**Exhibit 13**

 

ANNUAL REPORTOF THE TRUSTEES OFMESABI TRUSTFor The Year Ended January 31, 2009

 

ADDRESS

 

Mesabi Trust

c/o Deutsche Bank Trust Company Americas

Trust & Securities Services — GDS

60 Wall Street, 27th Floor

New York, NY 10005

(615) 835-2749 (telephone)

www.mesabi-trust.com

 

REGISTRAR AND TRANSFER AGENT

 

Deutsche Bank Trust Company Americas

 

LEGAL COUNSEL

 

Oppenheimer Wolff & 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, 2009as filed with the Securities and Exchange Commission pursuant to the SecuritiesExchange Act of 1934, as amended, and (ii) the Trustees Code of Ethics.

 

Special Note 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 2009 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, those described under the caption “Risk Factors”in this annual report.  Mesabi Trustundertakes 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.

 

----

 

**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 from theInternal Revenue Service, which ruling was based on the terms of the Agreementof Trust including the prohibition against entering into any business, theTrust is not taxable as a corporation for Federal income tax purposes.  Instead, the Unitholders are considered “owners”of the Trust and the Trust’s income is taxable directly to theUnitholders.  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 

 

2

----

 

Agreement of Trust, theyoungest of whom is believed to be forty-eight years old.

 

**RISKFACTORS**

 

The results of operations and financialcondition of the Trust are subject to various risks. Some of these risks aredescribed below, and you should take such risks into account in evaluating theTrust or any investment decision involving the Trust.  This section does not describe all risks thatmay be applicable to the Trust and it is intended only as a summary of certainmaterial risk factors.  More detailedinformation concerning the risk factors described below is contained in othersections of this Annual Report.

 

***The Trustees have no controlover the operations 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 ofNorthshore, and the terms and conditions of the Amended AssignmentAgreements.  Northshore alone controls: (i) historicaloperating 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 operating and capital expenditures; (iii) geologicaldata relating to iron ore reserves; and (iv) projected production of ironore products.  Any substantial alterationof Cliffs’ business or the operations, production and shipments by Northshorecould adversely affect the income of the Trust.

 

***The Trust does not control the portionof Northshore’s shipments that will come from ore mined from Mesabi Trustlands.***

 

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 products fromlands other than Mesabi Trust lands.  Incertain circumstances, the Trust may be entitled to royalties on those othershipments, but not in all cases.  Ingeneral, the Trust will receive higher royalties (assuming all other factorsare equal) if a higher percentage of shipments are from Mesabi Trustlands.  The percentages of shipments fromMesabi Trust lands were 90.2%, 88.2%, 90.9%, 90.1% and 92.0% in calendar years2008, 2007, 2006, 2005 and 2004, 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 currentdisruption 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 current 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 in recentmonths, including, among other things, extreme 

 

3

----

 

volatilityin security prices, severely diminished liquidity and credit availability,ratings downgrades of certain investments and declining values of others. Theglobal economy has entered a recession. Cliffs has announced production curtailments, workforce reductions and aone-month, temporary idling of production at Northshore in April 2009.  According to Cliffs, some of its customershave announced curtailments of production, which could adversely affect thedemand for iron ore and therefore shipments from lands owned by the Trust.  Continuation or worsening of the currenteconomic conditions, a prolonged global, national or regional economicrecession or other events could produce major changes in demand patterns andmay have a material adverse effect on sales prices of iron ore products shippedby Northshore 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 current globalfinancial and credit crisis will have on future royalties payable to the Trust.

 

***The royalties paid to the Trustmay be adversely affected by softening demand and reductions in the marketprices for iron ore and steel products both of which are subject to marketforces beyond the Trust’s control.***

 

The world price of iron ore and steel are strongly influenced byinternational demand 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. In the current economic environment, this recent increase in capacitycould result in excess supply of iron ore, which in turn could cause increaseddownward pressure on prices. With the current global economic crisis, themarket is presently characterized by a significant decline in steel demand andlimited global demand for iron ore. Reduced demand for iron ore will likelyresult in decreased sales of products to Cliffs’ customers and decreasingprices, both of which would adversely affect royalties received by the Trust in2009.  Since the Trust is not party toany specific customer contracts that Cliffs has with its customers and becausethese macroeconomic forces are difficult to accurately forecast, the Trusteesare not able to predict the extent to which the reduced demand and lower pricesfor iron ore products will adversely affect royalties payable to 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 26, 2009, 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, or price escalators, including adjustments based ongeneral industrial inflation rates, the price of steel and the internationalprice of iron ore pellets, among other factors, that allow Cliffs to adjust theprices under those 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, 

 

4

----

 

which limit Cliffs’ ability to raise prices to matchinternational levels and fully capitalize on strong demand for iron ore.  These price adjustments can be positive ornegative, and can result in significant variations in royalties received byMesabi Trust (and, in turn, the resulting amount available for distribution toUnitholders) from quarter to quarter and year to year.  These variations, which can be positive ornegative, could adversely affect the royalties received by the Trust.

 

***The royalties received by theTrust, and the distributions paid to Unitholders, in any particular quarter arenot necessarily indicative of royalties or distributions in any subsequentquarter or for a full year.***

 

Royalties received by the Trust can fluctuatesignificantly from quarter to quarter and year to year based upon market pricesfor iron ore products, adjustment mechanisms in the Cliff’s Customer Agreementsand production decisions made by Northshore. Because royalties paid to the Trust include payments made with respectto pellets shipped and sold at prices that are subject to future interim andfinal multi-year adjustments in accordance with Cliff’s Customer Agreements,the current downward trends in demand and market prices for iron and steelproducts could result in negative adjustments to royalties in futurequarters.  These negative priceadjustments could have a material adverse effect on the Trust’s royalty income,which in turn could result in lower quarterly distributions, and possibly couldreduce funds available for distribution in any quarter and in some quarters mayoffset royalties otherwise payable to the Trust, potentially reducing cashavailable for distribution to Unitholders in future quarters.  As a result, the royalties received by theTrust, and the distributions paid to Unitholders,  in any particular quarter are not necessarilyindicative of royalties that will be received, or distributions that will bepaid, in any subsequent quarter or for a full year.

 

***The royalties payable to the Trust could be adversely affected by thefailure of the Trust’s independent experts to competently perform.***

 

As permittedby the terms of the Agreement of Trust and the Amendment, the Trustees areentitled to, and in fact do rely, upon certain experts to assist the Trusteesin carrying out and fulfilling their obligations as Trustees.  Independent consultants perform services,render advice and produce reports with respect to monthly production andshipments, which include figures on crude ore production, iron ore pelletproduction, iron ore pellet shipments, and discussions concerning the conditionand accuracy of the scales used to weigh iron ore pellets produced atNorthshore’s facilities.  The Trusteeshave also retained an accounting firm to provide non-audit services, includingreviews of financial data related to shipping and sales reports provided byNorthshore and a review of the schedule of leasehold royalties payable to theTrust.  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 Trust relies on Cliffs’ estimates of recoverable reserves and ifthose estimates are inaccurate the total royalty stream to the Trust anddistributions payable to each Unitholder may be adversely affected.***

 

The Trusteesdo not participate in preparing the ore reserve estimate reported byCliffs.  According to Cliffs’ Form 10-K,Cliffs regularly evaluates its iron ore reserves based on revenues and costsand updates them as required in accordance with Securities Act IndustryGuide 7, promulgated by the U.S. Securities and Exchange Commission.  In 2007, 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 

 

5

----

 

regulations by governmental agencies, futureprices for iron ore, future industry conditions and operating costs, severanceand excise taxes, development costs and costs of extraction and reclamationcosts, all of which may in fact vary considerably from actual results.  For these reasons, estimates of the economicallyrecoverable quantities of mineralized deposits attributable to the lands ownedby Mesabi Trust and the classifications of such reserves based on the risk ofrecovery prepared by different engineers or by the same engineers at differenttimes may vary substantially as the criteria change.  Cliffs’ estimate of the ore reserves could beaffected by future industry conditions, geological conditions and ongoing mineplanning at the Peter Mitchell Mine. Actual reserves and therefore actual royalties will likely vary fromestimates, and if such variances are material, the value of the Trust’s Unitscould decline.

 

***The operations at Northshore are largely dependent on a single-sourceenergy supplier.***

 

The operationsat Northshore are largely dependent on Silver Bay Power Company, a 115 megawattpower plant, for its electrical supply. Silver Bay Power Company, which is wholly owned by Northshore, has aninterconnection agreement with Minnesota Power, Inc. for backup power, andsells 40 megawatts of excess power capacity to Xcel Energy under a contractthat extends to 2011.  A significantinterruption in service from Silver Bay Power Company due to vandalism,terrorism, weather conditions, natural disasters, or any other cause couldcause a decrease in production capacity or require a temporary shutdown ofNorthshore’s operations.  In addition,one natural gas pipeline serves all of Cliffs’ Minnesota mines, and a pipelinefailure could idle 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 ofNorthshore are subject to extensive governmental regulation and Northshore issubject to risks related to its compliance with federal and state environmentalregulations.***

 

Northshore, as the owner/operator of thePeter Mitchell 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.

