**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **ý**                                | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                | ** ** | **For the quarterly period ended July 31, 2004**                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **or**                                    |
|                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| **o**                                     | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                | ** ** | **For the transition period from                                         to                                       ** |
| ** **                                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Commission File Number:   1-4488** |

 

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

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.     Yes   ý     No   o

 

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

 

As of September 10, 2004, therewere 13,120,010 Units of Beneficial Interest in Mesabi Trust outstanding.

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item1.**    **Financial Statements.****  (Note 1)**

 
| ** ** | ** **                         | **Three Months Ended  July 31,** | ** ** | **Six Months Ended  July 31,** | ** ** |
|------------|------------------------------------|----------------------------------|------------|--------------------------------|------------|
| ** ** | ** **                         | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|       |                               |                             |       |                           |       |   |   |   |   |
| **A.**     | **Condensed Statements of Income** |                             |       |                           |       |   |   |   |   |   |
|       |                               |                             |       |                           |       |   |   |   |   |   |
|       | Revenues                           |                             |       |                           |       |   |   |   |   |   |
|       | Royalty income                     |                             | $          | 2,673,989                      |       | $ | 1,095,964 |   | $ | 3,601,195 |   | $ | 1,462,055 |   |
|       | Interest income                    |                             | 9,806      |                           | 10,713     |   | 20,309 |   | 22,786 |   |
|       |                               |                             | 2,683,795  |                           | 1,106,677  |   | 3,621,504 |   | 1,484,841 |   |
|       |                               |                             |       |                           |       |   |   |   |   |   |
|       | Expenses                           |                             | 179,737    |                           | 141,231    |   | 281,479 |   | 269,393 |   |
|       |                               |                             |       |                           |       |   |   |   |   |   |
|       | Net income                         |                             | $          | 2,504,058                      |       | $ | 965,446 |   | $ | 3,340,025 |   | $ | 1,215,448 |   |
|       |                               |                             |       |                           |       |   |   |   |   |   |
|       | Number of units outstanding        |                             | 13,120,010 |                           | 13,120,010 |   | 13,120,010 |   | 13,120,010 |   |
|       |                               |                             |       |                           |       |   |   |   |   |   |
|       | Net income per unit (Note 2)       |                             | $          | 0.190858                       |       | $ | 0.073586 |   | $ | 0.254575 |   | $ | 0.092641 |   |
|       |                               |                             |       |                           |       |   |   |   |   |   |
|       | Distributions declared per unit    |                             | $          | 0.175                          |       | $ | 0.07 |   | $ | 0.225 |   | $ | 0.07 |   |

 

SeeNotes to Financial Statements.

 

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| ** ** | ** **                                                                 | **July 31, 2004** | ** ** | **January 31, 2004** | ** ** |
|------------|----------------------------------------------------------------------------|-------------------|------------|----------------------|------------|
|       |                                                                       |              |       |                 |       |
| **B.**     | **Condensed Balance Sheets**                                               | ** **        | ** ** | ** **           | ** ** | ** ** |
| ** ** | ** **                                                                 | ** **        | ** ** | ** **           | ** ** | ** ** |
| ** ** | **Assets**                                                                 | ** **        | ** ** | ** **           | ** ** | ** ** |
|       |                                                                       |              |       |                 |       |   |
|       | Cash                                                                       |              | $          | 98,727               |       | $ | 98,692 |   |
|       |                                                                       |              |       |                 |       |   |
|       | U.S. Government securities, at amortized  cost (which approximates market) |              | 3,100,964  |                 | 4,826,046  |   |
|       |                                                                       |              |       |                 |       |   |
|       | Accrued income                                                             |              | 909,651    |                 | 449,780    |   |
|       | Prepaid expenses                                                           |              | 14,671     |                 | 15,560     |   |
|       |                                                                       |              | 4,124,013  |                 | 5,390,078  |   |
|       |                                                                       |              |       |                 |       |   |
|       | Fixed property, including intangibles, at  nominal values                  |              |       |                 |       |   |
|       |                                                                       |              |       |                 |       |   |
|       | Amended Assignment of Peters Lease                                         |              | 1          |                 | 1          |   |
|       |                                                                       |              |       |                 |       |   |
|       | Assignment of Cloquet Lease                                                |              | 1          |                 | 1          |   |
|       |                                                                       |              |       |                 |       |   |
|       | Certificate of beneficial interest for  13,120,010 units of land trust     |              | 1          |                 | 1          |   |
|       |                                                                       |              | 3          |                 | 3          |   |
|       |                                                                       |              |       |                 |       |   |
|       |                                                                       |              | $          | 4,124,016            |       | $ | 5,390,081 |   |
|       |                                                                       |              |       |                 |       |   |
|       | **Liabilities, Unallocated Reserve and Trust  Corpus**                     |              |       |                 |       |   |
|       |                                                                       |              |       |                 |       |   |
|       | Liabilities                                                                |              |       |                 |       |   |
|       | Distribution payable                                                       |              | $          | 2,296,002            |       | $ | 3,936,003 |   |
|       | Accrued expenses                                                           |              | 31,404     |                 | 45,491     |   |
|       |                                                                       |              | 2,327,406  |                 | 3,981,494  |   |
|       |                                                                       |              |       |                 |       |   |
|       | Unallocated Reserve (Note 3)                                               |              | 1,796,607  |                 | 1,408,584  |   |
|       | Trust Corpus                                                               |              | 3          |                 | 3          |   |
|       |                                                                       |              |       |                 |       |
|       |                                                                       | $                 | 4,124,016  |                 | $          | 5,390,081 |   |

