**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended October 31, 2010**

** **

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**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               |       | (I.R.S.  Employer Identification No.) |
| incorporation  or organization)                |       |                                  |
|                                           |       |                                  |
| **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) hasfiled 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) hasbeen subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the Registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the Registrant was required to submit and postsuch files).  Yes  o No  o*

 

----

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

 

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

| Large accelerated filer o |   | Accelerated filer x         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-accelerated filer o   |   | Smaller Reporting Company o |

 

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

 

As of December 1, 2010, there were 13,120,010 Unitsof Beneficial Interest in Mesabi Trust outstanding.

 

 

 

----

 

**PART I - FINANCIAL INFORMATION**

 

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

 

**Mesabi Trust**

**Condensed Statements of Income**

**Three and Nine Months Ended October 31, 2010 and 2009**

 
| ** ** | ** **                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** ** | ** **                               | ** ** | **October 31,**             | ** ** | **October 31,**            | ** ** |
| ** ** | ** **                               | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** ** | ** **                               | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| **A.**     | **Condensed Statements of Income**       | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|       |                                     |       |                             |       |                            |       |   |   |   |   |
|       | Revenues                                 |       |                             |       |                            |       |   |   |   |   |
|       | Royalty income                           |       | $                                | 11,574,496 |                            | $          | 5,041,525 |   | $ | 27,790,642 |   | $ | 6,482,372 |   |
|       | Interest income                          |       | 1,817                            |       | 1,214                           |       | 12,478 |   | 8,185 |   |
|       |                                     |       | 11,576,313                       |       | 5,042,739                       |       | 27,803,120 |   | 6,490,557 |   |
|       |                                     |       |                             |       |                            |       |   |   |   |   |
|       | Expenses                                 |       | 179,747                          |       | 141,870                         |       | 612,295 |   | 567,629 |   |
|       |                                     |       |                             |       |                            |       |   |   |   |   |
|       | Net income                               |       | $                                | 11,396,566 |                            | $          | 4,900,869 |   | $ | 27,190,825 |   | $ | 5,922,928 |   |
|       |                                     |       |                             |       |                            |       |   |   |   |   |
|       | Number of units outstanding              |       | 13,120,010                       |       | 13,120,010                      |       | 13,120,010 |   | 13,120,010 |   |
|       |                                     |       |                             |       |                            |       |   |   |   |   |
|       | Net income per unit (Note 2)             |       | $                                | 0.8686     |                            | $          | 0.3735 |   | $ | 2.0725 |   | $ | 0.4514 |   |
|       |                                     |       |                             |       |                            |       |   |   |   |   |
|       | Distributions declared per unit (Note 3) |       | $                                | 0.9100     |                            | $          | 0.2200 |   | $ | 1.8350 |   | $ | 0.6000 |   |

 

SeeNotes to Condensed Financial Statements.

 

2

----

 

**Mesabi Trust**

**Condensed Balance Sheets**

**October 31, 2010 and January 31, 2010**

 
| ** ** | ** **                                                                 | ** ** | **October 31, 2010** | ** ** | **January 31, 2010** | ** ** |
|------------|----------------------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** ** | ** **                                                                 | ** ** | **(unaudited)**                | ** ** | ** **                     | ** ** |
| **B.**     | **Condensed Balance Sheets**                                               | ** ** | ** **                     | ** ** | ** **                     | ** ** |
|       |                                                                       |       |                           |       |                           |       |
| ** ** | **Assets**                                                                 | ** ** | ** **                     | ** ** | ** **                     | ** ** |
|       |                                                                       |       |                           |       |                           |       |
|       | Cash and cash equivalents                                                  |       | $                              | 12,211,251 |                           | $          | 8,444,697 |   |
|       |                                                                       |       |                           |       |                           |       |
|       | U.S. Government securities, at amortized cost  (which approximates market) |       | 668,888                        |       | 1,850,515                      |       |
|       |                                                                       |       |                           |       |                           |       |
|       | Accrued income receivable                                                  |       | 3,320,776                      |       | 873,938                        |       |
|       | Prepaid expenses                                                           |       | 53,637                         |       | 30,422                         |       |
|       |                                                                       |       | 16,254,552                     |       | 11,199,572                     |       |
|       |                                                                       |       |                           |       |                           |       |
|       | 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                              |       |
|       |                                                                       |       |                           |       |                           |       |
|       |                                                                       |       | $                              | 16,254,555 |                           | $          | 11,199,575 |   |
|       |                                                                       |       |                           |       |                           |       |
| ** ** | **Liabilities, Unallocated Reserve  and Trust Corpus**                     | ** ** | ** **                     | ** ** | ** **                     | ** ** |
|       |                                                                       |       |                           |       |                           |       |
|       | Liabilities                                                                |       |                           |       |                           |       |
|       | Distribution payable                                                       |       | $                              | 11,939,209 |                           | $          | 7,216,005 |   |
|       | Accrued expenses                                                           |       | 71,905                         |       | 85,735                         |       |
|       | Deferred royalty revenue (Note 4)                                          |       | —                         |       | 2,770,000                      |       |
|       |                                                                       |       | 12,011,114                     |       | 10,071,740                     |       |
|       |                                                                       |       |                           |       |                           |       |
|       | Unallocated Reserve (Note 5)                                               |       | 4,243,438                      |       | 1,127,832                      |       |
|       | Trust Corpus                                                               |       | 3                              |       | 3                              |       |
|       |                                                                       |       |                           |       |                           |       |
|       |                                                                       |       | $                              | 16,254,555 |                           | $          | 11,199,575 |   |

 

See Notes to Condensed Financial Statements.