 

6

----

 

***Equipment failures and other unexpected events at Northshore may leadto production curtailments or shutdowns.***

 

Interruptions in production capabilities at the mine operated byNorthshore may have an adverse impact on the royalties payable to theTrust.  In addition to planned productionshutdowns and curtailments, equipment failures, the Northshore facilities arealso subject 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,concentrating and pelletizing facilities, depend on critical pieces ofequipment, such as drilling and blasting equipment, crushers, grinding mills,pebble mills, thickeners, separators, filters, mixers, furnaces, kilns androlling equipment, as well as electrical equipment, such as transformers. It ispossible that this equipment may, on occasion, be out of service because ofunanticipated failures or unforeseeable acts of vandalism or terrorism. Inaddition, because the Northshore mine and processing facilities have been inoperation for several decades, some of the equipment is aged.  Because the Trustees have no control over theoperations or maintenance of the equipment at Northshore, a shutdown orreduction in capacity may come with little or no advance warning.  The remediation of any interruption inproduction capability at Northshore could require Cliffs to make large capitalexpenditures which may take place over an extended period of time.  A shutdown or reduction in operations at Northshorecould adversely affect the royalties paid to the Trust.

 

***If steelmakers use methods other than blast furnace production toproduce steel, shut down or reduce production using blast furnaces, the demandfor iron ore pellets may decrease.***

 

Demand foriron ore pellets is determined by the operating rates for the blast furnaces ofsteel companies. However, not all finished steel is produced by blast furnaces;finished steel also may be produced by other methods that do not require ironore pellets. For example, steel “mini-mills,” which are steel recyclers,generally produce steel by using scrap steel, not iron ore pellets, in theirelectric furnaces.  North American steelproducers also can produce steel using imported iron ore or semi-finished steelproducts, which eliminates the need for domestic iron ore. Environmentalrestrictions on the use of blast furnaces also may reduce the use of theirblast furnaces in steel production. Because the maintenance of blast furnaces can require substantialcapital expenditures, manufacturers may choose not to maintain their blastfurnaces, and some of them may not have the resources necessary to adequatelymaintain their blast furnaces. If steel manufacturers significantly alter themethods they use to produce steel or otherwise substantially reduce their useof iron ore pellets, demand for iron ore pellets will decrease, which couldadversely affect the royalties paid to the Trust.

 

***Risk factors affecting Cliffs, and the operations of 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 for 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 26, 2009, include,among others, the global economic climate and financial market conditions,economic conditions in the iron ore industry, extensive governmental regulationrelating to environmental matters and the costs and risks related thereto,availability of 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, shipping 

 

7

----

 

conditionsin the Great Lakes and production at Northshore’s pelletizing/processingfacility.  Specifically, if any portionof Northshore’s pelletizing lines becomes idle for any reason, production,shipments and, consequently, the royalties paid to the Trust could be adverselyaffected.

 

***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:

 

·                  Baseoverriding royalties.  Baseoverriding royalties have historically constituted the majority of Mesabi Trust’sroyalty income.  Base overridingroyalties are determined by both the volume and selling price of iron oreproducts shipped.  Northshore isobligated to pay Mesabi Trust base overriding royalties in varying amounts,based on the volume of iron ore products shipped.  Base overriding royalties are calculated as apercentage of the gross proceeds of iron ore products produced at Mesabi Trustlands (and to a limited extent other lands) and shipped from Silver Bay,Minnesota.  The percentage ranges from2-1/2% of the gross proceeds for the first one million tons of iron oreproducts so shipped annually to 6% of the gross proceeds for all iron ore productsin excess of 4 million tons so shipped annually.  Base overriding royalties are subject tointerim and final price adjustments under the Cliffs Pellet Agreements and, asdescribed elsewhere in this report, such adjustments may be positive or negative.

 

·                  Royalty bonuses.  The Trust earns royalty bonuses when iron oreproducts shipped from Silver Bay are sold at prices above a threshold price perton.  The royalty bonus is based on apercentage of the gross proceeds of product shipped from Silver Bay and sold atprices above a threshold price.  Thethreshold price is adjusted (but not below $30.00 per ton) on an annual basisfor inflation and deflation (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $45.98 perton for calendar year 2007, $47.43 per ton for calendar year 2008 and will be$48.48 per ton for calendar year 2009. 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, 2009 and January 31,2008” on page 13 of this Annual Report for more information.

 

8

----

 

·                  Fee royalties.  Fee royalties have historically constituted asmaller component of the Trust’s total royalty income.  Fee royalties are payable to the Mesabi LandTrust, a Minnesota land trust, which holds a 20% interest as fee owner in theAmended Assignment of Peters Lease. Mesabi Trust holds the entire beneficial interest in the Mesabi LandTrust for which U.S. Bank N.A. acts as the corporate trustee.  Mesabi Trust receives the net income of theMesabi Land Trust, which is generated from royalties on the amount of crude oremined after the payment of expenses to U.S. Bank N.A. for its services ascorporate trustee.  Crude ore is thesource of iron oxides used to make iron ore pellets and other products.  The fee royalty on crude ore is based on anagreed price per ton, subject to certain indexing.

 

·                  Minimum advance royalties.  Northshore’s obligation to pay baseoverriding royalties and royalty bonuses with respect to the sale of iron oreproducts generally accrues upon the shipment of those products from SilverBay.  However, regardless of whether anyshipment has occurred, Northshore is obligated to pay to Mesabi Trust a minimumadvance royalty.  Each year, the amountof the minimum advance royalty is adjusted (but not below $500,000 per annum)for inflation and deflation.  The minimumadvance royalty was $766,510 for calendar year 2007, $790,721 for calendar year2008 and is $808,177 for calendar year 2009. Until overriding royalties (and royalty bonuses, if any) for aparticular year equal or exceed the minimum advance royalty for the year,Northshore must make quarterly payments of up to 25% of the minimum advanceroyalty for the year.  Because minimumadvance royalties are essentially prepayments of base overriding royalties androyalty bonuses earned each year, any minimum advance royalties paid in afiscal quarter are recouped by credits against base overriding royalties androyalty bonuses earned in later 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%, 99.7% and99.6% of the total revenue of the Trust in fiscal years ended 2009, 2008 and2007, respectively.  A more completediscussion of royalty rates and the manner in which they are determined is setforth under the headings 

 

9

----

 

“Leasehold Royalties” and “LandTrust and Fee Royalties,” beginning on pages 25 and 28, respectively, ofthis 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 adjustments are dependentin part on multiple price and inflation index factors that are not known untilafter the end of a contract year. Even though Mesabi Trust is not a party tothe Cliffs Pellet Agreements, these adjustments can result in significantvariations in royalties received by Mesabi Trust (and in turn the resultingamount available for distribution to Unitholders by the Trust) from quarter toquarter and on a comparative historical basis, and these variations, which canbe positive or negative, cannot be predicted by Mesabi Trust.  In either case, these price adjustments willimpact future royalties received by the Trust that become available fordistribution 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 Northshore was able tosell all of the iron ore products at prices higher than the Adjusted ThresholdPrice during calendar 2008, the Trustees are unable to project whetherNorthshore will continue to be able to sell pellets at prices above theapplicable Adjusted Threshold Price, entitling the Trust to any future bonusroyalty payments.

 

As a result of the priceadjustment mechanisms under the Cliffs Pellet Agreements, the Trust receivedpositive adjustments to the royalty income which is reflected in the royaltyincome for the year ended January 31, 2009.  These adjustments are attributable toshipments of iron ore pellets by Northshore/Cliffs to its customers from SilverBay, Minnesota during calendar years 2006, 2007 and 2008.  In the aggregate, the pricing adjustmentscaused an increase in the accrued income receivable reflected on the Trust’sbalance sheet as of January 31, 2009. The Trustees are not able to predict whether pricing adjustments in thefuture, if any, will increase or decrease the income received by the Trust.

 

10

----

 

**SELECTED FINANCIAL DATA**

 
| **Years ended on  January 31** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Royalty and interest income                   |       | $        | 35,469,105 |     | $          | 18,866,511 |       | $        | 17,902,988 |     | $          | 21,579,833 |   | $ | 13,575,548 |   |
| Trust expenses                                |       | 799,320  |       | 634,151  |       | 756,322    |       | 844,956  |       | 557,961  |       |
| Net income(a)                                 |       | $        | 34,669,785 |     | $          | 18,232,360 |       | $        | 17,146,666 |     | $          | 20,734,877 |   | $ | 13,017,587 |   |
| Net income per Unit(b)                        |       | $        | 2.64       |     | $          | 1.39       |       | $        | 1.31       |     | $          | 1.58 |   | $ | 0.99 |   |
| Distributions declared Per unit(b)(c)         |       | $        | 2.48       |     | $          | 1.35       |       | $        | 1.60       |     | $          | 1.53 |   | $ | 0.77 |   |

 
| **Years ended on  January 31** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Total Assets                                  |       | $          | 5,346,932  |       | $          | 8,488,509  |       | $          | 5,414,552  |       | $          | 11,328,959 |   | $ | 8,252,335 |   |
|                                               |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 

----

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

 

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

 

(c)                                 Duringthe Trust’s fiscal year ended January 31, 2009, the Trustees distributed$2.885 per Unit (including $0.515 per Unit declared in fiscal 2008 butdistributed in fiscal 2009 (February 2008)) and in fiscal 2009 declared adistribution of $0.11 per Unit payable in February 2009, the next fiscalyear.**** During the Trust’s fiscal year ended January 31,2008, the Trustees distributed $1.15 per Unit (including $0.315 per Unitdeclared in fiscal 2007 but distributed in fiscal 2008 (February 2007))and in fiscal 2008 declared a distribution of $0.515 per Unit payable in February 2008,the next fiscal year.  During the Trust’s fiscal year ended January 31,2007, the Trustees distributed $1.755 per Unit (including $0.47 per Unit declaredin fiscal 2006 but distributed in fiscal 2007 (February 2006)) and infiscal 2007 declared a distribution of $0.315 per Unit payable in February 2007,the next fiscal year.  During the Trust’sfiscal year ended January 31, 2006, the Trustees distributed $1.355 perUnit (including $0.295 per Unit declared in fiscal 2005 but distributed infiscal 2006 (February 2005)) and in fiscal 2006 declared a distribution of$0.47 per Unit payable in February 2006, the next fiscal year.  During the Trust’s fiscal year ended January 31,2005, the Trustees distributed $0.775 per Unit (including $0.30 per Unitdeclared in fiscal 2004 but distributed in fiscal 2005 (February 2004))and declared a distribution of $0.295 per Unit, payable in February 2005,the next fiscal year.

