**Exhibit 13**

 

ANNUAL REPORTOF THE TRUSTEES OFMESABI TRUSTFor The Year Ended January 31, 2010

 

ADDRESS

 

MesabiTrust

c/oDeutsche Bank Trust Company Americas

Trust &Securities Services — GDS

60Wall Street, 27th Floor

NewYork, NY 10005

(615)835-2749 (telephone)

www.mesabi-trust.com

 

REGISTRARAND TRANSFER AGENT

 

DeutscheBank Trust Company Americas

 

LEGALCOUNSEL

 

OppenheimerWolff & Donnelly LLP, General Counsel

 

REGISTRANT INFORMATION

 

Mesabi Trust maintains awebsite that provides access to its annual, quarterly, and other reports itfiles with the Securities and Exchange Commission.  Such reports can be accessed at www.mesabi-trust.com.  Mesabi Trust will provide, upon the writtenrequest of any Unitholder addressed to the Trustees at the above address andwithout charge to such Unitholder, (i) a paper copy of Mesabi Trust’sAnnual Report on Form 10-K for the fiscal year ended January 31, 2010as filed with the Securities and Exchange Commission pursuant to the SecuritiesExchange Act of 1934, as amended, and (ii) the Trustees Code of Ethics.

 

SpecialNote Regarding Forward-Looking Statements

 

Certain statements containedin this document are considered “forward-looking statements” within the meaningof the Private Securities Litigation Reform Act of 1995.  All such forward-looking statements,including those statements estimating calendar year 2010 production orshipments, are based on input 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,” “believe,”“anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast”and other similar words.  Suchforward-looking statements are inherently subject to known and unknown risksand uncertainties.  Actual results andfuture developments could differ materially from the results or developmentsexpressed in or implied by these forward-looking statements.  Factors that may cause actual results todiffer materially from those contemplated by such forward-looking statementsinclude, but are not limited to, volatility of iron ore and steel prices, marketsupply and demand, regulation or government action, litigation anduncertainties about estimates of reserves, and those described under thecaption “Risk Factors” in this annual report. Mesabi Trust undertakes no obligation 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.

 

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**OVERVIEW**

 

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

 

The Agreement of Trustspecifically prohibits the Trustees from entering into or engaging in anybusiness.  This prohibition seeminglyapplies even to business activities the Trustees may deem necessary or properfor the 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.  Becausethe Units of the Trust are registered pursuant to Section 12(b) ofthe Securities Exchange Act of 1934 and are listed on the New York StockExchange, the Trustees are also responsible for ensuring that the Trustmaintains compliance with all applicable laws, rules and regulations.  Deutsche Bank Trust Company Americas, theCorporate Trustee, performs certain administrative functions for the Trust.

 

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

 

The information regardingamounts and sales prices of shipped iron ore products is used to compute theroyalties payable to the Trust by Northshore. The Trustees request material information, from time to time, for use inthe Trust’s periodic reports and as part of their evaluation of the Trust’sdisclosure controls and procedures.  TheTrustees rely on Northshore to provide accurate and timely information for usein the Trust’s current, periodic and annual reports filed with the Securitiesand Exchange Commission.

 

Pursuant to a ruling fromthe Internal Revenue Service, which ruling was based on the terms of theAgreement of Trust including the prohibition against entering into anybusiness, the Trust is not taxable as a corporation for Federal income taxpurposes.  Instead, the Unitholders areconsidered “owners” of the Trust and the Trust’s income is taxable directly tothe Unitholders.  In accordance with theAgreement of Trust, the Trust will terminate twenty-one years after the deathof the survivor of twenty-five persons named in an exhibit to the Agreement ofTrust, the youngest of whom is believed to be forty-nine years old.

 

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**RISK FACTORS**

 

The results of operations and financial condition of the Trust aresubject to various risks. Some of these risks are described below, and youshould take such risks into account in evaluating the Trust or any investmentdecision involving the Trust.  Thissection does not describe all risks that may be applicable to the Trust and itis intended only as a summary of certain material risk factors.  More detailed information concerning the riskfactors described below is contained in other sections of this Annual Report.

 

***The Trustees have no control over theoperations and activities of Cliffs or Northshore.***

 

Except within the frameworkof the Amended Assignment Agreements, neither the Trust nor the Trustees haveany control over the operations and activities of Cliffs or its wholly-ownedsubsidiary, Northshore.  Accordingly, theincome of the Trust is highly dependent upon the activities and operations of Northshore,and the terms and conditions of the Amended Assignment Agreements.  Northshore together with Cliffs, without anyinfluence from the Trust, control: (i) historical operating data,including iron ore production volumes, marketing of iron ore products,operating and capital expenditures as they relate to Northshore, environmentaland other liabilities and the effects of regulatory changes; (ii) plansfor Northshore’s future production, operations and capital expenditures; (iii) geologicaldata relating to iron ore reserve estimates; (iv) shipments of iron oreproducts to customers of Cliffs; and (v) the provisions and pricing underthe Cliffs Pellet Agreements.  Anysubstantial alteration of Cliffs’ business or the operations, production andshipments by Northshore could adversely affect the income of the Trust.

 

***Price adjustment provisions inthe North American supply agreements with Cliffs’ customers can causesignificant positive and negative fluctuations in the royalties paid to theTrust.***

 

In Cliffs’ Form 10-Kfiled February 18, 2010, Cliffs has reported that five customers togetheraccounted for more than 80 percent of its North American iron ore salesrevenues.  According to the Form 10-Kfiled by Cliffs, sales volume under these agreements is largely dependent oncustomer requirements, and in some cases, Cliffs is the sole supplier of ironore pellets to its customers. Contractual disputes with any of Cliffs’ significant customers couldresult in lower sales volume or lower sales prices, which could adverselyaffect the royalties received by the Trust.

 

Cliffs has also reportedthat its North American term supply agreements contain a number of priceadjustment provisions, including adjustments based on general industrialinflation rates, the price of steel and the international price of iron orepellets, among other factors, that allow Cliffs to adjust the prices underthose agreements generally on an interim and annual basis.  Factors that could result in price adjustmentinclude measures of general industrial inflation, steel prices andinternational pellet prices.  Thesemarket prices are dependent upon supply and demand relationships and a varietyof other factors over which the Trust has no control.  Cliffs’ price adjustment provisions areweighted and some are subject to annual collars, which limit Cliffs’ ability toraise prices to match international levels and fully capitalize on strongdemand for iron ore.  These priceadjustments can be positive or negative, and can result in significantvariations in royalties received by Mesabi Trust from quarter to quarter andyear to year.  These variations couldadversely affect the royalties received by the Trust and, in turn, theresulting cash available for distribution to Unitholders.

 

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***Royalties received by theTrust, and distributions paid to Unitholders, in any particular quarter are notnecessarily indicative of royalties or distributions that will be paid in anysubsequent quarter or for a full year.***

 

Royalties received by theTrust can fluctuate significantly from quarter to quarter and year to yearbased upon market prices for iron ore products, the level of orders for ironore products from Cliffs’ customers, the consumption of inventory by Cliffs’customers, and production decisions made by Northshore.  Moreover, because the royalties paid to theTrust in any particular quarter include payments made with respect to pelletsshipped and sold at estimated prices that are subject to future interim andfinal multi-year adjustments in accordance with Cliff’s Customer Agreements,the recent downward trends in demand and market prices for iron and steelproducts could result in negative adjustments to royalties in future quarters,some of which may be significant.  Thesenegative price adjustments could have a material adverse effect on the Trust’sroyalty income, which in turn could result in lower quarterly distributions,and possibly reduce or even eliminate funds available for distribution in anyquarter and in some quarters may completely offset royalties otherwise payableto the Trust.  Because of this, cashavailable for distribution to Unitholders in future quarters could be reduced,potentially materially, and in some cases, such reduction could result in nocash being available for distribution to Unitholders.  As a result, the royalties received by theTrust, and the distributions paid to Unitholders, in any particular quarter arenot necessarily indicative of royalties that will be received, or distributionsthat will be paid, in any subsequent quarter or for a full year.  Based on the foregoing and the currentuncertainty in the economic environment, the Trust cannot ensure that therewill be adequate cash available to make a distribution to Unitholders in anyparticular quarter.

 

***The Trust does not control the portion ofNorthshore’s shipments that will come from ore mined from Mesabi Trust lands.***

 

The Trustees do not exertany influence over mining operational decisions and Northshore alone determineswhether to mine from lands owned by the Trust or state-owned lands, based onits current production estimates and engineering plan.  Northshore’s mining operations (the PeterMitchell Mine) include mineral-producing land owned by the Trust and the Stateof Minnesota.  Ore mined from state-ownedlands by Northshore is processed, along with ore mined from Trust-owned lands,in Northshore-owned crushing, concentrating and pelletizing facilities and isseparately accounted for on a periodic basis. Northshore also has the ability to process and ship iron ore productsfrom lands other than Mesabi Trust lands. In certain circumstances, the Trust may be entitled to royalties onthose other shipments, but not in all cases. In general, the Trust will receive higher royalties (assuming all otherfactors are equal) if a higher percentage of shipments are from Mesabi Trustlands.  The percentages of shipments fromMesabi Trust lands were 93.6%, 90.2%, 88.2%, 90.9% and 90.1% in calendar years2009, 2008, 2007, 2006 and 2005, respectively. If Northshore decides to materially reduce the percentage of ore mined,or pellets shipped, from Mesabi Trust lands, the income of the Trust could beadversely affected.

 

***The global economic climate and the recentdisruption in the financial and credit markets have created uncertainty and aprolonged downturn in global economic conditions could adversely affect theroyalties received by the Trust.***

 

Thevolatile global economic climate and the recent global financial and creditcrisis could have a material adverse effect on the royalties received by theTrust.  Financial markets in the UnitedStates and elsewhere have been experiencing extreme disruption, including,among other things, extreme volatility in security prices, diminished liquidityand credit availability, ratings downgrades of certain investments anddeclining values of others. The global economy is struggling to exit arecession.  In 2009 Cliffs announced 

 

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production curtailments, workforce reductionsand an extended idling of production at Northshore.  Deterioration or worsening of economicconditions, prolonged global, national or regional economic instability orother events could produce major changes in demand patterns and may have amaterial adverse effect on sales prices of iron ore products shipped byNorthshore which would adversely affect the royalties received by theTrust.  Moreover, such conditions couldimpact the international benchmark pellet price, hot band steel prices andvarious Producer Price Indexes all of which affect the royalties payable to theTrust.  The Trustees are not able topredict the impact the volatile global economic climate and the recent globalfinancial and credit crisis will have on future royalties payable to the Trust.

 

Theworld price of iron ore and steel are strongly influenced by internationaldemand and global market conditions which are uncertain.  Domestic demand for iron ore and steelproducts, which is influenced by international markets, is also uncertain.  In recent years, many major iron oresuppliers increased their capacity to meet the increased demand for iron oreand steel products, particularly from China. Despite some signs that the global economic environment is improving,there is a high degree of uncertainty concerning the overall demand for steeland iron ore products. Reduced demand for iron ore will likely result indecreased sales of products to Cliffs’ customers and decreasing prices, all ofwhich would adversely affect royalties received by the Trust in 2010.  Since the Trust is not party to any specificcustomer contracts that Cliffs has with its customers and because thesemacroeconomic forces are difficult to forecast, the Trustees are not able topredict the extent to which reduced demand and lower prices for iron oreproducts will adversely affect royalties payable to the Trust.

 

***The royaltiespayable to the Trust could be adversely affected by the failure of the Trust’sindependent experts to competently perform.***

 

As permitted by the terms ofthe Agreement of Trust and the Amendment, the Trustees are entitled to, and infact do rely, upon certain experts to assist the Trustees in carrying out andfulfilling their obligations as Trustees. Independent consultants perform services, render advice and producereports with respect to monthly production and shipments, which include figureson crude ore production, iron ore pellet production, iron ore pellet shipments,and discussions concerning the condition and accuracy of the scales used toweigh iron ore pellets produced at Northshore’s facilities.  The Trustees have also retained an accountingfirm to provide non-audit services, including preparing financial statements,reviewing financial data related to shipping and sales reports provided byNorthshore and reviewing the schedule of leasehold and fee royalties payable tothe Trust.  The Trustees believe that theindependent experts are qualified to perform the services and functionsassigned to them.   Nevertheless, anynegligence or the failure of any such independent expert to competently performcould adversely affect the royalties received by the Trust.

 

***The Trustrelies on Cliffs’ estimates of recoverable reserves and if those estimates areinaccurate the total potential future royalty stream to the Trust anddistributions payable to each Unitholder may be adversely affected.***

 

The Trustees do notparticipate in preparing the ore reserve estimate reported by Cliffs.  According to Cliffs’ Form 10-K, Cliffsregularly evaluates its iron ore reserves based on revenues and costs andupdates them as required in accordance with Securities Act IndustryGuide 7, promulgated by the U.S. Securities and Exchange Commission.  In 2010, the Trustees engaged an independentfirm of geological experts to evaluate the process Cliffs uses to estimate themineral reserves at the Peter Mitchell Mine. Still, there are numerous uncertainties inherent in estimatingquantities of reserves of mineral producing lands and such estimatesnecessarily depend upon a number of variable factors and assumptions, such asproduction capacity, effects of regulations by governmental agencies, futureprices for iron ore, future industry conditions and operating costs, 

 

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severance and excise taxes, development costsand costs of extraction and reclamation costs, all of which may in fact varyconsiderably from actual results.  Forthese reasons, estimates of the economically recoverable quantities ofmineralized deposits attributable to the lands owned by Mesabi Trust and theclassifications of such reserves based on the risk of recovery prepared bydifferent engineers or by the same engineers at different times may varysubstantially as the criteria change. Cliffs’ estimate of the ore reserves could be negatively affected byfuture industry conditions, geological conditions and ongoing mine planning atthe Peter Mitchell Mine.  Actual reservesand therefore actual royalties will likely vary from estimates, and if suchvariances are negative and material, the expected royalties of the Trust couldbe adversely affected and the value of the Trust’s Units could decline.

 

***The operationsat Northshore are largely dependent on a single-source energy supplier.***

 

The operations at Northshoreare largely dependent on Silver Bay Power Company, a 115 megawatt power plant,for its electrical supply.  Silver BayPower Company, which is wholly owned by Northshore, has an interconnectionagreement with Minnesota Power, Inc. for backup power, and sells 40megawatts of excess power capacity to Xcel Energy under a contract that extendsto 2011.  A significant interruption inservice from Silver Bay Power Company due to vandalism, terrorism, weatherconditions, natural disasters, or any other cause could cause a decrease inproduction capacity or require a temporary shutdown of Northshore’soperations.  In addition, one natural gaspipeline serves all of Cliffs’ Minnesota mines, and a pipeline failure couldidle or substantially impair the operations at Northshore.  Any substantial interruption of, or materialreduction in, Northshore’s operations could adversely affect the royaltiesreceived by the Trust.

 

***The mining operations of Northshore aresubject to extensive governmental regulation and Northshore is subject to risksrelated to its compliance with federal and state environmental regulations.***

 

Northshore, as the owner/operator of the PeterMitchell Mine, is subject to various federal, state and local laws andregulations on matters such as employee health and safety, air quality, waterpollution, plant and wildlife protection, reclamation and restoration of miningproperties, the discharge of materials into the environment, and the effectsthat mining has on groundwater quality and availability.  Northshore is required to maintain permitsand approvals issued by federal and state regulatory agencies and its miningoperations are subject to inspection and regulation by the Mine Safety andHealth Administration of the United States Department of Labor (“MSHA”) underthe provisions of the Mine Safety and Health Act of 1977.  The Occupational Safety and HealthAdministration (“OSHA”) also has jurisdiction over safety and health standardsnot covered by MSHA and the Minnesota Pollution Control Agency (“MPCA”)regulates various aspects of Northshore’s operations.  Northshore is involved in litigation with theMPCA over certain air quality permitting matters but because the Trust has nocontrol over Northshore’s operations, the potential impact of these proceedingscannot be determined.  Moreover,Northshore is solely responsible for its compliance with any laws, regulationsor permits applicable to Northshore’s operations and therefore the Trust cannotdetermine whether Northshore has been or will continue to be in compliance withsuch laws and regulations.  If Northshorefails to comply with these laws, regulations or permits, it could be subject tofines or other sanctions, any of which could have an adverse effect on itsoperations and its ability to ship iron ore products from Silver Bay,Minnesota, which could, in turn, have an adverse effect on the royalties paidto the Trust.