 

3

----

 

**Mesabi Trust**

**Condensed Statements of Cash Flows**

**Nine Months Ended October 31, 2010 and 2009**

** **
| ** ** | ** **                                                                     | ** ** | **Nine Months Ended** | ** ** |
|------------|--------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** ** | ** **                                                                     | ** ** | **October 31,**            | ** ** |
| ** ** | ** **                                                                     | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| ** ** | ** **                                                                     | ** ** | **(unaudited)**                 | ** ** | **(unaudited)** | ** ** |
| **C.**     | **Condensed Statements of Cash  Flows**                                        | ** ** | ** **                      | ** ** | ** ** | ** ** |
|       |                                                                           |       |                            |       |   |   |
|       | Cash flows from operating activities                                           | ** ** | ** **                      | ** ** | ** ** | ** ** |
|       | Royalties received                                                             |       | $                               | 22,570,769 |   | $ | 9,422,228 |   |
|       | Interest received                                                              |       | 15,513                          |       | 15,779 |   |
|       | Expenses paid                                                                  |       | (649,340                        | )          | (637,965 | ) |
|       |                                                                           |       |                            |       |   |   |
|       | Net cash provided by operating activities                                      |       | 21,936,942                      |       | 8,800,042 |   |
|       |                                                                           |       |                            |       |   |   |
|       | Cash flows from investing activities                                           |       |                            |       |   |   |
|       | Maturities of U.S. Government Securities                                       |       | 2,180,000                       |       | 208,000 |   |
|       | Purchases of U.S. Government Securities                                        |       | (998,373                        | )          | (921,193 | ) |
|       |                                                                           |       |                            |       |   |   |
|       | Net cash provided by (used for) investing  activities                          |       | 1,181,627                       |       | (713,193 | ) |
|       |                                                                           |       |                            |       |   |   |
|       | Cash flow used for financing activities                                        |       |                            |       |   |   |
|       | Distributions to Unitholders                                                   |       | (19,352,015                     | )          | (6,428,805 | ) |
|       |                                                                           |       |                            |       |   |   |
|       | Net change in cash and cash equivalents                                        |       | 3,766,554                       |       | 1,658,044 |   |
|       |                                                                           |       |                            |       |   |   |
|       | Cash, beginning of year                                                        |       | 8,444,697                       |       | 2,254,107 |   |
|       |                                                                           |       |                            |       |   |   |
|       | Cash, end of period                                                            |       | $                               | 12,211,251 |   | $ | 3,912,151 |   |
|       |                                                                           |       |                            |       |   |   |
| ** ** | **Reconciliation of net income to  net cash provided by operating activities** |       |                            |       |   |   |
|       |                                                                           |       |                            |       |   |   |
|       | Net income                                                                     |       | $                               | 27,190,825 |   | $ | 5,922,928 |   |
|       | (Increase) decrease in accrued income receivable                               |       | (2,446,838                      | )          | 697,450 |   |
|       | Increase in prepaid expenses                                                   |       | (23,215                         | )          | (23,214 | ) |
|       | Decrease in accrued expenses                                                   |       | (13,830                         | )          | (47,122 | ) |
|       | (Decrease) Increase in deferred royalty revenue                                |       | (2,770,000                      | )          | 2,250,000 |   |
|       |                                                                           |       |                            |       |   |   |
|       | Net cash provided by operating activities                                      |       | $                               | 21,936,942 |   | $ | 8,800,042 |   |

 

See Notes to Condensed Financial Statements.

 

4

----

 

**MESABI TRUST**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

 

**October 31, 2010 (Unaudited)**

 

Note 1.                            The financial statementsincluded herein have been prepared without audit (except for the balance sheetat January 31, 2010) 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 the threemonths and nine months ended October 31, 2010 and 2009, (b) thefinancial position at October 31, 2010 and (c) the cash flows for thenine months ended October 31, 2010 and 2009, 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, 2010.

 

Note 2.                            Net income per unit includesaccrued income receivable.  As of October 31,2010, the Trust recorded $3,320,776 of accrued income receivable as reflectedon the Condensed Balance Sheet.  Accruedincome receivable includes accruals for anticipated positive pricingadjustments and shipments during the month of October.  Accrued income receivable is accounted forand reported for the Trust’s third fiscal quarter even though such accruedincome receivable is not available for distribution to Unitholders until it isactually received by the Trust.  Netincome per unit is based on 13,120,010 units outstanding during the period.

 

Note 3.                            The Trust declaresdistributions each year in April, July, October and January.  Distributions are declared after receivingnotification from Northshore Mining Company (“Northshore”) as to the amount ofroyalty that is expected to be paid to the Trust based on shipments through theend of each calendar quarter.  The Trust’sfinancial statements are prepared on an accrual basis and present the Trust’sresults of operations based on each fiscal quarter which ends one month afterthe close of each calendar quarter.  Becausedistributions are declared based on the royalty payment that is payable as ofthe end of each calendar quarter and the Trust’s Net Income is calculated as ofthe end of each fiscal quarter, the distributions declared by the Trust are notequivalent to the Trust’s Net Income during the periods reported in thisquarterly report on Form 10-Q.

 

Note 4.                            As previouslyreported, in April 2009, the Trust received its quarterly distributionpayment from Northshore of approximately $5,200,000. In accordance with theTrust’s revenue recognition policy, the Trust recognized revenue related totons of iron ore that were shipped by Northshore, but for which Northshore hadindicated that final pricing was not yet known. As a result of decreases in estimated pellet pricing subsequent to January 31,2009, the cash proceeds received by the Trust in April 2009 exceeded theroyalty revenue recognized by the Trust in fiscal 2010.  Accordingly, the Trust had estimated a$2,770,000 liability in the form of deferred royalty revenue based on pricingestimates provided by Northshore as of January 31, 2010.

 

In April 2010, theTrust received customary quarterly payment notification from Northshore, whichindicated that the Trust was credited with a royalty payment of approximately $1.9million.  However, because of declines inthe price adjustment mechanisms under the Cliffs Pellet Agreements, Northshoreapplied a $2.8 million negative price adjustment with respect to shipments andsales by Northshore based on estimated pellet pricing.  These negative pricing adjustments, thecorresponding offset against the quarterly royalty payment and an increase in

 

5

----

 

estimated pellet pricing subsequent to January 31, 2010, reducedthe Trust’s deferred royalty revenue liability from $2,770,000 as of January 31,2010 to $972,000 as of April 30, 2010.

 

In July 2010, the Trustreceived a quarterly royalty payment notification from Northshore, whichindicated that the Trust was credited a royalty payment of approximately$10.024 million.  The amount of theroyalty payment was reduced by the application of $1.068 million of negativeprice adjustments with respect to shipments and sales by Northshore based onestimated pellet pricing.  These negativepricing adjustments, the corresponding offset against the quarterly royaltypayment made in the second fiscal quarter of 2010 and an increase in estimatedpellet pricing subsequent to January 31, 2010, together reduced the Trust’sdeferred royalty revenue liability from $2,770,000 as of January 31, 2010to $0 as of October 31, 2010. Pricing estimates are adjusted on a quarterly basis as updated pricinginformation is received from Northshore. To the extent that the Trust has recorded a deferred royalty revenueliability, it is anticipated that such amounts would be carried forward tosubsequent quarters until there are sufficient positive royalty payments and/orfuture positive price adjustments to fully offset any negative priceadjustments.

