**Exhibit 13**

 

ANNUAL REPORT OF THE TRUSTEES OF MESABI TRUST For The Year Ended January 31, 2011

 

ADDRESS

 

Mesabi Trust

c/o Deutsche Bank Trust Company Americas

Trust & Securities Services — GDS

60 Wall Street, 27th Floor

New York, NY 10005

(904) 271-2520

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 a website that provides access to its annual, quarterly, and other reports it files with the Securities and Exchange Commission.  Such reports can be accessed at www.mesabi-trust.com.  Mesabi Trust will provide, upon the written request of any Unitholder addressed to the Trustees at the above address and without charge to such Unitholder, (i) a paper copy of Mesabi Trust’s Annual Report on Form 10-K for the fiscal year ended January 31, 2011 as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended, and (ii) the Trustees Code of Ethics.

 

Special Note Regarding Forward-Looking Statements

 

Certain statements contained in this document are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All such forward-looking statements, including those statements estimating calendar year 2011 production or shipments, are based on input from the lessee/operator (and its parent corporation) of the mine located on the lands owned and held in trust for the benefit of the holders of units of beneficial interest of Mesabi Trust.  These statements may be identified by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “plan,” “forecast” and other similar words.  Such forward-looking statements are inherently subject to known and unknown risks and uncertainties.  Actual results and future developments could differ materially from the results or developments expressed in or implied by these forward-looking statements.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, volatility of iron ore and steel prices, market supply and demand, regulation or government action, litigation and uncertainties about estimates of reserves, and those described under the caption “Risk Factors” in this annual report.  Mesabi Trust undertakes no obligation to make any revisions to the forward-looking statements contained in this filing or to update them to reflect circumstances occurring after the date of this filing.

 

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**OVERVIEW**

 

Mesabi Trust (“Mesabi Trust” or the “Trust”), formed pursuant to an Agreement of Trust dated July 18, 1961 (the “Agreement of Trust”), is a trust organized under the laws of the State of New York.  Mesabi Trust holds all of the interests formerly owned by Mesabi Iron Company, including all right, title and interest in the Amendment of Assignment, Assumption and Further 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 Amended Assignment of Peters Lease, the “Amended Assignment Agreements”), the beneficial interest in the Mesabi Land Trust (as such term is defined below) and all other assets and property identified in the Agreement of Trust. The Amended 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 (“Dunka River”) and Claude W. Peters (the “Peters Lease”) and the Amended Assignment of Cloquet Lease relates to an Indenture made May 1, 1916 between Cloquet Lumber Company and Claude W. Peters (the “Cloquet Lease”).

 

The Agreement of Trust specifically prohibits the Trustees from entering into or engaging in any business.  This prohibition seemingly applies even to business activities the Trustees may deem necessary or proper for the preservation and protection of the Trust Estate.  Accordingly, the Trustees’ activities in connection with the administration of Trust assets are limited to collecting income, paying expenses and liabilities, distributing net income to the holders of Certificates of Beneficial Interest in Mesabi Trust (“Unitholders”) after the payment of, or provision for, such expenses and liabilities, and protecting and conserving the assets held.  Because the Units of the Trust are registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 and are listed on the New York Stock Exchange, the Trustees are also responsible for ensuring that the Trust maintains compliance with all applicable laws, rules and regulations.  Deutsche Bank Trust Company Americas, the Corporate Trustee, performs certain administrative functions for the Trust.

 

The Trustees do not intend to expand their responsibilities beyond those permitted or required by the Agreement 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 engages independent consultants to assist the Trustees in, among other things, monitoring the amount and sales prices of iron ore products shipped from Silver Bay, Minnesota, based on information supplied to the Trustees by Northshore Mining Company (“Northshore”), the lessee/operator of the Mesabi Trust lands, and its parent company Cliffs Natural Resources Inc (“Cliffs”).  References to Northshore in this annual report, unless the context requires otherwise, are applicable to Cliffs as well.

 

The information regarding amounts and sales prices of shipped iron ore products is used to compute the royalties payable to the Trust by Northshore.  The Trustees request material information, from time to time, for use in the Trust’s periodic reports and as part of their evaluation of the Trust’s disclosure controls and procedures.  The Trustees rely on Northshore to provide accurate and timely information for use in the Trust’s current, periodic and annual reports filed with the Securities and Exchange Commission.

 

Pursuant to a ruling from the Internal Revenue Service, which ruling was based on the terms of the Agreement of Trust including the prohibition against entering into any business, the Trust 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 the Unitholders.  In accordance with the Agreement of Trust, the Trust will terminate twenty-one years after the death of the survivor of twenty-five persons named in an exhibit to the Agreement of Trust, the youngest of whom is believed to be fifty years old.

 

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**RISK FACTORS**

 

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

 

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

 

Except within the framework of the Amended Assignment Agreements, neither the Trust nor the Trustees have any control over the operations and activities of Cliffs or its wholly-owned subsidiary, Northshore.  Accordingly, the income of the Trust is highly dependent upon the activities and operations of Northshore, and the terms and conditions of the Amended Assignment Agreements.  Northshore together with Cliffs, without any influence from the Trust, control: (i) historical operating data, including iron ore production volumes, marketing of iron ore products, operating and capital expenditures as they relate to Northshore, environmental and other liabilities and the effects of regulatory changes; (ii) plans for Northshore’s future production, operations and capital expenditures; (iii) geological data relating to iron ore reserve estimates; (iv) shipments of iron ore products to customers of Cliffs; and (v) the provisions and pricing under the Cliffs Pellet Agreements.  Any substantial alteration of Cliffs’ business or the operations, production and shipments by Northshore could adversely affect the income of the Trust.

 

***The stability of Cliffs’ North American iron ore operations and the price adjustment provisions in the North American iron ore supply agreements with Cliffs’ customers could have a significant effect on the amounts available for distribution to the Trust’s Unitholders***.

 

In its Form 10-K filed February 17, 2011, Cliffs reported that virtually all of its North American iron ore sales volume will be sold under term supply agreements to a limited number of customers.  According to the Form 10-K filed by Cliffs, sales volume under these agreements is largely dependent on customer requirements, and in some cases, Cliffs is the sole supplier of iron ore pellets to its customers.  Contractual disputes with any of Cliffs’ significant customers or failure to renew or replace such agreements with similar agreements could result in lower sales volume and lower sales prices, which could adversely affect the royalties received by the Trust.

 

Cliffs also reported in its Form 10-K that its North American term supply agreements contain a number of price adjustment provisions, including adjustments based on general industrial inflation rates, the price of steel and the international price of iron ore pellets, among other factors, that allow Cliffs to adjust the prices under those agreements generally on an interim and annual basis.  Factors that could result in price adjustments include measures of general industrial inflation (e.g., the producers price index), steel prices and international pellet prices.  These market prices are dependent upon supply and demand relationships and a variety of other factors over which the Trust has no control.  Cliffs’ price adjustment provisions are weighted and some are subject to annual collars, which limit Cliffs’ ability to raise prices to match international levels and fully capitalize on strong demand for iron ore.

 

Additionally, Cliffs has reported that during the first quarter of 2010, the world’s largest iron ore producers began to move away from the annual international benchmark pricing mechanism in favor of a shorter-term, more flexible pricing system. According to Cliffs’ Form 10-K, in addition to increased volatility of pricing, the change in the international pricing system will, in most instances, require that Cliffs’ sales 

 

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contracts be modified to take into account the new international pricing methodology. Cliffs reports that it has reached final pricing settlement with the majority of its North American iron ore customers.  However, negotiations with certain of its largest North American iron ore customers are still ongoing and some of Cliffs’ customers have filed arbitration demands related to the price adjustment provisions of their supply agreements.  Cliffs has not reported its assessment of the impact a change to the historical annual pricing mechanism will have on its existing supply agreements with such customers. Cliffs noted that these discussions and arbitrations may result in changes to the pricing mechanisms used with Cliffs’ various customers and could impact sales prices realized in current and future periods.  As discussed elsewhere in this Annual Report on Form 10-K, the price adjustments mechanisms under Cliffs’ North American term supply agreements, which can be positive or negative, may result in significant variations in royalties received by Mesabi Trust from quarter to quarter and year to year.  These variations could adversely affect the royalties received by the Trust and, in turn, the resulting cash available for distribution to Unitholders.

 

***Royalties received by the Trust, and distributions paid to Unitholders, in any particular quarter are not necessarily indicative of royalties or distributions that will be paid in any subsequent quarter or for a full year.***

 

Royalties received by the Trust can fluctuate significantly from quarter to quarter and year to year based upon market prices for iron ore products, the level of orders for iron ore products from Cliffs’ customers, the consumption of inventory by Cliffs’ customers, and production decisions made by Northshore.  Moreover, because the royalties paid to the Trust in any particular quarter include payments made with respect to pellets shipped and sold at estimated prices that are subject to future interim and final multi-year adjustments in accordance with Cliff’s Customer Agreements, a downward trend in demand and market prices for iron and steel products could result in negative adjustments to royalties in future quarters, some of which may be significant.  These negative price adjustments could have a material adverse effect on the Trust’s royalty income, which in turn could result in lower quarterly distributions, and possibly reduce or even eliminate funds available for distribution in any quarter and in some quarters may completely offset royalties otherwise payable to the Trust.  Because of this, cash available for distribution to Unitholders in future quarters could be reduced, potentially materially, and in some cases, such reduction could result in no cash being available for distribution to Unitholders.  As a result, the royalties received by the Trust, and the distributions paid to Unitholders, in any particular quarter are not necessarily indicative of royalties that will be received, or distributions that will be paid, in any subsequent quarter or for a full year.  Based on the foregoing and the current uncertainty in the economic environment, the Trust cannot ensure that there will be adequate cash available to make a distribution to Unitholders in any particular quarter.