 

SeeNotes to Financial Statements.

 

3

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| ** ** | ** **                                                                     | **Six Months Ended  July 31,** | ** ** |
|------------|--------------------------------------------------------------------------------|--------------------------------|------------|
| ** ** | ** **                                                                     | **2004**                       | ** ** | **2003** | ** ** |
|       |                                                                           |                           |       |   |   |
| **C.**     | **Condensed Statements of Cash Flows**                                         | ** **                     | ** ** | ** ** | ** ** | ** ** |
|       |                                                                           |                           |       |   |   |   |
|       | Cash flows from operating activities                                           |                           |       |   |   |   |
|       | Royalties received                                                             |                           | $          | 3,137,442 |   | $ | 1,277,556 |   |
|       | Interest received                                                              |                           | 24,190     |   | 25,710 |   |
|       | Expenses paid                                                                  |                           | (294,676   | ) | (279,112 | ) |
|       |                                                                           |                           |       |   |   |   |
|       | Net cash provided by operating activities                                      |                           | 2,866,956  |   | 1,024,154 |   |
|       |                                                                           |                           |       |   |   |   |
|       | Cash flows from investing activities                                           |                           |       |   |   |   |
|       | Maturities of U.S. Government Securities                                       |                           | 4,999,722  |   | 964,124 |   |
|       | Purchases of U.S. Government Securities                                        |                           | (3,274,640 | ) | (864,704 | ) |
|       |                                                                           |                           |       |   |   |   |
|       | Net cash provided by (used for) investing  activities                          |                           | 1,725,082  |   | 99,420 |   |
|       |                                                                           |                           |       |   |   |   |
|       | Cash flow from financing activities  Distributions to Unitholders              |                           | (4,592,003 | ) | (2,492,802 | ) |
|       |                                                                           |                           |       |   |   |   |
|       | Net change in cash                                                             |                           | 35         |   | (1,369,228 | ) |
|       |                                                                           |                           |       |   |   |   |
|       | Cash, beginning of year                                                        |                           | 98,692     |   | 2,515,457 |   |
|       |                                                                           |                           |       |   |   |   |
|       | Cash, end of quarter                                                           |                           | $          | 98,727 |   | $ | 1,146,229 |   |
|       |                                                                           |                           |       |   |   |   |
|       | **Reconciliation of net income to net cash  provided by operating activities** |                           |       |   |   |   |
|       |                                                                           |                           |       |   |   |   |
|       | Net income                                                                     |                           | $          | 3,340,025 |   | $ | 1,215,448 |   |
|       | (Increase) in accrued income                                                   |                           | (459,871   | ) | (181,576 | ) |
|       | Decrease in prepaid insurance                                                  |                           | 889        |   | 11,421 |   |
|       | Increase (Decrease) in accrued expenses                                        |                           | (14,087    | ) | (21,139 | ) |
|       |                                                                           |                           |       |   |   |   |
|       | Net cash provided by operating activities                                      |                           | $          | 2,866,956 |   | $ | 1,024,154 |   |

 

SeeNotes to Financial Statements.