 

***Equipmentfailures and other unexpected events at Northshore may lead to productioncurtailments or shutdowns.***

 

Interruptions in productioncapabilities at the mine operated by Northshore may have an adverse impact onthe royalties payable to the Trust.  Inaddition to planned production shutdowns and curtailments, equipment

 

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failures, the Northshore facilities are alsosubject to the risk of loss due to unanticipated events such as fires,explosions or extreme weather conditions. The manufacturing processes that takeplace in Northshore’s mining operations, as well as in its crushing, concentratingand pelletizing facilities, depend on critical pieces of equipment, such asdrilling and blasting equipment, crushers, grinding mills, pebble mills,thickeners, separators, filters, mixers, furnaces, kilns and rolling equipment,as well as electrical equipment, such as transformers. It is possible that thisequipment may, on occasion, be out of service because of unanticipated failuresor unforeseeable acts of vandalism or terrorism.  In addition, because the Northshore mine andprocessing facilities have been in operation for several decades, some of theequipment is aged.  Because the Trusteeshave no control over the operations or maintenance of the equipment atNorthshore, a shutdown or reduction in capacity may come with little or noadvance warning.  The remediation of anyinterruption in production capability at Northshore could require Cliffs tomake large capital expenditures which may take place over an extended period oftime.  A shutdown or reduction inoperations at Northshore could adversely affect the royalties paid to theTrust.

 

***If steelmakersuse methods other than blast furnace production to produce steel, shut down orreduce production using blast furnaces, the demand for iron ore pellets maydecrease.***

 

Demand for iron ore pelletsis determined by the operating rates for the blast furnaces of steel companies.However, not all finished steel is produced by blast furnaces; finished steelalso may be produced by other methods that do not require iron ore pellets. Forexample, steel “mini-mills,” which are steel recyclers, generally produce steelby using scrap steel, not iron ore pellets, in their electric furnaces.  North American steel producers also canproduce steel using imported iron ore or semi-finished steel products, whicheliminates the need for domestic iron ore. Environmental restrictions on theuse of blast furnaces also may reduce the use of their blast furnaces in steelproduction.  Because the maintenance ofblast furnaces can require substantial capital expenditures, manufacturers maychoose not to maintain their blast furnaces, and some of them may not have theresources necessary to adequately maintain their blast furnaces. If steelmanufacturers significantly alter the methods they use to produce steel orotherwise substantially reduce their use of iron ore pellets, demand for ironore pellets will decrease, which could adversely affect the royalties paid tothe Trust.

 

***Risk factors affectingCliffs’ North American Iron Ore Business and Operations at Northshore couldhave a material adverse effect on the royalties of the Trust.***

 

Becausesubstantially all of the Trust’s revenue is derived from iron ore productsshipped by Northshore from Silver Bay, Northshore’s iron ore pellet processingand shipping activities directly impact the Trust’s revenues in each quarterand each year.  A number of factorsaffect Cliffs’ operations, including Northshore’s production and shipmentvolume.  These factors which aredescribed in Cliffs’ Form 10-K filed February 18, 2010 include, amongothers, the global economic climate and financial market conditions, economicconditions in the iron ore industry, extensive governmental regulation relatingto environmental matters and the costs and risks related thereto, availabilityof substitute materials, pricing by domestic and international competitors,long-term customer contracts or arrangements by Northshore or its competitors,price adjustment provisions in Cliffs’ North American term supply agreements(which take into account various price indexes), availability of ore boats,production at Northshore’s mining operations, natural disasters, shippingconditions in the Great Lakes and production at Northshore’spelletizing/processing facility. Specifically, if any portion of Northshore’s pelletizing lines becomesidle for any reason, production, shipments and, consequently, the royaltiespaid to the Trust could be adversely affected.

 

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***The Trustees are not subject toannual election and, as a result, the ability of the holders of Certificates ofBeneficial Interest to influence the policies of the Trust may be limited.***

 

Directors of a corporation are generally subject toelection at each annual meeting of stockholders or, in the case of staggeredboards, at regular intervals. Under the Agreement of Trust, however, the Trustis not required to hold annual meetings of holders of Certificates ofBeneficial Interest to elect Trustees and Trustees generally hold office untiltheir death, resignation or disqualification. As a result, the ability ofholders of Certificates of Beneficial Interest to effect changes in the Boardof Trustees, and the policies of the Trust, is significantly more limited thanthat of the stockholders of a corporation.

 

**OVERVIEW OF TRUST’S ROYALTY STRUCTURE**

 

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

 

·                  Base overriding royalties.  Base overriding royalties have historicallyconstituted the majority of Mesabi 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 Mesabi Trustbase overriding 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 oreproducts produced at Mesabi Trust lands (and to a limited extent other lands)and shipped from Silver Bay, Minnesota. The percentage ranges from 2-1/2% of the gross proceeds for the first onemillion tons of iron ore products so shipped annually to 6% of the grossproceeds for all iron ore products in excess of 4 million tons so shippedannually.  Base overriding royalties aresubject to interim and final price adjustments under the Cliffs PelletAgreements and, as described elsewhere in this report, such adjustments may bepositive or negative.

 

·                  Royalty bonuses.  The Trust earns royalty bonuses when iron oreproducts shipped from Silver Bay are sold at prices above a threshold price perton.  The royalty bonus is based on apercentage of the gross proceeds of product shipped from Silver Bay and sold atprices above a threshold price.  Thethreshold price is adjusted (but not below $30.00 per ton) on an annual basisfor inflation and deflation (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $47.43 perton for calendar year 2008, $48.48 per ton for calendar year 2009 and will be$48.81 per ton for calendar year 2010. 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 tonnage shipped for sale at prices $10.00 or more above the AdjustedThreshold Price).  Royalty bonuses aresubject to price adjustments under the Cliffs Pellet Agreements (described elsewherein this Annual Report); such adjustments may be positive or negative.  See the section entitled “Comparison ofFinancial Results for Fiscal Years ended January 31, 2010 and January 31,2009” on page 12 of this Annual Report for more information.

 

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

 

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generatedfrom royalties on the amount of crude ore mined after the payment of expensesto U.S. Bank N.A. for its services as corporate trustee.  Crude ore is the source of iron oxides usedto make iron ore pellets and other products. The fee royalty on crude ore is based on an agreed price per ton,subject to certain indexing.

 

·                  Minimum advanceroyalties.  Northshore’sobligation to pay base overriding royalties and royalty bonuses with respect tothe sale of iron ore products generally accrues upon the shipment of thoseproducts from Silver Bay.  However,regardless of whether any shipment has occurred, Northshore is obligated to payto Mesabi Trust a minimum advance royalty. Each year, the amount of the minimum advance royalty is adjusted (butnot below $500,000 per annum) for inflation and deflation.  The minimum advance royalty was $790,721 forcalendar year 2008, $808,177 for calendar year 2009 and is $813,729 forcalendar year 2010.  Until overridingroyalties (and royalty bonuses, if any) for a particular year equal or exceedthe minimum advance royalty for the year, Northshore must make quarterlypayments of up to 25% of the minimum advance royalty for the year.  Because minimum advance royalties areessentially prepayments of base overriding royalties and royalty bonuses earnedeach year, any minimum advance royalties paid in a fiscal quarter are recoupedby credits against base overriding royalties and royalty bonuses earned inlater fiscal quarters during the year.

 

The current royalty rateschedule became effective on August 17, 1989 pursuant to the AmendedAssignment Agreements, which the Trust entered into with Cyprus NorthshoreMining Corporation (“Cyprus NMC”). Pursuant to the Amended Assignment Agreements, overriding royalties aredetermined by both the volume and selling price of iron ore productsshipped.  In 1994, Cyprus NMC was sold byits parent corporation to Cliffs and renamed Northshore Mining Company.  Cliffs now operates Northshore as a whollyowned subsidiary.

 

Under the relevantagreements, Northshore has the right to mine and ship iron ore products fromlands other than Mesabi Trust lands. Northshore alone determines whether to conduct mining operations onTrust and/or such other lands based on its current mining and engineeringplan.  The Trustees do not exert anyinfluence over mining operational decisions. To encourage the use of iron ore products from Mesabi Trust lands, MesabiTrust receives royalties on stated percentages of iron ore shipped from SilverBay, whether or not the iron ore products are from Mesabi Trust lands.  Mesabi Trust receives royalties at thegreater of (i) the aggregate quantity of iron ore products shipped thatwere 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 such year, 85% of the next two million tons shipped duringsuch year, and 25% of all tonnage shipped during such year in excess of sixmillion tons.

 

Royalty income constitutesthe principal source of the Trust’s revenue, which comprised 99.9%, 99.9% and99.7% of the total revenue of the Trust in fiscal years ended 2010, 2009 and 2008,respectively.  A more complete discussionof royalty rates and the manner in which they are determined is set forth underthe headings “Leasehold Royalties” and “Land Trust and Fee Royalties,”beginning on pages 25 and 28, respectively, of this Annual Report.

 

During the course of itsfiscal year some portion of royalties expected to be paid to Mesabi Trust isbased in part on estimated prices for iron ore products sold under termcontracts between Northshore, Cliffs and certain of their customers (the “CliffsPellet Agreements”).  The Cliffs PelletAgreements use estimated prices which are subject to interim and final pricingadjustments, which can be positive or negative, and which 

 

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adjustments are dependent in part on multipleprice and inflation index factors that are not known until after the end of acontract year. Even though Mesabi Trust is not a party to the Cliffs PelletAgreements, these adjustments can result in significant variations in royaltiesreceived by Mesabi Trust (and in turn the resulting amount available fordistribution to Unitholders by the Trust) from quarter to quarter and on acomparative historical basis, and these variations, which can be positive ornegative, cannot be predicted by Mesabi Trust. In either case, these price adjustments will impact future royaltiesreceived by the Trust that become available for distribution to Unitholders.

 

As described elsewhere inthis Annual 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 past each of the first four one-million ton volumethresholds.  Assuming a consistent salesprice per ton throughout a calendar year, shipments of iron ore productattributable to the Trust later in the year generate a higher royalty to theTrust, as total shipments for the year exceed increasing levels of royaltypercentages and pass each of the first four one-million ton volume thresholds.

 

As also described elsewherein this Annual Report, the Trust receives a bonus royalty equal to a percentageof the gross proceeds of iron ore products (mined from Mesabi Trust lands)shipped from Silver Bay and sold at prices above the Adjusted ThresholdPrice.  Although Cliffs was able to sellall of the iron ore products at prices higher than the Adjusted Threshold Priceduring calendar 2009, the Trustees are unable to project whether Northshorewill continue to be able to sell pellets at prices above the applicableAdjusted Threshold Price, entitling the Trust to any future bonus royaltypayments.

 

**SELECTED FINANCIAL DATA**

 
| ** **                                   | ** ** | **2010** | ** ** | **2009** | ** ** | **2008**   | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| **Years ended on January 31** |       |     |       |     |       |       |       |     |       |     |       |
| Royalty and interest  income                 |       | $        | 13,241,669 |     | $          | 35,469,105 |       | $        | 18,866,511 |     | $          | 17,902,988 |   | $ | 21,579,833 |   |
| Trust expenses                               |       | 818,007  |       | 799,320  |       | 634,151    |       | 756,322  |       | 844,956  |       |
| Net income(1)                                |       | $        | 12,423,662 |     | $          | 34,669,785 |       | $        | 18,232,360 |     | $          | 17,146,666 |   | $ | 20,734,877 |   |
| Net income per Unit(2)                       |       | $        | 0.95       |     | $          | 2.64       |       | $        | 1.39       |     | $          | 1.31 |   | $ | 1.58 |   |
| Distributions declared Per unit(2)(3)        |       | $        | 1.15       |     | $          | 2.48       |       | $        | 1.35       |     | $          | 1.60 |   | $ | 1.53 |   |
|                                         |       |     |       |     |       |       |       |     |       |     |       |
| **Years ended on January 31** |       |     |       |     |       |       |       |     |       |     |       |
| Total Assets                                 |       | $        | 11,199,575 |     | $          | 5,346,932  |       | $        | 8,488,509  |     | $          | 5,414,552 |   | $ | 11,328,959 |   |

 

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(1)                                  The Trust, as a grantor trust, is exempt fromfederal and state income taxes.

 

(2)                                  Based on 13,120,010 Units of BeneficialInterest outstanding during all years.

 

(3)                                  During the Trust’sfiscal year ended January 31, 2010, the Trustees distributed $0.71 perUnit (including $0.11 per Unit declared in fiscal 2009 but distributed infiscal 2010 (February 2009)) and in fiscal 2010 declared a distribution of$0.55 per Unit payable in February 2010, the next fiscal year.**** During the Trust’sfiscal year ended January 31, 2009, the Trustees distributed $2.885 perUnit (including $0.515 per Unit declared in fiscal 2008 but distributed infiscal 2009 (February 2008)) and in fiscal 2009 declared a distribution of$0.11 per Unit payable in February 2009, the next fiscal year.**** During the Trust’sfiscal year ended January 31, 2008, the Trustees distributed $1.15 perUnit (including $0.315 per Unit declared in fiscal 2007 but distributed infiscal 2008 (February 2007)) and in fiscal 2008 declared a distribution of$0.515 per Unit payable in February 2008, the next fiscal year.  Duringthe Trust’s fiscal year ended January 31, 2007, the Trustees distributed$1.755 per Unit (including $0.47 per Unit declared in fiscal 2006 butdistributed in fiscal 2007 (February 2006)) and in fiscal 2007 declared adistribution of $0.315 per Unit payable in February 2007, the next fiscalyear.  During the Trust’s fiscal yearended January 31, 2006, the Trustees distributed $1.355 per Unit(including $0.295 per Unit declared in fiscal 2005 but distributed in fiscal2006 (February 2005)) and in fiscal 2006 declared a distribution of $0.47per Unit payable in February 2006, the next fiscal year.

 

10

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**TRUSTEES’ DISCUSSION ANDANALYSIS OF FINANCIAL**

**CONDITION AND RESULTS OFOPERATIONS**

** **

**Results of Operations**

** **

**Comparison of Iron Ore Pellet Production and Shipmentsfor the Fiscal Years Ended January 31, 2010, January 31, 2009 and January 31,2008**

 

During fiscal 2010, production attributed to Trustlands totaled approximately 3.14 million tons, a decrease of 34.2% and 33.4% ascompared to production for fiscal years 2009 and 2008, respectively.  Shipments to Northshore’s customersattributed to the Trust totaled approximately 3.24 million tons during fiscal2010.  This represents a decrease of 37%and 23.7%, respectively, as compared to shipments for fiscal years 2009 and2008.  The table below, which is based oninformation provided to the Trust by Northshore, shows the total production andtotal shipments of iron ore pellets from Mesabi Trust lands during the priorthree fiscal years.

 
| **Fiscal Year Ended** | ** ** | **Pellets Produced from  Trust Lands  (Tons)** | ** ** | **Pellets Shipped from  Trust Lands  (Tons)** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| January 31, 2010           |       | 3,141,395                                                     |       | 3,241,237                                                    |       |
| January 31, 2009           |       | 4,774,939                                                     |       | 5,146,687                                                    |       |
| January 31, 2008           |       | 4,719,005                                                     |       | 4,248,785                                                    |       |

 

Production of iron orepellets was slightly lower for the fourth quarter of fiscal 2010 as compared tothe fourth quarter of fiscal 2009, decreasing 2.8%.  However, shipments of iron ore pellets byNorthshore during the fourth quarter of fiscal 2010 increased 2,504%.  The significant increase in shipments in thefourth quarter of fiscal 2010 is due to the return of more robust customerdemand in the fourth quarter of fiscal 2010, as compared to the fourth quarterof fiscal 2009, combined with a dramatic decline in shipments in the fourthfiscal quarter of 2009.  Notwithstandingthe significant increase in shipments in the fourth quarter, as shown in thetable below, shipments attributable to the Trust decreased 37% during fiscal2010, as compared to fiscal 2009.

 
| **Three  Months Ended** | ** ** | **Pellets Produced from********Trust  Lands********(Tons)** | ** ** | **Pellets Shipped from********Trust  Lands********(Tons)** | ** ** |
|-------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| January 31, 2010   |       | 1,059,310                                                   |       | 1,417,425                                                  |       |
|                    |       |                                                        |       |                                                       |       |
| January 31, 2009   |       | 1,089,757                                                   |       | 54,429                                                     |       |

 

The table below shows the change in the percentagesof production and shipments from lands owned or leased by Mesabi Trust versusthe percentages of production and shipments from lands owned by the State ofMinnesota for the most recent three fiscal years.

 
| **Fiscal Year  Ended** | ** ** | **Percentage of  Pellets Produced  From Trust  Lands** | ** ** | **Percentage of  Pellets Produced  From State  Lands** | ** ** | **Percentage of  Pellets  Shipped  From Trust  Lands** | ** ** | **Percentage of  Pellets  Shipped  From State  Lands** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| January 31, 2010       |       | 95.9                                                                  | %          | 4.1                                                                   | %          | 93.0                                                             | %          | 7.0                                                              | %          |
| January 31, 2009       |       | 87.8                                                                  | %          | 12.2                                                                  | %          | 90.2                                                             | %          | 9.8                                                              | %          |
| January 31, 2008       |       | 91.7                                                                  | %          | 8.3                                                                   | %          | 88.2                                                             | %          | 11.8                                                             | %          |

 

11

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As is the case with the volume of shipments fromSilver Bay, Minnesota, the Trustees cannot predict what percentage ofproduction or shipments will be attributable to Mesabi Trust lands in fiscal2011.  However, pursuant to theAmendment, Mesabi Trust will be credited with at least 90% of the first fourmillion tons of iron ore pellets shipped from Silver Bay, Minnesota in eachcalendar year, at least 85% of the next two million tons of pellets shippedfrom Silver Bay, Minnesota in each calendar year, and at least 25% of all tonsof pellets shipped from Silver Bay, Minnesota in each calendar year in excessof six million tons.