 

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

 

The Trustees do not exert any influence over mining operational decisions and Northshore alone determines whether to mine from lands owned by the Trust or state-owned lands, based on its current production estimates and engineering plan.  Northshore’s mining operations (the Peter Mitchell Mine) include mineral-producing land owned by the Trust, the State of Minnesota and others.  Ore mined from non-Trust owned lands by Northshore is processed, along with ore mined from Trust-owned lands, in Northshore-owned crushing, concentrating and pelletizing facilities and is separately accounted for on a periodic basis.  Northshore also has the ability to process and ship iron ore products from lands other than Mesabi Trust lands.  In certain circumstances, the Trust may be entitled to royalties on those other shipments, but not in all cases.  In general, the Trust will receive higher royalties (assuming all other factors are equal) if a higher percentage of shipments 

 

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are from Mesabi Trust lands.  The percentages of shipments from Mesabi Trust lands were 89.9%**,**93.6%, 90.2%, 88.2% and 90.9% in calendar years 2010, 2009, 2008, 2007 and 2006, 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 be adversely affected.

 

***The global economic climate and the current state of the financial and credit markets have created uncertainty and a prolonged downturn in global economic conditions could adversely affect the royalties received by the Trust.***

 

The volatile global economic climate and the current state of the financial and credit markets could have a material adverse effect on the royalties received by the Trust.  Financial markets in the United States and elsewhere have been experiencing disruptions, including, among other things, significant volatility in security prices, diminished liquidity and credit availability, ratings downgrades of certain investments and declining values of others. The global economy has been struggling to exit a recession.  Deterioration or worsening of economic conditions, prolonged global, national or regional economic instability or other events could produce major changes in demand patterns and may have a material adverse effect on sales prices of iron ore products shipped by Northshore which would adversely affect the royalties received by the Trust.  Moreover, such conditions could impact the international benchmark pellet price, hot band steel prices and various Producer Price Indexes all of which affect the royalties payable to the Trust.  The Trustees are not able to predict the impact the volatile global economic climate and the global financial and credit markets will have on future royalties payable to the Trust.

 

The world price of iron ore and steel are strongly influenced by international demand and global market conditions which are uncertain.  Domestic demand for iron ore and steel products, which is influenced by international markets, is also uncertain.  In recent years, many major iron ore suppliers increased their capacity to meet the increased demand for iron ore and steel products, particularly from China.  Although the global economic environment is improving, there is a high degree of uncertainty concerning the overall demand for steel and iron ore products. Reduced demand for iron ore would likely result in decreased sales of products to Cliffs’ customers and decreasing prices, all of which would adversely affect royalties received by the Trust.  Since the Trust is not party to any specific customer contracts that Cliffs has with its customers and because these macroeconomic forces are difficult to forecast, the Trustees are not able to predict the extent to which reduced demand and lower prices for iron ore products will adversely affect royalties payable to the Trust.

 

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

 

As permitted by the terms of the Agreement of Trust and the Amendment, the Trustees are entitled to, and in fact do rely, upon certain experts to assist the Trustees in carrying out and fulfilling their obligations as Trustees.  Independent consultants perform services, render advice and produce reports with respect to monthly production and shipments, which include figures on crude ore production, iron ore pellet production, iron ore pellet shipments, and discussions concerning the condition and accuracy of the scales used to weigh iron ore pellets produced at Northshore’s facilities.  The Trustees have also retained an accounting firm to provide non-audit services, including preparing financial statements, reviewing financial data related to shipping and sales reports provided by Northshore and reviewing the schedule of leasehold and fee royalties payable to the Trust.  The Trustees believe that the independent experts are qualified to perform the services and functions assigned to them.   Nevertheless, any negligence or the failure of any such independent expert to competently perform could adversely affect the royalties received by the Trust.

 

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

 

The Trustees do not participate in preparing the ore reserve estimate reported by Cliffs.  According to Cliffs’ Form 10-K, Cliffs regularly evaluates its iron ore reserves based on revenues and costs and updates them as required in accordance with Securities Act Industry Guide 7, promulgated by the U.S. Securities and Exchange Commission.  In 2010, the Trustees engaged an independent firm of geological experts to evaluate the process Cliffs uses to estimate the mineral reserves at the Peter Mitchell Mine.  Still, there are numerous uncertainties inherent in estimating quantities of reserves of mineral producing lands and such estimates necessarily depend upon a number of variable factors and assumptions, such as production capacity, effects of regulations by governmental agencies, future prices for iron ore, future industry conditions and operating costs, severance and excise taxes, development costs and costs of extraction and reclamation costs, all of which may in fact vary considerably from actual results.  For these reasons, estimates of the economically recoverable quantities of mineralized deposits attributable to the lands owned by Mesabi Trust and the classifications of such reserves based on the risk of recovery prepared by different engineers or by the same engineers at different times may vary substantially as the criteria change.  Cliffs’ estimate of the ore reserves could be negatively affected by future industry conditions, geological conditions and ongoing mine planning at the Peter Mitchell Mine.  Actual reserves and therefore actual royalties will likely vary from estimates, and if such variances are negative and material, the expected royalties of the Trust could be adversely affected and the value of the Trust’s Units could decline.

 

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

 

The operations at Northshore are largely dependent on Silver Bay Power Company, a 115 megawatt power plant, for its electrical supply.  Silver Bay Power Company, which is wholly owned by Northshore, has an interconnection agreement with Minnesota Power, Inc. for backup power, and sells 40 megawatts of excess power capacity to Xcel Energy under a contract that extends to 2011.  In March 2008, Northshore reactivated one of its furnaces, resulting in a shortage of electrical power of approximately 10 megawatts. As a result, supplemental electric power is purchased by Northshore from Minnesota Power under an agreement that is renewable yearly with one-year termination notice required. The contract expires on June 30, 2011, which coincides with the expiration of Silver Bay Power’s 40 megawatt sales agreement with Xcel Energy.  A significant interruption in service from Silver Bay Power Company due to vandalism, terrorism, weather conditions, natural disasters, or any other cause could cause a decrease in production capacity or require a temporary shutdown of Northshore’s operations.  In addition, one natural gas pipeline serves all of Cliffs’ Minnesota mines, and a pipeline failure could idle or substantially impair the operations at Northshore.  Any substantial interruption of, or material reduction in, Northshore’s operations could adversely affect the royalties received by the Trust.

 

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

 

Northshore, as the owner/operator of the Peter Mitchell Mine, is subject to various federal, state and local laws and regulations on matters such as employee health and safety, air quality, water pollution, plant and wildlife protection, reclamation and restoration of mining properties, the discharge of materials into the environment, and the effects that mining has on groundwater quality and availability.  Northshore is required to maintain permits and approvals issued by federal and state regulatory agencies and its mining operations are subject to inspection and regulation by the Mine Safety and Health Administration of the United States 

 

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Department of Labor (“MSHA”) under the provisions of the Mine Safety and Health Act of 1977.  The Occupational Safety and Health Administration (“OSHA”) also has jurisdiction over safety and health standards not covered by MSHA and the Minnesota Pollution Control Agency (“MPCA”) regulates various aspects of Northshore’s operations.  Northshore is involved in litigation with the MPCA over certain air quality permitting matters but because the Trust has no control over Northshore’s operations, the potential impact of these proceedings cannot be determined.  Moreover, Northshore is solely responsible for its compliance with any laws, regulations or permits applicable to Northshore’s operations and therefore the Trust cannot determine whether Northshore has been or will continue to be in compliance with such laws and regulations.  If Northshore fails to comply with these laws, regulations or permits, it could be subject to fines or other sanctions, any of which could have an adverse effect on its operations and its ability to ship iron ore products from Silver Bay, Minnesota, which could, in turn, have an adverse effect on the royalties paid to the Trust.

 

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

 

Interruptions in production capabilities at the mine operated by Northshore may have an adverse impact on the royalties payable to the Trust.  In addition to planned production shutdowns and curtailments, equipment failures, the Northshore facilities are also subject to the risk of loss due to unanticipated events such as fires, explosions or extreme weather conditions. The manufacturing processes that take place in Northshore’s mining operations, as well as in its crushing, concentrating and pelletizing facilities, depend on critical pieces of equipment, such as drilling and blasting equipment, crushers, grinding mills, pebble mills, thickeners, separators, filters, mixers, furnaces, kilns and rolling equipment, as well as electrical equipment, such as transformers. It is possible that this equipment may, on occasion, be out of service because of unanticipated failures or unforeseeable acts of vandalism or terrorism.  In addition, because the Northshore mine and processing facilities have been in operation for several decades, some of the equipment is aged.  Because the Trustees have no control over the operations or maintenance of the equipment at Northshore, a shutdown or reduction in capacity may come with little or no advance warning.  The remediation of any interruption in production capability at Northshore could require Cliffs to make large capital expenditures which may take place over an extended period of time.  A shutdown or reduction in operations at Northshore could adversely affect the royalties paid to the Trust.

 

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

 

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

 

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***Risk factors affecting Cliffs’ North American Iron Ore Business and Operations at Northshore could have a material adverse effect on the royalties of the Trust.***

 

Because substantially all of the Trust’s revenue is derived from iron ore products shipped by Northshore from Silver Bay, Northshore’s iron ore pellet processing and shipping activities directly impact the Trust’s revenues in each quarter and each year.  A number of factors affect Cliffs’ operations, including Northshore’s production and shipment volume.  These risk factors, which are described in Cliffs’ Form 10-K filed February 17, 2011, include, among others, the global economic climate and financial market conditions, economic conditions in the iron ore industry, extensive governmental regulation relating 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 conditions in the Great Lakes and production at Northshore’s pelletizing/processing facility.  Specifically, if any portion of Northshore’s pelletizing lines becomes idle for any reason, production, shipments and, consequently, the royalties paid to the Trust could be adversely affected.

 

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

 

Directors of a corporation are generally subject to election at each annual meeting of stockholders or, in the case of staggered boards, at regular intervals. Under the Agreement of Trust, however, the Trust is not required to hold annual meetings of holders of Certificates of Beneficial Interest to elect Trustees and Trustees generally hold office until their death, resignation or disqualification. As a result, the ability of holders of Certificates of Beneficial Interest to effect changes in the Board of Trustees, and the policies of the Trust, is significantly more limited than that of the stockholders of a corporation.

