009 decreasedfrom $3,792,181 as of January 31, 2009, to $1,843,102 as of October 31,2009.  The decrease in the UnallocatedReserve is due primarily to the Trust’s accrual of $2,250,000 in deferredroyalty revenue. Moreover, as a result of the price adjustment mechanisms underthe Cliffs Pellet Agreements, the Trust received positive adjustments to itsroyalty income which is reflected in the royalty income for the year ended January 31,2009.  Those adjustments wereattributable to shipments of iron ore pellets by Northshore/Cliffs to itscustomers from Silver Bay, Minnesota during calendar years 2006, 2007 and2008.  In the aggregate, the pricingadjustments increased the accrued income receivable reflected on the Trust’sbalance sheet as of January 31, 2009. At January 31, 2009, approximately 72% of the Unallocated Reserveor $2,721,978 was represented by accrued income receivable while 28% or$1,070,203 was represented by unallocated cash and U.S. Government securities.

 

The Trustees have determined that the cash and U.S. Governmentsecurities portion of the Unallocated Reserve, usually within the range of$500,000 to $1,000,000 or such other amount as the 

 

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Trusteesmay deem prudent, should be maintained as a reserve for potential fixed orcontingent future liabilities.  As aresult of the $2,250,000 deferred royalty revenue recorded by the Trust, theunpredictable nature of the current economic conditions, and the potential forfuture negative price adjustments under the long-term customer contractsbetween Northshore, Cliffs and certain customers, the Trustees have determinedthat it is prudent to increase the cash and U.S. Government securities portionof the Unallocated Reserve above the range of $500,000 to $1,000,000.  The actual amount of the Unallocated Reservewill fluctuate from time to time and may increase or decrease from its currentlevel. Future distributions will be highly dependent upon royalty income as itis received, changes in estimated pricing, potential for future priceadjustments and the level of Trust expenses. The amount of future royalty income available for distribution will besubject to the volume of iron ore product shipments and the dollar level ofsales by Northshore.  Shipping activityis greatly reduced during the winter months and economic conditions,particularly those affecting the steel industry, may adversely affect theamount and timing of such future shipments and sales.  It is possible that future negative priceadjustments could offset, or even eliminate, royalties or royalty income thatwould otherwise be payable to the Trust in any particular quarter, or at yearend, thereby potentially reducing cash available for distribution to the Trust’sUnitholders in future quarters.  Seediscussion under the heading “Risk Factors” beginning on page 3 of theTrust’s Annual Report on Form 10-K for the fiscal year ended January 31,2009, as updated by Part II — Item 1A of Mesabi Trust’s Quarterly Reporton Form 10-Q for the quarter ended April 30, 2009.

 

The Trustees will continue to monitor the economic circumstances of theTrust to strike a responsible balance between distributions to Unitholders andthe need to maintain reserves at a prudent level, given the unpredictablenature of the iron ore industry, the Trust’s dependence on the actions of thelessee/operator, and the fact that the Trust essentially has no other liquidassets.

 

**Recent Developments**

 

***Production and Shipments***.  In its Form 10-Q filed October 30,2009, Cliffs reported that production at Northshore for the three months ended September 30,2009 was 1.0 million tons and total production for the nine months ended September 30,2009 was approximately 2.0 million tons.   Comparatively, production of iron ore pellets at Northshore for thethree and nine months ended September 30, 2008 was 1.6 million tons and4.4 million tons, respectively.  In acurrent report on Form 8-K filed May 5, 2009, Cliffs reported that itis estimating total production of 3.2 million tons of iron ore pellets atNorthshore during calendar year 2009. Northshore has not provided the Trustees with an estimate of totalexpected shipments of iron ore pellets for calendar year 2009.   During calendar years 2008, 2007, 2006, 2005and 2004, the percentage of shipments of iron ore products from Mesabi Trustlands was approximately 90.2%, 88.2%, 90.9%, 90.1% and 92.0%, respectively, oftotal shipments.  Northshore has notadvised the Trustees as to the percentage of iron ore products from MesabiTrust lands it anticipates shipping in calendar year 2009.  See the description of the uncertainty ofmarket conditions in the iron ore and steel industry under “Important FactorsAffecting Mesabi Trust “ below and the information under the heading “RiskFactors” in Part I — Item 1A of the Trust’s Annual Report on Form 10-Kfor the year-ended January 31, 2009, as updated by Part II — Item 1Aof Mesabi Trust’s Quarterly Report on Form 10-Q for the quarter ended April 30,2009.