 

**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, 2009, January 31, 2008 and January 31,2007**

 

Production at Northshore attributable to Trust landsremained fairly constant over the prior three fiscal years.  During fiscal year 2009, productionattributed to Trust lands totaled approximately 4.77 million tons, an increaseof 1% as compared to production for fiscal year 2008.  Similarly, production for fiscal year 2008increased 3% to 4.72 million tons as compared to production for fiscal year2007.

 

Shipments, on the other hand, which are determinedby the demand of Northshore’s customers, increased in each of the prior threefiscal years.  Shipments for fiscal year2009 increased 21.1% to 5.15 million tons as compared to shipments for fiscalyear 2008.  Shipments for fiscal year2008 increased 15.3% to 4.25 million tons as compared to shipments for fiscalyear 2007.

 

The table below, which is based on informationprovided to the Trust by Northshore, shows the total production and totalshipments of iron ore pellets from Mesabi Trust lands during the prior threefiscal years.

 

11

----

 
| **Fiscal Year Ended** | ** ** | **Pellets Produced from  Trust Lands  (Tons)** | ** ** | **Pellets Shipped from  Trust Lands  (Tons)** | ** ** |
|---------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| January 31, 2009           |       | 4,774,939                                                     |       | 5,146,687                                                    |       |
| January 31, 2008           |       | 4,719,005                                                     |       | 4,248,785                                                    |       |
| January 31, 2007           |       | 4,575,655                                                     |       | 3,684,763                                                    |       |

 

Production of iron orepellets was lower for the fourth quarter of fiscal 2009 as compared to thefourth quarter of fiscal 2008, decreasing 7.6%. In addition, shipments by Northshore decreased by 95.8% for the fourthquarter of fiscal 2009 as compared to the fourth quarter of fiscal 2008.  The sharp and abrupt drop in shipments wascaused by a lack of orders from Northshore’s customers as they adjustedproduction based on anticipated demand from their customers.  Notwithstanding the significant decrease inshipments in the fourth quarter, as stated above, shipments attributable to theTrust increased by 21% during fiscal 2009, as compared to fiscal 2008, due tostrong demand from Northshore’s customers during the second and third calendarquarters of fiscal 2009.

 
| **Three Months Ended** | ** ** | **Pellets Produced from  Trust Lands  (Tons)** | ** ** | **Pellets Shipped from  Trust Lands  (Tons)** | ** ** |
|----------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| January 31, 2009            |       | 1,089,757                                                     |       | 54,429                                                       |       |
|                             |       |                                                          |       |                                                         |       |
| January 31, 2008            |       | 1,179,149                                                     |       | 1,302,240                                                    |       |

 

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, 2009       |       | 87.8                                                                  | %          | 12.2                                                                  | %          | 90.2                                                             | %          | 9.8                                                              | %          |
| January 31, 2008       |       | 91.7                                                                  | %          | 8.3                                                                   | %          | 88.2                                                             | %          | 11.8                                                             | %          |
| January 31, 2007       |       | 89.2                                                                  | %          | 10.8                                                                  | %          | 91.4                                                             | %          | 8.6                                                              | %          |

 

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 fiscal2010.  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 shipped fromSilver Bay, Minnesota in each calendar year, and at least 25% of all tons ofpellets shipped from Silver Bay, Minnesota in each calendar year in excess ofsix million tons.

 

As described above under the heading “Risk Factors,”Mesabi Trust has no control over the production or shipments of iron ore byNorthshore.  As described elsewhere inthis Annual Report, based on information provided by Cliffs, the Trusteesbelieve that production at Northshore during fiscal 2010 will decrease by 20%,to approximately 3.7 million tons, as compared to production at Northshoreduring fiscal 2009.  While the Trusteescannot predict whether shipments attributable to the Trust lands will increaseor decrease during 2010, given the current economic environment and anticipateddemand from Cliffs’ customers, the Trustees believe that the volume ofshipments during fiscal 2010 may be less than the volume of shipments duringfiscal 2009.

 

12

----

 

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

 

***Royalty Income***

 
| ** **                              | ** ** | **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 | % |

 

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.

 

 The royalty amounts set forth in the tableabove include pricing adjustments made to royalty payments previously receivedby the Trust based on shipments from Silver Bay, Minnesota during calendaryears 2006, 2007 and 2008.  Depending onthe year, the volume of shipments, and the interim and final price paid to theTrust for shipments from Silver Bay, Minnesota, the price adjustmentsprovisions of the Cliffs Pellet Agreements may increase or decrease, in somecases materially, the distributions payable to Unitholders.  Because the Trust is not a party to theCliffs Pellet Agreements, the Trustees are unable to determine the extent ofany pricing adjustments that may occur under the Cliffs Pellet Agreements orwhether the adjustments will increase or decrease royalties received by theTrust. With the current volatility in the prices for iron ore and steelproducts, the price adjustment provisions in the Cliffs Pellet Agreements mayhave a significant impact on future royalties received by the Trust and theadjustments, depending on whether they are positive or negative, may increaseor decrease the distributions payable to Unitholders.

 

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

 
| ** **   | ** ** | **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 | % |

 

Net income for fiscal 2009 increased 90.2% ascompared to fiscal 2008 primarily due to an increase in gross income related tothe increase in shipments and selling price of iron ore pellets.  In addition, total expenses for fiscal 2009increased as compared to fiscal 2008 as a result of increases in legal andaccounting fees and other fees related to the administration of the Trust.  A summary of the Trust’s expenses is setforth under the heading “Trust Expenses” on page 28 of this Annual Report.

 

13

----

 

***Cash Distributions and******Unallocated Reserve*

 
| ** **                | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                | ** ** | **2009**                                                       | ** ** | **2008**            | ** ** | **(decrease)** | ** ** |
| Total Cash Distributions  |       | $                                                              | 37,851,229 |                | $          | 15,088,012 |   | 150.9 | % |
| Distributions per Unit    |       | $                                                              | 2.885      |                | $          | 1.150 |   | 150.9 | % |
| Accrued Income Receivable |       | $                                                              | 2,721,978  |                | $          | 959,925 |   | 183.6 | % |
| Unallocated Reserve       |       | $                                                              | 3,792,181  |                | $          | 1,660,021 |   | 128.4 | % |

 

The Trust’s total royalty income and net income forfiscal 2009 increased 88.3% and 90.2% respectively, resulting in an increase intotal distributions paid to Unitholders in fiscal 2009 of 150.9% as compared tofiscal 2008.  The significant increase intotal cash distributions and distributions per unit in fiscal 2009, as comparedto fiscal 2008, 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.

 

The Unallocated Reserve, which is comprised of accrued incomereceivable and cash reserve for unexpected losses, increased $2,132,160 or128.4% to $3,792,181, as of January 31, 2009, as compared to $1,660,021 asof January 31, 2008.  The increasein the Unallocated Reserve as of January 31, 2009, is primarily due to a$1,762,053, or 183.6%, increase in the accrued income receivable portion of theUnallocated Reserve which increased to $2,721,978 as of January 31, 2009from $959,925 as of January 31, 2008. The significant increase in accrued income receivable is due to positivepricing adjustments that were determined and finalized under the Cliffs PelletAgreements with respect to shipments by the Trust in calendar 2007 and calendar2008.

 

During the fourth quarter of fiscal 2009, positive price adjustmentswere recorded by Mesabi Trust as accrued income receivable due to priceadjustment mechanisms in the agreements between Cliffs and its customers thatdetermine the final sales price of the shipments from NMC with respect toshipments during calendar years 2006, 2007 and 2008.  As of January 31, 2009, the Trust recognized revenue related totons of iron ore that were shipped by NMC as of December 31, 2008, but forwhich Cliffs has indicated that final pricing is not yet known.  The Trust has applied an estimated price tothese tons based on current market conditions even though the pricing relatedto these tons has not been finalized. Moreover, the Trust normally distributes substantially all of theroyalty payments received as a result of these positive pricing adjustmentseven though there may be negative pricing adjustments applied to future royaltypayments received by the Trust.