 

**OVERVIEW OF TRUST’S ROYALTY STRUCTURE**

 

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

 

·                  Base overriding royalties.  Base overriding royalties have historically constituted the majority of Mesabi Trust’s royalty income.  Base overriding royalties are determined by both the volume and selling price of iron ore products shipped.  Northshore is obligated 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 a percentage of the gross proceeds of iron ore products produced at Mesabi Trust lands (and to a limited extent other lands) and shipped from Silver Bay, Minnesota.  The percentage ranges from 2-1/2% of the gross proceeds for the first one million tons of iron ore products so shipped annually to 6% of the gross proceeds for all iron ore products in excess of 4 million tons so shipped annually.  Base overriding royalties are subject to interim and final price adjustments under the Cliffs Pellet Agreements and, as described elsewhere in this report, such adjustments may be positive or negative.

 

·                  Royalty bonuses.  The Trust earns royalty bonuses when iron ore products shipped from Silver Bay are sold at prices above a threshold price per ton.  The royalty bonus is based on a percentage of the gross proceeds of product shipped from Silver Bay and sold at prices above a threshold price.  The 

 

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threshold price is adjusted (but not below $30.00 per ton) on an annual basis for inflation and deflation (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $48.48 per ton for calendar year 2009, $48.81 per ton for calendar year 2010 and will be $49.35 per ton for calendar year 2011.  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 Price and $2.00 above the Adjusted Threshold Price) to 3% of the gross proceeds (on all tonnage shipped for sale at prices $10.00 or more above the Adjusted Threshold Price).  Royalty bonuses are subject to price adjustments under the Cliffs Pellet Agreements (described elsewhere in this Annual Report); such adjustments may be positive or negative.  See the section entitled “Comparison of Financial Results for Fiscal Years ended January 31, 2011 and January 31, 2010” on page 12 of this Annual Report for more information.

 

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

 

·                  Minimum advance royalties.  Northshore’s obligation to pay base overriding royalties and royalty bonuses with respect to the sale of iron ore products generally accrues upon the shipment of those products from Silver Bay.  However, regardless of whether any shipment has occurred, Northshore is obligated to pay to Mesabi Trust a minimum advance royalty.  Each year, the amount of the minimum advance royalty is adjusted (but not below $500,000 per annum) for inflation and deflation.  The minimum advance royalty was $808,177 for calendar year 2009, $813,729 for calendar year 2010 and is $822,783 for calendar year 2011.  Until overriding royalties (and royalty bonuses, if any) for a particular year equal or exceed the minimum advance royalty for the year, Northshore must make quarterly payments of up to 25% of the minimum advance royalty for the year.  Because minimum advance royalties are essentially prepayments of base overriding royalties and royalty bonuses earned each year, any minimum advance royalties paid in a fiscal quarter are recouped by credits against base overriding royalties and royalty bonuses earned in later fiscal quarters during the year.

 

The current royalty rate schedule became effective on August 17, 1989 pursuant to the Amended Assignment Agreements, which the Trust entered into with Cyprus Northshore Mining Corporation (“Cyprus NMC”).  Pursuant to the Amended Assignment Agreements, overriding royalties are determined by both the volume and selling price of iron ore products shipped.  In 1994, Cyprus NMC was sold by its parent corporation to Cliffs and renamed Northshore Mining Company.  Cliffs now operates Northshore as a wholly owned subsidiary.

 

Under the relevant agreements, Northshore has the right to mine and ship iron ore products from lands other than Mesabi Trust lands.  Northshore alone determines whether to conduct mining operations on Trust and/or such other lands based on its current mining and engineering plan.  The Trustees do not exert any influence over mining operational decisions.  To encourage the use of iron ore products from Mesabi Trust 

 

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lands, Mesabi Trust receives royalties on stated percentages of iron ore shipped from Silver Bay, whether or not the iron ore products are from Mesabi Trust lands.  Mesabi Trust receives royalties at the greater of (i) the aggregate quantity of iron ore products shipped that were mined from Mesabi Trust lands, and (ii) a portion of the aggregate quantity of all iron ore products shipped from Silver Bay that were mined from any lands, such portion being 90% of the first four million tons shipped from Silver Bay during such year, 85% of the next two million tons shipped during such year, and 25% of all tonnage shipped during such year in excess of six million tons.

 

Royalty income, which constitutes the principal source of the Trust’s revenue, comprised 99.9% of the Trust’s total revenue of the Trust in each of the fiscal years ended January 31, 2011, January 31, 2010 and January 31, 2009.  A more complete discussion of royalty rates and the manner in which they are determined is set forth under the headings “Leasehold Royalties” and “Land Trust and Fee Royalties,” beginning on pages 29 and 32, respectively, of this Annual Report.

 

During the course of its fiscal year some portion of royalties expected to be paid to Mesabi Trust is based in part on estimated prices for iron ore products sold under term contracts between Northshore, Cliffs and certain of their customers (the “Cliffs Pellet Agreements”).  The Cliffs Pellet Agreements use estimated prices which are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on multiple price and inflation index factors that are not known until after the end of a contract year. Even though Mesabi Trust is not a party to the Cliffs Pellet Agreements, these adjustments can result in significant variations in royalties received by Mesabi Trust (and in turn the resulting amount available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis, and these variations, which can be positive or negative, cannot be predicted by Mesabi Trust.  In either case, these price adjustments will impact future royalties received by the Trust that become available for distribution to Unitholders.

 

As described elsewhere in this Annual Report, the royalty percentage paid to the Trust increases as the aggregate tonnage of iron ore products shipped, attributable to the Trust, in any calendar year increases past each of the first four one-million ton volume thresholds.  Assuming a consistent sales price per ton throughout a calendar year, shipments of iron ore product attributable to the Trust later in the year generate a higher royalty to the Trust, as total shipments for the year exceed increasing levels of royalty percentages and pass each of the first four one-million ton volume thresholds.

 

As also described elsewhere in this Annual Report, the Trust receives a bonus royalty equal to a percentage of the gross proceeds of iron ore products (mined from Mesabi Trust lands) shipped from Silver Bay and sold at prices above the Adjusted Threshold Price.  Although all of the iron ore products shipped from Silver Bay during calendar 2010 were sold at prices higher than the Adjusted Threshold Price, the Trustees are unable to project whether Cliffs will continue to be able to sell iron ore products at prices above the applicable Adjusted Threshold Price, entitling the Trust to any future bonus royalty payments.

 

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**SELECTED FINANCIAL DATA**

 
| **Years ended on   January 31** | ** ** | **2011** | ** ** | **2010** | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|----------|------------|----------|------------|
| Royalty and interest income                    |       | $        | 33,341,871 |     | $          | 13,241,669 |       | $        | 35,469,105 |     | $          | 18,866,511 |   | $ | 17,902,988 |   |
| Trust expenses                                 |       | $        | 878,677    |     | 818,007    |       | 799,320    |     | 634,151    |     | 756,322    |   |
| Net income(1)                                  |       | $        | 32,463,194 |     | $          | 12,423,662 |       | $        | 34,669,785 |     | $          | 18,232,360 |   | $ | 17,146,666 |   |
| Net income per Unit(2)                         |       | $        | 2.47       |     | $          | 0.95       |       | $        | 2.64       |     | $          | 1.39 |   | $ | 1.31 |   |
| Distributions declared Per unit(2)(3)          |       | $        | 2.485      |     | $          | 1.15       |       | $        | 2.48       |     | $          | 1.35 |   | $ | 1.60 |   |

 
| **Years ended on    January 31** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Total Assets                                         |       | $          | 9,645,576  |       | $          | 11,199,575 |       | $          | 5,346,932  |       | $          | 8,488,509 |   | $ | 5,414,552 |   |
|                                                      |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |

 

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

 

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

 

(3)                                  The Trust declares distributions in January of each year and pays such distributions in February which is in the Trust’s next fiscal year.  Because of this, distributions declared generally do not equal the amount of cash distributed in the same fiscal year.  During the Trust’s fiscal year ended January 31, 2011, the Trustees distributed $2.385 per Unit (including $0.55 per Unit declared in fiscal 2010 but distributed in fiscal 2011 (February 2010)) and in fiscal 2011 declared a distribution of $0.65 per Unit payable in February 2011, the next fiscal year.**** During the Trust’s fiscal year ended January 31, 2010, the Trustees distributed $0.71 per Unit (including $0.11 per Unit declared in fiscal 2009 but distributed in fiscal 2010 (February 2009)) and in fiscal 2010 declared a distribution of $0.55 per Unit payable in February 2010, the next fiscal year.**** During the Trust’s fiscal year ended January 31, 2009, the Trustees distributed $2.885 per Unit (including $0.515 per Unit declared in fiscal 2008 but distributed in fiscal 2009 (February 2008)) and in fiscal 2009 declared a distribution of $0.11 per Unit payable in February 2009, the next fiscal year.**** During the Trust’s fiscal year ended January 31, 2008, the Trustees distributed $1.15 per Unit (including $0.315 per Unit declared 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 declared in fiscal 2006 but distributed in fiscal 2007 (February 2006)) and in fiscal 2007 declared a distribution of $0.315 per Unit payable in February 2007, the next fiscal year.

 

**TRUSTEES’ DISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITION AND RESULTS OF OPERATIONS**

 

**Results of Operations**

 

**Comparison of Iron Ore Pellet Production and Shipments for the Fiscal Years Ended January 31, 2011, January 31, 2010 and January 31, 2009**

 

During fiscal 2011, production attributed to Trust lands totaled approximately 4.6 million tons, an increase of 45.8% as compared to production for fiscal year 2010 and a decrease of 4.1% as compared to production for fiscal year 2009.  Shipments to Northshore’s customers attributed to the Trust totaled approximately 5.5 million tons during fiscal 2011.  This represents an increase of 69.4% and 6.7%, respectively, as compared to shipments for fiscal years 2010 and 2009.  The table below, which is based on information provided to the Trust by Northshore, shows the total production and total shipments of iron ore pellets from Mesabi Trust lands during the prior three fiscal years.