 

Note 5.                            The Trusteeshave determined that the unallocated cash and U.S. Government securitiesportion of the Unallocated Reserve should be maintained at a prudent level,usually within the range of $500,000 to $1,000,000, to meet present or futureliabilities of the Trust.  Accordingly,although the actual amount of the Unallocated Reserve will fluctuate from timeto time, and may increase or decrease from its current level, it is currentlyintended that future distributions will be highly dependent upon royaltypayments received quarterly and the level of Trust expenses that the Trusteesanticipate the Trust will incur in subsequent quarters.

 

As of October 31, 2010,the Unallocated Reserve consisted of $922,662 in unallocated cash and U.S.Government securities and $3,320,776 of accrued income receivable primarilyrepresenting royalties not yet received by the Trust but anticipated to bereceived in future periods.  Pursuant tothe Agreement of Trust, the Trust makes decisions on cash distributions toUnitholders primarily based on the royalty payments actually received fromNorthshore after considering any historical and potential future pricingadjustments, rather than as royalty income is recorded in accordance with theTrust’s revenue recognition policy. Refer to Note 3 for further information. As of October 31, 2010 and January 31, 2010, the Trust’sUnallocated Reserve was comprised of the following components:

 
| ** **                          | ** ** | **October 31,  2010  (unaudited)** | ** ** | **January 31, 2010  (audited)** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|-------------------------------------------|------------|
| Cash and U.S. Government securities |       | $                                       | 922,662    |                                      | $          | 3,023,894 |   |
| Accrued income receivable           |       | 3,320,776                               |       | 873,938                                   |       |
| Deferred royalty revenue            |       | —                                  |       | (2,770,000                                | )          |
|                                |       |                                    |       |                                      |       |
| Unallocated Reserve                 |       | $                                       | 4,243,438  |                                      | $          | 1,127,832 |   |

 

A reconciliation of theTrust’s Unallocated Reserve from January 31, 2010 to October 31, 2010is as follows:

 
| Unallocated Reserve, January 31, 2010 |       | $           | 1,127,832  |   |
|--------------------------------------------|------------|-------------|------------|--------|
|                                       |       |        |       |
| Net income                                 |       | 27,190,825  |       |
| Distributions declared                     |       | (24,075,219 | )          |
| ** **                                 | ** ** | ** **  | ** ** |
| Unallocated Reserve, October 31, 2010 |       | $           | 4,243,438  |   |

 

6

----

 

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

 

**Forward-LookingStatements**

 

Certaininformation included in this Quarterly Report on Form 10-Q contains “forward-lookingstatements” within the meaning of Section 21E of the Securities ExchangeAct of 1934 and Section 27A of the Securities Act of 1933.  All such forward-looking statements,including those statements estimating iron ore pellet production, shipments orpricing, 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 bythese forward-looking statements.  Theserisks and uncertainties include volatility of iron ore and steel prices,product supply and demand, competition, environmental hazards, health andsafety conditions, regulation or government action, litigation anduncertainties about estimates of reserves. Further, substantial portions of royalties earned by Mesabi Trust arebased on estimated prices that are subject to interim and final adjustments,which can be positive or negative, and are dependent in part on multiple priceand inflation index factors under agreements to which Mesabi Trust is not aparty and that are not known until after the end of a contract year.  It is possible that future negative priceadjustments could partially or even completely offset royalties or royaltyincome that would otherwise be payable to the Trust in any particular quarter,or at year-end, thereby potentially reducing cash available for distribution tothe Trust’s Unitholders in future quarters. 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, 2010, asupdated by Part II, Item 1A of this Quarterly Report on Form 10-Q.  Mesabi Trust undertakes no obligation, otherthan that imposed by law, to make any revisions to the forward-lookingstatements contained in this filing or to update them to reflect circumstancesoccurring after the date of this filing.

 

Thisdiscussion should be read in conjunction with the condensed financialstatements and notes presented in this Form 10-Q and the financialstatements and notes in the last filed Annual Report on Form 10-K filedfor the period ending January 31, 2010 for a full understanding of MesabiTrust’s financial position and results of operations for the nine month periodended October 31, 2010.

 

**Background**

 

MesabiTrust (“Mesabi Trust” or the “Trust”), formed pursuant to an Agreement of Trustdated July 18, 1961 (the “Agreement of Trust”), is a trust organized underthe laws of the State of New York. Mesabi Trust holds all of the interests formerly owned by Mesabi IronCompany (“MIC”), including all right, title and interest in the Amendment ofAssignment, Assumption and Further Assignment of Peters Lease (the “AmendedAssignment of Peters Lease”), the Amendment of Assignment, Assumption andFurther Assignment of Cloquet Lease (the “Amended Assignment of Cloquet Lease”and together with the Amended Assignment of Peters Lease, the “AmendedAssignment Agreements”), the beneficial interest in the Mesabi Land Trust (assuch term is defined below) and all other assets and property identified in theAgreement of Trust. The Amended Assignment of Peters Lease relates to anIndenture made as of April 30, 1915 among East Mesaba Iron Company (“EastMesaba”), Dunka River Iron Company (“Dunka River”) and Claude W. Peters (the “PetersLease”) and the Amended Assignment of Cloquet Lease relates to an Indenturemade May 1, 1916 between Cloquet Lumber Company and Claude W. Peters (the “CloquetLease”).

 

TheAgreement of Trust specifically prohibits the Trustees from entering into orengaging in any business.  Thisprohibition applies even to business activities the Trustees may deem necessaryor proper 

 

7

----

 

forthe preservation 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.

 

TheTrustees do not intend to expand their responsibilities beyond those permittedor required by the Agreement of Trust, the Amendment to the Agreement of Trustdated October 25, 1982 (the “Amendment”), and those required underapplicable law.  Mesabi Trust has noemployees, but it engages independent consultants to assist the Trustees in,among other things, monitoring the volume and sales prices of iron ore productsshipped from Silver Bay, Minnesota, based on information supplied to theTrustees by Northshore Mining Company (“Northshore”), the lessee/operator ofthe 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.

 

Leaseholdroyalty income constitutes the principal source of the Trust’s revenue.  The income of the Trust is highly dependentupon the activities and operations of Northshore.  Royalty rates and the resulting royaltypayments received by the Trust are determined in accordance with the terms ofthe Trust’s leases and assignments of leases.