 

Because the accrued income receivable is determined solely by volume ofshipments and the final price per ton paid to Cliffs under the Cliffs PelletAgreements, the Trustees cannot predict whether the accrued income receivablewill increase or decrease in fiscal 2010.  In addition, the pricing adjustments under the Cliffs Pellet Agreementsmay have a material effect on the accrued income receivable and in theseadjustments may increase or decrease the royalty payments available for distributionto the Trust’s Unitholders.

 

The Trust’s cash reserve for unexpected losses increased 52.9% to$1,070,203 as of January 31, 2009 from $700,096 as of January 31,2008.  The increase in the Trust’s cashreserve is due to the Trustee’s decision to add to the Trust’s cash reservebecause of the significant royalties received during fiscal 2009 and theuncertain economic environment that unfolded in the second half of fiscal2009.  See the discussion under theheading “Unallocated Reserve” on page 29 of this Annual Report for moreinformation on the Trust’s policy for maintaining a cash reserve for unexpectedlosses.

 

14

----

 

**Comparisonof Financial Results for Fiscal Years ended January 31, 2008 and January 31,2007**

 

***Royalty Income***

 
| ** **                              | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **2008**                                                       | ** ** | **2007**            | ** ** | **(decrease)** | ** ** |
| Base overriding royalties               |       | $                                                              | 10,624,935 |                | $          | 9,877,120 |   | 7.57 | % |
| Bonus royalties                         |       | 7,717,513                                                      |       | 7,530,423           |       | 2.48 | % |
| Minimum advance royalty paid (recouped) |       | —                                                         |       | —              |       |   |   |
| Fee royalties                           |       | 474,094                                                        |       | 426,313             |       | 11.21 | % |
| Total royalty income                    |       | $                                                              | 18,816,542 |                | $          | 17,833,856 |   | 5.51 | % |

 

Total royalty incomeincreased 5.51% in fiscal 2008 as compared to fiscal 2007.  Although the average sale price for each tonof iron ore shipped from Silver Bay, Minnesota decreased in fiscal 2008, ascompared to fiscal 2007, all three royalty streams payable to the Trustincreased because of the 15.3% increase in shipments in fiscal 2008 as comparedto fiscal 2007.  The amounts paid to the Trustfor pricing adjustments during fiscal 2008, the period for which the pricingadjustments were determined, are included in the royalty amounts listed above.

 

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

 
| ** **   | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|--------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **   | ** ** | **2008**                                                       | ** ** | **2007**            | ** ** | **(decrease)** | ** ** |
| Gross Income |       | $                                                              | 18,866,511 |                | $          | 17,902,988 |   | 5.38 | % |
| Expenses     |       | 634,151                                                        |       | 756,322             |       | (16.15 | )% |
| Net Income   |       | $                                                              | 18,232,360 |                | $          | 17,146,666 |   | 6.33 | % |

 

Net income for fiscal 2008 increased 6.33% ascompared to fiscal 2007 primarily due to an increase in gross income related tothe increase in shipments.  In addition,total expenses for fiscal 2008 decreased 16.15% as compared to fiscal 2007 as aresult of decreases 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.

 

***Cash Distributions and******Unallocated Reserve*

 
| ** **                | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                | ** ** | **2008**                                                       | ** ** | **2007**            | ** ** | **(decrease)** | ** ** |
| Total Cash Distributions  |       | $                                                              | 15,088,012 |                | $          | 23,025,618 |   | (34.47 | )% |
| Distributions per Unit    |       | $                                                              | 1.150      |                | $          | 1.755 |   | (34.47 | )% |
| Accrued Income Receivable |       | $                                                              | 959,925    |                | $          | 409,764 |   | 134.26 | % |
| Unallocated Reserve       |       | $                                                              | 1,660,021  |                | $          | 1,139,674 |   | 45.66 | % |

 

Although the Trust’s totalroyalty income and net income for fiscal 2008 each increased approximately5.51% and 6.33%, respectively, total distributions paid to Unitholders infiscal 2008 decreased 34.47% as compared to fiscal 2007. The decrease in totalcash distributions and distributions per unit is primarily due to decreasedshipping activity during the first quarter of fiscal 2008, which resulted inlower royalties received by the Trust in April 2007.  In addition, because income payable to theTrust is accounted for on an accrual basis, before the royalties are actuallyreceived by the Trust, shipments during the fourth quarter of fiscal 2008 wereincluded as income during fiscal 2008 even though royalty payments with respectto those shipments were distributed to Unitholders in the first quarter offiscal 2009.

 

15

----

 

The Unallocated Reserve aggregated$1,660,021, as of January 31, 2008, as compared to an Unallocated Reserveof $1,139,674 as of January 31, 2007. The Unallocated Reserve, which is comprised of accrued income receivableand cash reserve for unexpected losses, increased 45.7% or $520,347, as of theend of fiscal 2008 as compared to the balance at the end of fiscal 2007.  This increase is due to a significant increasein the accrued income receivable portion of the Unallocated Reserve whichincreased 134.3% to $959,925 in fiscal 2008 as compared to $490,764 in fiscal2007.  The significant increase inaccrued income receivable is the result of the 192.6% increase in shipmentsduring the fourth quarter of fiscal 2008 as compared to the fourth quarter offiscal 2007.  The Trust’s cash reservefor unexpected losses decreased 4.1% to $700,096 in fiscal 2008 from $729,910in fiscal 2007 because Trustees decided to distribute a slightly higher portionof the royalty payments received by the Trust during fiscal 2008.

** **

**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 UnallocatedReserve to provide for potential fixed or contingent future liabilities.  See the discussion of the Trustees’management of liquidity set forth under the heading “Unallocated Reserve”beginning on page 29****of this AnnualReport.

 

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, 2009, theTrust held $2,254,107 in cash and cash equivalents of which $390,661 wasinvested exclusively in obligations of the U.S. Treasury through a money marketfund.  In February 2009, the Trustdistributed $1,443,201 to Unitholders of record on January 30, 2009.

 

**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 Policies**

** **

This “Trustees’ Discussionand Analysis of Financial Condition and Results of Operations” is based uponthe Trust’s financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires the Trustees to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and 

 

16

----

 

related disclosure ofcontingent assets and liabilities.  Theseestimates form the basis for making judgments about the carrying value ofassets and liabilities that are not readily apparent from other sources.  The Trustees base their estimates andjudgments on historical experience and on various other assumptions that theTrustees believe are reasonable under the circumstances.  However, future events are subject to changeand the best estimates and judgments may require adjustment.  For a complete description of the Trust’ssignificant accounting policies, please see Note 2 to the financial statementson pages F-9 through F-13.

 

Critical accounting policiesare those that have meaningful impact on the reporting of the Trust’s financialcondition and results of operations, and that require significant managementjudgment and estimates.  The Trusteeshave determined that there are no critical accounting policies.

 

**RecentDevelopments**

** **

***2009 Estimates***.  Neither Cliffs nor Northshorehas provided the Trust with an estimate for total calendar year 2009shipments.  During calendar years 2008,2007, 2006 and 2005, the percentage of shipments of iron ore products fromMesabi Trust lands was approximately 90.2%, 88.2%, 90.9%, 90.1% and 92.0%,respectively, of total shipments. Northshore has not advised the Trustees as to the percentage of iron oreproducts from Mesabi Trust lands it anticipates shipping in calendar year 2009.  See the description of the uncertainty ofmarket conditions in the iron ore and steel industry under the heading “RiskFactors” 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 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.

 

***Idling of Pellet Furnaces.***  Aspreviously reported by the Trust, Cliffs has announced production curtailmentsat Northshore, including a one-month shutdown of production at Northshore whichis expected to occur during April 2009. Cliffs has reported that the curtailment will reduce production atNorthshore to approximately 3.7 million tons in 2009. Cliffs’ filing statedthat the announcement reflects continuing difficult economic conditions of theglobal steel and iron ore industry. Cliffs also reported that Northshoreanticipates restarting its two larger pelletizing lines at the beginning of May 2009.  While the Trustees cannot predict the fullimpact of Cliffs’ announcement on the Trust’s total royalty income, the Trusteesbelieve that shipments of iron ore products mined from Trust lands may decreasein calendar year 2009.

 

***Northshore Air PermitMatters*****.**  Inits Form 10-K filed February 26, 2009 (“Cliffs’ Form 10-K”),Cliffs provided an update to the matters previously reported regarding theadministrative permit amendment application that Northshore submitted on December 16,2006 to the Minnesota Pollution Control Agency. As previously reported, Northshore submitted an administrative permitamendment application to the Minnesota Pollution Control Agency (“MPCA”) withrespect to its Title V operating permit requesting the deletion of a 30 

 

17

----

 

year old “control city”monitoring requirement.  The MPCA deniedNorthshore’s application on February 23, 2007 and Cliffs appealed thedenial to the Minnesota Court of Appeals (the “Amendment Appeal”).   Cliffs reported that subsequent to thefiling of the appeal, the MPCA advised Northshore that the MPCA consideredNorthshore to be in violation of the control city standard based on new datathat the MPCA collected showing that current fiber levels in St. Paul werelower than in Silver Bay for a period in 2007. Cliffs’ Form 10-K also reported that the Minnesota Center forEnvironmental Advocacy intervened in the Amendment Appeal, that oral argumentswere held on February 21, 2008 and that the court of appeals ruled in theMPCA’s favor.