 

11

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| **Fiscal Year Ended ** | ** ** | **Pellets Produced from   Trust Lands   (Tons)** | ** ** | **Pellets Shipped from   Trust Lands   (Tons)** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| January 31, 2011                      |       | 4,580,384                                                       |       | 5,491,700                                                      |       |
| January 31, 2010                      |       | 3,141,395                                                       |       | 3,241,237                                                      |       |
| January 31, 2009                      |       | 4,774,939                                                       |       | 5,146,687                                                      |       |

 

Production of iron ore pellets was slightly higher for the fourth quarter of fiscal 2011 as compared to the fourth quarter of fiscal 2010, increasing 1.2%.  However, shipments of iron ore pellets by Northshore during the fourth quarter of fiscal 2011 decreased 45.6% as compared to the fourth quarter of fiscal 2010.  The decrease in shipments in the fourth quarter of fiscal 2011 was caused by a decrease in orders from Northshore’s customers as they adjusted production based on anticipated demand from their customers.

 
| **Three Months Ended** | ** ** | **Pellets Produced from   Trust Lands   (Tons)** | ** ** | **Pellets Shipped from   Trust Lands   (Tons)** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| January 31, 2011                 |       | 1,071,865                                                       |       | 770,668                                                        |       |
|                             |       |                                                            |       |                                                           |       |
| January 31, 2010                 |       | 1,059,310                                                       |       | 1,417,425                                                      |       |

 

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

 
| **Fiscal Year Ended** | ** ** | **Percentage of   Pellets Produced   From Trust   Lands** | ** ** | **Percentage of   Pellets Produced   From Non-Trust   Lands** | ** ** | **Percentage of   Pellets   Shipped   From Trust   Lands** | ** ** | **Percentage of   Pellets   Shipped   From Non-Trust   Lands** | ** ** |
|---------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| January 31, 2011                |       | 88.2                                                                     | %          | 11.8                                                                         | %          | 89.3                                                                 | %          | 10.7                                                                     | %          |
| January 31, 2010                |       | 95.9                                                                     | %          | 4.1                                                                          | %          | 93.0                                                                 | %          | 7.0                                                                      | %          |
| January 31, 2009                |       | 87.8                                                                     | %          | 12.2                                                                         | %          | 90.2                                                                 | %          | 9.8                                                                      | %          |

 

As is the case with the volume of shipments from Silver Bay, Minnesota, the Trustees cannot predict what percentage of production or shipments will be attributable to Mesabi Trust lands in fiscal 2011.  However, pursuant to the Amendment, Mesabi Trust will be credited with at least 90% of the first four million tons of iron ore pellets shipped from Silver Bay, Minnesota in each calendar year, at least 85% of the next two million tons of pellets shipped from Silver Bay, Minnesota in each calendar year, and at least 25% of all tons of pellets shipped from Silver Bay, Minnesota in each calendar year in excess of six million tons.

 

**Comparison of Financial Results for Fiscal Years ended January 31, 2011 and January 31, 2010**

 

***Royalty Income***

 

As shown in the table below, in fiscal 2011 there was a 165.9% increase in base royalties, a 136.1% increase in bonus royalties and a 88.7% increase in fee royalties, each as compared to fiscal 2010.  Accordingly, the Trust’s total royalty income increased 151.9% in fiscal 2011 as compared to fiscal 2010.  The significant increase in royalties received by the Trust is primarily the result of an increase in shipments in fiscal 2011 as compared to fiscal 2010 and higher average selling prices for each ton of iron ore shipped from Silver Bay, Minnesota in fiscal 2011, as compared to fiscal 2010.

 

12

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| ** **                              | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **2011**                                                       | ** ** | **2010**            | ** ** | **(decrease)** | ** ** |
| Base overriding royalties               |       | $                                                              | 19,999,089 |                | $          | 7,522,767 |   | 165.9 | % |
| Bonus royalties                         |       | 12,752,121                                                     |       | 5,401,563           |       | 136.1 | % |
| Minimum advance royalty paid (recouped) |       | —                                                         |       | —              |       |   |   |
| Fee royalties                           |       | 576,428                                                        |       | 305,407             |       | 88.7 | % |
| Total royalty income                    |       | $                                                              | 33,327,638 |                | $          | 13,229,737 |   | 151.9 | % |

 

 The royalty amounts set forth in the table above include pricing adjustments made to royalty payments previously received by the Trust based on shipments from Silver Bay, Minnesota during prior calendar years.  Depending on the year, the volume of shipments, and the interim and final price paid to the Trust for shipments from Silver Bay, Minnesota, the price adjustments provisions of the Cliffs Pellet Agreements may increase or decrease, in some cases materially, the distributions payable to Unitholders.  Because the Trust is not a party to the Cliffs Pellet Agreements, the Trustees are unable to determine the extent of any pricing adjustments that may occur under the Cliffs Pellet Agreements or whether the adjustments will increase or decrease royalties received by the Trust. With the current volatility in demand and prices for iron ore and steel products, the price adjustment provisions in the Cliffs Pellet Agreements may have a significant impact on future royalties received by the Trust and the adjustments, depending on whether they are positive or negative, may increase or decrease the distributions payable to Unitholders.

 

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

 

As set forth in the table below, net income for fiscal 2011 increased 161.3%, as compared to fiscal 2010, primarily due to an increase in gross income related to the increase in shipments and selling prices of iron ore pellets.  Total expenses for fiscal 2011 increased 7.4% as compared to fiscal 2010 due to an increase in total compensation paid to the Corporate Trustee, additional insurance expenses and slightly higher legal and accounting fees and other fees related to the administration of the Trust.  A more detailed summary of the Trust’s expenses, including legal and accounting expenses, is set forth under the heading “Trust Expenses” on page 32 of this Annual Report.

 
| ** **   | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|--------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **   | ** ** | **2011**                                                       | ** ** | **2010**            | ** ** | **(decrease)** | ** ** |
| Gross Income |       | $                                                              | 33,341,871 |                | $          | 13,241,669 |   | 151.8 | % |
| Expenses     |       | 878,677                                                        |       | 818,007             |       | 7.4 | % |
| Net Income   |       | $                                                              | 32,463,194 |                | $          | 12,423,662 |   | 161.3 | % |

 

As discussed in the paragraph above,******the Trust’s total royalty income and net income for fiscal 2011 increased 151.8% and 161.3% respectively, due to increased shipping activity during fiscal 2011 and the higher prices paid to the Trust for shipments, both as compared to fiscal year 2010.  The increase in the Trust’s net income, combined with a decrease in the Trust’s cash reserve resulted in a 235.9% increase in total distributions paid to Unitholders in fiscal 2011, as compared to fiscal year 2010.

 
| ** **                  | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                  | ** ** | **2011**                                                       | ** ** | **2010**            | ** ** | **(decrease)** | ** ** |
| Total Cash Distributions    |       | $                                                              | 31,291,223 |                | $          | 9,315,207 |   | 235.9 | % |
| Distributions Paid per Unit |       | $                                                              | 2.385      |                | $          | 0.71 |   | 235.9 | % |

 

13

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***Unallocated Reserve***

 

As set forth in the table below, the Unallocated Reserve decreased $140,030 or 12.4% to $987,802, as of January 31, 2011, as compared to $1,127,832 as of January 31, 2010.  As of January 31, 2011, the Unallocated Reserve consisted of $755,016 in unallocated cash and U.S. Government securities and $232,786 of accrued income receivable, primarily representing royalties earned but not yet received by the Trust and anticipated to be received in fiscal 2012.  Comparatively, as of January 31, 2010, the Unallocated Reserve consisted of $3,023,894 in unallocated cash and U.S. Government securities, $873,938 of accrued income receivable, primarily representing royalties earned but not yet received by the Trust, which were received in fiscal 2011, less deferred royalty revenue of ($2,770,000).

 
| ** **                | ** ** | **Fiscal Years Ended on January 31,** | ** ** | **% increase** | ** ** |
|---------------------------|------------|----------------------------------------------------------------|------------|---------------------|------------|
| ** **                | ** ** | **2011**                                                       | ** ** | **2010**            | ** ** | **(decrease)** | ** ** |
| Accrued Income Receivable |       | $                                                              | 232,786    |                | $          | 873,938 |   | (73.4 | )% |
| Deferred Royalty Revenue  |       | —                                                         |       | (2,770,000          | )          | (100 | )% |
| Cash Reserve              |       | 755,016                                                        |       | 3,023,894           |       | (75.0 | )% |
| Unallocated Reserve       |       | $                                                              | 987,802    |                | $          | 1,127,832 |   | (12.4 | )% |

 

The 12.4% decrease in the Unallocated Reserve is primarily attributable to the decrease in the Trust’s accrued income receivable and unallocated cash and U.S. Government securities which decreased 73.4% and 75.0%, respectively.  The decrease in the Trust’s accrued income receivable and unallocated cash and U.S. Government securities, which together totaled $2,910,030 was offset by the elimination of the ($2,770,000) of deferred revenue royalty during fiscal 2011.

 

*Accrued Income Receivable*.  The $641,152, or 73.4%, decrease in the accrued income receivable portion of the Unallocated Reserve is the result of fewer positive pricing adjustments together with negative price adjustments for the fiscal year ended January 31, 2011, as compared to the fiscal year ended January 31, 2010.  In addition, the accrued income receivable decreased as a result of lower shipments attributed to the Trust during January 2011, as compared to January 2010.  In accordance with the Cliffs Pellet Agreements, for fiscal 2011 there were positive and negative price adjustments which are determined and finalized by Cliffs each calendar year with respect to shipments by the Trust in earlier calendar years.  These positive and negative pricing adjustments are included in the accrued income receivable portion of the Unallocated Reserve.

 

*Deferred Royalty Revenue*.  As of January 31, 2011, the Trust had $0 of deferred revenue royalty, as compared to ($2,770,000) in deferred revenue royalty as of January 31, 2010.  The decrease in and elimination of the deferred revenue royalty is the result of Northshore applying royalty payments earned during calendar 2010 against the negative price adjustments that the Trust recorded as deferred revenue royalty as of January 31, 2010.  As previously reported, in April 2010, the Trust received its customary first quarter payment notification from Northshore, which indicated that the Trust was credited with a royalty payment of approximately $1,900,000.  However, because of declines in the price adjustment mechanisms under the Cliffs Pellet Agreements, Northshore applied negative price adjustments with respect to shipments and sales by Northshore based on estimated pellet pricing of approximately $2,800,000.  These negative pricing adjustments, the corresponding offset against the quarterly royalty payment and an increase in estimated pellet pricing subsequent to January 31, 2010, reduced the Trust’s deferred royalty revenue liability from $2,770,000 as of January 31, 2010 to $972,000 as of April 30, 2010.