 

4

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**MESABI TRUST**

** **

**NOTES TO FINANCIAL STATEMENTS**

 

Note 1.                                  The financial statementsincluded herein have been prepared without audit (except for the balance sheetat January 31, 2004) in accordance with the instructions to Form 10-Q pursuantto the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles have been condensed or omitted pursuant to suchrules and regulations.  In the opinion ofthe Trustees, all adjustments, consisting only of normal recurring adjustments,necessary for a fair statement of (a) the results of operations for the sixmonths ended July 31, 2004 and 2003, (b) the financial positions at July 31,2004 and January 31, 2004, and (c) the cash flows for the six months ended July31, 2004 and 2003, have been made.

 

Note 2.                                  Earnings per unit are basedon weighted average number of units outstanding during the period (13,120,010units).

 

Note 3.                                  The Trustees have determinedto maintain an Unallocated Reserve of at least $1,000,000 in liquidassets.  The actual amount of suchUnallocated Reserve may vary from quarter to quarter depending upon conditionsin the industry and the judgment of the Trustees.  At July 31, 2004, the Unallocated Reserve wasrepresented by $886,956 in unallocated cash and U.S. Government securities, and$909,651 of accrued revenue primarily representing royalties not yet receivedby the Trust but anticipated to be received in October 2004 from Northshore MiningCompany as part of the royalty due with respect to the third fiscal quarter,based upon reported lessee shipping activity for the month of July 2004.

 

5

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

 

**Forward-LookingInformation**

 

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

 

**Background**

 

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

 

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

 

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

 

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

 

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

 

With respect to the selling price componentof the overriding royalty calculation, Northshore is obligated to pay to MesabiTrust royalty bonuses.  The royalty bonusis a percentage of the gross proceeds of product shipped from Silver Bay andsold at prices above a threshold price. The threshold price is adjusted (but not below $30.00) on an annualbasis for inflation and deflation (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $40.61 perton for calendar year 2002, $41.13 per ton for calendar year 2003, and is$41.76 per ton for calendar year 2004. The royalty bonus percentage ranges from 1/2 of 1% of the gross proceeds(on all tonnage shipped for sale at prices between the Adjusted Threshold Priceand $2.00 above the Adjusted Threshold Price) to 3% of the gross proceeds onall

 

6

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tonnageshipped for sale at prices $10.00 or more above the Adjusted ThresholdPrice.  No royalty bonus has been paid tothe Trust for several years.

 

Generally, Northshore’s obligation to paybase overriding royalties and royalty bonuses with respect to the sale of ironore products accrues upon the shipment of those products from Silver Bay.  However, regardless of whether any shipmenthas occurred, Northshore is obligated to pay to Mesabi Trust a minimum advanceroyalty.  Each year, the amount of theminimum advance royalty is adjusted (but not below $500,000 per annum) forinflation and deflation.  Advanceroyalties payable were $676,814 for calendar year 2002, $685,630 for calendaryear 2003, and are $696,161 for calendar year 2004.  Until overriding royalties (and royaltybonuses, if any) for a particular year equal or exceed the minimum advanceroyalty for the year, Northshore must make quarterly payments of up to 25% ofthe minimum advance royalty for the year. Because advance minimum royalties are essentially prepayments of baseoverriding and bonus royalties earned each year, any advance minimum royaltiespaid in a fiscal quarter are recouped by credits against base overriding andbonus royalties earned in later fiscal quarters during the year.  Historically, advance minimum royalties havebeen paid in the first fiscal quarter and recouped in the second fiscalquarter.