 

**Comparisonof Financial Results for Fiscal Years ended January 31, 2010 and January 31,2009**

 

***Royalty Income***

 

As shown in the table below,in fiscal 2010 there was a 64.9% decrease in base royalties and a 60% decreasein bonus royalties, each as compared to fiscal 2009.  Accordingly, the Trust’s total royalty incomedecreased 62.7% in fiscal 2010 as compared to fiscal 2009.  The significant decrease in royaltiesreceived by the Trust is primarily the result of lower average selling pricefor each ton of iron ore shipped from Silver Bay, Minnesota in fiscal 2010, ascompared to fiscal 2009, and a decrease in shipments in fiscal 2010 as comparedto fiscal 2009.

 
| ** **                              | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **2010**                                                       | ** ** | **2009**            | ** ** | **(decrease)** | ** ** |
| Base overriding royalties               |       | $                                                              | 7,522,767  |                | $          | 21,442,218 |   | (64.9 | )% |
| Bonus royalties                         |       | 5,401,563                                                      |       | 13,454,580          |       | (60.0 | )% |
| Minimum advance royalty paid (recouped) |       | —                                                         |       | —              |       |   |   |
| Fee royalties                           |       | 305,407                                                        |       | 525,851             |       | (41.9 | )% |
| Total royalty income                    |       | $                                                              | 13,229,737 |                | $          | 35,422,649 |   | (62.7 | )% |

 

Theroyalty amounts set forth in the table above include pricing adjustments madeto royalty payments previously received by the Trust based on shipments fromSilver Bay, Minnesota during prior calendar years.  Depending on the year, the volume ofshipments, and the interim and final price paid to the Trust for shipments fromSilver Bay, Minnesota, the price adjustments provisions of the Cliffs PelletAgreements may increase or decrease, in some cases materially, thedistributions payable to Unitholders. Because the Trust is not a party to the Cliffs Pellet Agreements, theTrustees are unable to determine the extent of any pricing adjustments that mayoccur under the Cliffs Pellet Agreements or whether the adjustments willincrease or decrease royalties received by the Trust. With the currentvolatility in demand and prices for iron ore and steel products, the priceadjustment provisions in the Cliffs Pellet Agreements may have a significantimpact on future royalties received by the Trust and the adjustments, dependingon whether they are positive or negative, may increase or decrease thedistributions payable to Unitholders.

 

***Gross Income, Expenses, Net Income and Distributions***

 

As set forth in the table below, net income forfiscal 2010 decreased 64.2% as compared to fiscal 2009 primarily due to adecrease in gross income related to the decrease in shipments and selling priceof iron ore pellets.  Total expenses forfiscal 2010 increased 2.3% as compared to fiscal 2009 due to a slight increasein legal and accounting fees and other fees related to the administration ofthe Trust.  A more detailed summary ofthe Trust’s expenses, including legal and accounting expenses, is set forthunder the heading “Trust Expenses” on page 28 of this Annual Report.

 

12

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| ** **   | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|--------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **   | ** ** | **2010**                                                       | ** ** | **2009**            | ** ** | **(decrease)** | ** ** |
| Gross Income |       | $                                                              | 13,241,669 |                | $          | 35,469,105 |   | (62.8 | )% |
| Expenses     |       | 818,007                                                        |       | 799,320             |       | 2.3 | % |
| Net Income   |       | $                                                              | 12,423,662 |                | $          | 34,669,785 |   | (64.2 | )% |

 

Asdiscussed in the paragraph above,******the Trust’s total royalty income andnet income for fiscal 2010 decreased 62.8% and 64.2% respectively, due todecreased shipping activity during fiscal 2010 and the lower prices paid to theTrust for shipments, both as compared to fiscal year 2009.  The decrease in the Trust’s net income,combined with an increase in the Trust’s cash reserve for unexpected losses,resulted in a 75.4% decrease in total distributions paid to Unitholders infiscal 2010, as compared to fiscal year 2009.

 
| ** **                  | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **2010**                                                       | ** ** | **2009**            | ** ** | **(decrease)** | ** ** |
| Total Cash Distributions    |       | $                                                              | 9,315,207  |                | $          | 37,851,229 |   | (75.4 | )% |
| Distributions Paid per Unit |       | $                                                              | 0.71       |                | $          | 2.885 |   | (75.4 | )% |

 

***Unallocated Reserve***

 

As set forth below, the UnallocatedReserve, decreased $2,664,349 or 70.3% to $1,127,832, as of January 31,2010, as compared to $3,792,181 as of January 31, 2009.  As of January 31, 2010, the UnallocatedReserve consisted of $3,023,894 in unallocated cash and U.S. Governmentsecurities, $873,938 of accrued income receivable, primarily representingroyalties not yet received by the Trust but anticipated to be received infiscal 2011, less deferred royalty revenue of ($2,770,000). Comparatively, as of January 31, 2009, the Unallocated Reserve consistedof $1,070,203 in unallocated cash and U.S. Government securities and,$2,721,978 of accrued income receivable.

 
| ** **                | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                | ** ** | **2010**                                                       | ** ** | **2009**            | ** ** | **(decrease)** | ** ** |
| Accrued Income Receivable |       | $                                                              | 873,938    |                | $          | 2,721,978 |   | (67.9 | )% |
| Deferred Royalty Revenue  |       | (2,770,000                                                     | )          | —              |       | 100 | % |
| Cash Reserve              |       | 3,023,894                                                      |       | 1,070,203           |       | 182.6 | % |
| Unallocated Reserve       |       | $                                                              | 1,127,832  |                | $          | 3,792,181 |   | (70.3 | )% |

 

The 70.3% decrease in the UnallocatedReserve is primarily attributable to the Trust’s deferred royaltyrevenue.  In April 2009, the Trust received a payment from Northshorebut did not recognize the entire payment as revenue in accordance with theTrust’s revenue recognition policy. Because of declines in the estimated pricing of iron ore pelletssubsequent to January 31, 2009, the royalty payment received by the Trustin April 2009 included funds received by the Trust but for which the Trusthas not recognized as revenue in accordance with the Trust’s revenuerecognition policy which is described in Note 2 to the Trust’s consolidatedfinancial statements included in this Annual Report.  Depending on future adjustments to iron orepellet pricing, if any, the deferred royalty revenue could cause a cumulativenegative price adjustment related to shipments of pellets during prior periods,which could partially or even completely offset future royalty income to bereceived by the Trust.

 

Thedecrease in the Unallocated Reserve as of January 31, 2010, is alsoattributable to a $1,848,040, or 67.9%, decrease in the accrued incomereceivable portion of the Unallocated Reserve which decreased to $873,938 as ofJanuary 31, 2010 from $2,721,978 as of January 31, 2009.  The decrease in accrued income receivable isthe result of fewer positive pricing adjustments for the fiscal year ended January 31,2010, as 

 

13

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compared to the fiscal year ended January 31,2009.  In accordance with the Cliffs PelletAgreements, there were positive and negative price adjustments that aredetermined and finalized by Cliffs each calendar year with respect to shipmentsby the Trust in earlier calendar years. However, these negative pricing adjustments were partially offset due tohigher shipments by the Trust during January 2010 and an accrual forpositive price adjustments with respect to tonnage shipped by Northshore as of December 31,2009, that is estimated using current pricing information provided byNorthshore.

 

The Trust’s cash reserve forunexpected losses increased 182.6% to $3,023,894 as of January 31, 2010from $1,070,203 as of January 31, 2009. The increase in the Trust’s cash reserve is due to the Trustees’decision to add to the Trust’s cash reserve because of the Trust’s deferredroyalty revenue for fiscal 2010, the use of estimates regarding pricing that ispotentially subject to negative adjustment in future periods, and as a resultof the continuing uncertainty in the economic environment that affects theroyalties paid to the Trust by Northshore under Cliffs Pellet Agreements.  It is possible that future negative priceadjustments could offset, or even eliminate, royalties or royalty income thatwould otherwise be payable to the Trust in any particular quarter, or at yearend, thereby potentially reducing cash available for distribution to the Trust’sUnitholders in future quarters.  Seediscussion under the heading “Risk Factors” beginning on page 3 of thisAnnual Report.

 

TheTrustees have determined that the unallocated cash and U.S. Governmentsecurities portion of the Unallocated Reserve should be maintained at a prudentlevel, usually within the range of $500,000 to $1,000,000, to meet present orfuture liabilities of the Trust.  As a result of the deferred royaltyrevenue recorded by the Trust as a liability, the Trustees have determined thatit is prudent to increase the unallocated cash and U.S. Government securitiesportion of the Unallocated Reserve above the range of $500,000 to $1,000,000.  See the discussion under the heading “UnallocatedReserve” on page 29 of this Annual Report for more information on theTrust’s policy for maintaining a cash reserve for unexpected losses.  The Trustees will continue to monitor theeconomic circumstances of the Trust to strike a responsible balance betweendistributions to Unitholders and the need to maintain reserves at a prudentlevel, given the unpredictable nature of the iron ore industry, the Trust’sdependence on the actions of the lessee/operator, and the fact that the Trustessentially has no other liquid assets.

 

**Comparisonof Financial Results for Fiscal Years ended January 31, 2009 and January 31,2008**

 

***Royalty Income***

 

The increase in the volumeof shipments and the higher average selling price for each ton of iron ore bothcontributed to the 101.8% increase in base royalties and the 74.3% increase inbonus royalties for fiscal 2009, both as compared to fiscal 2008.  Accordingly, total royalty income increased88.3% in fiscal 2009 as compared to fiscal 2008.  The significant increase in royaltiesreceived by the Trust is primarily the result of higher average selling pricefor each ton of iron ore shipped from Silver Bay, Minnesota in fiscal 2009, ascompared to fiscal 2008, and an increase in shipments in fiscal 2009 ascompared to fiscal 2008.

 
| ** **                              | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **2009**                                                       | ** ** | **2008**            | ** ** | **(decrease)** | ** ** |
| Base overriding royalties               |       | $                                                              | 21,442,218 |                | $          | 10,624,935 |   | 101.8 | % |
| Bonus royalties                         |       | 13,454,580                                                     |       | 7,717,513           |       | 74.3 | % |
| Minimum advance royalty paid (recouped) |       | —                                                         |       | —              |       |   |   |
| Fee royalties                           |       | 525,851                                                        |       | 474,094             |       | 10.9 | % |
| Total royalty income                    |       | $                                                              | 35,422,649 |                | $          | 18,816,542 |   | 88.3 | % |

 

14

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***Gross Income, Expenses, Net Income and CashDistributions***

 

Netincome for fiscal 2009 increased 90.2% as compared to fiscal 2008 primarily dueto an increase in gross income related to the increase in shipments and sellingprice of iron ore pellets.  In addition,total expenses for fiscal 2009 increased as compared to fiscal 2008 as a resultof increases in legal and accounting fees and other fees related to theadministration of the Trust.  A summaryof the Trust’s expenses is set forth under the heading “Trust Expenses” on page 28of this Annual Report.

 
| ** **   | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|--------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **   | ** ** | **2009**                                                       | ** ** | **2008**            | ** ** | **(decrease)** | ** ** |
| Gross Income |       | $                                                              | 35,469,105 |                | $          | 18,866,511 |   | 88.0 | % |
| Expenses     |       | 799,320                                                        |       | 634,151             |       | 26.1 | % |
| Net Income   |       | $                                                              | 34,669,785 |                | $          | 18,232,360 |   | 90.2 | % |

 

TheTrust’s gross income and net income for fiscal 2009 increased 88.0% and 90.2%respectively, resulting in an increase in total distributions paid toUnitholders in fiscal 2009 of 150.9% as compared to fiscal 2008.  The significant increase in total cashdistributions and distributions per unit in fiscal 2009, as compared to fiscal2008, is primarily due to increased shipping activity in the fourth calendarquarter of 2008 and increased shipping activity at significantly higher priceswith respect to shipments during fiscal 2009.

 
| ** **                  | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **2009**                                                       | ** ** | **2008**            | ** ** | **(decrease)** | ** ** |
| Total Cash Distributions    |       | $                                                              | 37,851,229 |                | $          | 15,088,012 |   | 150.9 | % |
| Distributions Paid per Unit |       | $                                                              | 2.885      |                | $          | 1.150 |   | 150.9 | % |

 

***Unallocated Reserve***

** **

The Unallocated Reserve,which is comprised of accrued income receivable and cash reserve for unexpectedlosses, increased $2,132,160 or 128.4% to $3,792,181, as of January 31,2009, as compared to $1,660,021 as of January 31, 2008.  The increase in the Unallocated Reserve as ofJanuary 31, 2009, is primarily due to a $1,762,053, or 183.6%, increase inthe accrued income receivable portion of the Unallocated Reserve whichincreased to $2,721,978 as of January 31, 2009 from $959,925 as of January 31,2008.  The significant increase inaccrued income receivable is due to positive pricing adjustments that weredetermined and finalized under the Cliffs Pellet Agreements with respect toshipments by the Trust in calendar 2007 and calendar 2008.

 
| ** **                | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                | ** ** | **2009**                                                       | ** ** | **2008**            | ** ** | **(decrease)** | ** ** |
| Accrued Income Receivable |       | $                                                              | 2,721,978  |                | $          | 959,925 |   | 183.6 | % |
| Cash Reserve              |       | $                                                              | 1,070,203  |                | $          | 700,096 |   | 52.9 | % |
| Unallocated Reserve       |       | $                                                              | 3,792,181  |                | $          | 1,660,021 |   | 128.4 | % |

 

**Liquidityand Capital Resources**

 

The Trust’s activities arelimited to the collection of royalty income, payment of expenses andliabilities, distribution of net income to the Trust’s Unitholders andprotection and conservation of Trust assets. Distributions of net income to Unitholders are based on the amount oftotal royalty income after providing for the payment of expenses and, to theextent deemed prudent by the Trustees, reserving funds in the Unallocated 

 

15

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Reserve to provide for potential fixed orcontingent future liabilities.  See thediscussion of the Trustees’ management of liquidity set forth under the heading“Unallocated Reserve” beginning on page 29****ofthis Annual Report.

 

The Trust’s primaryshort-term liquidity needs are to fund the distributions to Unitholdersfollowing the Trust’s receipt of the royalty payments from Northshore eachcalendar quarter.  After the Trustreceives the royalty payments, the Trust’s current assets are invested in U.S.government securities, either through direct purchases of U.S. governmentsecurities or through investments in a money market fund that invests itsassets in U.S. Treasury securities and securities guaranteed by the U.S.government its agencies or instrumentalities, or the FDIC.  Due to the short-term duration and investmentgrade nature of these investments, the Trustees believe that the Trust’scurrent assets are adequate to meet the Trust’s currently foreseeable liquidityneeds.  As of January 31, 2010, theTrust held $8,444,697 in cash and cash equivalents of which $24,788 wasinvested in a money market fund that exclusively invests in obligations of theU.S. Treasury.  In February 2010,the Trust distributed $7,216,005 to Unitholders of record on January 30,2010.

 

**Off-Balance Sheet Arrangements**

 

The Trust has no off-balancesheet arrangements.

 

**ContractualObligations**

** **

**The Trusthas no payment obligations under any long-term borrowings, capital lease,operating lease, or purchase agreement.**

** **

**CriticalAccounting Estimates**

** **

This “Trustees’ Discussionand Analysis of Financial Condition and Results of Operations” is based uponthe Trust’s financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires the Trustees to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. These estimates form the basis for making judgments about the carryingvalue of assets and liabilities that are not readily apparent from othersources.  The Trustees base theirestimates and judgments on historical experience and on various otherassumptions that the Trustees believe are reasonable under the circumstances.  However, because future events and theireffects cannot be determined with certainty, actual results could differ fromour assumptions and estimates, and such differences could be material.  Critical accounting policies are those thathave meaningful impact on the reporting of the Trust’s financial condition andresults of operations, and that require significant judgment andestimates.  For a complete description ofthe Trust’s significant accounting policies, please see Note 2 to the financialstatements on pages F-9 through F-13.