 

Threetypes of royalties, as well as royalty bonuses, comprise the Trust’s leaseholdroyalty income:

 

·                  Base overriding royalties.  Base overriding royalties have historicallyconstituted the majority of the Trust’s royalty income.  Base overriding royalties are determined byboth the volume and selling price of iron ore products shipped.  Northshore is obligated to pay the Trust baseoverriding royalties in varying amounts, based on the volume of iron oreproducts shipped.  Base overridingroyalties are calculated as a percentage of the gross proceeds of iron ore productsproduced at the Trust lands (and to a limited extent other lands) and shippedfrom Silver Bay, Minnesota.  Thepercentage ranges from 2-1/2% of the gross proceeds for the first one milliontons of iron ore products so shipped annually to 6% of the gross proceeds forall iron ore products in 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 $48.48 perton for calendar year 2009 and is $48.81 per ton for calendar year 2010.  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 the AmendedAssignment of Peters Lease.  Mesabi Trustholds the entire beneficial interest in the Mesabi Land Trust for which U.S.Bank N.A. acts as the corporate trustee. Mesabi Trust receives the net income of the Mesabi Land Trust, which isgenerated from royalties on the amount of crude ore mined after the payment ofexpenses to U.S. Bank N.A. for its services as corporate trustee.  Crude ore is the source of iron oxides usedto make iron ore 

 

8

----

 

pellets and otherproducts.  The fee royalty on crude oreis based on an agreed price per ton, subject to certain indexing.

 

·                  Minimum advance royalties.  Northshore’s obligation to pay baseoverriding royalties and royalty bonuses with respect to the sale of iron oreproducts generally accrues upon the shipment of those products from SilverBay.  However, regardless of whether anyshipment has occurred, under the terms of the Amended Assignment Agreements,Northshore is obligated to pay to Mesabi Trust a minimum advance royalty.  Each year, the amount of the minimum advanceroyalty is adjusted (but not below $500,000 per annum) for inflation anddeflation in accordance with the Amended Assignment Agreements.  The minimum advance royalty was $808,177 forcalendar year 2009 and is $813,729 for calendar year 2010.  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 minimum advance royalties are essentially prepayments of baseoverriding royalties and royalty bonuses earned each year, any minimum advanceroyalties paid in a fiscal quarter are recouped by credits against baseoverriding royalties and royalty bonuses earned in later fiscal quarters duringthe year.

 

Underthe relevant documents, Northshore may mine and ship iron ore products fromlands other than Mesabi Trust lands. Northshore is obligated to make quarterly royalty payments in January,April, July and October of each year based on shipments of iron oreproducts from Silver Bay, Minnesota during each calendar quarter.  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.  Northshore alonedetermines whether to mine off Trust and/or such other lands, based on its currentmining and engineering plan.  The Trusteesdo not exert any influence over mining operational decisions.  To encourage the mining 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 thatare shipped are actually mined from Mesabi Trust lands.  Mesabi Trust receives royalties based on thegreater of following two methods of calculating royalty payments (i) theaggregate quantity of iron ore products shipped that were produced using ironore mined 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 the calendar year, 85% of the next two million tons shippedduring the calendar year, and 25% of all tonnage shipped from Silver Bay duringsuch year in excess of six million tons.

 

DeutscheBank Trust Company Americas, the Corporate Trustee, performs certainadministrative functions for Mesabi Trust. The Trust maintains a website at www.mesabi-trust.com. The Trust makesavailable (free of charge) its annual, quarterly and current reports (and anyamendments thereto) filed with the Securities and Exchange Commission (the “SEC”)through its website as soon as reasonably practicable after electronicallyfiling or furnishing such material with or to the SEC.

 

9

----

 

**Resultsof Operations**

 

**Comparisonof Iron Ore Pellet Production and Shipments for the Three and Nine Months EndedOctober 31, 2010 and October 31, 2009**

 

Asshown in the table below, production of iron ore pellets at Northshore fromMesabi Trust lands during the fiscal quarter ended October 31, 2010 totaledapproximately 1,257,479 tons, and actual shipments over the same period totaledapproximately 1,702,938 tons.  Bycomparison, actual pellet production and actual shipments for the comparableperiod in 2009 were approximately 1,122,020 tons and 1,307,915 tons,respectively.  The increase in productionand shipments at Northshore are the result of an increase in orders from Cliffs’customers.

 
| **Fiscal Quarter Ended** | ** ** | **Pellets Produced from  Trust Lands  (tons)** | ** ** | **Pellets Shipped from Trust  Lands  (tons)** | ** ** |
|------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| October 31, 2010              |       | 1,257,479                                                     |       | 1,702,938                                                    |       |
| October 31, 2009              |       | 1,122,020                                                     |       | 1,307,915                                                    |       |

 

Asshown in the table below, during the nine months ended October 31, 2010,production of iron ore pellets at Northshore from Mesabi Trust lands totaledapproximately 3,508,519 tons, and actual shipments over the same period totaledapproximately 4,721,032 tons.  Bycomparison, actual pellet production and actual shipments for the comparableperiod in 2009 were approximately 2,082,085 tons and 1,823,812 tons,respectively.  The increase in productionand shipments at Northshore for the nine months ended October 31, 2010 isthe result of a significant increase in orders from Cliffs’ customers.

 
| **Nine Months Ended** | ** ** | **Pellets Produced from  Trust Lands  (tons)** | ** ** | **Pellets Shipped from Trust  Lands  (tons)** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| October 31, 2010           |       | 3,508,519                                                     |       | 4,721,032                                                    |       |
| October 31, 2009           |       | 2,082,085                                                     |       | 1,823,812                                                    |       |

 

**Comparisonof Royalty Income for the Three and Nine Months Ended October 31, 2010 andOctober 31, 2009**

 

Totalroyalty income for the quarter increased $6,532,971 over the comparable priorperiod.  The increase in total royaltyincome is due to higher sales prices per ton of iron ore pellets sold and anincrease in the total volume of iron ore pellets shipped during the threemonths ended October 31, 2010, each as compared to the three months ended October 31,2009.  The higher sales prices per tonand the increase in the volume of iron ore pellets shipped both contributed toan increase in the base overriding royalty and the bonus royalty payments.

 

Thetable below shows that the base overriding royalties, the bonus royalties, andthe fee royalties increased by $5,092,859, $1,413,722, and $26,390respectively, for the three months ended October 31, 2010.  The increases in the base overridingroyalties and the bonus royalties are both attributable to the higher salesprices per ton of iron ore pellets and the increase in the volume of tonsshipped during the three months ended October 31, 2010, each as comparedto the three months ended October 31, 2009.

 

Thetable below summarizes the components of Mesabi Trust’s royalty income for thethree months ended October 31, 2010 and October 31, 2009.