 

As previously reported, in July 2010, the Trust received its customary second quarter royalty payment notification from Northshore, which indicated that the Trust was credited a royalty payment of approximately

 

14

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$1,024,000.  The amount of the royalty payment was reduced by the application of $1,068,000 of negative price adjustments with respect to shipments and sales by Northshore based on estimated pellet pricing.  These negative pricing adjustments, the corresponding offset against the quarterly royalty payment made in the second fiscal quarter of 2010 and an increase in estimated pellet pricing subsequent to January 31, 2010, together reduced the Trust’s deferred royalty revenue liability from $2,770,000 to $0.

 

As described elsewhere in this Annual Report on Form 10-K, pricing estimates are adjusted on a quarterly basis as updated pricing information is received from Northshore.  To the extent that the Trust has recorded a deferred royalty revenue liability, it is anticipated that such amounts would be carried forward to subsequent quarters until there are sufficient positive royalty payments and/or future positive price adjustments to fully offset any negative price adjustments.  Depending on future adjustments to iron ore pellet pricing, if any, the deferred royalty revenue could cause a cumulative negative price adjustment related to shipments of pellets during prior periods, which could partially or even completely offset future royalty income to be received by the Trust.  Furthermore, it is possible that future negative price adjustments could offset, or even eliminate, royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to the Trust’s Unitholders in future quarters.  See discussion under the heading “Risk Factors” beginning on page 3 of this Annual Report.

 

*Cash Reserve*.  The Trust’s cash reserve for unexpected losses decreased 75.0% to $755,016 as of January 31, 2011 from $3,023,894 as of January 31, 2010.  The $2,268,878 decrease in the Trust’s cash reserve is due to the Trustee’s decision to use a portion of the cash reserve to pay distributions to Unitholders during the year ended January 31, 2011, as the Trust’s deferred royalty revenue liability was reduced and then eliminated during fiscal 2011.

 

The Trustees have determined that the unallocated cash and U.S. Government securities portion of the Unallocated Reserve should be maintained at a prudent level, usually within the range of $500,000 to $1,000,000, to meet present or future liabilities of the Trust.  The actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level. Future distributions will be highly dependent upon royalty income as it is received, changes in estimated pricing, potential for future price adjustments and the level of Trust expenses.  The amount of future royalty income available for distribution will be subject to the volume of iron ore product shipments and the dollar level of sales by Northshore.  Shipping activity is greatly reduced during the winter months and economic conditions, particularly those affecting the steel industry, may adversely affect the amount and timing of such future shipments and sales.  The Trustees will continue to monitor the economic and other circumstances of the Trust to strike a responsible balance between distributions to Unitholders and the need to maintain a reserve for unexpected loss contingencies at a prudent level, given the unpredictable nature of the iron ore industry, the Trust’s dependence on the actions of the lessee/operator, and the fact that the Trust essentially has no other liquid assets.

 

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

 

***Royalty Income***

 

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

 

15

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

 

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

 

As set forth in the table below, net income for fiscal 2010 decreased 64.2% as compared to fiscal 2009 primarily due to a decrease in gross income related to the decrease in shipments and selling price of iron ore pellets. Total expenses for fiscal 2010 increased 2.3% as compared to fiscal 2009 due to a slight increase in legal and accounting fees and other fees related to the administration of the Trust. A more detailed summary of the Trust’s expenses, including legal and accounting expenses, is set forth under the heading “Trust Expenses” on page 32 of this Annual Report.

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

 

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

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

 

***Unallocated Reserve***

 

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

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

 

16

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The $1,953,691 increase in the cash reserve was caused by the Trust’s receipt of its quarterly distribution payment from Northshore in April 2009 which totaled approximately $5,200,000. In accordance with the Trust’s revenue recognition policy, which is described in Note 2 to the Trust’s consolidated financial statements included in this Annual Report, the Trust recognized revenue related to tons of iron ore that were shipped by Northshore, but for which Northshore had indicated that final pricing was not yet known.  As a result of decreases in estimated pellet pricing subsequent to January 31, 2009, the cash proceeds received by the Trust in April 2009 exceeded the royalty revenue recognized by the Trust in fiscal 2010.  Accordingly, the Trust had estimated a $2,770,000 liability in the form of deferred royalty revenue based on pricing estimates provided by Northshore as of January 31, 2010 whereas it had no deferred royalty revenue as of January 31, 2009.

 

**Liquidity and Capital Resources**

 

The Trust’s activities are limited to the collection of royalty income, payment of expenses and liabilities, distribution of net income to the Trust’s Unitholders and protection and conservation of Trust assets.  Distributions of net income to Unitholders are based on the amount of total royalty income after providing for the payment of expenses and, to the extent deemed prudent by the Trustees, reserving funds in the Unallocated Reserve 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 33****of this Annual Report.

 

The Trust’s primary short-term liquidity needs are to fund the distributions to Unitholders following the Trust’s receipt of the royalty payments from Northshore each calendar quarter.  After the Trust receives the royalty payments, the Trust’s current assets are invested in U.S. government securities, either through direct purchases of U.S. government securities or through investments in a money market fund that invests its assets 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 investment grade nature of these investments, the Trustees believe that the Trust’s current assets are adequate to meet the Trust’s currently foreseeable liquidity needs.  As of January 31, 2011, the Trust held $8,693,691 in cash and cash equivalents of which $157,742 was invested in a money market fund that exclusively invests in obligations of the U.S. Treasury.  In February 2011, the Trust distributed $8,528,006 to Unitholders of record on January 30, 2011.

 

**Off-Balance Sheet Arrangements**

 

The Trust has no off-balance sheet arrangements.

 

**Contractual Obligations**

 

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

 

**Critical Accounting Estimates**

 

This “Trustees’ Discussion and Analysis of Financial Condition and Results of Operations” is based upon the Trust’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Trustees to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  The Trustees

 

17

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base their estimates and judgments on historical experience and on various other assumptions that the Trustees believe are reasonable under the circumstances.  However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.  Critical accounting policies are those that have meaningful impact on the reporting of the Trust’s financial condition and results of operations, and that require significant judgment and estimates.  For a complete description of the Trust’s significant accounting policies, please see Note 2 to the financial statements on pages F-8 through F-11.

 

***Revenue Recognition***

 

Royalty income under the amended lease agreements with Northshore is recognized as it is earned. Under such agreements, royalties are earned upon shipment from Silver Bay, Minnesota, regardless of whether the actual sales proceeds for any shipment are received by Northshore.  The amount of base overriding royalties and royalty bonuses payable to the Trust are determined based on the volume of iron ore tonnage shipped from Silver Bay, Minnesota during each calendar quarter and the proceeds to Cliffs resulting from shipments by Cliffs to its customers in accordance with the iron ore pellet sales agreements between Cliffs and its customers.

 

The Trust’s royalty income includes accrued income receivable.  Accrued income receivable represents royalty income earned but not yet received by the Trust.   Accrued income receivable is calculated using estimated prices and includes (i) shipments during the last month of Mesabi Trust’s fiscal year, if any, and (ii) net positive price adjustments under the pricing adjustment mechanisms in the iron ore pellet sales agreements between Cliffs and its customers that determine the final sales price of the shipments from Silver Bay, Minnesota.

 

Deferred royalty revenue represents an estimate of potential decreases in the Trust’s royalty revenue due to negative price adjustments anticipated to be applied to tons of iron ore that were shipped by Northshore, but for which Northshore has indicated that final pricing is not yet known.  The royalty revenue received by the Trust for certain tons of iron ore shipped by Northshore is subject to adjustment in accordance with the Trust’s revenue recognition policy each quarter as updated pricing information is received from Northshore.  Accordingly, it is possible that changes in iron ore pellet pricing provided to the Trust by Northshore may have a significant impact on the Trust’s deferred royalty revenue.

 

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

 

During the fourth quarter of fiscal 2010, negative price adjustments were recorded by Mesabi Trust as deferred royalty revenue due to price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Northshore with respect to certain shipments during calendar 2008 and calendar 2009.  During the fourth quarter of fiscal 2011, positive price adjustments were recorded by Mesabi Trust as accrued income receivable due to price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Northshore with respect to shipments during calendar 2009 and calendar 2010.  As of January 31, 2011, the Trust recognized revenue as accrued income receivable related to approximately 770,000 tons of iron ore that were shipped by Northshore as of December 31, 2010, but for which Cliffs has indicated that final pricing is not yet known.  Pricing related to these tons is expected to be finalized in the first quarter of calendar 2012.

 

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**Recent Developments**

 

***Production and Shipping Estimates***.  In its Form 10-K filed February 17, 2011, Cliffs reported that Northshore was operating three of its four furnaces during the first nine months of calendar year 2010 with the fourth restarted in September 2010.  As a result of the restarted furnace, the annual production capacity at Northshore as reported by Cliffs increased from 5.7 million tons to 6.0 million tons of combined iron ore pellets and concentrate.

 

Neither Cliffs nor Northshore has provided the Trust with an estimate for total calendar year 2011 shipments of iron ore pellets or concentrate.  During calendar years 2010, 2009, 2008 and 2007, the percentage of shipments of iron ore products from Mesabi Trust lands was approximately 89.3%, 93.0%, 90.2% and 88.2%, respectively, of total shipments.  Northshore has not advised the Trustees as to the percentage of iron ore products from Mesabi Trust lands it anticipates shipping in calendar year 2011.  See the description of the uncertainty of market conditions in the iron ore and steel industry under the heading “Risk Factors” above.

 

***Iron Ore Pricing and Contract Adjustments***.  During the course of its fiscal year some portion of the royalties paid to Mesabi Trust are based on estimated prices for iron ore products sold under term contracts between Cliffs and its subsidiaries and certain of their customers (the “Cliffs Pellet Agreements”).  Mesabi Trust is not a party to any of the Cliffs Pellet Agreements.  These prices are subject to interim and final pricing adjustments, which can be positive or negative, and which adjustments are dependent in part on a variety of price and inflation index factors, including but not limited to the international benchmark pellet price, hot band steel prices and various Producer Price Indexes.