 

***Revenue Recognition***

 

Royalty income under theamended lease agreements with Northshore is recognized as it is earned. Undersuch agreements, royalties are earned upon shipment from Silver Bay, Minnesota,regardless of whether the actual sales proceeds for any shipment are receivedby Northshore.  The amount of baseoverriding royalties and royalty bonuses payable to the Trust are determinedbased on the volume of iron ore tonnage shipped from Silver Bay, Minnesotaduring each calendar quarter and the proceeds to Cliffs resulting fromshipments by Cliffs to its customers in accordance with the iron ore pelletsales agreements between Cliffs and its customers.

 

16

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The Trust’s royalty incomeincludes accrued income receivable. Accrued income receivable represents royalty income earned but not yetreceived by the Trust.  Accrued incomereceivable is calculated using estimated prices and includes (i) shipmentsduring the last month of Mesabi Trust’s fiscal year, if any, and (ii) positiveprice adjustments under the pricing adjustment mechanisms in the iron orepellet sales agreements between Cliffs and its customers that determine thefinal sales price of the shipments from Silver Bay, Minnesota.

 

Deferred royalty revenuerepresents an estimate of potential decreases in the Trust’s royalty revenuedue to negative price adjustments anticipated to be applied to tons of iron orethat were shipped by Northshore, but for which Northshore has indicated thatfinal pricing is not yet known.  Theroyalty revenue received by the Trust for certain tons of iron ore shipped byNorthshore is subject to adjustment in accordance with the Trust’s revenuerecognition policy each quarter as updated pricing information is received fromNorthshore.  Accordingly, it is possiblethat changes in iron ore pellet pricing provided to the Trust by Northshore mayhave a significant impact on the Trust’s deferred royalty revenue.

 

Adjustments to royaltyincome may result from changes in final reconciliations of tonnage shipped byNorthshore with the final amounts received from Cliffs’ customers.  Adjustments may also result from revisions toestimated prices previously used to record revenue for tonnage shipped.  Pricing decreases may give rise to negativeprice adjustments which may be applied against future royalty income recognizedby the Trust and changes in iron ore pellet prices may have a significantimpact on the revenue recognized by the Trust

 

During the fourth quarter offiscal 2009, positive price adjustments were recorded by Mesabi Trust asaccrued income receivable due to price adjustment mechanisms in the agreementsbetween Cliffs and its customers that determine the final sales price of theshipments from Northshore with respect to shipments during calendar 2007 andcalendar 2008.  During the fourth quarterof fiscal 2010, negative price adjustments were recorded by Mesabi Trust asdeferred royalty revenue due to price adjustment mechanisms in the agreementsbetween Cliffs and its customers that determine the final sales price of theshipments from Northshore with respect to certain shipments during calendar2008 and calendar 2009.  As of January 31,2010, the Trust recognized revenue as accrued income receivable related toapproximately 1,400,000 tons of iron ore that were shipped by Northshore as of December 31,2009, but for which Cliffs has indicated that final pricing is not yetknown.  Pricing related to these tons isexpected to be finalized in the first quarter of 2011.

 

**RecentDevelopments**

** **

***2010 Estimates***.  Neither Cliffs nor Northshorehas provided the Trust with an estimate for total calendar year 2010 shipmentsof iron ore pellets or concentrate. During calendar years 2009, 2008, 2007 and 2006, the percentage ofshipments of iron ore products from Mesabi Trust lands was approximately 93.0%,90.2%, 88.2% and 90.9%, respectively, of total shipments.  Northshore has not advised the Trustees as tothe percentage of iron ore products from Mesabi Trust lands it anticipatesshipping in calendar year 2010.  See thedescription of the uncertainty of market conditions in the iron ore and steelindustry under the heading “Risk Factors” above.

 

***Iron Ore Pricing and Contract Adjustments.***  During the course of its fiscal year some portionof the royalties paid to Mesabi Trust are based on estimated prices for ironore products sold under term contracts between Cliffs and its subsidiaries andcertain of their customers (the “Cliffs Pellet Agreements”).  Mesabi Trust is not a party to any of theCliffs Pellet Agreements.  These pricesare subject to interim and final pricing adjustments, which can be positive ornegative, and which adjustments are dependent in part on a variety of price andinflation index factors, including but not limited to the internationalbenchmark pellet price, hot band steel prices and various Producer PriceIndexes.  Although Northshore makesinterim adjustments to the royalty 

 

17

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payments on a quarterly basis, these priceadjustments cannot be finalized until after the end of a contract year. Thismay result in significant and frequent variations in royalties received byMesabi Trust (and in turn the resulting amount of funds available fordistribution to Unitholders by the Trust) from quarter to quarter and on acomparative historical basis, and these variations, which can be positive ornegative, cannot be predicted by Mesabi Trust. See the description of pricing adjustments in Cliffs’ contracts underthe heading “Risk Factors” above.

 

***ArcelorMittal Arbitrationwith Cliffs. ***In its Form 10-K filed February 18,2010 (“Cliffs’ Form 10-K”), Cliffs provided an update to the matterspreviously reported regarding Cliffs’ arbitration with 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”).  Cliffsreported that each arbitration demand was filed on September 11, 2009 andrelated to that certain Umbrella Agreement between Mittal Steel USA andCleveland-Cliffs Inc, The Cleveland-Cliffs Iron Company, Cliffs Mining Company,Northshore Mining Company, and Cliffs Sales Company, dated as of March 1,2007 and effective as of April 12, 2006 (the “Umbrella Agreement”).  According to Cliffs, the first arbitration,to which ArcelorMittal filed an answer on October 1, 2009, stemmed from attemptsby ArcelorMittal to revise the nomination of ArcelorMittal’s pelletrequirements and a corresponding shipping schedule for 2009.  Cliffs reported that the Umbrella Agreementallows ArcelorMittal to nominate tonnage under the Umbrella Agreement for exportout of the U.S. to any facility owned by ArcelorMittal.  Cliffs reported that the nomination andshipping schedule were finalized in November 2008, and that ArcelorMittalprovided several revised nominations and shipping schedules in 2009.  Cliffs reported that in response to therevised nominations, Cliffs filed the arbitration demand to enforce thenomination and shipping schedule finalized in November 2008 for the year2009.  Cliffs further reported that asimilar arbitration demand filed by Cliffs in 2008 and related to attemptedrevisions to ArcelorMittal’s 2008 nomination was successful.

 

According to Cliffs, thesecond arbitration demand, to which ArcelorMittal filed an answer andcounterclaim on October 1, 2009, related to ArcelorMittal’s attempt toreverse an election to defer certain tonnage for 2009.  As Cliffs reports, the Umbrella Agreementpermits ArcelorMittal to make a one-time election to defer tons from onecalendar year into the next, which then prevents ArcelorMittal from taking anythingless than its minimum tonnage for the following calendar year.  ArcelorMittal made an election to defertonnage from 2009 to 2010.  Subsequently,ArcelorMittal purported to revoke its election to defer, which would have theeffect of increasing the tonnage to be received in 2009 and allowingArcelorMittal to defer tonnage from 2010 into 2011.  Cliffs reported that it filed the arbitrationdemand to enforce the nomination and the 2009 deferral contained in the nomination.  In its Form 10-K, Cliffs’ reported thatthe two arbitrations had been consolidated and that an arbitration panel hadbeen selected while noting further that the arbitration was in an early phase.

 

The Trustees are unable topredict what impact, if any, the arbitration proceedings between Cliffs andArcelorMittal will have on shipments from Northshore or future royaltiespayable to the Trust.

 

***Northshore Air PermitMatters*****.**  InCliffs’ Form 10-K, Cliffs provided an update to the matters previouslyreported regarding air permit amendments submitted to the Minnesota PollutionControl Agency (“MPCA”).  As previouslyreported, Northshore submitted an administrative permit amendment applicationon December 16, 2006 to the MPCA with respect to its Title V operatingpermit requesting the deletion of a 30 year old “control city” monitoringrequirement.  The MPCA denied Northshore’sapplication on February 23, 2007 and Cliffs appealed the denial to theMinnesota Court of Appeals.

 

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Cliffs reported that on August 28,2008 it filed a major permit amendment to remove the control city requirementfrom its permit. Cliffs also reported that on November 25, 2008, inresponse to the proposed amendment, MPCA issued an order declaring thatNorthshore’s request to remove the control city standard from its permitconstitutes a “project” for which an Environmental Assessment Worksheet, orEAW, must be completed.  According toCliffs’ Form 10-K, MPCA also stated that it was ceasing all other work onthe permit, including its own efforts to create a replacement standard, untilthe environmental review process was complete. Northshore filed an action to challenge the MPCA’s requirement for anEAW in Minnesota State District Court.

 

In Cliff’s Form 10-K, Cliffs reportedthat on January 13, 2010, the Minnesota District Court ruled thatNorthshore was entitled to judgment in its favor as a matter of law. Cliffsreported further that the District Court specifically ruled that its request toremove the control city standard was not a project under Minnesota law and thatMPCA’s determination that Northshore’s application required an EAW wasarbitrary and capricious, unsupported by substantial evidence and an error oflaw.  On March 12, 2010, the MPCAappealed the District Court’s decision to the Minnesota Court of Appeals,however, no further information is available about the status of the appeal asof the date of this Annual Report on Form 10-K.

 

The Trustees are unable topredict what impact the proceedings discussed above will have on Northshore’scompliance with its Title V operating permit or on future royalties payable tothe Trust.

 

***Securities Regulation***.  The Trust is a publicly-traded trust with itsunits of beneficial interest listed on the New York Stock Exchange (“NYSE”) andis 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 the Trust isexempt from many of the corporate governance requirements that apply to otherpublicly traded corporations.  The Trustdoes not have, nor does the Agreement of Trust, as amended, provide for, aboard of directors, an audit committee, a corporate governance committee, acompensation committee or executive officers. The Trustees intend to closely monitor the SEC’s and NYSE’s rulemakingactivity and will comply with their rules and regulations to the extentapplicable.

 

***Other Information.***  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.

 

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**TO THE HOLDERS OFCERTIFICATES OF BENEFICIAL INTEREST INMESABI TRUST**

 

**THE TRUST ESTATE**

** **

The principal assets ofMesabi Trust consist of two different interests in certain properties in theMesabi Iron Range: (i) Mesabi Trust’s interest as assignor in the AmendedAssignment of Peters Lease and the Amended Assignment of Cloquet Lease, whichtogether cover properties aggregating approximately 9,750 largely contiguousacres in St. Louis County, Minnesota (the “Peters Lease Lands” and the “CloquetLease Lands,” respectively), and (ii) Mesabi Trust’s ownership of theentire beneficial interest in the Mesabi Land Trust, which has a 20% interestas fee owner in the Peters Lease Lands and a 100% fee ownership in certainnon-mineral-bearing lands adjacent to the Peters and Cloquet Lease Lands (the “MesabiLease Lands,” together with the Peters Lease Lands and the Cloquet Lease Lands,the “Trust Estate”).  The map below showsthe approximate location of the Trust Estate.

 

 

  o                              *Theboxed area indicates the approximate location of Mesabi Trust’s Trust Estate(not drawn to scale), as defined above under “The Trust Estate,” which is asmall part of the region known as the Mesabi Iron Range. The Mesabi Trust doesnot own any property interests other than in the Trust Estate.*

* *

Under the Amended AssignmentAgreements, Northshore produces iron ore from the Trust Estate for themanufacture of iron ore products to be sold to various customers ofCliffs.  Mesabi Trust receives royalties 

 

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on the crude ore extracted from such Landsand the pellets produced from such crude ore, and in each case the royaltiesare based upon the volume of iron ore products shipped and the prices chargedto Cliffs’ customers.

 

The largest component of theTrust Estate is the Peters Lease Lands. The Peters Lease provides that each leasehold estate will continue untilthe reserves of iron ore, taconite and other minerals or materials on the landsubject to the Peters Lease are exhausted. The Mesabi Lease terminates when the Peters Lease terminates.  The Cloquet Lease, executed in 1916,terminates in the year 2040.  IfNorthshore decides to terminate or surrender one or more of these leases, itmust first give Mesabi Trust at least six months’ notice of its intention to doso and, at Mesabi Trust’s request, reassign all of such leases to MesabiTrust.  If any such reassignment occurs,Northshore must transfer the lease interests to Mesabi Trust free and clear ofliens, except public highways.  In return,Mesabi Trust must assume Northshore’s future obligations as lessee under thereassigned leases.

 

The Peters Lease Lands andthe Cloquet Lease Lands are located at the northeastern end of the Mesabi IronRange and contain mineral deposits consisting of a sedimentary bed of bandedmagnetite in siliceous gangue, a form of low-grade iron ore known as taconite,approximately three tons of which must be beneficiated to produce one ton ofhigh-grade pellets.  The Mesabi LeaseLands contain substantially no commercial ore deposits and have been usedprincipally in connection with mining the taconite from other parts of theTrust Estate, such as the provision of an area for location of service roads,supporting plants and equipment and dump sites for overburden.

 

Because the Trust is notinvolved with the mining operations at Northshore, the Trust relies on the orereserve estimate reported in Cliffs’ Form 10-K each year.  In Cliff’s most recent Form 10-K, asfiled with the Securities and Exchange Commission, which was for the year endedDecember 31, 2009, the following information was provided by Cliffsregarding the estimated ore reserves at Northshore.

 

| ** **                          | ** ** | ** **   | ** ** | **Tons in Millions (1)** | ** ** | ** **   | ** ** | ** **    | ** ** |
|-------------------------------------|------------|--------------|------------|--------------------------|------------|--------------|------------|---------------|------------|
| ** **                          | ** ** | **Current**  | ** ** | **Mineral Reserves (2)** | ** ** | ** **   | ** ** | **Method of** | ** ** |
| **Iron Ore**                        | ** ** | **Annual**   | ** ** | **Current Year**         | ** ** | **Previous** | ** ** | **Reserve**   | ** ** |
| **Mineralization**                  | ** ** | **Capacity** | ** ** | **Proven**               | ** ** | **Probable** | ** ** | **Total**     | ** ** | **Year** | ** ** | **Estimation** | ** ** |
| Biwabik Iron  Formation (Magnetite) |       | 5.7          |       | 304                      |       | 16           |       | 320           |       | 308 |   | Geologic - Block Model |   |

 

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(1)                                  Tons are long tons of pellets of 2,240pounds.

(2)                                  Estimated standard equivalent pellets,including both proven and probable reserves based on life-of-mine operatingschedules.

 

In 2010, the Trusteesengaged an independent geological consulting firm, Scott Wilson Roscoe PostleAssociates, Inc. (“Scott Wilson RPA”), to confirm that the process used byCliffs to estimate the ore reserve in the mine at Northshore isreasonable.  In its report to theTrustees, Scott Wilson RPA summarized its review and evaluation of Cliffs’ orereserve estimation process.  Scott WilsonRPA reported to the Trustees that the reserve estimation process used by Cliffsis reasonable and complies with the reporting standards set forth in SecuritiesAct Industry Guide 7.  Based on thereport of Scott Wilson RPA, the Trustees estimate that at least 90% of the orereserve in the mine at Northshore, as reported by Cliffs, is attributable tothe Trust Estate.

 

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## **HISTORY OF THE TRUST’SACQUISITION OF THE TRUST ESTATE**

##  

Prior to the creation of theMesabi Trust and the Mesabi Land Trust on July 18, 1961, Mesabi IronCompany (“MIC”), the Trust’s predecessor in interest, owned the interests inthe Peters, Cloquet and Mesabi Lease Lands. MIC obtained its interests as follows:

 

Peters Lease Lands. MIC owned a 20% interest in the feeownership in the Peters Lease Lands. Originally, the Peters Lease Lands were owned by East Mesaba and DunkaRiver which were wholly owned subsidiaries of Dunka-Mesaba Security Company (“Dunka-Mesaba”).  In August 1951, East Mesaba and Dunka Riverconveyed the Peters Lease Lands to their parent company, Dunka-Mesaba, which inturn conveyed to each of its stockholders an undivided interest in the PetersLease Lands in proportion to each stockholder’s ownership in the parentcompany.  Accordingly, MIC, which hadbeen the owner of 20% of the outstanding capital stock of Dunka-Mesaba,acquired a 20% undivided interest in the Peters Lease Lands and the right toreceive a 20% fee royalty under the Peters Lease.