 

On May 20, 2008, theMinnesota Court of Appeals issued a ruling on Northshore’s appeal and held thatthe MPCA did not err in concluding that Northshore proceeded under the wrongpermit modification procedures when it applied to amend its permit to eliminatethe “control city” standard from its Title V operating permit.  The Minnesota Court of Appeals ruled thatNorthshore’s administrative amendment application should have been dealt withthrough the major permit amendment process rather than through theadministrative permit amendment process, which is used to address insignificantamendments.  Cliffs also reported that onAugust 28, 2008 it filed a major permit amendment to remove the controlcity requirement from its permit and that this permit amendment is currentlypending. Cliffs also reported that on November 25, 2008, in response tothe proposed amendment, MPCA issued an order declaring that Northshore’srequest to remove the control city standard from its permit constitutes a “project”for which an Environmental Assessment Worksheet, or EAW, must becompleted.  According to Cliffs’ Form 10-K,MPCA also stated that it was ceasing all other work on the permit, includingits own efforts to create a replacement standard, until the environmentalreview process was complete.  Cliffs alsoreported that Northshore has filed an action to challenge the MPCA’s requirementfor an EAW in Minnesota State District Court, which is currently pending.

 

The Trustees are unable topredict what impact the administrative proceedings discussed above will have onNorthshore’s compliance with its Title V operating permit or on futureroyalties payable to the Trust.

 

***Other Developments***.   Additionally, in its Form 10-K Cliffs reported that as part ofNorthshore’s permitting of the restart of Furnace 5, Northshore was required tocertify compliance with air emission standards within 180 days ofoperation.  In its Form 10-K, Cliffsreported that during the scheduled compliance testing for Furnace 5, Northshoreexperienced abnormal operating difficulties and was thereby unable to certifycompliance.  As reported above, Furnace 5has been idled due to changes in market demand. Cliffs further reported thatNorthshore will take appropriate steps to establish compliance with the MPCA,will perform retesting as soon as Furnace 5 returns to normal operatingconditions and anticipates meeting the required limits.

 

***Securities Regulation***.  The Trust is a publicly-traded trust listedon the New York Stock Exchange (“NYSE”) and is therefore subject to extensiveregulation under, among others, the Securities Act of 1933, the SecuritiesExchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and therules and regulations of the NYSE. Issuers failing to comply with such authorities risk seriousconsequences, including criminal as well as civil and administrativepenalties.  In most instances, theselaws, rules and regulations do not specifically address theirapplicability 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 provide for, a board ofdirectors, an audit committee, a corporate governance committee, a compensationcommittee or 

 

18

----

 

executive officers.  The Trustees intend to closely monitor theSEC’s and NYSE’s rulemaking activity and will comply with their rules andregulations to the extent applicable.

 

***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 ore productsis used to compute the royalties payable to Mesabi Trust by Northshore.  Deutsche Bank Trust Company Americas, theCorporate Trustee, also performs certain administrative functions for MesabiTrust.

 

19

----

 

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

 

20

----

 

Under the Amended AssignmentAgreements, Northshore produces iron ore from the Trust Estate for themanufacture of iron ore products to be sold to various customers of Cliffs.  Mesabi Trust receives royalties on the crudeore extracted from such Lands and the pellets produced from such crude ore, andin each case the royalties are based upon the volume of iron ore productsshipped and the prices charged to 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.  Inreturn, Mesabi Trust must assume Northshore’s future obligations as lesseeunder the reassigned 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, 2008, the following information was provided by Cliff’sregarding 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          |       | 298                                     |       | 10           |       | 308                      |       | 313 |   | Geologic  - Block Model |   |

 

----

(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 2007, 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

 

21

----

 

Securities Act IndustryGuide 7.  Based on the report of ScottWilson RPA, the Trustees estimate that at least 90% of the ore reserve in themine at Northshore, as reported by Cliffs, is attributable to the Trust Estate.

 

## **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 DunkaRiver conveyed the Peters Lease Lands to their parent company, Dunka-Mesaba,which in turn conveyed to each of its stockholders an undivided interest in thePeters Lease 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”) in considerationfor which Reserve agreed to pay MIC a percentage of its net profits.  Later, these payments were changed to royaltypayments.

 

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.

 

22

----

 

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% fee owner inthe Mesabi Lease Lands and as lessor of the Mesabi Lease (subject to thereservation of mineral rights described above).

 

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:

 

 

23

----

** **

**DESCRIPTION OF THE MINERAL PROPERTIES AND NORTHSHORE’SMINING OPERATIONS**

** **

Mine and Rock Formation.  The Mesabi Trust properties, including theore mine, are located in northeastern Minnesota, approximately two miles southof Babbitt, Minnesota.  The ore mine onthe Mesabi Trust properties is called the Peter Mitchell mine, an open pit mineconsisting of a 10-mile long segment of a host rock called the Biwabik IronFormation, which is a very hard cherty rock containing magnetite as the oremineral.  The Biwabik Iron Formationextends west and southwest for over 100 miles and constitutes the Mesabi IronRange.  Recoverable iron grades rangefrom 21% in the west end of the mine open pit to 26% in the central portion andeast end, with 22.5% as the cut off grade. The ore body dips south under the hanging wall called the VirginiaFormation.  To date, the Mesabi Trustproperties have been explored for their iron ore potential.  To the knowledge of the Mesabi Trustees, noother minerals have been explored 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 and facilities.  Based on information provided to the Trustees’during the most recent inspection trip in October 2008, the miningproperties and facilities at Northshore were in good operating condition.

 

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 Gardener 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 700,000to 1,200,000 tons of crude taconite. After blasts, taconite is then removed by a loading fleet consisting ofthree P&H 2800XPC shovels with 34 cubic-yard buckets, one P&H 2800shovel with a 28 cubic-yard bucket, one LeTourneau L1850 loader with a 28 cubicyard bucket and a Cat 994D loader with a 19 cubic-yard bucket.  A haulage fleet of three 250-ton Terex Model4400AC and four 200-ton Komatsu Haulpak 730E carry crude taconite to theprimary and secondary 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 4-6 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.

 

24

----

 

The non-magnetic material is railhauled seven miles to the Mile Post 7 disposal site. The magnetic material isthen fed into one of the fourteen active grinding lines.  Each line includes one 10-1/2-foot by 18-footrod mill and two 10-foot by 16-foot (14-foot in west plant) ball mills.  The final grinding of the crude taconite isreduced 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 2008, 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:

 

·                  Received and commissioned the secondand third of four P&H 2800-XPC shovels. Two arrived during calendar 2008 with the final one scheduled fordelivery in early 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 firesuppression and clean-up systems) and environment (primarily dust control andwater treatment plant expansion) to protect employees and improve air &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% onshipments above 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:

 

25

----

 
| **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 calendarquarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $45.98 forcalendar year 2007, $47.43 for calendar year 2008 and will be $48.48 forcalendar year 2009.  The Adjusted ThresholdPrice is subject to adjustment (but not below $30 per ton) for inflation anddeflation and is determined each year on the basis of the change in the GrossDomestic Product Implicit Price Deflator, a broad based index of inflation anddeflation 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 2009, and furtherassume that pellets were shipped from Silver Bay in the second and thirdcalendar quarters of 2009 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 2009 would beas follows:

 

26

----

 

| 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 2009 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 2009 would beas follows (with reference to the Adjusted Threshold Price (“ATP”) of $48.48:

 

| 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 2009 or any other calendar or fiscal year.  Accordingly, the foregoing example illustratingthe calculation of base overriding royalties and royalty bonuses should not beconsidered a prediction of the amount of base overriding royalties or royaltybonuses 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 $766,510 for calendaryear 2007, $790,721 for calendar year 2008 and is $808,177 for calendar year2009.  The amount of advance royalties payableis subject to adjustment (but not below $500,000 per annum) for inflation anddeflation 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

----

 

***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 beneficial interest in Mesabi Land Trustand is entitled to receive the net income of Mesabi Land Trust after payment ofexpenses.  Northshore is not obligated topay royalties or rental to Mesabi Land Trust as fee owner of the non-mineralbearing Mesabi Lease Lands, a consideration having been paid in that respect atthe inception of the Mesabi Lease.

 

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 $525,851 withrespect to crude ore mined by Northshore were earned by Mesabi Land Trustduring the fiscal year ended January 31, 2009.

 

**TRUST EXPENSES**

** **

***Total Trust Expenses***

 

Total Trust expenses for the fiscal year ended January 31,2009 were $799,320, representing an increase of 26.0% from the $634,151 oftotal Trust expenses in fiscal 2008.  Forthe fiscal year ended January 31, 2008, total Trust expenses decreased16.2% to $634,151, as compared to $756,322 for the fiscal year ended January 31,2007.

 

***Trust Legal Expenses***

 

Mesabi Trust paidOppenheimer Wolff & Donnelly LLP (“Oppenheimer”) $219,329 for legalservices provided to the Trust during the fiscal year ended January 31,2009.  Comparatively, Mesabi Trust paid Oppenheimer $160,780 and $244,070 for legal services provided to the Trust duringfiscal years ended January 31, 2008 and January 31, 2007,respectively.

 

28

----

 

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 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 2009 increased approximately $58,000, or 36%, as compared tofiscal 2008.  The increase in legal feesin fiscal 2009, as compared to fiscal 2008, resulted primarily from Oppenheimerproviding the Trust with services related to the Trust’s change of itsindependent certified public accounting firm, responding to comments receivedfrom the SEC staff under the disclosure review program, additional thirdparty inquiries made to the Trust, and cost of living increases in the billingrates of Oppenheimer attorneys who provide services to the Trust.