 

***Production at Northshore***.*** *** Production at Northshore was shutdown from April 2009 throughearly July 2009.  As reported byCliffs, production at Northshore resumed at reduced levels in early July.  In its Form 10-Q filed October 30,2009, Cliffs reported that Northshore would operate its two large furnacesduring Cliffs’ fourth quarter.  Cliffshas not informed the Trustees of any change to its estimate that totalproduction at Northshore during calendar year 2009 will equal 3.2 million tonsof iron ore pellets.  Cliffs has also notinformed the Trustees about the effect that current production levels will haveon shipments of iron ore pellets by Northshore from Silver Bay, Minnesota.  Accordingly, the Trustees are unable to makeany projections regarding the production levels at Northshore or the futureroyalties payable to Mesabi Trust.

 

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***ArcelorMittal Arbitration with Cliffs***.  In its Form 10-Q filed October 30,2009, Cliffs reported that Northshore, along with The Cleveland-Cliffs IronCompany, Cliffs Mining Company and Cliffs Sales Company, filed two arbitrationdemands against ArcelorMittal USA Inc., ISG Cleveland Inc., ISG Indiana HarborInc. and Mittal Steel USA Weirton Inc. (collectively, “ArcelorMittal”).  Cliffs reported that each arbitration demandwas filed on September 11, 2009 and related to the Umbrella Agreemententered into by the parties in 2007. According to Cliffs, the first arbitration, to which ArcelorMittal filedan answer on October 1, 2009, stemmed from attempts by ArcelorMittal torevise the nomination of ArcelorMittal’s pellet requirements and acorresponding shipping schedule for 2009. Cliffs reported that the nomination and shipping schedule were finalizedin November 2008, and that ArcelorMittal provided several revisednominations and shipping schedules in 2009. Cliffs reported that in response to the revised nominations, Cliffsfiled the arbitration demand to enforce the nomination and shipping schedulefinalized in November 2008 for the year 2009.  Cliffs further reported that a similararbitration demand filed by Cliffs in 2008 and related to attempted revisionsto the ArcelorMittal’s 2008 nomination was successful.

 

According to Cliffs, the second arbitration demand, to whichArcelorMittal filed an answer and counterclaim on October 1, 2009, relatedto ArcelorMittal’s attempt to reverse an election to defer certain tonnage for2009.  As Cliffs reports, the UmbrellaAgreement permits ArcelorMittal to make a one-time election to defer tons fromone calendar year into the next, which then prevents ArcelorMittal from takinganything less than its minimum tonnage for the following calendar year.  ArcelorMittal made an election to defertonnage from 2009 to 2010.  Subsequently,ArcelorMittal purported to revoke its election to defer, which would have theeffect of increasing the tonnage to be received in 2009 and allowingArcelorMittal to defer tonnage from 2010 into 2011.  Cliffs reported that it filed the arbitrationdemand to enforce the nomination and the 2009 deferral contained in thenomination.

 

The Trustees are unable to predict what impact the arbitrationproceedings between Cliffs and ArcelorMittal will have on shipments fromNorthshore or future royalties payable to the Trust.

 

***Northshore Administrative Permit Amendment***.   In July 2007, Northshore filed a motionwith the Minnesota Federal District Court seeking clarification of and relieffrom the “control city” standard established in that court’s 1975injunction.  The Minnesota FederalDistrict Court ruled that Northshore lacked standing to challenge the “controlcity” standard found in the 1975 injunction because the “control city” standardhad become an independent state standard found in Northshore’s permits from theMPCA and thus, a favorable decision concerning the injunction would not affectNorthshore’s duty to comply with its state permits.  For the same reason, the District Court alsoheld that the 1975 injunction was moot and had no further force or effectbecause Northshore’s permits still require it to comply with the “control city”standard.  On August 17, 2009, theUnited States Court of Appeals for the Eighth Circuit affirmed the MinnesotaFederal District Court’s decision that the “control city” standard in the 1975injunction is moot.