 

By an instrument dated October 1,1917, as of April 30, 1915, East Mesaba and Dunka River leased theirproperties to Claude W. Peters.  (Thisinstrument, as modified by instruments dated February 3, 1921, July 17,1939 and July 31, 1951, is known as the “Peters Lease.”)  Claude W. Peters acquired the Peters Lease onbehalf of MIC and an assignment of the Peters Lease from Claude W. Peters toMIC was recorded in 1919.  In 1939, MICassigned the Peters Lease to Reserve Mining Company (“Reserve”) inconsideration for which Reserve agreed to pay MIC a percentage of its netprofits.  Later, these payments werechanged to royalty payments.

 

Cloquet Lease Lands.  MICheld a leasehold interest in the Cloquet Lease Lands pursuant to the Indentureof Lease dated May 1, 1916.  In1939, MIC assigned its interest in the Cloquet Lease as lessee to Reserve.

 

Mesabi Lease Lands.  MICheld a fee interest in the Mesabi Lease Lands, subject to earlier grants ofmineral rights to other parties.  In1939, MIC leased its interest in the Mesabi Lease Lands to Reserve.  One 40-acre parcel of the Mesabi Lease Landswas forfeited in the 1980s to the State of Minnesota and subsequently sold tothe United States government, excluding the mineral rights granted to otherparties.  Further, another 40-acre parcelof the Mesabi Lease Lands, for which the Trust owns only surface rights, iscurrently being explored for non-ferrous deposits by the holder of the mineralrights to the parcel.  The Trustees donot believe that either parcel was ever involved in, or otherwise material to,Northshore’s mining operations.

 

Acquisition of Interestsfrom MIC.  MIC had not engaged in actual miningoperations since 1939, with all of its ownership of land in fee having beenleased out and its leaseholds in land assigned to Reserve in exchange forroyalty payments.  Because MIC’sactivities in connection with the administration of its assets were limited tothe collection of income, the payment of expenses and liabilities, thedistribution of the net income and the protection and conservation of theassets held, in July 1961 its board of directors proposed, and itsstockholders subsequently approved, to adopt a plan of complete liquidation asa result of which MIC’s assets were transferred to and administered by twotrust entities.

 

To comply with the law ofthe State of Minnesota, which requires that a trust holding real propertylocated in that state must be administered under Minnesota law, the Mesabi LandTrust was created under Minnesota law on July 18, 1961 pursuant to anAgreement of Trust of even date.  MICtransferred to the Mesabi Land Trust its 20% interest as fee owner in thePeters Lease and the Peters Lease Lands and its interest as 100% 

 

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fee owner in the Mesabi Lease Lands and as lessorof the Mesabi Lease (subject to the reservation of mineral rights describedabove).

 

Also pursuant to anAgreement of Trust, the Mesabi Trust was created under New York law on July 18,1961.  MIC transferred to the MesabiTrust instruments assigning the Amended Assignment of Peters Lease and theAmended Assignment of Cloquet Lease (covering its interest as assignor of theentire leasehold interest in the Peters Lease Lands and the Cloquet LeaseLands), together with cash, marketable securities and other assets.  The Mesabi Trust also received all of thebeneficial interest in the Mesabi Land Trust.

 

Reserve, the originallessee, operated the mine until it closed on July 31, 1986.  Cyprus Minerals Company (“Cyprus”) purchasedsubstantially all of Reserve’s assets on August 17, 1989 and resumedoperations as Cyprus NMC.  On September 30,1994, Cliffs purchased all of Cyprus NMC’s capital stock from Cyprus.  Cliffs renamed the operation NorthshoreMining Corporation.

 

Since the creation of theMesabi Land Trust and the Mesabi Trust, although the mining operators havechanged and the Peters Lease, the Cloquet Lease and the Mesabi Lease have beenfurther amended and assigned, the Trust Estate has not changed beyond theforfeiture of one parcel of the Mesabi Lease Lands described above.

 

The diagram belowillustrates the relationships of the various parties that own the lands andhave interests in the lands the Trust has interests in:

 

 

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**DESCRIPTIONOF THE MINERAL PROPERTIES AND NORTHSHORE’S MINING OPERATIONS**

** **

Mineand Rock Formation.  The MesabiTrust properties, including the ore mine, are located in northeasternMinnesota, approximately two miles south of Babbitt, Minnesota.  The ore mine on the Mesabi Trust propertiesis called the Peter Mitchell mine, an open pit mine consisting of a 10-milelong segment of a host rock called the Biwabik Iron Formation, which is a veryhard cherty rock containing magnetite as the ore mineral.  The Biwabik Iron Formation extends west andsouthwest for over 100 miles and constitutes the Mesabi Iron Range.  Recoverable iron grades range from 21% in thewest end of the mine open pit to 26% in the central portion and east end, with22.5% as the cut off grade.  The ore bodydips south under the hanging wall called the Virginia Formation.  To date, the Mesabi Trust properties havebeen explored for their iron ore potential. To the knowledge of the Mesabi Trustees, no other minerals have beenexplored on the Mesabi Trust properties.

 

Mining Properties.  As disclosed elsewhere in this Annual Report,Northshore, a wholly owned subsidiary of Cliffs, currently conducts the miningoperation upon the Mesabi Trust properties. The main entrance to the Northshore mine is accessed by means of agravel road and is located off County Road 70. Northshore’s processing facilities are located in Silver Bay, Minnesota,near Lake Superior, on U.S. Highway 61. Each year, the Trustees visit the Northshore mine in Babbitt, Minnesotaand the processing plant in Silver Bay, Minnesota.  During such visits, the Trustees inspect thecondition of the mining properties as well as mining equipment andfacilities.  Based on informationprovided to the Trustees’ during the most recent inspection trip in October 2009,the mining properties and facilities at Northshore were in good operatingcondition.

 

Northshore’s Operations.  Because the Mesabi Trust is not involved inNorthshore’s mining operations, the Trustees do not have detailed firsthandinformation relating to such operations or the equipment and facilities used byNorthshore.  Therefore, the Trustees relyon information provided by Northshore personnel, disclosed by Cliffs in itsperiodic reports filed with the SEC or provided in other reports published byindependent organizations, such as Skillings Mining Review, in providing theinformation relating to Northshore’s mining operations, its equipment andfacilities.

 

·                  **Mining and Railroad:** Drilling at the Northshore mine is conducted with two P&H120, one P&H 320XPC and one Gardner Denver 120 rotary units with 16-inchdiameter holes on 28- to 30-foot spacing. The drilling is followed with blasts using heavy ANFO (which stands forammonium nitrate and fuel oil) and emulsion which break an average of 700,000 to1,200,000 tons of crude taconite.  Afterblasts, taconite is then removed by a loading fleet consisting of three P&H2800XPC shovels with 37 cubic-yard buckets, one P&H 2800 shovel with a 28cubic-yard bucket, one LeTourneau L1850 loader with a 28 cubic yard bucket anda Cat 994D loader with a 19 cubic-yard bucket. A haulage fleet of three 250-ton Terex Model 4400AC and four 200-tonKomatsu 730E production trucks carry crude taconite to the primary andsecondary crushers located about two miles away.  At the crushers, taconite is emptied from theend-dump trucks into a 60 inch primary gyratory unit and four 30-inch by70-inch secondary crushers for reduction to a nominal 4 inch size.  Coarse ore is then fed into 90-ton capacityore cars for transportation to Silver Bay via a 47 mile long, single trackrailroad owned by Northshore.  Each trainis pulled by three or four diesel electric locomotives.

 

·                  **Concentrating and Pelletizing Process**.  Upon arrival at thepelletizing facility in Silver Bay, the coarse taconite ore first passesthrough a fine crushing stage where it is reduced in size to approximately0-3/4” and then the non-magnetic material is rejected through a dry cobbermagnetic separation stage.  Thenon-magnetic material is rail hauled seven miles to the Mile Post 7 disposalsite. The magnetic 

 

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material is then fed into one ofthe fourteen active grinding lines.  Eachline includes one 10-1/2-foot by 18-foot rod mill and two 10-foot by 16-foot (14-footin west plant) ball mills.  The finalgrinding of the crude taconite is reduced to 90% minus 325 mesh.

 

During the concentrating process,ore concentrate is separated by a two-stage magnetic separation, which removeslow grade tailings from the ore concentrate. The tailings are pumped uphill to the Mile Post 7 disposal site.  The concentrate is then fed intohydro-separators followed by a final flotation upgrading accomplished with two500 cubic foot flotation cells per grinding line.  Next, the concentrate proceeds to a centralfiltering facility of nine 9-foot diameter vacuum filters, during which processthe moisture content in the concentrate is reduced and the final concentrate isready for pelletizing.  The pelletizingprocess first feeds the ore concentrate, to which bentonite and starch has beenadded as a binder, into a balling drum 14 feet long and 7 feet indiameter.  The revolving action of thedrum causes the concentrate to build up into green balls.  Next, the green balls with a target size ofplus 0-1/4” and minus 0-1/2” in diameter are conveyed to one of four movinggrates and enter into an accompanying high temperature furnace where they areheated to over 2400° F. and are hardened into the final pellet product.  From the four furnaces the pellets areconveyed to a dockside storage area with a 5-million ton storage capacity.  Northshore’s sheltered harbor at Silver Baycan handle lake-going vessels with capacities up to 55,000 tons.

 

·                  **Capital Expenditures**.** **Duringcalendar year 2009, Northshore continued to modernize and improve theoperations at the Peter Mitchell Mine in Babbitt and Northshore’s pelletizingfacility in Silver Bay, Minnesota. Toward that end, Cliffs implemented the following capital expenditures:

 

·                  Completed commissioning the third offour P&H 2800-XPC shovels.  The finalshovel is scheduled for delivery in late calendar 2010.

 

·                  Continueda program to improve the railroad locomotive fleet for the ore haul between thePeter Mitchell Mine and Northshore’s pelletizing facility.

 

·                  Continued investments in projects for safety (primarily millliner handler and mine cable handler) and environment (primarily dust control)to protect employees and improve air and water quality.

 

**LEASEHOLDROYALTIES**

 

Northshore is obligated topay to Mesabi Trust base overriding royalties and royalty bonuses on allpellets (and other iron ore products) produced from the Peters Lease Lands andthe Cloquet Lease Lands (“Mesabi Ore”) and shipped from Silver Bay in eachcalendar year.  The royalties are basedon prices per unit of product, volumes of product shipped and where on theescalating scale of royalties—2-1/2% on the first million tons to 6% on shipmentsabove four million long tons per calendar year—each shipment falls.

 

***Base overriding royalties.***  Base overriding royalties are calculated onthe basis of an escalating scale of percentages of gross sales proceeds of ironore shipped.  The applicable percentageis determined by reference to the tonnage of pellets previously shipped in thethen current calendar year, as follows:

 

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| **Tons of iron ore products  shipped in calendar year** | ** ** | **Applicable royalty  (expressed as a percentage  of gross sales proceeds  within each tranche)** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                       |       |                                                                                                                                           |       |
| one  million or less                                                                       |       | 2-1/2%                                                                                                                                         |       |
| more  than one but not more than two million                                               |       | 3-1/2%                                                                                                                                         |       |
| more  than two but not more than three million                                             |       | 5%                                                                                                                                             |       |
| more  than three but not more than four million                                            |       | 5-1/2%                                                                                                                                         |       |
| more  than four million                                                                    |       | 6%                                                                                                                                             |       |

 

***Royalty bonuses.***  Royalty bonuses are payable on all iron oreproducts produced from Mesabi Ore shipped from Silver Bay during a calendar quarterand sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $47.43 forcalendar year 2008, $48.48 for calendar year 2009 and will be $48.81 forcalendar year 2010.  The AdjustedThreshold Price is subject to adjustment (but not below $30 per ton) forinflation and deflation and is determined each year on the basis of the changein the Gross Domestic Product Implicit Price Deflator, a broad based index ofinflation and deflation published quarterly by the U.S. Department of Commerce.

 

Theamount of royalty bonuses payable for any calendar quarter is calculated on thebasis of an escalating scale of percentages of the gross sales proceeds toNorthshore of pellets produced from Mesabi Ore that are sold at prices abovethe Adjusted Threshold Price.  Theapplicable percentage is determined by reference to the amount by which thesales prices for a particular quantity of pellets exceeds the AdjustedThreshold Price, as follows:

 
| **Amount by which  sales price per ton  exceeds Adjusted Threshold Price** | ** ** | **Applicable  Percentage** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
|                                                                                                          |       |                       |       |
| $2 or less                                                                                                    |       | 1/2 of 1%             |       |
| more than $2 but not more than $4                                                                             |       | 1%                         |       |
| more than $4 but not more than $6                                                                             |       | 1-1/2%                     |       |
| more than $6 but not more than $8                                                                             |       | 2%                         |       |
| more than $8 but not more than $10                                                                            |       | 2-1/2%                     |       |
| more than $10                                                                                                 |       | 3%                         |       |

 

***Leasehold royalty example.***  To illustrate the calculation of baseoverriding royalties and royalty bonuses, assume that no shipments of iron oreproducts were made during the first calendar quarter of 2010, and furtherassume that pellets were shipped from Silver Bay in the second and thirdcalendar quarters of 2010 in the following tonnage quantities and rendering thefollowing gross proceeds:

 
| ** **   | ** ** | **Tonnage** | ** ** | **Sales Price per Ton** | ** ** | **Gross Proceeds** | ** ** |
|--------------|------------|-------------|------------|----------------------------------------|------------|-------------------------|------------|
| 2nd Quarter: |       | 500,000     |       | $                                      | 42.00      |                    | $          | 21,000,000 |   |
| 3rd Quarter: |       | 500,000     |       | $                                      | 44.00      |                    | $          | 22,000,000 |   |
|         |       | 1,000,000   |       | $                                      | 46.00      |                    | $          | 46,000,000 |   |
|         |       | 1,000,000   |       | $                                      | 48.00      |                    | $          | 48,000,000 |   |
|         |       | 1,000,000   |       | $                                      | 50.00      |                    | $          | 50,000,000 |   |
|         |       | 1,500,000   |       | $                                      | 52.00      |                    | $          | 78,000,000 |   |

 

In this example, the base overriding royaltiespayable in respect of the second and third calendar quarters of 2010 would beas follows:

 

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| 2nd Quarter: |   | $21,000,000 x 2-1/2% |   | = |   | $ | 525,000   |   |
|--------------|--------|----------------------|--------|---|--------|---|-----------|--------|
| 3rd Quarter: |   | $22,000,000 x 2-1/2% |   | = |   | $ | 550,000   |   |
|         |   | $46,000,000 x 3-1/2% |   | = |   | $ | 1,610,000 |   |
|         |   | $48,000,000 x 5%     |   | = |   | $ | 2,400,000 |   |
|         |   | $50,000,000 x 5-1/2% |   | = |   | $ | 2,750,000 |   |
|         |   | $78,000,000 x 6%     |   | = |   | $ | 4,680,000 |   |

 

Based on the same example, the base overridingroyalty percentage applicable for all iron ore products shipped in the fourthcalendar quarter of 2010 would be 6%, because more than four million tons wereshipped during the first three quarters.

 

Further, the royalty bonusespayable in respect of the second and third calendar quarters of 2010 would beas follows (with reference to the Adjusted Threshold Price (“ATP”) of $48.81:

 
| 2nd Quarter: |   | $42.00/ton falls below  ATP: no bonus payable |   | = |   | None |    |
|--------------|--------|-----------------------------------------------|--------|---|--------|------|---------|
| 3rd Quarter: |   | $44.00/ton falls below  ATP: no bonus payable |   | = |   | None |    |
|         |   | $46.00/ton falls below  ATP: no bonus payable |   | = |   | None |    |
|         |   | $48.00/ton falls below  ATP: no bonus payable |   | = |   | None |    |
|         |   | $50,000,000 x 1/2 of 1%                  |   | = |   | $    | 250,000 |   |
|         |   | $78,000,000 x 1%                              |   | = |   | $    | 780,000 |   |

 

The above figures areprovided only to illustrate the method for calculating base overridingroyalties and royalty bonuses and do not indicate the amount of base overridingroyalties or royalty bonuses the Trustees expect Mesabi Trust to earn incalendar 2010 or any other calendar or fiscal year.  Accordingly, the foregoing exampleillustrating the calculation of base overriding royalties and royalty bonusesshould not be considered a prediction of the amount of base overridingroyalties or royalty bonuses Mesabi Trust will receive.