 

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

 

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

 

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

 

**Comparisonof three months ended July 31, 2004 and July 31, 2003**

 

Net income for the quarter ended July 31,2004 was $2,504,058 an increase of 159% over the quarter ended July 31,2003.  This increase was primarily due tocontinued increases in pellet shipments and price, and a higher applicableroyalty rate, as compared to the comparable prior period.  Expenses increased from the comparable priorperiod, primarily due to increases in general and administrative expenses.** **Followingis a summary of results for the three months ended July 31, 2004 and July 31,2003, respectively.

 

7

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| ** **           | ** ** | **Three Months Ended July 31,** | ** ** |
|----------------------|------------|---------------------------------|------------|
| ** **           | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| Total royalty income |       | $                               | 2,673,989  |   | $ | 1,095,964 |   |
| Interest income      |       | 9,806                           |       | 10,713 |   |
| Gross income         |       | $                               | 2,683,795  |   | $ | 1,106,677 |   |
|                 |       |                            |       |   |   |
| Expenses             |       | 179,737                         |       | 141,231 |   |
| Net income           |       | $                               | 2,504,058  |   | $ | 965,446 |   |

 

**Comparisonof six months ended July 31, 2004 and July 31, 2003**

 

Net income for the six months ended July 31,2004 was $3,340,025 an increase of 175% over the six months ended July 31,2003.  This increase was primarily due toincreases in pellet shipments and price, and a higher applicable royalty rate,as compared to the comparable prior period. Following is a summary of results for the six months ended July 31, 2004and July 31, 2003, respectively.

 
| ** **           | ** ** | **Six Months Ended July 31,** | ** ** |
|----------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Total royalty income |       | $                             | 3,601,195  |   | $ | 1,462,055 |   |
| Interest income      |       | 20,309                        |       | 22,786 |   |
| Gross income         |       | $                             | 3,621,504  |   | $ | 1,484,841 |   |
|                 |       |                          |       |   |   |
| Expenses             |       | 281,479                       |       | 269,393 |   |
| Net income           |       | $                             | 3,340,025  |   | $ | 1,215,448 |   |

 

**UnallocatedReserve**

 

Unallocated Reserve as of July 31, 2004 was$1,796,607, an increase of 32% over the prior year.  This increase is primarily due to increasesin pellet shipments and price.  TheTrustees anticipate that the amount of Unallocated Reserve will fluctuate fromtime to time, depending upon a number of factors, including but not limited tothe income for a particular period, the amount and timing of distributions,uncertainty about future royalty income and the uncertainty of futureexpenses.  Following is a comparison ofUnallocated Reserve over the past year.

 
| ** **          | ** ** | **As of July 31,** | ** ** |
|---------------------|------------|--------------------|------------|
| ** **          | ** ** | **2004**           | ** ** | **2003** | ** ** |
| Unallocated reserve |       | $                  | 1,796,607  |   | $ | 1,363,096 |   |
|                     |            |                    |            |  |  |  |  |

 

**RoyaltyComparisons**

 

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

 

8

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| ** **                                    | ** ** | **Three Months Ended July 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| Base overriding royalties                     |       | $                               | 2,575,290  |   | $ | 997,740 |   |
| Bonus royalties                               |       | 0                               |       | 0 |   |
| Minimum advance royalty paid  (recouped) |       | 0                               |       | 0 |   |
| Fee royalties                                 |       | 98,699                          |       | 98,224 |   |
| Total royalty income                          |       | $                               | 2,673,989  |   | $ | 1,095,964 |   |

 

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

 
| ** **                              | ** ** | **Six Months Ended July 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------|------------|
| ** **                              | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Base overriding royalties               |       | $                             | 3,405,230  |   | $ | 1,322,296 |   |
| Bonus royalties                         |       | 0                             |       | 0 |   |
| Minimum advance royalty paid (recouped) |       | 0                             |       | (45,089 | ) |
| Fee royalties                           |       | 195,965                       |       | 184,848 |   |
| Total royalty income                    |       | $                             | 3,601,195  |   | $ | 1,462,055 |   |

 

**CurrentDevelopments**

 

***General***.  CCI indicated in its Form 10-Q filed July 29,2004 that production for the first six months for Northshore was 2.5 milliontons of iron ore pellets.  Thisrepresents an increase of 100,000 tons over the first six months of 2003.  CCI has not provided an update to its Northshoreproduction forecast of 5.0 million tons for calendar year 2004, reported inCCI’s previous Form 10-Q filed April 29, 2004.