 

10

----

 
| ** **                              | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                               | ** ** | **2009** | ** ** |
| Base overriding royalties               |       | $                                                      | 7,721,172  |   | $ | 2,628,313 |   |
| Bonus royalties                         |       | 3,721,330                                              |       | 2,307,608 |   |
| Minimum advance royalty paid (recouped) |       | —                                                 |       | — |   |
| Fee royalties                           |       | 131,994                                                |       | 105,604 |   |
| Total royalty income                    |       | $                                                      | 11,574,496 |   | $ | 5,041,525 |   |

 

TheTrust’s total royalty income for the nine months ended October 31, 2010increased $21,308,270 as compared to the nine months ended October 31,2009.  The increase is the result ofhigher realized sales prices per ton of iron ore pellets and a 159% increase inthe total volume of iron ore pellets shipped during the nine months ended October 31,2010, each as compared to the nine months ended October 31, 2009.  The higher sales prices per ton and theincrease in the volume of iron ore pellets shipped both contributed to anincrease in the base overriding royalty and the bonus royalty payments.

 

Thetable below shows that the base overriding royalties, the bonus royalties, andthe fee royalties increased $13,501,318, $7,624,321 and $182,631 respectively,for the nine months ended October 31, 2010, from the comparable period in2009.  The increases in the baseoverriding royalties and the bonus royalties are both attributable to thehigher sales prices per ton of iron ore pellets and the increase in the volumeof tons shipped during the nine months ended October 31, 2010, each ascompared to the nine months ended October 31, 2009.

 

Thetable below summarizes the components of Mesabi Trust’s royalty income for thenine months ended October 31, 2010 and October 31, 2009.

 
| ** **                              | ** ** | **Nine Months Ended October 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                              | ** ** | **2010**                                              | ** ** | **2009** | ** ** |
| Base overriding royalties               |       | $                                                     | 16,758,987 |   | $ | 3,257,669 |   |
| Bonus royalties                         |       | 10,656,599                                            |       | 3,032,278 |   |
| Minimum advance royalty paid (recouped) |       | —                                                |       | — |   |
| Fee royalties                           |       | 375,056                                               |       | 192,425 |   |
| Total royalty income                    |       | $                                                     | 27,790,642 |   | $ | 6,482,372 |   |

 

**Comparisonof Net Income, Expenses and Distributions for the Three and Nine Months Ended October 31,2010 and October 31, 2009**

 

Netincome for the three months ended October 31, 2010 was $11,396,566, anincrease of $6,495,697 compared to the three months ended October 31, 2009.  As with the increase in total royalty income,the increase in net income for the quarter ended October 31, 2010 was theresult of higher sales prices per ton of iron ore pellets shipped and anincrease in the volume of tons shipped. The Trust’s expenses increased $37,877 for the three months ended October 31,2010, as compared to the three month period ended October 31, 2009, as aresult of higher expenses incurred in connection with the administration of theTrust primarily related to compliance with the SEC’s XBRL filing mandate andthe recently enacted Dodd-Frank Act.****The tablebelow summarizes the Trust’s income and expenses for the three months ended October 31,2010 and October 31, 2009.

 

11

----

 
| ** **           | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                               | ** ** | **2009** | ** ** |
| Total royalty income |       | $                                                      | 11,574,496 |   | $ | 5,041,525 |   |
| Interest income      |       | 1,817                                                  |       | 1,214 |   |
| Gross income         |       | 11,576,313                                             |       | 5,042,739 |   |
|                 |       |                                                   |       |   |   |
| Expenses             |       | 179,747                                                |       | 141,870 |   |
| Net income           |       | $                                                      | 11,396,566 |   | $ | 4,900,869 |   |

 

Netincome for the nine months ended October 31, 2010 was $27,190,825, anincrease of $21,267,897 as compared to the nine months ended October 31,2009.  As with the increase in totalroyalty income, the increase in net income for the nine months ended October 31,2010 was the result of higher sales prices per ton of iron ore pellets shippedand an increase in the volume of tons shipped. The Trust’s expenses increased$44,666 for the nine months ended October 31, 2010, as compared to thenine months ended October 31, 2009, as a result of higher expensesincurred in connection with the administration of the Trust primarily relatedto compliance with the SEC’s XBRL filing mandate and the recently enactedDodd-Frank Act. The table below summarizes the Trust’s income and expenses forthe nine months ended October 31, 2010 and October 31, 2009.

 
| ** **           | ** ** | **Nine Months Ended October 31,** | ** ** |
|----------------------|------------|-------------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                              | ** ** | **2009** | ** ** |
| Total royalty income |       | $                                                     | 27,790,642 |   | $ | 6,482,372 |   |
| Interest income      |       | 12,478                                                |       | 8,185 |   |
| Gross income         |       | 27,803,120                                            |       | 6,490,557 |   |
|                 |       |                                                  |       |   |   |
| Expenses             |       | 612,295                                               |       | 567,629 |   |
| Net income           |       | $                                                     | 27,190,825 |   | $ | 5,922,928 |   |

 

Aspresented on the Trust’s Condensed Statements of Income on page 2 of thisquarterly report, the Trust’s net income per unit increased $0.4951 per unit to$0.8686 per unit for the three months ended October 31, 2010 as comparedto October 31, 2009.  For the ninemonths ended October 31, 2010, the Trust’s net income per unit increased$1.621 per unit to $2.0725 per unit, as compared to the prior year period. On October 15,2010, the Trust declared a distribution of $0.91 per unit payable toUnitholders of record on October 30, 2010. Comparatively, the Trust declared a distribution of $0.22 per unit in October 2009.  During the nine months ended October 31,2010 and October 31, 2009, the Trust had declared total distributions perunit of $1.835 and $0.60, respectively.

 

Distributions,if any, are declared after receiving notification from Northshore MiningCompany as to the amount of royalty income that is expected to be paid to theTrust based on shipments through the end of each calendar quarter and suchroyalty payments may include pricing adjustments with respect to shipmentsduring prior periods.  The Trust accountsfor and reports accrued income receivable based on shipments during the lastmonth of the Trust’s fiscal quarter (April, July, October and January) andprice adjustments 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,distributions declared by the Trust are not equivalent to the Trust’s NetIncome during the periods reported in this quarterly report on Form 10-Q.