 

In its Form 10-K filed February 17, 2011, Cliffs reported that during the first calendar quarter of 2010, the world’s largest iron ore producers began to move away from the annual international benchmark pricing mechanism in favor of a shorter-term, more flexible pricing system. According to Cliffs’ Form 10-K, in addition to increased volatility of pricing, the change in the international pricing system will, in most instances, require that Cliffs agreements with its customers be modified to take into account the new international pricing methodology.  Cliffs also reported that negotiations and arbitrations related to the price adjustment provisions of the Cliffs agreements with its customers could result in changes to the pricing mechanisms used with its various customers, impact sales prices realized in current and future periods and result in retroactive revised pricing.

 

As reported elsewhere in this Annual Report, Northshore makes interim adjustments to the royalty payments on a quarterly basis but these price adjustments cannot be finalized until after the end of a contract year, or, in the case of pricing subject to arbitration or negotiation, much later. This may result in significant and frequent variations in royalties received by Mesabi Trust (and in turn the resulting amount of funds available for distribution to Unitholders by the Trust) from quarter to quarter and on a comparative historical basis, and these variations, which can be positive or negative, cannot be predicted by Mesabi Trust.  See the description of pricing adjustments in Cliffs’ contracts under the heading “Risk Factors” above.

 

***Disputes Between Cliffs and ArcelorMittal***.

 

*2011 Nomination Dispute*.*** ***In its Form 10-K filed February 17, 2011, Cliffs reported that ArcelorMittal USA Inc. (“ArcelorMittal”) filed a complaint in the Circuit Court of Cook County, Illinois against Northshore, along with Cliffs, The Cleveland-Cliffs Iron Company, Cliffs Mining Company and Cliffs Sales Company on January 31, 2011 demanding a declaratory judgment and claiming breach of contract.  According to Cliffs, the complaint related to ArcelorMittal’s attempt to twice modify its pellet nomination submitted to Cliffs in 2010 for the calendar year 2011 to increase the iron ore pellets to be delivered in 2011 to ArcelorMittal’s Cleveland

 

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Works and Indiana Harbor Works. Cliffs reports that it strongly disagrees with the allegations and intends to defend the case vigorously.

 

*Nomination Dispute*. In its Form 10-K filed February 17, 2011, Cliffs provided an update to the matters previously reported regarding Cliffs’ arbitration with ArcelorMittal.  As previously reported, Northshore, along with The Cleveland-Cliffs Iron Company, Cliffs Mining Company and Cliffs Sales Company, filed two arbitration demands against ArcelorMittal, ISG Cleveland Inc., ISG Indiana Harbor Inc. and Mittal Steel USA Weirton Inc. (collectively, the “Arbitration Parties”) related to attempts by the Arbitration Parties to revise the nomination of the Arbitration Parties’ pellet requirements and a corresponding shipping schedule for 2009 and to reverse an election to defer certain tonnage for 2009.  Cliffs reported that these two arbitration demands were settled on April 14, 2010.  Under the settlement, Cliffs reached an agreement with the Arbitration Parties as to the final nomination for 2009 and the binding nomination for 2010. Cliffs also reported that on June 7, 2010, the Arbitration Parties filed a complaint in the Circuit Court of Cook County, Illinois seeking a declaratory judgment that Cliffs must permit it to change the amounts and types of pellets to be shipped to its Indiana Harbor East facility in 2010 from the amounts and types set forth in the settlement agreement as part of the Arbitration Parties’ 2010 nomination. Cliffs also reported that on June 25, 2010, it filed a motion to stay the case and to compel arbitration.  The Arbitration Parties dismissed the Cook County lawsuit and commenced arbitration for which Cliffs filed an answering statement on September 10, 2010.  In its Form 10-K filed February 17, 2011, Cliffs reported that an evidentiary hearing has been scheduled for May 2, 2011.

 

*Price Re-Opener*.  In its Form 10-K filed February 17, 2011, Cliffs reported that on May 18, 2010, The Cleveland-Cliffs Iron Company and Cliffs Mining Company filed an arbitration demand against ArcelorMittal with respect to the Pellet Sale and Purchase Agreement dated December 31, 2002 covering the Indiana Harbor East facility.  The demand seeks a declaration that because annual pellet prices used to adjust the prices of the pellets sold to ArcelorMittal under the agreement are no longer published, (1) ArcelorMittal must enter into negotiations with Cliffs to amend the agreement in this regard and (2) pending the outcome of such negotiations or an order from the arbitration panel amending the agreement, Cliffs need not comply with certain conditions for requesting a price reopener for 2010 under the agreement that would otherwise have to be met by July 1, 2010.  Cliffs reported that ArcelorMittal filed its response on June 7, 2010 and on July 9, 2010, Cliffs filed a second amended demand in the arbitration seeking a declaration that Cliffs is entitled to a price reopener for 2010. According to Cliffs, on January 25, 2011, the arbitrator denied both parties cross-motions for summary judgment and no evidentiary hearing has been scheduled.

 

*Negotiated Settlement of Disputes Between Cliffs and ArcelorMittal*.  In a news release distributed on April 8, 2011, Cliffs announced that it reached a negotiated settlement with ArcelorMittal USA Inc., and related parties, with respect to the arbitrations and litigation proceedings discussed above.  Cliffs announced that it has agreed to specific pricing levels for 2009 and 2010 with ArcelorMittal USA Inc.****regarding certain pellet sales and related sales volumes.  As a result, Cliffs announced that it will receive a cash payment of approximately $250 to $270 million as a pricing “true-up” for pellet volumes delivered to certain ArcelorMittal steelmaking facilities in North America during both years. Cliffs also announced, as part of the settlement, that it and ArcelorMittal have agreed to replace the previous pricing mechanism with a world market-based pricing mechanism beginning in 2011 and through the remainder of the contract for one of the iron ore supply agreements that Cliffs has with ArcelorMittal.

 

The Trustees are unable to predict what impact, if any, the negotiated settlement between Cliffs and ArcelorMittal described above will have on shipments from Northshore or future royalties payable to the Trust.  The Trustees have not been informed what portion, if any, of the iron ore tonnage subject to the negotiated settlement was shipped from Trust lands or if the Trust will receive any adjustments to royalties previously received as a result of the negotiated settlement.

 

***Securities Regulation***.  The Trust is a publicly-traded trust with its units of beneficial interest listed on the New York Stock Exchange (“NYSE”) and is therefore subject to extensive regulation under, among others, the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules and regulations of the NYSE.  Issuers failing to comply with such authorities risk serious consequences, including criminal as well as civil and administrative penalties.  In most instances, these laws, rules and regulations do not specifically address their applicability to publicly-traded trusts such as Mesabi Trust.  In particular, Sarbanes-Oxley mandated the adoption by the Securities and Exchange Commission (the “SEC”) and NYSE of certain rules and regulations that are impossible for the Trust to literally satisfy because of its nature as a pass-through trust.  Pursuant to NYSE rules the Trust is exempt from many of the corporate governance requirements that apply to other publicly traded corporations.   The Trust does not have, nor does

 

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the Agreement of Trust, as amended, provide for, a board of directors, an audit committee, a corporate governance committee, a compensation committee or executive officers.  The Trustees intend to closely monitor the SEC’s and NYSE’s rulemaking activity and will comply with their rules and regulations to the extent applicable.

 

***Other Information.***  Mesabi Trust has no employees, but it engages independent consultants to assist the Trustees in monitoring, among other things, the amount and sales prices of iron ore products shipped by Northshore from Silver Bay, Minnesota.  As noted above, the information regarding amounts and sales prices of shipped iron ore products is used to compute the royalties payable to Mesabi Trust by Northshore.  Deutsche Bank Trust Company Americas, the Corporate Trustee, also performs certain administrative functions for Mesabi Trust.

 

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**TO THE HOLDERS OF CERTIFICATES OF BENEFICIAL INTEREST IN MESABI TRUST**

 

**THE TRUST ESTATE**

 

The principal assets of Mesabi Trust consist of two different interests in certain properties in the Mesabi Iron Range: (i) Mesabi Trust’s interest as assignor in the Amended Assignment of Peters Lease and the Amended Assignment of Cloquet Lease, which together cover properties aggregating approximately 9,750 largely contiguous acres in St. Louis County, Minnesota (the “Peters Lease Lands” and the “Cloquet Lease Lands,” respectively), and (ii) Mesabi Trust’s ownership of the entire beneficial interest in the Mesabi Land Trust, which has a 20% interest as fee owner in the Peters Lease Lands and a 100% fee ownership in certain non-mineral-bearing lands adjacent to the Peters and Cloquet Lease Lands (the “Mesabi Lease Lands,” together with the Peters Lease Lands and the Cloquet Lease Lands, the “Trust Estate”).  The map below shows the 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.* |
|---|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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Under the Amended Assignment Agreements, Northshore produces iron ore from the Trust Estate for the manufacture of iron ore products to be sold to various customers of Cliffs.  Mesabi Trust receives royalties on the crude ore extracted from such Lands and the pellets produced from such crude ore, and in each case the royalties are based upon the volume of iron ore products shipped and the prices charged to Cliffs’ customers.

 

The largest component of the Trust Estate is the Peters Lease Lands.  The Peters Lease provides that each leasehold estate will continue until the reserves of iron ore, taconite and other minerals or materials on the land subject 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.  If Northshore decides to terminate or surrender one or more of these leases, it must first give Mesabi Trust at least six months’ notice of its intention to do so and, at Mesabi Trust’s request, reassign all of such leases to Mesabi Trust.  If any such reassignment occurs, Northshore must transfer the lease interests to Mesabi Trust free and clear of liens, except public highways.  In return, Mesabi Trust must assume Northshore’s future obligations as lessee under the reassigned leases.