 

As reported in the Trust’s Form 10-K filed April 16, 2009,according to Cliffs’ Form 10-K filed February 26, 2009, Cliffs fileda major permit amendment on August 28, 2008 to remove the “control city”requirement from its permit. Cliffs also reported that on November 25,2008, in response to the proposed amendment, the Minnesota Pollution ControlAgency (“MPCA”) issued an order declaring that Northshore’s request to removethe “control city” standard from its permit constitutes a “project” for whichan Environmental Assessment Worksheet, or EAW, must be completed.  According to Cliffs’ Form 10-K, the MPCAalso stated that it was ceasing all other work on the permit, including its ownefforts to create a replacement standard, until the environmental reviewprocess was complete.  Cliffs alsoreported that Northshore has filed an action to challenge the MPCA’srequirement for an EAW in Minnesota State District Court, which is currentlypending.  Cliffs reported in its Form 10-Qfiled October 30, 2009 that oral arguments on this appeal were held on October 19,2009.

 

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The Trustees are unable to predict what impact, if any, theadministrative hearings discussed above will have on Northshore’s compliancewith its Title V operating permit or future royalties payable to the Trust.

 

**Important Factors Affecting Mesabi Trust**

 

The Agreement of Trustspecifically prohibits the Trustees from entering into or engaging in anybusiness.  This prohibition seeminglyapplies even to business activities the Trustees deem necessary or proper forthe preservation and protection of the Trust Estate (as such term is definedbelow).  Accordingly, the Trustees’activities in connection with the administration of Trust assets are limited tocollecting income, paying expenses and liabilities, distributing net income toMesabi Trust’s Unitholders after the payment of, or provision for, suchexpenses and liabilities, and protecting and conserving the assets held.  Consequently, the income of Mesabi Trust ishighly dependent upon the activities and operations of Northshore, and theterms and conditions of the leases and assignments of leases between MesabiTrust and Northshore.

 

Neither Mesabi Trust nor theTrustees have any control over the operations and activities of Northshore,except within the framework of the Amended Assignment Agreements.  Cliffs alone controls (i) historicaloperating data, including iron ore production volumes, marketing of iron oreproducts, operating and capital expenditures as they relate to Northshore,environmental and other liabilities and the effects of regulatory changes; (ii) plansfor Northshore’s future operating and capital expenditures; (iii) geologicaldata relating to ore reserves (iv) projected production of iron oreproducts; (v) contracts between Cliffs and Northshore with theircustomers; and (vi) the decision to mine off Mesabi Trust and/or statelands, based on Cliffs’ current mining and engineering plan.  The Trustees do not exert any influence overmining operational decisions at Northshore, nor do the Trustees provide anyinput regarding the ore reserve estimated at Northshore as reported by Cliffs.  While the Trustees request material informationfor use in periodic reports as part of their evaluation of Mesabi Trust’sdisclosure controls and procedures, the Trustees do not control thisinformation and they rely on the information in Cliffs’ periodic and currentfilings with the SEC to provide accurate and timely information in Mesabi Trust’sreports filed with the SEC.

 

In accordance with theAgreement of Trust and the Amendment, the Trustees are entitled to, and in factdo rely, upon certain experts in good faith, including (i) the independentconsultants with respect to monthly production and shipment reports, whichinclude figures on crude ore production and iron ore pellet shipments, anddiscussions concerning the condition and accuracy of the scales and plansregarding the development of Mesabi Trust’s mining property; and (ii) theaccounting firm they have contracted with for non-audit services, includingreviews of financial data related to shipping and sales reports provided byNorthshore and a review of the schedule of leasehold royalties payable toMesabi Trust.