 

In fiscal 2008, the totalamount of legal fees paid to Oppenheimer decreased approximately $83,000, or34%, as compared to fiscal 2007.  Thedecrease in legal fees in fiscal 2008 resulted primarily from there being fewerthird party inquiries made to the Trust and the Trust having settled anarbitration matter that was active during fiscal 2007.  Additionally, the average billing rate of theattorneys who provided services to the Trust in 2008 was less than in 2007because the nature of legal services provided to the Trust during fiscal 2008permitted more junior attorneys, who have lower average billing rates, toprovide a greater portion of the legal services to the Trust.

 

Total Trust expenses bycategory for fiscal 2009, 2008 and 2007 are set forth in the table below.

 
| ** **                                                                                                                                    | ** ** | **Fiscal Year ended on January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **2009**                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                                                          |       |                                                          |       |   |   |   |   |
| Compensation of Trustees                                                                                                                      |       | $                                                             | 264,069    |   | $ | 181,700 |   | $ | 167,216 |   |
| Fees and Disbursements:                                                                                                                       |       |                                                          |       |   |   |   |   |
| Corporate Trustee’s administrative fees                                                                                                  |       | 62,500                                                        |       | 62,500 |   | 62,500 |   |
| Accounting                                                                                                                                    |       | 109,268                                                       |       | 60,324 |   | 71,465 |   |
| Inspection trips, travel and other expenses of Trustees                                                                                       |       | 22,617                                                        |       | 26,688 |   | 37,217 |   |
| Legal                                                                                                                                         |       | 219,329                                                       |       | 160,780 |   | 244,070 |   |
| Mining consultant and field representatives                                                                                                   |       | 22,617                                                        |       | 52,242 |   | 56,650 |   |
| Stock exchange listing fee                                                                                                                    |       | 38,000                                                        |       | 38,000 |   | 38,000 |   |
| Printing and filing of annual, quarterly and current reports, proxy  statements and letters to Unitholders; other Unitholder meeting expenses |       | 5,646                                                         |       | 4,601 |   | 51,854 |   |
| Transfer Agent and Registrar                                                                                                                  |       | 10,273                                                        |       | 12,694 |   | 12,738 |   |
| Transfer Agent miscellaneous disbursements                                                                                                    |       | 45,011                                                        |       | 34,622 |   | 14,612 |   |
|                                                                                                                                          |       | $                                                             | 799,320    |   | $ | 634,151 |   | $ | 756,322 |   |

 

**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.  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.  Shipping activity is greatly reduced duringthe winter months and economic conditions, particularly those affecting thesteel industry, may adversely affect the amount and timing of such futureshipments and sales.  See discussionunder the heading “Risk Factors” beginning on page 3 of this AnnualReport.

 

29

----

 

The Trustees will continueto monitor the economic circumstances of the Trust to strike a responsible balancebetween distributions to Unitholders and the need to maintain reserves at aprudent level, given the unpredictable nature of the iron ore industry, theTrust’s dependence on the actions of the Cliffs and Northshore, and the factthat 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, 2009 totaled$37,851,229 as compared to $15,088,011 during fiscal year ended January 31,2008, and $23,025,618 during the fiscal year ended January 31, 2007.  Unitholders received distributions of $2.885per Unit for the fiscal year ended January 31, 2009, compared withdistributions of $1.150 and $1.755 per Unit for the fiscal years ended January 31,2008 and 2007, 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, 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 |   |

 
| **Fiscal Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** | **Distribution  Declared** | ** ** | **Distribution  Per Unit** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|----------------------------|------------|---------------------------------|------------|
| April 30, 2007                |       | $        | 25.88      |    | $          | 19.73                      |       | $                               | 590,400    |   | $ | 0.045 |   |
| July 31, 2007                 |       | $        | 22.80      |    | $          | 19.04                      |       | 4,067,203                       |       | 0.31 |   |
| October 31, 2007              |       | $        | 25.94      |    | $          | 17.89                      |       | 6,297,605                       |       | 0.48 |   |
| January 31, 2008              |       | $        | 25.28      |    | $          | 19.06                      |       | 6,756,805                       |       | 0.515 |   |
|                               |       |     |       |    |       | $                          | 17,712,013 |                            | $          | 1.35 |   |

 

As of the close of businesson April 2, 2009, the beneficial interest in Mesabi Trust was representedby 13,120,010 Units registered in the names of approximately 1,318****individuals holding of recordapproximately 915,886 Units, and in the names of approximately 118 brokers,nominees, or fiduciaries holding of record approximately 12,204,124 Units.

 

30

----

** **

**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                                                                                                                             |
|                                                                                                                                                                     |       |                                                                                                                                                     |
| 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.                                                                 |
|                                                                                                                                                                     |       |                                                                                                                                                     |
| David J. Hoffman   Individual Trustee   150 Forrest View Drive   Sedona, Arizona 86336                                                                                   |       | Retired mining geologist                                                                                                                                 |
|                                                                                                                                                                     |       |                                                                                                                                                     |
| 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 16, 2009                                                                                                                                 |       | Respectfully submitted,

DEUTSCHE BANK TRUST COMPANY AMERICAS 

 

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

 

31

----

 

INDEX TO 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, 2009 and 2008                                                           | Page F-5          |
|                                                                                                          |                   |
| Statements of Income for the years ended  January 31, 2009, 2008, and 2007                               | Page F-6          |
|                                                                                                          |                   |
| Statements of Unallocated Reserve and Trust Corpus  for the years ended January 31, 2009, 2008, and 2007 | Page F-7          |
|                                                                                                          |                   |
| Statements of Cash Flows for the years ended  January 31, 2009, 2008, and 2007                           | Page F-8          |
|                                                                                                          |                   |
| Notes to Financial Statements                                                                                 | Pages F-9 - F-17  |

 

F-1

----

** **

**TRUSTEES’REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

** **

The Mesabi Trustees are responsible for establishingand maintaining adequate internal control over financial reporting for MesabiTrust.  The Trust’s internal controlsystem was designed to provide reasonable assurance to the Trustees regardingthe preparation and fair presentation of published financial statements.

 

All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determined to be effective can provideonly reasonable assurance with respect to financial statement preparation andpresentation.

 

The Mesabi Trustees assessed the effectiveness ofthe Trust’s internal control over financial reporting as of January 31,2009.  In making this assessment, theyused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission in Internal Control — Integrated Framework.  Based on their assessment, the Trusteesbelieve that, as of January 31, 2009, the Trust’s internal control overfinancial reporting is effective, based on those criteria.

 

Wipfli LLP, the Trust’s independent registeredpublic accounting firm, has issued an audit report on its assessment of theTrust’s internal control over financial reporting.  This report appears immediately below.

 

F-2

----

 

 

REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Tothe Trustees

MesabiTrust

NewYork, New York

 

Wehave audited the accompanying balance sheet of Mesabi Trust (the “Trust”) as ofJanuary 31, 2009, and the related statements of income, unallocatedreserve and trust corpus, and cash flows for the year then ended.  We alsohave audited Mesabi Trust’s internal control over financial reporting as of January 31,2009, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  Mesabi Trust’s trustees are responsible forthese financial statements, for maintaining effective internal control overfinancial reporting, and for their assessment of the effectiveness of the Trust’sinternal control over financial reporting, included in the accompanyingTrustees’ Report on Internal Control Over Financial Reporting.  Ourresponsibility is to express an opinion on these financial statements and anopinion on the Trust’s internal control over financial reporting based on ouraudit.  The financial statements ofMesabi Trust as of January 31, 2008 and 2007 were audited by otherauditors whose report dated April 8, 2008 expressed an unqualified opinionon those statements.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit of the financial statements included examining, on atest basis, 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 statementpresentation.  Our audit of internal control over financial reportingincluded obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing andevaluating the design and operating effectiveness of internal control based onthe assessed risk.  Our audit also included performing such otherprocedures as we considered necessary in the circumstances.  We believethat our audit provides a reasonable 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’sinternal control over financial reporting includes those policies andprocedures that 1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the organization; 2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the organization are being made only in accordance withauthorizations of the Trustees; and 3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the organization’s assets that could have a material effect on the financialstatements.

 

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

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Mesabi Trust as of January 31,2009, and the results of its operations and its cash flows for the year thenended in conformity with accounting principles generally accepted in the UnitedStates of America.  Also in our opinion, Mesabi Trust maintained, in allmaterial respects, effective internal control over financial reporting as of January 31,2009, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

***/s/WIPFLI LLP***

 

St.Paul, Minnesota

April 14,2009

 

F-3

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Trustees

Mesabi Trust

New York, New York

 

We have audited theaccompanying balance sheet of MESABI TRUST (the “Trust”) as of January 31,2008, and the related statements of income, unallocated reserve and trustcorpus, and cash flows for each of the years ended January 31, 2008 and January 31,2007.  We also have audited MESABI TRUST’Sinternal control over financial reporting as of January 31, 2008, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO).  The Trustees are responsible for thesefinancial statements, for maintaining effective internal control over financialreporting, and for their assessment of the effectiveness of the Trust’sinternal control over financial reporting, included in the accompanyingTrustees’ Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinionon these financial statements and an opinion on the Trust’s internal controlover financial reporting based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audits to obtain reasonable assuranceabout whether the financial statements are free of material misstatement andwhether effective internal control over financial reporting was maintained inall material respects.  Our audits of thefinancial statements included examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by the Trustees, and evaluatingthe overall financial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk.  Our audits also includedperforming such other procedures as we considered necessary in thecircumstances.  We believe that ouraudits provide a reasonable basis for our opinions.