 

The Peters Lease Lands and the Cloquet Lease Lands are located at the northeastern end of the Mesabi Iron Range and contain mineral deposits consisting of a sedimentary bed of banded magnetite 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 of high-grade pellets.  The Mesabi Lease Lands contain substantially no commercial ore deposits and have been used principally in connection with mining the taconite from other parts of the Trust 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 not involved with the mining operations at Northshore, the Trust relies on the ore reserve estimate reported in Cliffs’ Form 10-K each year.  In Cliff’s most recent Form 10-K, as filed with the Securities and Exchange Commission, which was for the year ended December 31, 2010, the following information was provided by Cliffs regarding 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 (3)** | ** ** | **Proven**                              | ** ** | **Probable** | ** ** | **Total**          | ** ** | **Year** | ** ** | **Estimation** | ** ** |
|                               |       |                  |       |                                    |       |         |       |               |       |   |   |   |   |
| Biwabik Iron Formation (Magnetite) |       | 6.0                   |       | 300                                     |       | 16           |       | 316                |       | 320 |   | Geologic   - Block Model |   |

 

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

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

(3)                                  Capacity at Northshore increased to 6.0 million tons of combined pellet and concentrate capacity in 2010 by reactivating idle concentrator capacity.

 

According to Cliffs’ Form 10-K, the iron ore prices utilized for reserve estimation are derived from 3-year trailing averages of regional benchmark pricing. For the Northshore mine, prices are based on iron ore pellets delivered to the Lower Great Lakes. Cliffs evaluates and analyzes iron ore reserve estimates every three years in accordance with its mineral reserve policy or earlier if conditions merit.  The table below identifies the

 

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reserve analysis date and the 3-year trailing price for the Northshore mine, both as reported by Cliffs in its Form 10-K for the year ended December 31, 2010.

 
| **Date of Base Economic   Ore Reserve Analysis** | ** ** | **Commodity   Pricing (1)** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| 2009 (2)                                                                  |       | $                                | 90.42      |   |
|                                                                           |            |                                  |            |  |

 

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| (1) | Pricing   in North America reflects US$ per long tons of pellets FOB port.                                                                                                                                                                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Cliffs   made the decision to exclude anomalous 2008 Benchmark Pricing from the 3-year   trailing average price used in determining its North American Iron Ore   reserve estimates. Therefore, the 3-year trailing average for the 2009   reserve analysis reflects 2005-2007 prices. |

 

In 2010, the Trustees engaged an independent geological consulting firm, Scott Wilson Roscoe Postle Associates, Inc. (“Scott Wilson RPA”), to confirm that the process used by Cliffs to estimate the ore reserves in the mine at Northshore is reasonable.  In its report to the Trustees, Scott Wilson RPA summarized its review and evaluation of Cliffs’ ore reserve estimation process which was performed by Cliffs in 2009.  Scott Wilson RPA reported to the Trustees that the reserve estimation process used by Cliffs, including the $90.42 per ton pricing assumption, is reasonable and comports with the reporting standards set forth in Securities Act Industry Guide 7.  Based on the report of Scott Wilson RPA, the Trustees estimate that at least 90% of the ore reserve in the mine at Northshore, as reported by Cliffs, is attributable to the Trust Estate.

 

**HISTORY OF THE TRUST’S ACQUISITION OF THE TRUST ESTATE**

 

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

 

Peters Lease Lands. MIC owned a 20% interest in the fee ownership in the Peters Lease Lands.  Originally, the Peters Lease Lands were owned by East Mesaba and Dunka River which were wholly owned subsidiaries of Dunka-Mesaba Security Company (“Dunka-Mesaba”).  In August 1951, East Mesaba and Dunka River conveyed the Peters Lease Lands to their parent company, Dunka-Mesaba, which in turn conveyed to each of its stockholders an undivided interest in the Peters Lease Lands in proportion to each stockholder’s ownership in the parent company.  Accordingly, MIC, which had been 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 to receive 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 their properties to Claude W. Peters.  (This instrument, 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 on behalf of MIC and an assignment of the Peters Lease from Claude W. Peters to MIC was recorded in 1919.  In 1939, MIC assigned the Peters Lease to Reserve Mining Company (“Reserve”) in consideration for which Reserve agreed to pay MIC a percentage of its net profits.  Later, these payments were changed to royalty payments.

 

Cloquet Lease Lands.  MIC held a leasehold interest in the Cloquet Lease Lands pursuant to the Indenture of Lease dated May 1, 1916.  In 1939, MIC assigned its interest in the Cloquet Lease as lessee to Reserve.

 

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Mesabi Lease Lands.  MIC held a fee interest in the Mesabi Lease Lands, subject to earlier grants of mineral rights to other parties.  In 1939, MIC leased its interest in the Mesabi Lease Lands to Reserve.  One 40-acre parcel of the Mesabi Lease Lands was forfeited in the 1980s to the State of Minnesota and subsequently sold to the United States government, excluding the mineral rights granted to other parties.  Further, another 40-acre parcel of the Mesabi Lease Lands, for which the Trust owns only surface rights, is currently being explored for non-ferrous deposits by the holder of the mineral rights to the parcel.  The Trustees do not believe that either parcel was ever involved in, or otherwise material to, Northshore’s mining operations.

 

Acquisition of Interests from MIC.  MIC had not engaged in actual mining operations since 1939, with all of its ownership of land in fee having been leased out and its leaseholds in land assigned to Reserve in exchange for royalty payments.  Because MIC’s activities in connection with the administration of its assets were limited to the collection of income, the payment of expenses and liabilities, the distribution of the net income and the protection and conservation of the assets held, in July 1961 its board of directors proposed, and its stockholders subsequently approved, to adopt a plan of complete liquidation as a result of which MIC’s assets were transferred to and administered by two trust entities.

 

To comply with the law of the State of Minnesota, which requires that a trust holding real property located in that state must be administered under Minnesota law, the Mesabi Land Trust was created under Minnesota law on July 18, 1961 pursuant to an Agreement of Trust of even date.  MIC transferred to the Mesabi Land Trust its 20% interest as fee owner in the Peters Lease and the Peters Lease Lands and its interest as 100% fee owner in the Mesabi Lease Lands and as lessor of the Mesabi Lease (subject to the reservation of mineral rights described above).

 

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

 

Reserve, the original lessee, operated the mine until it closed on July 31, 1986.  Cyprus Minerals Company (“Cyprus”) purchased substantially all of Reserve’s assets on August 17, 1989 and resumed operations as Cyprus NMC.  On September 30, 1994, Cliffs purchased all of Cyprus NMC’s capital stock from Cyprus.  Cliffs renamed the operation Northshore Mining Corporation.

 

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

 

The diagram below illustrates the relationships of the various parties that own the lands and have interests in the lands the Trust has interests in:

 

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**DESCRIPTION OF THE MINERAL PROPERTIES AND NORTHSHORE’S MINING OPERATIONS**

 

Mine and Rock Formation.  The Mesabi Trust properties, including the ore mine, are located in northeastern Minnesota, approximately two miles south of Babbitt, Minnesota.  The ore mine on the Mesabi Trust properties is called the Peter Mitchell mine, an open pit mine consisting of a 10-mile long segment of a host rock called the Biwabik Iron Formation, which is a very hard cherty rock containing magnetite as the ore mineral.  The Biwabik Iron Formation extends west and southwest for over 100 miles and constitutes the Mesabi Iron Range.  Recoverable iron grades range from 21% in the west end of the mine open pit to 26% in the central portion and east end, with 22.5% as the cut off grade.  The ore body dips south under the hanging wall called the Virginia Formation.  To date, the Mesabi Trust properties have been explored for their iron ore potential.  To the knowledge of the Mesabi Trustees, no other 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 mining operation upon the Mesabi Trust properties.  The main entrance to the Northshore mine is accessed by means of a gravel 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, Minnesota and the processing plant in Silver Bay, Minnesota.  During such visits, the Trustees inspect the condition of the mining properties as well as mining equipment and facilities.  Based on information provided to the Trustees’ during the most recent

 

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inspection trip in October 2010, the mining properties and facilities at Northshore were in good operating condition.

 

Northshore’s Operations.  Because Mesabi Trust is not involved in Northshore’s mining operations, the Trustees do not have detailed firsthand information relating to such operations or the equipment and facilities used by Northshore.  Therefore, the Trustees rely on information provided by Northshore personnel, disclosed by Cliffs in its periodic reports filed with the SEC or provided in other reports published by independent organizations, such as Skillings Mining Review, in providing the information relating to Northshore’s mining operations, its equipment and facilities.

 

·                  **Mining and Railroad:** Drilling at the Northshore mine is conducted with two P&H 120, one P&H 320XPC and one Gardner Denver 120 rotary units with 16-inch diameter holes on 28- to 30-foot spacing.  The drilling is followed with blasts using heavy ANFO (which stands for ammonium nitrate and fuel oil) and emulsion which break an average of 700,000 to 1,200,000 tons of crude taconite.  After blasts, taconite is then removed by a loading fleet consisting of four P&H 2800XPC shovels with 39 cubic-yard buckets, one LeTourneau L1850 loader with a 28 cubic yard bucket and a Cat 994D loader with a 19 cubic-yard bucket.  A haulage fleet of three 250-ton Terex Model 4400AC, two 250-ton Komatsu Model 830E, and four 200-ton Komatsu 730E production trucks carry crude taconite to the primary and secondary crushers located about two miles away.  At the crushers, taconite is emptied from the end-dump trucks into a 60 inch primary gyratory unit and four 30-inch by 70-inch secondary crushers for reduction to a nominal 4 inch size.  Coarse ore is then fed into 90-ton capacity ore cars for transportation to Silver Bay via a 47 mile long, single track railroad owned by Northshore.  Each train is pulled by three or four diesel electric locomotives.

 

·                  **Concentrating and Pelletizing Process**.  Upon arrival at the pelletizing facility in Silver Bay, the coarse taconite ore first passes through a fine crushing stage where it is reduced in size to approximately 0-3/4” and then the non-magnetic material is rejected through a dry cobber magnetic separation stage.  The non-magnetic material is rail hauled seven miles to the Mile Post 7 disposal site. The magnetic material is then fed into one of the fourteen active grinding lines.  Each line includes one 10-1/2-foot by 18-foot rod mill and two 10-1/2-foot by 18-foot (16-foot in west plant) ball mills.  The final grinding of the crude taconite is reduced to 90% minus 325 mesh.