 

***Bonuses on other ore.***  Northshore also must pay base overridingroyalties and royalty bonuses on pellets produced from lands other than MesabiLease Lands (“Other Ore”) to the extent necessary to assure payment of baseoverriding royalties and royalty bonuses on at least 90% of the first fourmillion tons of pellets shipped from Silver Bay in each calendar year, at least85% of the next two million tons of pellets shipped therefrom in each calendaryear, and at least 25% of all tonnage of pellets shipped therefrom in eachcalendar year in excess of six million tons. Base overriding royalties and royalty bonuses payable on Other Ore canbe recouped by Northshore out of base overriding royalties and royalty bonusespaid on Mesabi Ore.  The amount of OtherOre royalties and Other Ore royalty bonuses which can be recouped on anypayment date cannot, however, exceed 20% of the amount of Mesabi Ore royaltiesand royalty bonuses which are otherwise payable on that payment date.

 

***Advance royalties.***  Northshore is obligated to pay Mesabi Trustadvance royalties in equal quarterly installments.  The advance royalty was $790,721 for calendaryear 2008, $808,177 for calendar year 2009 and is $813,729 for calendar year2010.  The amount of advance royaltiespayable is subject to adjustment (but not below $500,000 per annum) for inflationand deflation and is determined each year in the same manner as the AdjustedThreshold Price.  All payments of advanceroyalties are credited against payments of base overriding royalties androyalty bonuses payable on Mesabi Ore until fully recouped by Northshore.  The amount of advance royalties payable inrespect of each calendar quarter constitutes the minimum overriding royaltyamount payable by Northshore in respect of that calendar quarter.

 

27

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***Other leasehold royalty information.***  Base overriding royalties and royalty bonusesare payable quarterly and accrue upon shipment, whether or not the actual salesproceeds for any shipment are received by Northshore.  The amount of base overriding royalties androyalty bonuses payable with respect to the first three quarters in anycalendar year are determined on the basis of tonnage shipped during each suchcalendar quarter and the actual sales proceeds of such shipments, with anadjustment made to the royalties payable with respect to the last quarter inany calendar year to account for adjustments.

 

**LAND TRUST AND FEE ROYALTIES**

** **

Mesabi Land Trust holds a 20% interest as feeowner in the Peters Lease Lands and a 100% interest as fee owner in the MesabiLease Lands as lessor of the Mesabi Lease.  Mesabi Trust holds the entire beneficialinterest in Mesabi Land Trust and is entitled to receive the net income ofMesabi Land Trust after payment of expenses. Northshore is not obligated to pay royalties or rental to Mesabi LandTrust as fee owner of the non-mineral bearing Mesabi Lease Lands, aconsideration having been paid in that respect at the inception of the MesabiLease.

 

Northshore is required topay a base royalty to the fee owners in an amount which, at its option, iseither (a) 11-2/3¢ per gross ton of crude ore it mines from the PetersLease Lands, or (b) $0.0056 for each 1% of metallic iron ore naturalcontained in each gross ton of pellets it produces from the Peters Lease Landsand ships.  The base fee royalty rate isadjusted up or down each quarter (but not below the base royalty specifiedabove) by adding or subtracting an amount to be determined by reference tochanges in Lower Lake Mesabi Range pellet prices and the All CommoditiesProducer Price Index.  The adjustmentfactor is computed by multiplying the base fee royalty rate specified above bya percentage that is the sum of (a) one-half of the percentage change, ifany, by which the then prevailing price per iron unit of Mesabi Range taconitepellets delivered by rail or vessel at Lower Lake Erie ports exceeds 80.5¢ (theprice per iron unit in effect in January 1982), plus (b) one-half ofthe percentage change, if any, by which the All Commodities Producer PriceIndex exceeds 295.8 (the level of the Index for December 1981).  Fee royalties aggregating $305,407 withrespect to crude ore mined by Northshore were earned by Mesabi Land Trustduring the fiscal year ended January 31, 2010.

 

**TRUST EXPENSES**

** **

***Total Trust Expenses***

 

Total Trust expenses for the fiscal year ended January 31,2010 were $818,007, representing an increase of 2.3% from the $799,320 of totalTrust expenses in fiscal 2009.  For thefiscal year ended January 31, 2009, total Trust expenses increased 26.0%to $799,320, as compared to $634,151 for the fiscal year ended January 31,2008.

 

***Trust Legal Expenses***

 

Mesabi Trust paidOppenheimer Wolff & Donnelly LLP (“Oppenheimer”) $224,796 for legalservices provided to the Trust during the fiscal year ended January 31,2010.  Comparatively, Mesabi Trust paid Oppenheimer $219,389 and $160,780 forlegal services provided to the Trust during fiscal years ended January 31,2009 and January 31, 2008, respectively.

 

In each of the last threefiscal years, Oppenheimer represented the Trust and assisted the Trustees inthe preparation and filing of the Trust’s current, periodic and annual reportswith the SEC and related securities law 

 

28

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compliance.  Oppenheimer also advised the Trust on variousother legal matters related to inquiries from third parties in the ordinarycourse of the Trust’s administration. The total amount of Oppenheimer’s legal fees for services renderedduring fiscal 2010 increased approximately $5,400, or 2.5%, as compared tofiscal 2009.  The increase in legal fees infiscal 2010, as compared to fiscal 2009, resulted primarily from Oppenheimerproviding the Trust with services related to the preparation of the proxystatement and the proxy solicitation to appoint Robert C. Berglund as anindividual trustee of the Trust, legal review of real estate matters and costof living increases in the billing rates of Oppenheimer attorneys who provideservices to the Trust.

 

The total amount ofOppenheimer’s legal fees for services rendered during fiscal 2009 increasedapproximately $58,000, or 36%, as compared to fiscal 2008.  The increase in legal fees in fiscal 2009, ascompared to fiscal 2008, resulted primarily from Oppenheimer providing theTrust with services related to the Trust’s change of its independent certifiedpublic accounting firm, responding to comments received from the SEC staffunder the disclosure review program, additional third party inquiries made tothe Trust, and cost of living increases in the billing rates of Oppenheimerattorneys who provide services to the Trust.

 

Total Trust expenses bycategory for fiscal 2010, 2009 and 2008 are set forth in the table below.

 
| ** **                                      | ** ** | **Fiscal Year ended on January 31,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                      | ** ** | **2010**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                            |       |                                      |       |   |   |   |   |
| Compensation of Trustees                        |       | $                                         | 178,581    |   | $ | 228,053 |   | $ | 181,700 |   |
| Corporate Trustee’s Administrative Fees    |       | 62,500                                    |       | 62,500 |   | 62,500 |   |
| Professional fees and expenses                  |       |                                      |       |   |   |   |   |
| Legal                                           |       | 224,796                                   |       | 219,389 |   | 160,780 |   |
| Accounting                                      |       | 125,009                                   |       | 109,268 |   | 60,324 |   |
| Mining consultant and field representatives     |       | 22,908                                    |       | 22,617 |   | 52,242 |   |
| Insurance                                       |       | 66,492                                    |       | 52,518 |   | 37,195 |   |
| Annual stock exchange fee                       |       | 38,000                                    |       | 38,000 |   | 38,000 |   |
| Transfer agent’s and registrar’s fees |       | 9,974                                     |       | 10,273 |   | 12,694 |   |
| Other Trust Expenses                            |       | 89,747                                    |       | 56,702 |   | 28,716 |   |
|                                            |       | $                                         | 818,007    |   | $ | 799,320 |   | $ | 634,151 |   |

 

**UNALLOCATED RESERVE**

 

The Trustees have determinedthat a portion of the Unallocated Reserve, usually within the range of $500,000to $1,000,000 or such other amount as the Trustees may deem prudent, should bemaintained as a cash reserve for unexpected losses. The actual amount of theUnallocated Reserve will fluctuate from time to time and may increase ordecrease from its current level. Future distributions will be highly dependentupon royalty income as it is received, changes in estimated pricing, potentialfor future price adjustments and the level of Trust expenses.  Although the actual amount of the UnallocatedReserve will fluctuate from time to time and may increase or decrease from itscurrent level, it is currently intended that future distributions will behighly dependent upon royalty income as it is received 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.

 

29

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As a result of the$2,770,000 deferred royalty revenue recorded by the Trust, the unpredictablenature of the current economic conditions, and the potential for futurenegative price adjustments under the long-term customer contracts betweenNorthshore, Cliffs and certain customers, the Trustees have determined that itis prudent to increase the cash and U.S. Government securities portion of theUnallocated Reserve above the range of $500,000 to $1,000,000.  The amount of future royalty income availablefor distribution will be subject to the volume of iron ore product shipmentsand the dollar level of sales by Northshore. Shipping activity is greatly reduced during the winter months andeconomic conditions, particularly those affecting the steel industry, mayadversely affect the amount and timing of such future shipments and sales.  It is possible that future negative priceadjustments could offset, or even eliminate, royalties or royalty income thatwould otherwise be payable to the Trust in any particular quarter, or at yearend, thereby potentially reducing cash available for distribution to the Trust’sUnitholders in future quarters.  Seediscussion under the heading “Risk Factors” beginning on page 3 of thisAnnual Report.

 

The Trustees will continueto monitor the economic circumstances of the Trust to strike a responsiblebalance between distributions to Unitholders and the need to maintain reservesat a prudent level, given the unpredictable nature of the iron ore industry,the Trust’s dependence on the actions of the Cliffs and Northshore, and thefact that the Trust essentially has no other liquid assets.

 

**CERTIFICATES OF BENEFICIALINTEREST**

** **

The Mesabi Trust’sCertificates of Beneficial Interest are traded on the New York StockExchange.  Distributions paid toUnitholders during the fiscal year ended January 31, 2010 totaled$9,315,207 as compared to $37,851,229 during fiscal year ended January 31,2009, and $15,088,011 during the fiscal year ended January 31, 2008.  Unitholders received distributions of $0.71per Unit for the fiscal year ended January 31, 2010, compared withdistributions of $2.885 and $1.150 per Unit for the fiscal years ended January 31,2009 and 2008, respectively.

 

During the past two fiscal years, the marketranges of the certificates for each quarterly period and the distributionsdeclared for such quarterly periods were as follows:

 
| **Fiscal Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** | **Distribution  Declared** | ** ** | **Distribution  Per Unit** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|----------------------------|------------|---------------------------------|------------|
| April 30, 2009                |       | $        | 9.75       |    | $          | 5.30                       |       | $                               | 4,985,604  |   | $ | 0.38 |   |
| July 31, 2009                 |       | $        | 13.09      |    | $          | 9.50                       |       | 0                               |       | 0.00 |   |
| October 31, 2009              |       | $        | 11.22      |    | $          | 8.60                       |       | 2,886,402                       |       | 0.22 |   |
| January 31, 2010              |       | $        | 15.60      |    | $          | 9.65                       |       | 7,216,005                       |       | 0.55 |   |
|                               |       |     |       |    |       | $                          | 15,088,012 |                            | $          | 1.15 |   |

 
| **Fiscal Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** | **Distribution  Declared** | ** ** | **Distribution  Per Unit** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|----------------------------|------------|---------------------------------|------------|
| April 30, 2008                |       | $        | 28.20      |    | $          | 21.36                      |       | $                               | 1,574,401  |   | $ | 0.12 |   |
| July 31, 2008                 |       | $        | 30.80      |    | $          | 24.31                      |       | 13,120,010                      |       | 1.00 |   |
| October 31, 2008              |       | $        | 27.65      |    | $          | 11.34                      |       | 16,400,013                      |       | 1.25 |   |
| January 31, 2009              |       | $        | 12.96      |    | $          | 6.98                       |       | 1,443,201                       |       | 0.11 |   |
|                               |       |     |       |    |       | $                          | 32,537,625 |                            | $          | 2.48 |   |

 

As of the close of businesson April 6, 2010, the beneficial interest in Mesabi Trust was representedby 13,120,010 Units registered in the names of approximately 1,250 individualsholding of record approximately 864,749 Units, and in the names of approximately115 brokers, nominees, or fiduciaries holding of record approximately12,255,261 Units.

 

30

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**THETRUSTEES**

** **

The name and address of eachTrustee and the principal occupation of each individual Trustee are as follows:

 
| **Name and Address of Trustee**                                                                                                                  | ** ** | **Principal Occupation**                                                                                                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                 |       |                                                                                                                                                              |
| Deutsche Bank  Trust Company Americas  Corporate Trustee  60 Wall Street  27th Floor  New York, New York 10005                                                  |       | New York banking corporation                                                                                                                                      |
|                                                                                                                                                                 |       |                                                                                                                                                              |
| Robert C.  Berglund

PO Box 351

Corona, New Mexico  88318                                                                                                           |       | Retired Mining Engineer                                                                                                                                           |
|                                                                                                                                                                 |       |                                                                                                                                                              |
| James A.  Ehrenberg  Individual Trustee  295 Kopp Drive  West St. Paul, Minnesota 55118                                                                              |       | Until April 2005, Senior Vice  President, Corporate Trust Services,  U.S. Bank, N.A.                                                                         |
|                                                                                                                                                                 |       |                                                                                                                                                              |
| Richard G.  Lareau  Individual Trustee  Oppenheimer Wolff & Donnelly LLP  Plaza VII, Suite 3300  45 South Seventh Street  Minneapolis, Minnesota 55402 |       | Senior Partner in the law firm of  Oppenheimer Wolff & Donnelly  LLP                                                                                     |
|                                                                                                                                                                 |       |                                                                                                                                                              |
| Norman F.  Sprague III  Individual Trustee  11726 San Vicente Blvd.  Suite 625  Los Angeles, California 90049                                                   |       | Private investor; orthopedic surgeon                                                                                                                    |
|                                                                                                                                                                 |       |  

                                                                                                                                                     |
| New York, New  York  April 15, 2010                                                                                                                             |       | Respectfully submitted,

 

DEUTSCHE BANK  TRUST  COMPANY AMERICAS

 

ROBERT C. BERGLUND

JAMES A. EHRENBERG  RICHARD G. LAREAU  NORMAN F. SPRAGUE III |

 

31

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INDEXTO FINANCIAL STATEMENTS

 
| Trustees’ Report on  Internal Control over Financial Reporting                                            |   | Page F-2              |
|----------------------------------------------------------------------------------------------------------------|--------|----------------------------|
|                                                                                                           |   |                       |
| Reports of Independent  Registered Public Accounting Firms                                                     |   | Pages F-3 and F-4     |
|                                                                                                           |   |                       |
| Balance Sheets as of  January 31, 2010 and 2009                                                           |   | Page F-5              |
|                                                                                                           |   |                       |
| Statements of Income for  the years ended January 31, 2010, 2009, and 2008                                |   | Page F-6              |
|                                                                                                           |   |                       |
| Statements of Unallocated  Reserve and Trust Corpus for the years ended January 31, 2010, 2009, and  2008 |   | Page F-7              |
|                                                                                                           |   |                       |
| Statements of Cash Flows  for the years ended January 31, 2010, 2009, and 2008                            |   | Page F-8              |
|                                                                                                           |   |                       |
| Notes to Financial  Statements                                                                                 |   | Pages F-9 – F-16 |

 

F-1

----

 

**TRUSTEES’ REPORT ON INTERNALCONTROL OVER FINANCIAL REPORTING**

** **

The Mesabi Trustees are responsible for establishing and maintainingadequate internal control over financial reporting for Mesabi Trust.  The Trust’s internal control system wasdesigned to provide reasonable assurance to the Trustees regarding thepreparation and fair presentation of published financial statements.

 

All internal control systems, no matter how well designed, haveinherent limitations.  Therefore, eventhose systems determined to be effective can provide only reasonable assurancewith respect to financial statement preparation and presentation.

 

The Mesabi Trustees assessed the effectiveness of the Trust’s internalcontrol over financial reporting as of January 31, 2010.  In making this assessment, they used thecriteria set forth by the Committee of Sponsoring Organizations of the TreadwayCommission in Internal Control — Integrated Framework.  Based on their assessment, the Trusteesbelieve that, as of January 31, 2010, the Trust’s internal control overfinancial reporting is effective, based on those criteria.

 

Wipfli LLP, the Trust’s independent registered public accounting firm,has issued an audit report on its assessment of the Trust’s internal controlover financial reporting.  This reportappears immediately below.

 

F-2

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

To the Trustees

Mesabi Trust

New York, New York

 

We have audited theaccompanying balance sheets of Mesabi Trust (the “Trust”) as of January 31,2010 and 2009, and the related statements of income, unallocated reserve andtrust corpus, and cash flows for the years then ended.  We also have audited Mesabi Trust’s internalcontrol over financial reporting as of January 31, 2010, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  Mesabi Trust’s trustees areresponsible for these financial statements, for maintaining effective internalcontrol over financial reporting, and for their assessment of the effectivenessof the Trust’s internal control over financial reporting, included in theaccompanying Trustees’ Report on Internal Control Over FinancialReporting.  Our responsibility is toexpress an opinion on these financial statements and an opinion on the Trust’sinternal control over financial reporting based on our audits.  The financial statements of Mesabi Trust asof January 31, 2008 were audited by other auditors whose report dated April 8,2008 expressed an unqualified opinion on those statements.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement and whether effective internal control over financialreporting was maintained in all material respects.  Our audits of the financial statementsincluded examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by the Trustees, and evaluating the overallfinancial statement presentation.  Ouraudit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk.  Our audits also included performing suchother procedures as we considered necessary in the circumstances.  We believe that our audits provide areasonable basis for our opinions.