 

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 its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of MESABI TRUST as of January 31, 2008,and the results of its operations and its cash flows for each of the yearsended January 31, 2008 and January 31, 2007 in conformity withaccounting principles generally accepted in the United States of America.  Also in our opinion, MESABI TRUST maintained,in all material respects, effective internal control over financial reportingas of January 31, 2008, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO).

 

/s/ Gordon, Hughes &Banks, LLP

 

Greenwood Village, Colorado

April 8, 2008

 

F-4

----

#  

# **MESABI TRUST**

#### **BALANCESHEETS**

**JANUARY31, 2009 AND 2008**

 
| ** **                                                                 | ** ** | **2009**      | ** **    | **2008**  | ** ** |
|----------------------------------------------------------------------------|------------|---------------|---------------|-----------|------------|
|                                                                       |       |          |          |      |       |
| **ASSETS**                                                                 |       |          |          |      |       |
|                                                                       |       |          |          |      |       |
| CASH AND CASH EQUIVALENTS                                                  | ** ** | **$**         | **2,254,107** |      | $          | 6,959,701 |   |
| U.S. GOVERNMENT SECURITIES, at amortized cost (which approximates  market) |       | **340,421**   |          | 544,193   |       |
| ACCRUED INCOME RECEIVABLE                                                  | ** ** | **2,721,978** |          | 959,925   |       |
| PREPAID EXPENSE                                                            | ** ** | **30,423**    |          | 24,687    |       |
| ** **                                                                 |       | **5,346,929** |          | 8,488,506 |       |
|                                                                       |       |          |          |      |       |
| 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         |       |
|                                                                       |       |          |          |      |       |
| ** **                                                                 |       | **$**         | **5,346,932** |      | $          | 8,488,509 |   |
|                                                                       |       |          |          |      |       |
| **LIABILITIES, UNALLOCATED RESERVE AND TRUST  CORPUS**                     |       |          |          |      |       |
|                                                                       |       |          |          |      |       |
| DISTRIBUTION PAYABLE                                                       | ** ** | **$**         | **1,443,201** |      | $          | 6,756,805 |   |
| ACCRUED EXPENSES                                                           | ** ** | **111,547**   |          | 71,680    |       |
| ** **                                                                 |       | **1,554,748** |          | 6,828,485 |       |
|                                                                       |       |          |          |      |       |
| UNALLOCATED RESERVE                                                        | ** ** | **3,792,181** |          | 1,660,021 |       |
|                                                                       |       |          |          |      |       |
| TRUST CORPUS                                                               | ** ** | **3**         |          | 3         |       |
|                                                                       |       |          |          |      |       |
| ** **                                                                 |       | **$**         | **5,346,932** |      | $          | 8,488,509 |   |

 

SeeNotes to Financial Statements

 

F-5

----

 

# **MESABI TRUST**

#### **STATEMENTSOF INCOME**

**YEARS ENDED JANUARY 31, 2009, 2008, AND 2007**

 
| ** **                                      | ** ** | **2009**       | ** **     | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
|                                            |       |           |           |       |       |       |       |
| REVENUES                                        |       |           |           |       |       |       |       |
| Royalties under amended lease agreements        | ** ** | **$**          | **34,896,798** |       | $          | 18,342,448 |       | $ | 17,407,543 |   |
| Royalties under Peters Lease fee                | ** ** | **525,851**    |           | 474,094    |       | 426,313    |       |
| Interest                                        | ** ** | **46,456**     |           | 49,969     |       | 69,132     |       |
| ** **                                      |       |           |           |       |       |       |       |
| Total revenues                                  | ** ** | **35,469,105** |           | 18,866,511 |       | 17,902,988 |       |
| ** **                                      |       |           |           |       |       |       |       |
| EXPENSES                                        | ** ** | ** **     |           |       |       |       |       |
| Compensation of Trustees                        | ** ** | **264,069**    |           | 181,700    |       | 167,216    |       |
| Corporate Trustee’s administrative fees    | ** ** | **62,500**     |           | 62,500     |       | 62,500     |       |
| Professional fees and expenses:                 | ** ** | ** **     |           |       |       |       |       |
| Legal and accounting                            | ** ** | **328,657**    |           | 221,104    |       | 315,535    |       |
| Mining consultant and field representatives     | ** ** | **22,617**     |           | 52,242     |       | 56,650     |       |
| Transfer agent’s and registrar’s fees | ** ** | **10,273**     |           | 12,694     |       | 12,738     |       |
| Other Trust expenses                            | ** ** | **111,204**    |           | 103,911    |       | 141,683    |       |
| ** **                                      |       |           |           |       |       |       |       |
| Total expenses                                  | ** ** | **799,320**    |           | 634,151    |       | 756,322    |       |
| ** **                                      |       |           |           |       |       |       |       |
| NET INCOME                                      | ** ** | **$**          | **34,669,785** |       | $          | 18,232,360 |       | $ | 17,146,666 |   |
| ** **                                      |       |           |           |       |       |       |       |
| WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING    | ** ** | **13,120,010** |           | 13,120,010 |       | 13,120,010 |       |
| ** **                                      |       |           |           |       |       |       |       |
| ** **                                      |       |           |           |       |       |       |       |
| NET INCOME PER UNIT                             | ** ** | **$**          | **2.643**      |       | $          | 1.390      |       | $ | 1.307 |   |

 

SeeNotes to Financial Statements

 

F-6

----

# ** **

# **MESABI TRUST**

**STATEMENTSOF UNALLOCATED RESERVE AND TRUST CORPUS**

**YEARS ENDED JANUARY 31, 2009, 2008, AND 2007**

 
| ** **                                                                                | ** ** | **Unallocated Reserve** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                                                                                | ** ** | **Number of**           | ** ** | ** **  | ** ** | **Trust** | ** ** |
| ** **                                                                                | ** ** | **Units**                    | ** ** | **Amount**  | ** ** | **Corpus** | ** ** |
|                                                                                      |       |                         |       |        |       |   |   |
| BALANCE, JANUARY 31, 2006                                                                 |       | 13,120,010                   |       | $           | 4,985,024  |   | $ | 3 |   |
|                                                                                      |       |                         |       |        |       |   |   |
| Net income                                                                                |       | —                       |       | 17,146,666  |       | — |   |
| Distribution paid  May 20, 2006, $.30 per unit                                       |       | —                       |       | (3,936,003  | )          | — |   |
| Distribution paid  August 20, 2006, $.40 per unit                                    |       | —                       |       | (5,248,004  | )          | — |   |
| Distribution paid  November 20, 2006, $.585 per unit                            |       | —                       |       | (7,675,206  | )          | — |   |
| Distribution declared January 12, 2007,  paid February 20, 2007, $.315 per unit |       | —                       |       | (4,132,803  | )          | — |   |
|                                                                                      |       |                         |       |        |       |   |   |
| 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 |   |

 

SeeNotes to Financial Statements

 

F-7

----

# ** **

# **MESABI TRUST**

**STATEMENTSOF CASH FLOWS**

**YEARSENDED JANUARY 31, 2009, 2008, AND 2007**

 
| ** **                                                         | ** ** | **2009**        | ** **     | **2008**    | ** ** | **2007**    | ** ** |
|--------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|-------------|------------|
|                                                               |       |            | ** **     |        |       |        |       |
| OPERATING ACTIVITIES                                               |       |            | ** **     |        |       |        |       |
| Royalties received                                                 | ** ** | **$**           | **33,658,880** | ** **  | $          | 18,265,935  |       | $ | 21,702,292 |   |
| Interest received                                                  | ** ** | **48,173**      | ** **     | 50,415      |       | 68,697      |       |
| Expenses paid                                                      | ** ** | **(765,190**    | **)**          | (710,529    | )          | (785,470    | )          |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| NET CASH FROM OPERATING ACTIVITIES                                 | ** ** | **32,941,863**  | ** **     | 17,605,821  |       | 20,985,519  |       |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| INVESTING ACTIVITIES                                               | ** ** | ** **      | ** **     |        |       |        |       |
| Maturities of U.S. Government securities                           | ** ** | **586,953**     | ** **     | 9,464,477   |       | 23,881,252  |       |
| Purchases of U.S. Government securities                            | ** ** | **(383,181**    | **)**          | (9,280,787  | )          | (23,960,942 | )          |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| NET CASH FROM (USED FOR) INVESTING ACTIVITIES                      | ** ** | **203,772**     | ** **     | 183,690     |       | (79,690     | )          |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| FINANCING ACTIVITY                                                 | ** ** | ** **      | ** **     |        |       |        |       |
| Distributions to unitholders                                       | ** ** | **(37,851,229** | **)**          | (15,088,011 | )          | (23,025,618 | )          |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                            | ** ** | **(4,705,594**  | **)**          | 2,701,500   |       | (2,119,789  | )          |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                       | ** ** | **6,959,701**   | ** **     | 4,258,201   |       | 6,377,990   |       |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                             | ** ** | **$**           | **2,254,107**  | ** **  | $          | 6,959,701   |       | $ | 4,258,201 |   |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| RECONCILIATION OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES | ** ** | ** **      | ** **     |        |       |        |       |
| Net income                                                         | ** ** | **$**           | **34,669,785** | ** **  | $          | 18,232,360  |       | $ | 17,146,666 |   |
| Decrease (increase) in accrued income receivable                   | ** ** | **(1,762,053**  | **)**          | (550,161    | )          | 3,868,002   |       |
| Decrease (increase) in prepaid expense                             | ** ** | **(5,736**      | **)**          | (5,986      | )          | 6,306       |       |
| Increase (decrease) in accrued expenses                            | ** ** | **39,867**      | ** **     | (70,392     | )          | (35,455     | )          |
| ** **                                                         |       |            | ** **     |        |       |        |       |
| NET CASH FROM OPERATING ACTIVITIES                                 | ** ** | **$**           | **32,941,863** | ** **  | $          | 17,605,821  |       | $ | 20,985,519 |   |
|                                                               |       |            | ** **     |        |       |        |       |
| NON CASH FINANCING ACTIVITY                                        |       |            | ** **     |        |       |        |       |
| Distributions declared                                             | ** ** | **$**           | **1,443,201**  | ** **  | $          | 6,756,805   |       | $ | 4,132,803 |   |