 

12

----

 

**Comparisonof Unallocated Reserve as of October 31, 2010, October 31, 2009 and January 31,2010**

 

Asset forth in the table below, the Trust’s Unallocated Reserve, which iscomprised of accrued income receivable, cash reserve for potential fixed orcontingent future liabilities and deferred royalty revenue, increased from$1,843,102 as of October 31, 2009 to $4,243,438 as of October 31,2010.  The increase in UnallocatedReserve as of October 31, 2010, as compared to October 31, 2009, isthe result of an increase of approximately $1,296,249 of accrued incomereceivable, which resulted from an increase in shipments during October 2010as compared to shipments during October 2009.  Additionally, the Trust’s deferred royaltyrevenue liability, which was ($2,250,000) as of October 31, 2009, has beeneliminated due to Northshore’s offsetting of negative pricing adjustmentsagainst the Trust’s quarterly royalty payments received during 2010.  The Trust’s cash reserve for potential fixedor contingent future liabilities decreased from $2,068,574 as of October 31,2009 to $922,662 as of October 31, 2010. The decrease in the cash reserve for potential fixed or contingentfuture liabilities is due to the Trustee’s decision to use a portion of thecash reserve to pay distributions to Unitholders during the nine months ended October 31,2010, as the Trust’s deferred royalty revenue liability was reduced and theneliminated.

 
| ** **                    | ** ** | **October 31, 2010** | ** ** | **October 31, 2009** | ** ** |
|-------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Accrued Income Receivable     |       | $                              | 3,320,776  |                           | $          | 2,024,528 |   |
| Deferred Royalty Revenue      |       | —                         |       | (2,250,000                     | )          |
| Cash Reserve                  |       | 922,662                        |       | 2,068,574                      |       |
| Unallocated Reserve (Deficit) |       | $                              | 4,243,438  |                           | $          | 1,843,102 |   |

 

Asstated in the preceding paragraph, the remaining balance of the Trust’sdeferred royalty revenue was eliminated during the second fiscal quarter of2010, as Northshore offset $1,068,000 of royalty payments.  Although the Trust does not currently haveany deferred revenue liability, 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.  See thediscussion under the heading “Risk Factors” beginning on page 3 of theTrust’s Annual Report on Form 10-K for the fiscal year ended January 31,2010, as updated by Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

TheTrust’s Unallocated Reserve as of October 31, 2010 increased $3,115,606 ascompared to the fiscal year ended January 31, 2010.  The increase in the Unallocated Reserve isdue to the decrease in deferred royalty revenue and an increase in accruedincome receivable due to the increased shipments from Northshore during themonth of October 2010, offset by a decrease in the cash reserve portion ofthe Unallocated Reserve.  At January 31,2010, the Unallocated Reserve consisted of $3,023,894 in unallocated cash andU.S. Government securities, $873,938 of accrued income receivable, primarilyrepresenting royalties not yet received by the Trust but anticipated to bereceived in fiscal 2011, less deferred royalty revenue of ($2,770,000).

 

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.  Theactual amount of the Unallocated Reserve will fluctuate from time to time andmay increase or decrease from its current level. Future distributions will behighly dependent upon royalty income as it is received, changes in estimatedpricing, potential for future price adjustments and the level of Trustexpenses.  The amount of future royaltyincome available for distribution will be subject to the volume of iron oreproduct shipments and the dollar level of sales by Northshore.  Shipping activity is greatly reduced duringthe winter months and economic conditions, particularly those affecting thesteel industry, may adversely affect the amount and timing of such futureshipments and sales.  The Trustees willcontinue to monitor the economic and other circumstances of the Trust to strikea responsible balance between distributions to Unitholders and the need tomaintain a reserve for unexpected loss contingencies at a prudent level, giventhe unpredictable 

 

13

----

 

natureof 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 29,2010, Cliffs reported that Northshore was operating three of its four furnacesduring the first nine months of calendar year 2010 with the fourth restarted inSeptember 2010. In its Form 10-Q, Cliffs did not separately reportthe amount of iron ore produced at Northshore for the three months ended September 30,2010.  Northshore has not provided theTrustees with an estimate of total expected shipments of iron ore pellets forcalendar year 2010.  See the descriptionof the uncertainty of market conditions in the iron ore and steel industry under“Important Factors Affecting Mesabi Trust” below and the information under theheading “Risk Factors” in Part I — Item 1A of the Trust’s Annual Report onForm 10-K for the year-ended January 31, 2010, as updated by Part II, Item1A of this Quarterly Report on Form 10-Q.

 

***Arbitration between Cliffs and ArcelorMittal***.  In its Form 10-Q filed October 29,2010, Cliffs provided an update to the matters previously reported regardingCliffs’ arbitration with its customer ArcelorMittal.  As previously reported, Northshore, alongwith The Cleveland-Cliffs Iron Company, Cliffs Mining Company and Cliffs SalesCompany, filed two arbitration demands against ArcelorMittal USA Inc., ISGCleveland Inc., ISG Indiana Harbor Inc. and Mittal Steel USA Weirton Inc.(collectively, “ArcelorMittal”) related to attempts by ArcelorMittal to revisethe nomination of ArcelorMittal’s pellet requirements and a correspondingshipping schedule for 2009 and to reverse an election to defer certain tonnagefor 2009.  Cliffs reported that these twoarbitration demands were settled on April 14, 2010.  Under the settlement, Cliffs reached anagreement with ArcelorMittal as to the final nomination for 2009 and thebinding nomination for 2010. Cliffs also reported that on June 7, 2010,ArcelorMittal filed a complaint in the Circuit Court of Cook County, Illinoisseeking a declaratory judgment that Cliffs must permit it to change the amountsand types of pellets to be shipped to its Indiana Harbor East facility in 2010from the amounts and types set forth in the settlement agreement as part ofArcelorMittal’s 2010 nomination. Cliffs also reported that on June 25,2010, it filed a motion to stay the case and to compel arbitration and on July 9,2010, Cliffs filed an amended demand seeking a declaration that Cliffs isentitled to a price reopener for 2010. In its Form 10-Q filed October 29, 2010, Cliffs reported thatArcelorMittal dismissed the Cook County lawsuit and commenced arbitration forwhich Cliffs filed an answering statement on September 10, 2010.

 

TheTrustees are unable to predict what impact, if any, the proceedings betweenCliffs and ArcelorMittal described above will have on shipments from Northshoreor future royalties payable to the Trust. However, the royalties received by the Trust could be affected,negatively or positively, to the extent such proceedings result in a negativeor positive pricing adjustment for iron ore shipped from Trust lands.  The Trustees have not been informed whatportion, if any, of the iron ore tonnage subject to these proceedings wasshipped from Trust lands.