 

For a discussion ofadditional factors, including but not limited to those that could adverselyaffect Mesabi Trust’s actual results and performance, see “Risk Factors” in Part I— Item 1A of Mesabi Trust’s Annual Report on Form 10-K for the year-ended January 31,2009, as updated by Part II — Item 1A of Mesabi Trust’s Quarterly Reporton Form 10-Q for the quarter ended April 30, 2009.

 

**Iron Ore Pricing and ContractAdjustments**

 

During the course of its fiscal year some portion of the royalties paidto Mesabi Trust are based on estimated prices for iron ore products sold underterm contracts between Cliffs and its subsidiaries and certain of theircustomers (the “Cliffs Pellet Agreements”). Mesabi Trust is not a party to any ofthe Cliffs Pellet Agreements.  Theseprices are subject to interim and final pricing adjustments, which can bepositive or negative, and which adjustments are dependent in part on a varietyof price and inflation index factors, including but not limited to theinternational benchmark pellet price, hot band steel prices and variousProducer Price Indexes. Although Northshore makes interim adjustments to theroyalty payments on a quarterly basis, these price adjustments cannot befinalized until after the end of a contract year. This 

 

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mayresult in significant and frequent variations in royalties received by MesabiTrust (and in turn the resulting amount of funds available for distribution toUnitholders by the Trust) from quarter to quarter and on a comparativehistorical basis, and these variations, which can be positive or negative,cannot be predicted by Mesabi Trust.  Itis possible that future negative price adjustments could partially or evencompletely offset royalties or royalty income that would otherwise be payableto the Trust in any particular quarter, or at year-end, thereby potentiallyreducing cash available for distribution to the Trust’s Unitholders in futurequarters.

 

**Effects of Securities Regulation**

 

The Trust is apublicly-traded trust listed on the New York Stock Exchange (“NYSE”) and istherefore subject to extensive regulation under, among others, the SecuritiesAct of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of2002 (“Sarbanes-Oxley”) and the rules and regulations of the NYSE.  Issuers failing to comply with suchauthorities risk serious consequences, including criminal as well as civil andadministrative penalties.  In mostinstances, these laws, rules and regulations do not specifically addresstheir applicability to publicly-traded trusts such as Mesabi Trust.  In particular, Sarbanes-Oxley mandated theadoption by the Securities and Exchange Commission (the “SEC”) and NYSE ofcertain rules and regulations that are impossible for the Trust toliterally satisfy because of its nature as a pass-through trust.  Pursuant to NYSE rules currently ineffect, the Trust is exempt from many of the corporate governance requirementsthat apply to publicly traded corporations. The Trust does not have, nor does the Agreement of Trust provide for, aboard of directors, an audit committee, a corporate governance committee or acompensation committee.  The Trusteesintend to closely monitor the SEC’s and the NYSE’s rulemaking activity and willattempt to comply with such rules and regulations where applicable.

 

In May 2008, the Trust established a websitein response to the NYSE’s interpretation of Rule 203.01 of the NYSE ListedCompany Manual.  The Trust’swebsite is located at www.mesabi-trust.com.

 

**CriticalAccounting Policies**

 

This “Trustees’ Discussionand Analysis of Financial Condition and Results of Operations” is based uponthe Trust’s financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires the Trustees to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. Critical accounting policies are those that have meaningful impact onthe reporting of the Trust’s financial condition and results, and that requiresignificant judgment and estimates. During the preparation of financial statements, the Trust makesestimates, assumptions and judgments that affect reported amounts. Theseestimates, assumptions and judgments include those related to revenuerecognition and accrued expenses. The Trust bases its estimates on variousassumptions and historical experience, which are believed to be reasonable;however, due to the inherent nature of estimates, actual results may differsignificantly due to changed conditions or assumptions. On a regular basis, theTrust reviews the accounting policies, assumptions, estimates and judgments toensure that the financial statements are fairly presented in accordance withaccounting principles generally accepted in the United States. However, becausefuture events and their effects cannot be determined with certainty, actualresults could differ from assumptions and estimates, and such differences couldbe material.