 

SeeNotes to Financial Statements

 

F-8

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

**NOTE 1 -               NATUREOF 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 -               SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

*Cash and Cash Equivalents*

 

Forpurposes of the statements of cash flows, the Trust considers all highly liquidinvestments with an**originalmaturity of three months or less to be cash equivalents.  As of January 31,2009 and 2008, the Trust held $390,661 and $6,958,227, respectively, in a moneymarket fund that invests primarily in obligations of the U.S. Treasury, whichit considers to be cash and cash equivalents.

 

*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.

 

F-9

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

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.

 

*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) the 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 negative priceadjustments which may be applied against future royalty income recognized bythe Trust.

 

Theprice adjustments related to final pricing made in the fourth quarter of fiscal2008, with respect to shipments during calendar 2007, were notsubstantial.  During the fourth quarterof fiscal 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 NMC with respect to shipments during calendar 2007 and calendar2008.  As of January 31, 2009,the Trust recognized revenue related to approximately 1,420,000 tons of ironore that were shipped by NMC as of December 31, 2008, but for which Cliffshas indicated that final pricing is not yet known.  Pricing related to these tons is expected tobe finalized in the first quarter of 2010. See Note 7 for additionalinformation concerning the impact pricing adjustments may have on the Trust’srevenue in future periods.

 

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:

 

F-10

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

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.

 

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

 

*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*

 

Statementof Financial Accounting Standards (“SFAS”) No. 105, “*Disclosure of Information about Financial Instrumentswith Off-Balance-Sheet Risk and Financial Instruments with Concentrations ofCredit Risk*” requires disclosure of significant concentrations ofcredit risk regardless of the degree of such risk. Financial instruments whichpotentially subject the Trust to concentrations of credit risk consistprimarily of cash that is maintained at an FDIC insured financial institution.At times during the year the Trust’s cash balance may exceed insured limits.

 

Asfurther described in Note 1, NMC is the 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 receivableand related royalty revenue is a significant estimate which is subject tochange in the near term, and changes to this estimate could have a materialeffect on the Trust’s financial statements.

 

F-11

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

*Fair Value of Financial Instruments*

 

*ValuationHierarchy*

 

SFAS No. 157, *Fair Value Measurements* (“SFAS 157”)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.

 

·             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 other unobservableinputs 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. Valuation methodologies used for assets andliabilities measured at fair value are as follows:

 

*Cash Equivalents*

 

Wherequoted prices are available in an active market, cash equivalents areclassified within Level 1 of the valuation hierarchy. All cash equivalents(money market funds) are classified as Level 1 at January 31, 2009. Thevaluation of these instruments is determined using a market approach and isbased upon unadjusted quoted prices for identical assets in active markets.

 

Thecarrying amounts of other financial instruments including cash, investments,accrued income receivable, distributions payable and accrued expensesapproximated fair value as of January 31, 2009 and 2008, because of therelative short maturity of these instruments.

 

*Recent Accounting Pronouncements*

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157defines fair value, establishes a framework for measuring fair value andexpands disclosure of fair value measurements. SFAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements andaccordingly, does not require any new fair value measurements. SFAS 157 wasinitially effective for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. In February 2008, the FASBissued FASB Staff Position (FSP) FAS 157-2.  This FSP permits adelay in the 

 

F-12

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

effective date ofSFAS 157 to fiscal years beginning after November 15, 2008, fornonfinancial assets and nonfinancial liabilities,  except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). In October 2008, the FASB issued FSPFAS 157-3, “Determining the Fair Value of a Financial Asset when the Market forThat Asset Is Not Active,” which clarifies the application of SFAS 157 forfinancial assets in a market that is not active. The adoption of SFAS 157 didnot have a material impact on the Trust’s financial statements.

 

InFebruary 2007, the FASB issued SFAS 159, The Fair Value Option forFinancial Assets and Financial Liabilities (“SFAS 159”).  SFAS 159provides companies with an option to report selected financial assets andliabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Trust has elected not to apply the fair value option to the specifiedfinancial assets and liabilities, and accordingly, the adoption of SFAS No. 159had no financial statement impact.

 

InMay 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 162, “The Hierarchyof Generally Accepted Accounting Principles.” This statement identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (“GAAP”) in the United States. This statement became effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” The adoption of this statement did not have a materialimpact on the financial statements.

 

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

 

U.S.government securities at January 31, 2009 and 2008 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** |   | $ | 544,193 |   | $ | 544,266 |   |
|                     |            |              |             |                     |            |  |  |  |  |  |  |  |  |

 

F-13

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

**NOTE 4 -               ROYALTYAGREEMENT**

 

Thecurrent royalty rate schedule became effective on August 17, 1989, whichwas established pursuant to certain agreements (the “Amended AssignmentAgreements”) the Trust entered into with Cyprus Northshore Mining Corporation (“CyprusNMC”).  Pursuant to the Amended Assignment Agreements, overridingroyalties are determined by both the volume and selling price of iron oreproducts 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.

 

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 $45.98 (per ton) for calendar year 2007, $47.43 (per ton) forcalendar year 2008 and will be $48.48 (per ton) for calendar year 2009.  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, 2009, the minimum advance royalty is$808,177. The minimum annual advance royalty was $790,721 and $766,510, for thecalendar years ended December 31, 2008 and 2007, 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 

 

F-14

----

 

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

 

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, 2009, 2008, and 2007, the Trusteesdistributed cash payments totaling $37,851,229 ($2.89 per Unit), $15,088,011($1.15 per Unit), and $23,025,618 ($1.755 per Unit), respectively. In addition,in January 2009 the Trustees declared a distribution of $.11 per Unit ofbeneficial interest, which was paid in February 2009.

 

F-15

----

** **

# **MESABI TRUST**

**NOTESTO FINANCIAL STATEMENTS**

**JANUARY31, 2009 AND 2008**

** **

**NOTE 6 -               SUMMARYOF QUARTERLY EARNINGS (UNAUDITED)**

 

The quarterly results of operations for the two years ended January 31,2009 and 2008 are presented below:

 
| ** **          | ** ** | **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** | ** ** |

 
| ** **          | ** ** | **2008**    | ** ** |
|---------------------|------------|-------------|------------|
| ** **          | ** ** | **First**   | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                |       |        |       |   |   |   |   |   |   |
| Revenue             |       | $           | 1,785,056  |   | $ | 4,435,484 |   | $ | 6,703,055 |   | $ | 5,942,916 |   |
| Expenses            |       | 85,439      |       | 261,345 |   | 109,924 |   | 177,443 |   |
|                |       |        |       |   |   |   |   |   |   |
| Net income          |       | $           | 1,699,617  |   | $ | 4,174,139 |   | $ | 6,593,131 |   | $ | 5,765,473 |   |
|                |       |        |       |   |   |   |   |   |   |
| Net income per unit |       | $           | 0.130      |   | $ | 0.318 |   | $ | 0.503 |   | $ | 0.439 |   |

 

F-16

----

 

**NOTE 7 –              SUBSEQUENTEVENT**

 

InApril 2009, the Trust received customary quarterly payment notificationfrom NMC, which indicated the Trust will receive a payment of approximately$5,100,000 from NMC on April 30, 2009. In accordance with the Trust’srevenue recognition policy, the Trust has recorded revenue for royalties byapplying the most current price estimates provided by NMC. Because of declinesin the pricing of iron ore pellets subsequent to January 31, 2009, thepayment to be received by the Trust in April includes approximately$2,350,000 of proceeds that will be received by the Trust, but for whichrevenue has not been recognized in accordance with the Trust’s revenuerecognition policy. Pricing on shipments by NMC made during fiscal 2009 may beadjusted in fiscal 2010 and beyond, and depending on future adjustments to ironore pellet pricing, the Trust may have a cumulative negative price adjustmentrelated to prior period shipments, which could be offset against future royaltyincome recognized by the Trust.

 

F-17

----