 

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

 

***Northshore Furnace Reactivation***.  In a September 9, 2004 press release, CCIannounced plans to reactivate an idled furnace at Northshore to meet increasedpellet demand.  According to CCI, thereactivated furnace is expected to begin production in 2005.  In addition to the furnace’s capacity toproduce approximately 800,000 tons of pellets annually, CCI stated thatadditional concentrating capacity will be brought on line to support thereactivated furnace.  CCI stated in itspress release that these plans are subject to the approval of its board ofdirectors.

 

***Mesabi Nugget Project***.  CCI is participating in the Mesabi NuggetProject with Kobe Steel, Ltd. (“Kobe”), Steel Dynamics, Inc. (“SDI”),Ferrometrics, Inc. (“Ferrometrics”) and the State of Minnesota.

 

9

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The project’s objective is todevelop and apply a new iron making technology (Kobe Steel’s Itmk3 process) forconverting iron ore into nearly pure iron nugget form.  CCI has indicated that if the Mesabi NuggetProject successfully achieves commercialization, iron nuggets from this newprocess would be used as an alternative to steel scrap as a raw material forelectric steel furnaces and blast furnaces or basic oxygen furnaces ofintegrated steel producers.

 

A pilot plant to test the Itmk3 process wasconstructed at the Northshore facility and operated through August 2004.  In published statements, Mesabi Nugget LLCconcluded that the pilot plant  project was a success.  In May 2004, the Minnesota state legislatureenacted legislation to shorten the environmental permitting timeline for thedevelopment of a nugget plant at Cliffs Erie, another site owned by CCI in HoytLakes, Minnesota, and Minnesota state agencies may offer tax and financialincentives for construction at the Hoyt Lakes site.  CCI stated in a September 9, 2004 pressrelease that it was proceeding with plans to participate in the development ofa 500,000 ton nugget demonstration plant at its Cliffs Erie facility.  CCI reported in its Form 10-Q filed July 29,2004 that environmental permitting activities had been initiated for threepotential commercial plant locations, with the earliest approval expected inthe first quarter of 2005.  Whileenvironmental permitting activities are currently ongoing for the expectednugget demonstration plant at CCI’s Cliffs Erie site, CCI indicated in itsSeptember 9, 2004 press release that efforts to permit commercial nuggetmodules at the Northshore facility have been terminated.

 

CCI announced in its September 9, 2004 pressrelease that any future Minnesota construction of commercial nugget moduleswould be at CCI’s Cliffs Erie facility, and added that Northshore would becapable of supplying iron concentrates to the initial iron nugget demonstrationplant expected at Cliffs Erie, as well as subsequent commercial modules.  Although Mesabi Trust is not a party to theMesabi Nugget Project and its involvement in this project was not solicited,iron ore from Mesabi Trust lands could foreseeably be used to supplyconcentrate to the iron nugget demonstration plant or commercial modules.  At this time, however, the Trustees areunable to make projections as to whether any prospective future royalties mightbe payable to the Trust with respect to any new nugget demonstration plants orcommercial modules.

 

***Securities Regulation***.  The Trust is a publicly-traded trust listedon the New York Stock Exchange (“NYSE”) and is therefore subject to extensiveregulation under, among others, the Securities Act of 1933, the SecuritiesExchange Act of 1934, NYSE rules and regulations and the Sarbanes-Oxley Act of2002 (“Sarbanes-Oxley”).  Issuers failingto comply with such authorities risk serious consequences, including criminalas well as civil and administrative penalties. In most instances, these laws, rules and regulations do not specificallyaddress their applicability to publicly-traded trusts such as MesabiTrust.  In particular, Sarbanes-Oxleyprovides for the adoption by the Securities and Exchange Commission (the “SEC”)and NYSE of certain rules and regulations that may be impossible for the Trustto literally satisfy because of its nature as a pass-through trust.  During fiscal 2004, the SEC and NYSE adoptedrules and regulations pursuant to Sarbanes-Oxley that require a publicly-tradedcompany’s board of directors, audit committee or executive directors (or similarbody) to act with respect to certain corporate governance matters.  The Trust does not have, nor does theAgreement of Trust provide for, a board of directors, an audit committee or anyexecutive officers.  Moreover, the Trusthas no employees at all.  Therefore, theTrust cannot literally comply with many of these rules and regulations.  The Trustees intend to follow the SEC’s andNYSE’s rulemaking closely and attempt to comply with such rules and regulationswhere possible.