 

The Trust did not have anychanges in critical accounting policies or in significant accounting estimatesduring the three months ended October 31, 2009.  For a complete description of the Trust’ssignificant accounting policies, please see Note 2 to the financial statementsincluded in the Trust’s Annual Report on Form 10-K for the year ended January 31,2009.

 

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**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk.**

 

Not applicable.

 

**Item 4.  Controls andProcedures.**

 

***Evaluation of Disclosure Controls and Procedures******. ***The Trustees maintaindisclosure controls and procedures designed to ensure that information requiredto be disclosed by the Trust in the reports that it files or submits under theSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported within the time periods specified in the rules andregulations of the Securities and Exchange Commission.  Disclosure controls and procedures includecontrols and procedures designed to ensure that information required to bedisclosed by the Trust is accumulated and communicated by Northshore and consultantsto the Trustees as appropriate, to allow timely decisions regarding requireddisclosure.

 

As part of their evaluationof the Trust’s disclosure controls and procedures, the Trustees rely onquarterly shipment and royalty calculations provided by Northshore.  Because Northshore has declined to supportthis information with a written certification attesting to whether Northshorehas established disclosure controls and procedures and internal controlssufficient to enable it to verify that the information furnished to theTrustees is accurate and complete, the Trustees also rely on (a) an annualcertification from Northshore and Northshore’s parent, Cliffs, certifying as tothe accuracy of the royalty calculations, and (b) the related duediligence review performed by the Trust’s external accountants.  In addition, the Trust’s consultants reviewthe schedule of leasehold royalties payable and shipping and sales reportsprovided by Northshore against production and shipment reports prepared by theEveleth Fee Office, Inc., an independent consultant to the Trust (“EvelethFee Office”). The Eveleth Fee Office gathers production and shippinginformation from Northshore and prepares monthly production and shipmentreports for the Trustees. Furthermore, as part of its engagement by the Trust,the Eveleth Fee Office also attends Northshore’s calibration and testing of itscrude ore scales and boat loader scales which are conducted on a periodicbasis.

 

As of the end of the periodcovered by this report, the Trustees carried out an evaluation of the Trust’sdisclosure controls and procedures.  TheTrustees have concluded that such disclosure controls and procedures areeffective.

 

***Changes in Internal Control Over Financial Reporting***.  To the knowledge of the Trustees, there hasbeen no change in the Trust’s internal control over financial reporting thatoccurred during the Trust’s last fiscal quarter that has materially affected,or is reasonably likely to materially affect, the Trust’s internal control overfinancial reporting.  The Trustees notefor purposes of clarification that they have no authority over, and make nostatement concerning, the internal control over financial reporting ofNorthshore or Cliffs.

 

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**PART II - OTHER INFORMATION**

 

**Item 1.****               ****LegalProceedings.**

 

None.

 

**Item 1A.****      ****Risk Factors**

 

There have been no material changes in the Trust’s riskfactors as described in Part I Item 1A, “Risk Factors” in the Trust’sAnnual Report on Form 10-K for the year ended January 31, 2009, asupdated by Part II — Item 1A of Mesabi Trust’s Quarterly Report on Form 10-Qfor the quarter ended April 30, 2009.

 

**Item 6.****               ****Exhibits.**

 
| 31     | Certification  of Corporate Trustee of Mesabi Trust pursuant to Rule 13a-14 of the  Securities Exchange Act of 1934, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.        |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                         |
| 32     | Certification  of 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   | Report  of Wipfli LLP, dated December 4, 2009 regarding its review of the  unaudited interim financial statements of Mesabi Trust as of and for the  three and nine months ended October 31, 2009. |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on 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:* |
|                         |                                                              |
|                         | By:                                                               | DEUTSCHE  BANK NATIONAL TRUST COMPANY |
|                         |                                                              |   |
|                         |                                                              |   |
| Date:  December 4, 2009 | By:                                                               | /s/  Kenneth R. Ring |
|                         |                                                              | Name:  Kenneth R. Ring |
|                         |                                                              | Title:  Vice President |

 

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* There are no principal executive officersor principal financial officers of the registrant.

 

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