 

Anorganization’s internal control over financial reporting is a process designedto provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.  An organization’s internal control overfinancial reporting includes those policies and procedures that 1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the organization; 2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of theorganization are being made only in accordance with authorizations of the Trustees;and 3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the organization’s assets thatcould have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Mesabi Trust as of January 31,2010 and 2009, and the results of its operations and its cash flows for theyears then ended in conformity with accounting principles generally accepted inthe United States of America.  Also inour opinion, Mesabi Trust maintained, in all material respects, effective internalcontrol over financial reporting as of January 31, 2010, based on criteriaestablished *in Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).

 

**/s/ WIPFLI LLP**

St. Paul, Minnesota

April 15, 2010

 

F-3

----

 

## REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

##  

To the Trustees

MESABI TRUST

New York, New York

 

We have audited theaccompanying statements of income, unallocated reserve and trust corpus, andcash flows of MESABI TRUST (the “Trust”) for the year ended January 31,2008.  We also have audited MESABI TRUST’Sinternal control over financial reporting as of January 31, 2008, based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  The Trusteesare responsible for these financial statements, for maintaining effectiveinternal control over financial reporting, and for their assessment of theeffectiveness of the Trust’s internal control over financial reporting,included in the accompanying Trustees’ Report on Internal Control OverFinancial Reporting.  Our responsibilityis to express an opinion on these financial statements and an opinion on theTrust’s internal control over financial reporting based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States).  Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement and whether effective internal control over financial reportingwas maintained in all material respects. Our audit of the financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by the Trustees, and evaluating the overall financial statement presentation.  Our audit of internal control over financialreporting included obtaining an understanding of internal control overfinancial reporting, assessing the risk that a material weakness exists, andtesting and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk.  Ouraudits also included performing such other procedures as we considerednecessary in the circumstances.  We believethat our audits provide a reasonable basis for our opinion.

 

An organization’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. An organization’s internal control over financial reporting includesthose policies and procedures that 1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the organization; 2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat receipts and expenditures of the organization are being made only inaccordance with authorizations of the Trustees; and 3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use, or disposition of the organization’s assets that could have a materialeffect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the results of operations of MESABI TRUST and cash flows for the yearended January 31, 2008 in conformity with accounting principles generallyaccepted in the United States of America. Also in our opinion, MESABI TRUST maintained, in all material respects,effective internal control over financial reporting as of January 31,2008, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).

 

 

***/s/ Gordon,Hughes & Banks, LLP***

 

Greenwood Village,Colorado

April 8, 2008

 

F-4

----

 

# **MESABI TRUST**

#### **BALANCESHEETS**

**YEARS ENDED JANUARY 31, 2010 AND2009**

 
| ** **                                                                 | ** ** | **2010**       | ** **     | **2009**  | ** ** |
|----------------------------------------------------------------------------|------------|----------------|----------------|-----------|------------|
|                                                                       |       |           |           |      |       |
| **ASSETS**                                                                 |       |           |           |      |       |
|                                                                       |       |           |           |      |       |
| CASH AND CASH EQUIVALENTS                                                  | ** ** | **$**          | **8,444,697**  |      | $          | 2,254,107 |   |
| U.S. GOVERNMENT  SECURITIES, at amortized cost (which approximates market) | ** ** | **1,850,515**  |           | 340,421   |       |
| ACCRUED INCOME RECEIVABLE                                                  | ** ** | **873,938**    |           | 2,721,978 |       |
| PREPAID EXPENSE                                                            | ** ** | **30,422**     |           | 30,423    |       |
|                                                                       | ** ** | **11,199,572** |           | 5,346,929 |       |
|                                                                       |       |           |           |      |       |
| FIXED PROPERTY, including  intangibles, at nominal values                  |       |           |           |      |       |
| Assignments of leased  property                                            |       |           |           |      |       |
| Amended assignment of  Peters Lease                                        | ** ** | **1**          |           | 1         |       |
| Assignment of Cloquet  Leases                                              | ** ** | **1**          |           | 1         |       |
| Certificate of beneficial  interest for 13,120,010 units of Land Trust     | ** ** | **1**          |           | 1         |       |
|                                                                       | ** ** | **3**          |           | 3         |       |
|                                                                       |       |           |           |      |       |
|                                                                       | ** ** | **$**          | **11,199,575** |      | $          | 5,346,932 |   |
|                                                                       |       |           |           |      |       |
| **LIABILITIES,  UNALLOCATED RESERVE AND TRUST CORPUS**                     |       |           |           |      |       |
|                                                                       |       |           |           |      |       |
| DISTRIBUTION PAYABLE                                                       | ** ** | **$**          | **7,216,005**  |      | $          | 1,443,201 |   |
| ACCRUED EXPENSES                                                           | ** ** | **85,735**     |           | 111,547   |       |
| DEFERRED ROYALTY REVENUE                                                   | ** ** | **2,770,000**  |           | —    |       |
|                                                                       | ** ** | **10,071,740** |           | 1,554,748 |       |
|                                                                       |       |           |           |      |       |
| UNALLOCATED RESERVE                                                        | ** ** | **1,127,832**  |           | 3,792,181 |       |
|                                                                       |       |           |           |      |       |
| TRUST CORPUS                                                               | ** ** | **3**          |           | 3         |       |
|                                                                       |       |           |           |      |       |
|                                                                       | ** ** | **$**          | **11,199,575** |      | $          | 5,346,932 |   |

 

See Notes to Financial Statements

 

F-5

----

 

# **MESABI TRUST**

**STATEMENTS OF INCOME**

**YEARS ENDED JANUARY 31, 2010,2009, AND 2008**

 
| ** **                                       | ** ** | **2010**       | ** **     | **2009**   | ** ** | **2008**   | ** ** |
|--------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
|                                             |       |           |           |       |       |       |       |
| REVENUES                                         |       |           |           |       |       |       |       |
| Royalties under amended  lease agreements        | ** ** | **$**          | **12,924,330** |       | $          | 34,896,798 |       | $ | 18,342,448 |   |
| Royalties under Peters  Lease fee                | ** ** | **305,407**    |           | 525,851    |       | 474,094    |       |
| Interest                                         | ** ** | **11,932**     |           | 46,456     |       | 49,969     |       |
|                                             |       |           |           |       |       |       |       |
| Total revenues                                   | ** ** | **13,241,669** |           | 35,469,105 |       | 18,866,511 |       |
|                                             |       |           |           |       |       |       |       |
| EXPENSES                                         |       |           |           |       |       |       |       |
| Compensation of Trustees                         | ** ** | **178,581**    |           | 228,053    |       | 181,700    |       |
| Corporate Trustee’s  administrative fees    | ** ** | **62,500**     |           | 62,500     |       | 62,500     |       |
| Professional fees and  expenses:                 |       |           |           |       |       |       |       |
| Legal                                            | ** ** | **224,796**    |           | 219,389    |       | 160,780    |       |
| Accounting                                       | ** ** | **125,009**    |           | 109,268    |       | 60,324     |       |
| Mining consultant and  field representatives     |       | **22,908**     |           | 22,617     |       | 52,242     |       |
| Insurance                                        | ** ** | **66,492**     |           | 52,518     |       | 37,195     |       |
| Annual stock exchange fee                        | ** ** | **38,000**     |           | 38,000     |       | 38,000     |       |
| Transfer agent’s and  registrar’s fees | ** ** | **9,974**      |           | 10,273     |       | 12,694     |       |
| Other Trust expenses                             | ** ** | **89,747**     |           | 56,702     |       | 28,716     |       |
|                                             |       |           |           |       |       |       |       |
| Total expenses                                   | ** ** | **818,007**    |           | 799,320    |       | 634,151    |       |
|                                             |       |           |           |       |       |       |       |
| NET INCOME                                       | ** ** | **$**          | **12,423,662** |       | $          | 34,669,785 |       | $ | 18,232,360 |   |
|                                             |       |           |           |       |       |       |       |
| WEIGHTED AVERAGE NUMBER OF  UNITS OUTSTANDING    |       | **13,120,010** |           | 13,120,010 |       | 13,120,010 |       |
|                                             |       |           |           |       |       |       |       |
| NET INCOME PER UNIT                              | ** ** | **$**          | **0.947**      |       | $          | 2.643      |       | $ | 1.390 |   |

 

See Notes to Financial Statements

 

F-6

----

 

# **MESABI TRUST**

**STATEMENTS OF UNALLOCATED RESERVEAND TRUST CORPUS**

**YEARS ENDED JANUARY 31, 2010,2009, AND 2008**

 
| ** **                                                                                | ** ** | **Unallocated Reserve** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|
| ** **                                                                                | ** ** | **Number of**           | ** ** | ** **  | ** ** | **Trust** | ** ** |
| ** **                                                                                | ** ** | **Units**               | ** ** | **Amount**  | ** ** | **Corpus** | ** ** |
|                                                                                      |       |                    |       |        |       |   |   |
| BALANCE, JANUARY 31, 2007                                                                 |       | 13,120,010              |       | 1,139,674   |       | 3 |   |
|                                                                                      |       |                    |       |        |       |   |   |
| Net income                                                                                |       | —                  |       | 18,232,360  |       | — |   |
| Distribution paid May 20,  2007, $.045 per unit                                      |       | —                  |       | (590,400    | )          | — |   |
| Distribution paid August 20,  2007, $.310 per unit                                   |       | —                  |       | (4,067,203  | )          | — |   |
| Distribution paid November 20,  2007, $.480 per unit                                 |       | —                  |       | (6,297,605  | )          | — |   |
| Distribution declared  January 11, 2008, paid February 20, 2008, $.515 per unit |       | —                  |       | (6,756,805  | )          | — |   |
|                                                                                      |       |                    |       |        |       |   |   |
| BALANCE, JANUARY 31, 2008                                                                 |       | 13,120,010              |       | 1,660,021   |       | 3 |   |
|                                                                                      |       |                    |       |        |       |   |   |
| Net income                                                                                |       | —                  |       | 34,669,785  |       | — |   |
| Distribution paid May 20,  2008, $.12 per unit                                       |       | —                  |       | (1,574,401  | )          | — |   |
| Distribution paid August 20,  2008, $1.00 per unit                                   |       | —                  |       | (13,120,010 | )          | — |   |
| Distribution paid November 20,  2008, $1.25 per unit                                 |       | —                  |       | (16,400,013 | )          | — |   |
| Distribution declared  January 16, 2009, paid February 20, 2009, $.11 per unit  |       | —                  |       | (1,443,201  | )          | — |   |
|                                                                                      |       |                    |       |        |       |   |   |
| BALANCE, JANUARY 31, 2009                                                                 |       | 13,120,010              |       | $           | 3,792,181  |   | $ | 3 |   |
|                                                                                      |       |                    |       |        |       |   |   |
| Net income                                                                                |       | —                  |       | 12,423,662  |       | — |   |
| Distribution paid May 20,  2009, $.38 per unit                                       |       | —                  |       | (4,985,604  | )          | — |   |
| Distribution paid November 20,  2009, $.22 per unit                                  |       | —                  |       | (2,886,402  | )          | — |   |
| Distribution declared  January 15, 2010, paid February 20, 2010, $.55 per unit  |       | —                  |       | (7,216,005  | )          | — |   |
|                                                                                      |       |                    |       |        |       |   |   |
| BALANCE, JANUARY 31, 2010                                                                 |       | 13,120,010              |       | $           | 1,127,832  |   | $ | 3 |   |

 

See Notes to FinancialStatements

 

F-7

----

 

# **MESABI TRUST**

**STATEMENTS OF CASH FLOWS**

**YEARS ENDED JANUARY 31, 2010,2009, AND 2008**

 
| ** **                                                          | ** ** | **2010**       | ** **     | **2009**    | ** ** | **2008**    | ** ** |
|---------------------------------------------------------------------|------------|----------------|----------------|-------------|------------|-------------|------------|
|                                                                |       |           |           |        |       |        |       |
| OPERATING ACTIVITIES                                                |       |           |           |        |       |        |       |
| Royalties received                                                  | ** ** | **$**          | **17,841,808** |        | $          | 33,658,880  |       | $ | 18,265,935 |   |
| Interest received                                                   | ** ** | **17,901**     |           | 48,173      |       | 50,415      |       |
| Expenses paid                                                       | ** ** | **(843,818**   | **)**          | (765,190    | )          | (710,529    | )          |
|                                                                |       |           |           |        |       |        |       |
| NET CASH FROM OPERATING  ACTIVITIES                                 | ** ** | **17,015,891** |           | 32,941,863  |       | 17,605,821  |       |
|                                                                |       |           |           |        |       |        |       |
| INVESTING ACTIVITIES                                                |       |           |           |        |       |        |       |
| Maturities of U.S.  Government securities                           | ** ** | **329,000**    |           | 586,953     |       | 9,464,477   |       |
| Purchases of U.S.  Government securities                            | ** ** | **(1,839,094** | **)**          | (383,181    | )          | (9,280,787  | )          |
|                                                                |       |           |           |        |       |        |       |
| NET CASH FROM (USED FOR)  INVESTING ACTIVITIES                      |       | **(1,510,094** | **)**          | 203,772     |       | 183,690     |       |
|                                                                |       |           |           |        |       |        |       |
| FINANCING ACTIVITY                                                  |       |           |           |        |       |        |       |
| Distributions to  unitholders                                       | ** ** | **(9,315,207** | **)**          | (37,851,229 | )          | (15,088,011 | )          |
|                                                                |       |           |           |        |       |        |       |
| NET CHANGE IN CASH AND  CASH EQUIVALENTS                            |       | **6,190,590**  |           | (4,705,594  | )          | 2,701,500   |       |
|                                                                |       |           |           |        |       |        |       |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR                       |       | **2,254,107**  |           | 6,959,701   |       | 4,258,201   |       |
|                                                                |       |           |           |        |       |        |       |
| CASH AND CASH EQUIVALENTS,  END OF YEAR                             |       | **$**          | **8,444,697**  |        | $          | 2,254,107   |       | $ | 6,959,701 |   |
|                                                                |       |           |           |        |       |        |       |
| RECONCILIATION OF NET  INCOME TO NET CASH FROM OPERATING ACTIVITIES |       |           |           |        |       |        |       |
| Net income                                                          | ** ** | **$**          | **12,423,662** |        | $          | 34,669,785  |       | $ | 18,232,360 |   |
| Decrease (increase) in  accrued income receivable                   | ** ** | **1,848,040**  |           | (1,762,053  | )          | (550,161    | )          |
| Decrease (increase) in  prepaid expense                             | ** ** | **1**          |           | (5,736      | )          | (5,986      | )          |
| Increase (decrease) in  accrued expenses                            | ** ** | **(25,812**    | **)**          | 39,867      |       | (70,392     | )          |
| Increase in deferred  royalty revenue                               | ** ** | **2,770,000**  |           | —      |       | —      |       |
|                                                                |       |           |           |        |       |        |       |
| NET CASH FROM OPERATING  ACTIVITIES                                 | ** ** | **$**          | **17,015,891** |        | $          | 32,941,863  |       | $ | 17,605,821 |   |
|                                                                |       |           |           |        |       |        |       |
| NON CASH FINANCING  ACTIVITY                                        |       |           |           |        |       |        |       |
| Distributions declared                                              | ** ** | **$**          | **7,216,005**  |        | $          | 1,443,201   |       | $ | 6,756,805 |   |

 

See Notes to Financial Statements

 

F-8

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

**NOTE 1 -             NATURE OF BUSINESS AND ORGANIZATION**

 

*Nature of Business*

 

MesabiTrust was created in 1961 upon the liquidation of Mesabi Iron Company. The solepurpose of the Trust, as set forth in the Agreement of Trust dated as of July 18,1961, is to conserve and protect the Trust Estate and to collect and distributethe income and proceeds there from to the Trust’s certificate holders after thepayment of, or provision for, expenses and liabilities. The Agreement of Trustprohibits the Trust from engaging in any business.  In accordance with theAgreement of Trust, the Trust will terminate twenty-one years after the deathof the survivor of twenty-five persons named in an exhibit to the Agreement ofTrust, the youngest of whom is believed to be forty-eight years old.