 

**ImportantFactors Affecting Mesabi Trust**

 

The Agreement of Trust dated July 18, 1961(the “Agreement of Trust”) specifically prohibits the Trustees from enteringinto or engaging in any business.  Thisprohibition seemingly applies even to business activities the Trustees deem necessaryor proper for the preservation and protection of the Trust

 

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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 Trust’sCertificate Holders after the payment of, or provision for, such expenses andliabilities, and protecting and conserving the assets held.

 

Accordingly, the income of the Trust is highlydependent upon the activities and operations of Northshore, and the terms andconditions of the Amendment of Assignment, Assumption and Further Assignment ofPeters Lease (the “Amended Assignment of Peters Lease”), the Amendment ofAssignment, Assumption and Further Assignment of Cloquet Lease (the “AmendedAssignment of Cloquet Lease”), and the Assumption and Assignment of MesabiLease (together with the Amended Assignment of Peters Lease and the AmendedAssignment of Cloquet Lease, the “Amended Assignment Agreements”).  The Trust and the Trustees have no controlover the operations and activities of Northshore, except within the frameworkof the Amended Assignment Agreements.

 

Due to winter weather, and the increasingroyalty percentages based on tonnage shipped in a calendar year, results for aparticular calendar quarter are typically not indicative of results for futurequarters or the year as a whole.  Factorswhich can impact the results of the Trust in any quarter or year include:

 

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

 

2.                                       Operationsof Northshore.  Because the primaryportion of the Trust’s revenues derive from iron ore product shipped byNorthshore from Silver Bay, Northshore’s processing and shipping activitiesdirectly impact the Trust’s revenues in each quarter and for each year.  In turn, a number of factors affectNorthshore shipment volume.  Thesefactors include, among others, the economic conditions in the iron ore industry,pricing by domestic and international competitors, long-term customer contractsor arrangements by Northshore or its competitors, availability of ore boats,production at Northshore’s mining operations, and production at thepelletizing/processing facility.  If anypelletizing line becomes idle for any reason, production and shipments (and,consequently, Trust income) could be adversely impacted.  In addition, as noted in CCI’s September 9,2004 press release, the planned reactivation of a previously idled furnace atNorthshore may be impacted by such factors as changes in laws and regulationsthat negatively affect the reactivation of the furnace and the relatedincreases in concentrate production, the failure to obtain requiredenvironmental permits in a timely manner, an inability to generate sufficientconcentrate to support the reactivated furnace, and increases in the cost andlength of time required for the reactivation.

 

3.                                       IncreasingRoyalties.  As described elsewhere inthis Report, the royalty percentage paid to the Trust increases as theaggregate tonnage of iron ore products shipped, attributable to the Trust, inany calendar year increases.  Assuming aconsistent sales price per ton throughout a calendar year, shipments of ironore product attributable to the Trust later in the year generate a higherroyalty to the Trust, as total shipments for the year exceed increasing levelsof royalty percentages and pass each of the first four one-million ton volumethresholds.

 

4.                                       Percentageof Mesabi Trust Ore.  As describedelsewhere in this Report, Northshore has the ability to process and ship ironore products from lands other than Mesabi Trust lands.  In certain circumstances, the Trust may beentitled to royalties on those other shipments, but not in all cases.

 

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In general,the Trust will receive higher royalties (assuming all other factors are equal)if a higher percentage of shipments are from Mesabi Trust lands.  The percentages of shipments that came fromMesabi Trust lands were 95.5%, 97.5%, 99.2%, 99.8%, and 98.9% in calendar years2003, 2002, 2001, 2000, and 1999, respectively.