 

***Arbitration and Application between Cliffs andEssar Algoma Steel***.  Inits Form 10-Q filed October 29, 2010, Cliffs reported that EssarAlgoma Steel (“Essar”) filed an Application for Emergency Relief in the OntarioSuperior Court of Justice in Ontario, Canada requesting that the court orderNorthshore, The Cleveland-Cliffs Iron Company and Cliffs Mining Company to shippellets to an Essar facility in Sault Ste. Marie, Ontario pursuant to a PelletSale and Purchase Agreement dated January 31, 2002.  According to Cliffs, Essar disputed amid-year adjustment to the price it pays for pellets under that agreementleading Cliffs to suspend performance due to Essar’s failure to pay amounts dueto Cliffs.  According to Cliffs, thecourt granted the application and ordered Cliffs to resume shipping pellets atthe December 2009 price though this injunction expired on October 1,2010, following an agreement between the parties on an interim price to be paidby Essar pending the outcome of a related arbitration.

 

Cliffsalso reported that simultaneously with the Application for Emergency Relief,Essar filed an arbitration demand pursuant to the agreement requesting that thearbitration panel determine a price 

 

14

----

 

adjustmentand declare the May 2010 adjustment by Cliffs invalid and ineffective.Cliffs reported that it filed an answer and counterclaim on June 18, 2010and an amended answer and counterclaim in the arbitration on July 16,2010. Cliffs reported that the amended counterclaim asserts that publishedannual prices used to adjust the price of the pellets sold to Essar under theagreement have ceased to be published and asks the arbitration panel to eitheramend the agreement in this regard or require Essar to enter into negotiationswith Cliffs to amend the agreement.

 

TheTrustees are unable to predict what impact, if any, the proceedings betweenCliffs and Essar described above will have on shipments from Northshore orfuture royalties payable to the Trust. However, the royalties received by the Trust could be affected,negatively or positively, to the extent such proceedings result in a negativeor positive pricing adjustment for iron ore shipped from Trust lands.  The Trustees have not been informed whatportion, if any, of the iron ore tonnage subject to these proceedings wasshipped from Trust lands.

 

**ImportantFactors Affecting Mesabi Trust**

 

TheAgreement of Trust specifically prohibits the Trustees from entering into orengaging in any business.  Thisprohibition seemingly applies even to business activities the Trustees deemnecessary or proper for the preservation and protection of the Trust’sassets.  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.

 

NeitherMesabi Trust nor the Trustees have any control over the operations andactivities of Northshore, except within the framework of the Amended AssignmentAgreements.  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 materialinformation for use in periodic reports as part of their evaluation of MesabiTrust’s disclosure 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.

 

Inaccordance with 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 andshipment reports, which include figures on crude ore production and iron orepellet shipments, and discussions concerning the condition and accuracy of thescales and plans regarding the development of Mesabi Trust’s mining property;and (ii) the accounting firm they have contracted with for non-auditservices, including reviews of financial data related to shipping and salesreports provided by Northshore and a review of the schedule of leaseholdroyalties payable to Mesabi Trust.

 

Fora discussion of additional factors, including but not limited to those thatcould adversely affect Mesabi Trust’s actual results and performance, see “RiskFactors” in Part I — Item 1A of Mesabi Trust’s Annual Report on Form 10-Kfor the year-ended January 31, 2010, as updated by Part II, Item1A of this Quarterly Report on Form 10-Q.

 

15

----

 

**Iron Ore Pricing and ContractAdjustments**

 

During the course of itsfiscal year some portion of the royalties paid to Mesabi Trust are based onestimated prices for iron ore products sold under term contracts between Cliffsand its subsidiaries and certain of their customers (the “Cliffs PelletAgreements”). Mesabi Trust is not a party to any of the Cliffs PelletAgreements.  These prices are subject tointerim and final pricing adjustments, which can be positive or negative, andwhich adjustments are dependent in part on a variety of price and inflationindex factors, including but not limited to the international benchmark pelletprice, hot band steel prices and various Producer Price Indexes. AlthoughNorthshore makes interim adjustments to the royalty payments on a quarterlybasis, these price adjustments cannot be finalized until after the end of acontract year. This may result in significant and frequent variations inroyalties received by Mesabi Trust (and in turn the resulting amount of fundsavailable for distribution to Unitholders by the Trust) from quarter to quarterand on a comparative historical basis, and these variations, which can bepositive or negative, cannot be predicted by Mesabi Trust.  It is possible that future negative priceadjustments could partially or even completely offset royalties or royaltyincome that would otherwise be payable to the Trust in any particular quarter,or at year-end, thereby potentially reducing cash available for distribution tothe Trust’s Unitholders in future quarters.

 

For a discussion ofadditional factors, including but not limited to those that could adverselyaffect Mesabi Trust’s actual results and performance, see “Risk Factors” inPart I — Item 1A of Mesabi Trust’s Annual Report on Form 10-K for theyear-ended January 31, 2010, as updated by Part II, Item 1A ofthis Quarterly Report on Form 10-Q.

 

**Effects of Securities Regulation**

 

TheTrust is a publicly-traded trust listed on the New York Stock Exchange (“NYSE”)and is therefore subject to extensive regulation under, among others, theSecurities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-OxleyAct of 2002 (“Sarbanes-Oxley”) and the rules and regulations of theNYSE.  Issuers failing to comply withsuch authorities risk serious consequences, including criminal as well as civiland administrative 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.

 

TheTrust’s website is located at www.mesabi-trust.com.

 

**CriticalAccounting Policies**

 

This“Trustees’ Discussion and Analysis of Financial Condition and Results ofOperations” is based upon the Trust’s financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Trustees to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  Critical accounting policies are those thathave meaningful impact on the reporting of the Trust’s financial condition andresults, and that require significant judgment and estimates.  During the preparation of financialstatements, the Trust makes estimates, assumptions and judgments that affectreported amounts. These estimates, assumptions and judgments include thoserelated to revenue recognition and accrued expenses. The Trust bases its estimateson various assumptions and historical experience, which are believed to bereasonable; however, due to the inherent nature of estimates, actual resultsmay differ significantly due to changed conditions or assumptions. On a regularbasis, the Trust reviews the accounting policies, assumptions, estimates andjudgments to ensure that the financial statements are fairly presented inaccordance with accounting principles generally accepted in the United States.However, because future events and their effects cannot be determined withcertainty, actual results could differ from assumptions and estimates, and suchdifferences could be material.

 

16

----

 

TheTrust did not have any changes in critical accounting policies or insignificant accounting estimates during the three months ended October 31,2010.  For a complete description of theTrust’s significant accounting policies, please see Note 2 to the financialstatements included in the Trust’s Annual Report on Form 10-K for the yearended January 31, 2010.

 

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

 

Notapplicable.