 

Thelessee/operator of Mesabi Trust’s mineral interests is Northshore MiningCorporation (NMC), a subsidiary of Cliffs Natural Resources Inc (Cliffs).Cliffs is among the world’s largest producers of iron ore products. Prior to September 30,1994, the lessee/operator had been a subsidiary of Cyprus Amax Minerals Companyand was named Cyprus Northshore Mining Corporation (Cyprus NMC).

 

*Organization*

 

Thebeneficial interest in Mesabi Trust is represented by 13,120,010 transferableunits distributed on July 27, 1961 to shareholders of Mesabi Iron Company.

 

TheTrust’s status as a grantor trust was confirmed by letter ruling addressed toMesabi Iron Company from the Internal Revenue Service in 1961. As a grantortrust, Mesabi is exempt from Federal income taxes and its income is taxabledirectly to the Unitholders.

 

**NOTE 2 -             SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Cash and Cash Equivalents*

 

TheTrust considers all highly liquid investments with an**original maturity of three months or less to be cashequivalents.  As of January 31, 2010 and 2009, the Trust held $24,788and $390,661, respectively, in a money market fund that invests primarily inobligations of the U.S. Treasury, which it considers to be cash and cashequivalents.

 

*Investments*

 

TheTrust invests solely in U.S. Government securities. Management determines theappropriate classifications of the securities at the time they are acquired andevaluates the appropriateness of such classifications as of each balance sheetdate.

 

TheU.S. Government securities are classified as held-to-maturity securities as theTrust has the positive intent and ability to hold to maturity and are thereforestated at amortized cost.

 

F-9

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

*Revenue Recognition*

 

Royaltyincome under the amended lease agreements with NMC is recognized as it isearned. Under such agreements, royalties are earned upon shipment from SilverBay, Minnesota (NMC’s location), regardless of whether the actual salesproceeds for any shipment are received by NMC. The amount of base overriding royalties and royalty bonuses payable aredetermined on the volume of tonnage shipped from Silver Bay, Minnesota duringeach calendar quarter and the actual proceeds to Cliffs resulting from suchshipments.

 

Royaltyincome includes accrued income receivable. Accrued income receivable represents royalty income earned but not yetreceived by the Trust under the royalty agreements described elsewhere in thesenotes.   Accrued income receivable iscalculated based on (i) shipments during the last month of Mesabi Trust’sfiscal year, if any, and (ii) positive price adjustment mechanisms in theagreements between Cliffs and its customers that determine the final salesprice of the shipments from Silver Bay, Minnesota.

 

Adjustmentsto royalty income may result from changes in final reconciliations of tonnageshipped by NMC with the final amounts received from NMC customers.  Adjustments may also result from revisions toestimated prices previously used to record revenue for tonnage shipped.  Pricing decreases may give rise to negativeprice adjustments which may be applied against future royalty income recognizedby the Trust.

 

Duringthe fourth quarter of fiscal 2009, positive price adjustments were recorded byMesabi Trust as accrued income receivable due to price adjustment mechanisms inthe agreements between Cliffs and its customers that determine the final salesprice of the shipments from NMC with respect to shipments during calendar 2007and calendar 2008.  During the fourthquarter of fiscal 2010, negative price adjustments were recorded by MesabiTrust as deferred royalty revenue due to price adjustment mechanisms in theagreements between Cliffs and its customers that determine the final salesprice of the shipments from NMC with respect to certain shipments duringcalendar 2008 and calendar 2009.  As of January 31,2010, the Trust recognized revenue as accrued income receivable related toapproximately 1,400,000 tons of iron ore that were shipped by NMC as of December 31,2009, but for which Cliffs has indicated that final pricing is not yetknown.  Pricing related to these tons isexpected to be finalized in the first quarter of 2011.

 

Royaltyincome under the Peters Lease fee agreement also is recognized quarterly as itis earned. Under such agreement, however, royalties are earned at the option ofNMC either upon mining of crude ore from Peters Lease lands or upon shipmentfrom Silver Bay of iron ore product produced from Peters Lease lands.

 

*Fixed Property, Including Intangibles*

 

TheTrust’s fixed property, including intangibles, is recorded at nominal valuesand includes the following:

 

1.                                   The entirebeneficial interest as assignor in the Amended Peters Lease Assignment and theAmended Cloquet Lease Assignment covering taconite properties in Minnesotawhich are leased to NMC.

 

F-10

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

2.                                   The entirebeneficial interest in Mesabi Land Trust which owns a 20% fee interest in thelands     subject to the Peters Lease andthe entire fee interest in other properties in Minnesota.

 

*Deferred Royalty Revenue*

 

Deferred royalty revenue represents an estimate ofdecreases in pellet revenue related to tons of iron ore that were shipped byNorthshore, but for which Northshore has indicated that final pricing is notyet known and is adjusted in accordance with the Trust’s revenue recognitionpolicy each quarter as updated pricing information is received.

 

*Reclassifications*

 

Certainreclassifications have been made to facilitate comparability with currentpresentation. Such reclassifications have no effect on the statement of income.

 

*Net Income Per Unit*

 

Netincome per unit is computed by dividing net income available to Unitholders bythe weighted average number of units outstanding.

 

*Concentration of Credit Risk*

 

Financialinstruments which potentially subject the Trust to concentrations of creditrisk consist primarily of cash that is maintained at an FDIC insured financialinstitution. At times during the year the Trust’s cash balance may exceedinsured limits.

 

Asfurther described in Note 1, NMC is the lessee/operator of the Mesabi Trustland.  All royalty income earned by theTrust is received from NMC, and accordingly, the entire accrued incomereceivable is also due from NMC.

 

*Accounting Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires the Trustees to make estimatesand assumptions that affect the reported amounts of assets and liabilities, thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.  Specifically, the accrued income receivable,deferred royalty revenue and related royalty revenue is a significant estimatewhich is subject to change in the near term, and changes to this estimate couldhave a material effect on the Trust’s financial statements.

 

*Fair Value Measures*

 

*Valuation Hierarchy*

 

ASC 820, *FairValue Measurements**and Disclosures*,establishes a three-level valuation hierarchy for classification of fair valuemeasurements. The valuation hierarchy is based upon the transparency of inputsto the valuation of an asset or liability as of the measurement date.

 

F-11

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

·                  Level 1 — Valuation is basedupon quoted prices (unadjusted) for identical assets or liabilities in activemarkets.

·                  Level 2 — Valuation is basedupon quoted prices for similar assets and liabilities in active markets, orother inputs that are observable for the asset or liability, either directly orindirectly, for substantially the full term of the financial instrument.

·                  Level 3 — Valuation is based upon otherunobservable inputs that are significant to the fair value measurement.

 

Theclassification of assets and liabilities within the valuation hierarchy isbased upon the lowest level of input that is significant to the fair valuemeasurement in its entirety.

 

Thecarrying amounts of financial instruments including investments, accrued incomereceivable, distributions payable, accrued expenses and deferred royaltyrevenue approximated fair value as of January 31, 2010 and 2009, becauseof the relative short maturity of these instruments.

 

*Recent Accounting Pronouncements*

 

Effective July 1, 2009, the Trust adopted theFASB Accounting Standards CodificationTM (“Codification”). The Codification isthe source of authoritative U.S. GAAP recognized by the FASB to be applied bynongovernmental entities. The content of the Codification carries the samelevel of authority, thereby modifying the previous GAAP hierarchy to includeonly two levels of GAAP: authoritative and nonauthoritative. The Codificationis effective for financial statements issued for interim and annual periodsending after September 15, 2009. Adoption of the Codification did notresult in a change in current accounting practice.

 

In April 2009, the FASB updated ASC 820 toprovide additional guidance for estimating fair value when the volume and levelof activity for an asset or liability have significantly decreased, includingguidance on identifying circumstances that indicate a transaction is notorderly. The updated guidance emphasizes that the objective of a fair valuemeasurement remains the same even if there has been a significant decrease inthe volume and level of activity for the asset or liability and amends certainreporting requirements for interim and annual periods related to disclosure ofmajor security types and the inputs and valuation techniques used indetermining fair value. The amendment is effective for interim and annualreporting periods ending after June 15, 2009, with early adoptionpermitted for periods ending after March 15, 2009. The adoption of thisamendment did not have a material impact the Trust’s financial statements.

 

InAugust 2009, the FASB issued ASU No. 2009-05 which amends ASC820-10-35 to provide further guidance concerning the measurement of a liabilityat fair value when there is a lack of observable market information,particularly in relation to a liability whose transfer is contractuallyrestricted. The amendment provides additional guidance on the use of anappropriate valuation technique that reflects the quoted price of an identicalor similar liability when traded as an asset and clarifies the circumstancesunder which adjustments to such price may be required in estimating the fairvalue of the liability. The guidance provided in this update is effective forthe first reporting period beginning after issuance, with early applicationpermitted. The amendment was adopted for the annual reporting period endedJanuary 31, 2010 and did not have a material 

 

F-12

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

impact on the Trust’s financial statements.

 

InJanuary 2010, the FASB issued ASU 2010-06, which amends the guidance onfair value to add new requirements for disclosures about transfers into and outof Levels 1 and 2 and separate disclosures about purchases, sales, issuances,and settlements relating to Level 3 measurements. It also clarifies existingfair value disclosures about the level of disaggregation and about inputs andvaluation techniques used to measure fair value.  The new guidance is effective for the firstreporting period beginning after December 15, 2009, except for therequirement to provide the Level 3 activity of purchases, sales, issuances, andsettlements on a gross basis, which will be effective for fiscal yearsbeginning after December 15, 2010, and for interim periods within thosefiscal years. The Trust will adopt this amendment upon its effective date andwill report the required disclosures beginning with the interim period ended April 30,2010.

 

**NOTE 3 -             U. S. GOVERNMENT SECURITIES**

 

U.S.government securities at January 31, 2010 and 2009 are classified asheld-to-maturity and mature as follows:

 
| ** **                              | ** ** | **2009**      | ** **    | **2008**       | ** ** |
|-----------------------------------------|------------|---------------|---------------|----------------|------------|
| ** **                              | ** ** | **Carrying**  | ** **    | ** **     | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Value**     | ** **    | **Fair Value** | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
|                                    |       |          |          |           |       |   |   |   |   |
| Due within one  year                    | ** ** | **$**         | **—**    | ** **     | **$**      | **—** |   | $ | 340,421 |   | $ | 335,254 |   |
|                                    |       |          |          |           |       |   |   |   |   |
| Due after one  year through three years | ** ** | **1,850,515** | ** **    | **1,855,546**  |       | — |   | — |   |
|                                    | ** ** | **$**         | **1,850,515** | ** **     | **$**      | **1,855,546** |   | $ | 340,421 |   | $ | 335,254 |   |

 

**NOTE 4 -             ROYALTY AGREEMENT**

 

The current royalty rate schedule becameeffective on August 17, 1989, which was established pursuant to certainagreements (the “Amended Assignment Agreements”) the Trust entered into withCyprus Northshore Mining Corporation (“Cyprus NMC”).  Pursuant to theAmended Assignment Agreements, overriding royalties are determined by both thevolume and selling price of iron ore products shipped.

 

Pursuantto the Amended Assignment Agreements, NMC is obligated to pay Mesabi Trust baseoverriding royalties, in varying amounts constituting a percentage of the grossproceeds of shipments, from Silver Bay, Minnesota, of iron ore product producedfrom Mesabi Trust lands or, to a limited extent, other lands.  NMC isobligated to make payments of overriding royalties on product shipments within30 days following the calendar quarter in which such shipments occur.  NMCresumed mining operations and shipping product from Silver Bay in the secondcalendar quarter of 1990, and the first payment of overriding royalties wasmade in July 1990.

 

F-13

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

Royaltybonuses are payable on all iron ore products produced from Mesabi Ore shippedfrom Silver Bay during a calendar quarter and sold at prices above the AdjustedThreshold Price.  The Adjusted ThresholdPrice was $47.43 (per ton) for calendar year 2008, $48.48 (per ton) forcalendar year 2009 and will be $48.81 (per ton) for calendar year 2010.  The Adjusted Threshold Price is subject toadjustment (but not below $30 per ton) for inflation and deflation and isdetermined each year on the basis of the change in the Gross Domestic ProductImplicit Price Deflator, a broad based index of inflation and deflationpublished quarterly by the U.S. Department of Commerce.

 

NMCalso is obligated to pay to Mesabi Trust a minimum advance royalty of $500,000per annum, subject to adjustment for inflation and deflation (but not below$500,000), which is credited against base overriding royalties and royaltybonuses. NMC is obligated to make quarterly payments of the minimum advanceroyalty in January, April, July and October of each year. For thecalendar year ending December 31, 2010, the minimum advance royalty is$813,729. The minimum annual advance royalty was $808,177 and $790,721, for thecalendar years ended December 31, 2009 and 2008, respectively.

 

**NOTE 5 -             UNALLOCATEDRESERVE AND DISTRIBUTIONS**

 

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 cash and U.S. Government securities portion ofthe Unallocated Reserve will fluctuate from time to time, and it may increaseor decrease from its current level.

 

TheTrustees determine the level of distributions on a quarterly basis afterreceiving notification from NMC as to the amount of royalty income that will bereceived and after determination of any known or anticipated expenses,liabilities and obligations of the Trust. As a result of fluctuations in the accrued income receivable portion ofthe Unallocated Reserve, future distributions may vary depending upon theadjustments to royalty income, which are determined by NMC, and the level ofTrust expenses that the Trustees anticipate occurring in subsequentquarters.

 

Duringthe fiscal years ended January 31, 2010, 2009, and 2008, the Trusteesdistributed cash payments totaling $9,315,207 ($.71 per Unit), $37,851,229($2.89 per Unit), and $15,088,011 ($1.15 per Unit), respectively. In addition,in January 2010 the Trustees declared a distribution of $.55 per Unit ofbeneficial interest, which was paid in February 2010.

 

F-14

----

 

**MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2010, 2009 AND 2008**

 

**NOTE 6 -             SUMMARY OF QUARTERLY EARNINGS (UNAUDITED)**

 

The quarterly results of operations for the two years ended January 31,2010 and 2009 are presented below:

 
| ** **           | ** ** | **2010**    | ** **    |
|----------------------|------------|-------------|---------------|
| ** **           | ** ** | **First**   | ** **    | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **           | ** ** | **Quarter** | ** **    | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                 |       |        |          |   |   |   |   |   |   |
| Revenue              | ** ** | **$**       | **1,024,881** | ** ** | **$** | **422,936** | ** ** | **$** | **5,042,739** | ** ** | **$** | **6,751,113** | ** ** |
| Expenses             | ** ** | **223,835** | ** **    | **201,925** | ** ** | **141,870** | ** ** | **250,377** | ** ** |
|                 | ** ** | ** **  | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income           | ** ** | **$**       | **801,046**   | ** ** | **$** | **221,011** | ** ** | **$** | **4,900,869** | ** ** | **$** | **6,500,736** | ** ** |
|                 |       |        |          |   |   |   |   |   |   |
| Net income per  unit | ** ** | **$**       | **0.061**     | ** ** | **$** | **0.017** | ** ** | **$** | **0.374** | ** ** | **$** | **0.495** | ** ** |

 
| ** **           | ** ** | **2009**    | ** ** |
|----------------------|------------|-------------|------------|
| ** **           | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **           | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                 |       |        |       |   |   |   |   |   |   |
| Revenue              |       | $           | 3,861,807  |   | $ | 16,771,803 |   | $ | 11,796,116 |   | $ | 3,039,379 |   |
| Expenses             |       | 222,154     |       | 201,486 |   | 138,805 |   | 236,875 |   |
|                 |       |        |       |   |   |   |   |   |   |
| Net income           |       | $           | 3,639,653  |   | $ | 16,570,317 |   | $ | 11,657,311 |   | $ | 2,802,504 |   |
|                 |       |        |       |   |   |   |   |   |   |
| Net income per  unit |       | $           | 0.277      |   | $ | 1.263 |   | $ | 0.889 |   | $ | 0.214 |   |

 

F-15

----

 

**NOTE 7 — SUBSEQUENT EVENT**

 

In April 2010, the Trust received customaryquarterly payment notification from NMC, which indicated that the Trust wascredited a royalty payment of approximately $1.77 million.  The Trust will receive only the minimum advanceroyalty payment of approximately $203,000 on April 30, 2010 because NMCapplied negative pricing adjustments of approximately $2.8 million against the$1.77 million royalty payment credited to the Trust for shipments during thethree months ended March 31, 2010. This resulted in a carry forward negative pricing adjustment ofapproximately $1.1 million.  The Trustanticipates that NMC will offset the $1.1 million carry forward negative priceadjustment against royalties that will be payable to the Trust in futureperiods.

 

F-16

----