 

5.                                       Uncertaintyof Market Conditions in the Steel and Iron Ore Industry.  Although CCI reported in its Form 10-Q forits quarterly period ending June 30, 2004 that it experienced record secondquarter iron ore pellet sales and is projecting an overall increase in total2004 pellet sales (as compared to 2003), CCI cautioned in such Form 10-Q thatsignificant risks and uncertainties may impact its forecast, including, but notlimited to, changes in customer demand, an increase in certain steel imports, adecrease in iron ore production in North America due to global overcapacity ofsteel and uncertainty relating to customer restructuring and financialdifficulty.  Furthermore, there existsconsolidation and intense competition in the domestic steel market.

 

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

 

**CriticalAccounting Policies**

 

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

 

**Item3.****  Quantitative and Qualitative Disclosure About Market Risk.**

 

Notapplicable.

 

**Item4.****  Controls and Procedures.**

 

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

 

As of the end of the period covered by thisReport, the Trustees carried out an evaluation of the Trust’s disclosurecontrols and procedures.  The Trusteeshave concluded that the disclosure controls and procedures are effective, whilenoting certain limitations on disclosure controls and procedures as set forthbelow.

 

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

 

•       Northshore 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)plans for Northshore’s future operating and capital expenditures; (iii)geological data relating to reserves; and (iv) projected production of iron oreproducts. While the Trustees request material information for use in periodicreports as part of their disclosure controls and procedures, the Trustees donot control this information, and they rely on Northshore to provide accurateand timely information for use in the Trust’s reports filed with the Securitiesand Exchange Commission. Moreover, while each quarter Northshore furnishesshipment and royalty calculations to the Trustees, Northshore has declined tosupport this information with a written certification attesting to whetherNorthshore has established disclosure controls and procedures and internalcontrols sufficient to enable it to verify that the information furnished tothe Trustees is accurate and complete. Northshore is not required either bycontract or by governmental laws or regulations to provide such acertification.

 

•       Eide Bailly LLP, which serves as theTrust’s independent accountants (“Eide Bailly”), has delivered a report to the Trustconcluding that based upon its review of the financial statements of the Trustfor its quarter ended July 31, 2004 (the “Financial Statements”), it is notaware of any material modifications that should be made to the FinancialStatements in order for the Financial Statements to be in conformity withgenerally accepted accounting principles.

 

•       Under the terms of the Agreement of Trustand the Amendment, the Trustees are entitled to, and in fact do rely, uponcertain experts in good faith, including (i) the independent consultants withrespect to monthly production and shipment reports, which include figures oncrude ore production and iron ore pellet shipments and discussions concerningthe condition and accuracy of the scales and plans regarding the development ofthe Trust’s mining property; and (ii) the independent auditors they havecontracted with respect to reviews of financial data related to shipping andsales reports provided by Northshore.

 

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

 

***Changes in Internal Control Over Financial Reporting***.  To the knowledge of the Trustees, there hasbeen no significant change in the Trust’s internal control over financialreporting that occurred during the Trust’s last fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, the Trust’sinternal control over financial reporting. The Trustees note for purposes of clarification that they have noauthority over, and make no statement concerning, the internal control overfinancial reporting of Northshore.

 

**PART II - OTHER INFORMATION**

 

**Item 1.**           **Legal Proceedings.**

 

None.

 

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**Item 2.**           **Unregistered Sales of Equity Securities and Use ofProceeds.**

 

None.

 

**Item 3.**           **Defaults Upon SeniorSecurities.**

 

None.

 

**Item 4.**           **Submission of Matters to a Vote of Security Holders.**

 

None.

 

**Item 5.**           **Other Information.**

 

None.

 

**Item6.**           **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 Eide Bailly LLP regarding its review of  the un-audited interim financial statements of Mesabi Trust for its quarter  ending July 31, 2004.                                       |

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe 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:* |
|                           |                                                               |
|                           |                                                               |
| Date:  September 14, 2004 | By:                                                                | /s/ Rodney  Gaughan |   |
|                           |                                                               | Name:               | Rodney Gaughan |
|                           |                                                               | Title:              | Assistant  Vice President |
|                                |                                                                    |                     |  |  |  |  |

 

 

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

 

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