 

**Item 4.  Controls andProcedures.**

 

***Evaluation of Disclosure Controlsand 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 and communicatedby Northshore and consultants to the Trustees as appropriate, to allow timelydecisions regarding required disclosure.

 

Aspart of their evaluation of the Trust’s disclosure controls and procedures, theTrustees rely on quarterly shipment and royalty calculations provided byNorthshore.  Because Northshore hasdeclined to support this information with a written certification attesting towhether Northshore has established disclosure controls and procedures and internalcontrols sufficient to enable it to verify that the information furnished tothe Trustees is accurate and complete, the Trustees also rely on (a) anannual certification from Northshore and Northshore’s parent, Cliffs,certifying as to the accuracy of the royalty calculations, and (b) therelated due diligence review performed by the Trust’s externalaccountants.  In addition, the Trust’sconsultants review the schedule of leasehold royalties payable and shipping andsales reports provided by Northshore against production and shipment reportsprepared by the Eveleth Fee Office, Inc., an independent consultant to theTrust (“Eveleth Fee Office”). The Eveleth Fee Office gathers production andshipping information from Northshore and prepares monthly production andshipment reports for the Trustees. Furthermore, as part of its engagement bythe Trust, the Eveleth Fee Office also attends Northshore’s calibration andtesting of its crude ore scales and boat loader scales which are conducted on aperiodic basis.

 

Asof the end of the period covered by this report, the Trustees carried out anevaluation of the Trust’s disclosure controls and procedures.  The Trustees have concluded that suchdisclosure controls and procedures are effective.

 

***Changes in Internal Control OverFinancial Reporting***.  Tothe knowledge of the Trustees, there has been no change in the Trust’s internalcontrol over financial reporting that occurred during the Trust’s last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, the Trust’s internal control over financial reporting.  The Trustees note for purposes ofclarification that they have no authority over, and make no statementconcerning, the internal control over financial reporting of Northshore orCliffs.

 

17

----

 

**PART II - OTHER INFORMATION**

 

**Item1A.********RiskFactors**

 

The information presented below amends, updates andshould be read in conjunction with the risk factors and information disclosedhere and in the Trust’s Annual Report on Form 10-K for the fiscal yearended January 31, 2010. The risk factors disclosed here and in the Trust’sAnnual Report on Form 10-K for the fiscal year ended January 31,2010, in addition to the other information set forth in this quarterly report,could have a material adverse effect on the royalties received by Mesabi Trust.You should carefully consider such risks in addition to other informationcontained in this report before engaging in any transaction involving units ofbeneficial interest of Mesabi Trust. Additional risks and uncertainties notcurrently known to the Trust or that have been deemed to be immaterial as ofthe filing of this Quarterly Report could also materially adversely affect theTrust’s results of operations.

 

The Trust’s risk factors are hereby updated as follows:

 

***The stability of Cliffs’ NorthAmerican iron ore operations and the price adjustment provisions in the NorthAmerican iron ore supply agreements with Cliffs’ customers could have asignificant effect on the amounts available for distribution to the Trust’sUnitholders***.

 

In Cliffs’ Form 10-K filed February 18, 2010,Cliffs reported that in 2009 five customers together accounted for more than 80percent of its North American iron ore sales revenues.  According to the Form 10-K filed byCliffs, sales volume under these agreements is largely dependent on customerrequirements, and in some cases, Cliffs is the sole supplier of iron orepellets to its customers.   In its Form 10-Qfiled October 29, 2010, Cliffs reported that in 2010 virtually all of itsNorth American iron ore sales volume will be sold under term supply agreementsto a limited number of customers. Contractual disputes with any of Cliffs’ significant customers orfailure to renew or replace such agreements with similar agreements couldresult in lower sales volume and lower sales prices, which could adverselyaffect the royalties received by the Trust.

 

Cliffs has also reported that its North American termsupply agreements contain a number of adjustment provisions, includingadjustments based on general industrial inflation rates, the price of steel andthe international price of iron ore pellets, among other factors, that allowCliffs to adjust the prices under those agreements generally on an interim andannual basis.  These market prices aredependent upon supply and demand relationships and a variety of other factorsover which the Trust has no control. Cliffs’ price adjustment provisions are weighted and some are subject toannual collars, which limit Cliffs’ ability to raise prices to matchinternational levels and fully capitalize on strong demand for iron ore.

 

Additionally, Cliffs has reported that during the firstquarter of 2010, the world’s largest iron ore producers began to move away fromthe annual international benchmark pricing mechanism in favor of ashorter-term, more flexible pricing system. According to the most recent Form 10-Qfiled by Cliffs, in addition to increased volatility of pricing, the change inthe international pricing system will, in most instances, require that Cliffs’sales contracts be modified to take into account the new international pricingmethodology. Cliffs reports that it has reached final pricing settlement withthe majority of its North American iron ore customers. However, negotiationswith certain of its largest North American iron ore customers are still ongoingand some of Cliffs’ customers have filed arbitration demands related to theprice adjustment provisions of their supply agreements.  Cliffs has not reported their assessment ofthe impact a change to the historical annual pricing mechanism will have ontheir existing supply agreements with such customers. Cliffs noted that thesediscussions and arbitrations may result in changes to the pricing mechanismsused with Cliffs’ various customers and could impact sales prices realized incurrent and future periods.  As discussedelsewhere in this Form 10-Q, the price adjustments mechanisms under Cliffs’North American term supply agreements may result in significant variations inroyalties received by Mesabi Trust from quarter to quarter and year toyear.  These variations could adverselyaffect the royalties received by the Trust and, in turn, the resulting cashavailable for distribution to Unitholders.

 

18

----

 

**Item 5. Other Information.**

 

***Mine Safety and Health Administration Safety Data***.  Pursuant to §1503(a) of the recentlyenacted Dodd-Frank Wall Street Reform and Consumer Protection Act, Cliffsstarted reporting information related to certain mine safety results atNorthshore.  This information isavailable in Part II, Item V of Cliffs Form 10-Q filed October 29,2010.

 

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

 

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

 

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

 

99.1                 Report of Wipfli LLP, dated December 3,2010 regarding its review of the unaudited interim financial statements ofMesabi Trust as of and for the three and nine months ended October 31,2010.

 

19

----

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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 |
|              |                                                              |   |
| December  3, 2010 |                                                              | By: | /s/  Kenneth R. Ring |
|              |                                                              | Name:  Kenneth R. Ring |
|              |                                                              | Title:  Vice President |
|                   |                                                                   |  |  |  |

 

----

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

 

20

----