 

During the concentrating process, ore concentrate is separated by a two-stage magnetic separation, which removes low grade tailings from the ore concentrate.  The tailings are pumped uphill to the Mile Post 7 disposal site.  The concentrate is then fed into hydro-separators followed by a final flotation upgrading accomplished with two 500 cubic foot flotation cells per grinding line.  Next, the concentrate proceeds to a central filtering facility of nine 9-foot diameter vacuum filters, during which process the moisture content in the concentrate is reduced and the final concentrate is ready for pelletizing.  The pelletizing process first feeds the ore concentrate, to which bentonite and starch has been added as a binder, into a balling drum 31 feet long and 9 feet in diameter.  The revolving action of the drum causes the concentrate to build up into green balls.  Next, the green balls with a target size of plus 0-1/4” and minus 0-1/2” in diameter are conveyed to one of four moving grates and enter into an accompanying high temperature furnace where they are heated to over 2400° F. and are hardened into the final pellet product.  From the four furnaces the pellets are conveyed to a dockside storage area with a 5-million ton storage capacity.  Northshore’s sheltered harbor at Silver Bay can handle lake-going vessels with capacities up to 55,000 tons.

 

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·                  **Capital Expenditures**.** **During calendar year 2010, Northshore continued to modernize and improve the operations at the Peter Mitchell Mine in Babbitt and Northshore’s pelletizing facility in Silver Bay, Minnesota.  Toward that end, Cliffs implemented the following capital expenditures:

 

·                  Completed commissioning the fourth of four P&H 2800-XPC shovels.

 

·                  Acquired two 240 ton haul trucks for the mine.

 

·                  Replaced the rotary car dump.

 

·                  Reactivated concentrator sections 6 and 7.

 

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

 

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

 

·   **N****orthshore Mine Safety and Health Administration Safety Data**.  The operation of the Northshore mine is subject to regulation by MSHA under the FMSH Act. In its Form 10-K filed February 17, 2011, Cliffs reported that MSHA inspects its mines on a regular basis and issues various citations and orders when it believes a violation has occurred under the FMSH Act.  In its Form 10-K, Cliffs provided information regarding certain mining safety and health citations which MSHA has issued with respect to Northshore’s mining operations. In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the mine, (ii) the number of citations issued will vary from inspector to inspector, and (iii) citations and orders can be contested and appealed, and in that process, are often reduced in severity and amount, and are sometimes dismissed.

 

Under the recently enacted Dodd-Frank Act, each operator of a coal or other mine is required to include certain mine safety results within its periodic reports filed with the SEC. As required by the reporting requirements included in §1503(a) of the Dodd-Frank Act, in its Form 10-K, Cliffs presented the following items regarding certain mining safety and health matters for the Northshore Mine.

 

(A)          The total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a coal or other mine safety or health hazard under section 104 of the FMSH Act (30 U.S.C. 814) for which the operator received a citation from MSHA;

 

(B)            The total number of orders issued under section 104(b) of the FMSH Act (30 U.S.C. 814(b));

 

(C)            The total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under section 104(d) of the FMSH Act (30 U.S.C. 814(d));

 

(D)           The total number of imminent danger orders issued under section 107(a) of the FMSH Act (30 U.S.C. 817(a));

 

(E)             The total dollar value of proposed assessments from MSHA under the FMSH Act (30 U.S.C. 801 et seq.); and

 

(F)             Any pending legal action currently before the Federal Mine Safety and Health Review Commission involving such coal or other mine.

 

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In its Form 10-K, Cliffs reported that the Northshore mine did not receive any flagrant violations under Section 110(b)(2) of the FMSH Act and no written notices of a pattern of violations, or the potential to have a pattern of such violations, under section 104(e) of the FMSH Act were received during the year ended December 31, 2010. In addition, according to Cliffs there were no mining-related fatalities at the Northshore mine during the same period.

 

Following is a summary of the information listed above with respect to Northshore for the year ended December 31, 2010.

 
| ** **             | ** ** | ** **    | ** ** | **Year ended December 31, 2010** | ** ** |
|------------------------|------------|---------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | ** **    | ** ** | **(A)**                                              | ** ** | **(B)** | ** ** | **(C)** | ** ** | **(D)** | ** ** | **(E)** | ** ** | **(F)** | ** ** |
| **Mine Location** | ** ** | **Operation** | ** ** | **Section   104**                                    | ** ** | **Section   104(b)** | ** ** | **Section   104(d)** | ** ** | **Section   107(a)** | ** ** | **Proposed   Assessments $ (1)** | ** ** | **Pending   Legal Action** | ** ** |
| Northshore             |       | Iron   Ore    |       | 130                                                  |       | 1 |   | 3 |   | 0 |   | 250,731 |   | None |   |

 

----

(1)                                  Amounts included under the heading “Proposed Assessments” are the total dollar amounts for proposed assessments received from MSHA on or before December 31, 2010.

 

**LEASEHOLD ROYALTIES**

 

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

 

***Base overriding royalties.***  Base overriding royalties are calculated on the basis of an escalating scale of percentages of gross sales proceeds of iron ore shipped.  The applicable percentage is determined by reference to the tonnage of pellets previously shipped in the then current calendar year, as follows:

 
| **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 ore products produced from Mesabi Ore shipped from Silver Bay during a calendar quarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $48.48 for calendar year 2009, $48.81 for calendar year 2010 and will be $49.35 for calendar year 2011.  The Adjusted Threshold Price is subject to adjustment (but not below $30 per ton) for

 

29

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inflation and deflation and is determined each year on the basis of the change in the Gross Domestic Product Implicit Price Deflator, a broad based index of inflation and deflation published quarterly by the U.S. Department of Commerce.

 

The amount of royalty bonuses payable for any calendar quarter is calculated on the basis of an escalating scale of percentages of the gross sales proceeds to Northshore of pellets produced from Mesabi Ore that are sold at prices above the Adjusted Threshold Price.  The applicable percentage is determined by reference to the amount by which the sales prices for a particular quantity of pellets exceeds the Adjusted Threshold 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 base overriding royalties and royalty bonuses, assume that no shipments of iron ore products were made during the first calendar quarter of 2011, and further assume that pellets were shipped from Silver Bay in the second and third calendar quarters of 2011 in the following tonnage quantities and rendering the following 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 royalties payable in respect of the second and third calendar quarters of 2011 would be as follows:

 
| 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 overriding royalty percentage applicable for all iron ore products shipped in the fourth calendar quarter of 2011 would be 6%, because more than four million tons were shipped during the first three quarters.

 

30

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Further, the royalty bonuses payable in respect of the second and third calendar quarters of 2011 would be as follows (with reference to the Adjusted Threshold Price (“ATP”) of $49.35:

 
| 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 are provided only to illustrate the method for calculating base overriding royalties and royalty bonuses and do not indicate the amount of base overriding royalties or royalty bonuses the Trustees expect Mesabi Trust to earn in calendar 2011 or any other calendar or fiscal year.  Accordingly, the foregoing example illustrating the calculation of base overriding royalties and royalty bonuses should not be considered a prediction of the amount of base overriding royalties or royalty bonuses Mesabi Trust will receive.

 

***Bonuses on other ore.***  Northshore also must pay base overriding royalties and royalty bonuses on pellets produced from lands other than Mesabi Lease Lands (“Other Ore”) to the extent necessary to assure payment of base overriding royalties and royalty bonuses on at least 90% of the first four million tons of pellets shipped from Silver Bay in each calendar year, at least 85% of the next two million tons of pellets shipped therefrom in each calendar year, and at least 25% of all tonnage of pellets shipped therefrom in each calendar year in excess of six million tons.  Base overriding royalties and royalty bonuses payable on Other Ore can be recouped by Northshore out of base overriding royalties and royalty bonuses paid on Mesabi Ore.  The amount of Other Ore royalties and Other Ore royalty bonuses which can be recouped on any payment date cannot, however, exceed 20% of the amount of Mesabi Ore royalties and royalty bonuses which are otherwise payable on that payment date.

 

***Advance royalties.***  Northshore is obligated to pay Mesabi Trust advance royalties in equal quarterly installments.  The advance royalty was $808,177 for calendar year 2009, $813,729 for calendar year 2010 and is $822,783 for calendar year 2011.  The amount of advance royalties payable is subject to adjustment (but not below $500,000 per annum) for inflation and deflation and is determined each year in the same manner as the Adjusted Threshold Price.  All payments of advance royalties are credited against payments of base overriding royalties and royalty bonuses payable on Mesabi Ore until fully recouped by Northshore.  The amount of advance royalties payable in respect of each calendar quarter constitutes the minimum overriding royalty amount payable by Northshore in respect of that calendar quarter.

 

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

 

31

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**LAND TRUST AND FEE ROYALTIES**

 

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

 

Northshore is required to pay a base royalty to the fee owners in an amount which, at its option, is either (a) 11-2/3¢ per gross ton of crude ore it mines from the Peters Lease Lands, or (b) $0.0056 for each 1% of metallic iron ore natural contained in each gross ton of pellets it produces from the Peters Lease Lands and ships.  The base fee royalty rate is adjusted up or down each quarter (but not below the base royalty specified above) by adding or subtracting an amount to be determined by reference to changes in Lower Lake Mesabi Range pellet prices and the All Commodities Producer Price Index.  The adjustment factor is computed by multiplying the base fee royalty rate specified above by a percentage that is the sum of (a) one-half of the percentage change, if any, by which the then prevailing price per iron unit of Mesabi Range taconite pellets delivered by rail or vessel at Lower Lake Erie ports exceeds 80.5¢ (the price per iron unit in effect in January 1982), plus (b) one-half of the percentage change, if any, by which the All Commodities Producer Price Index exceeds 295.8 (the level of the Index for December 1981).  Fee royalties aggregating $305,407 with respect to crude ore mined by Northshore were earned by Mesabi Land Trust during the fiscal year ended January 31, 2011.

 

**TRUST EXPENSES**

 

***Total Trust Expenses***

 

Total Trust expenses for the fiscal year ended January 31, 2011 were $878,677, representing an increase of $60,670, or 7.4%, from the $818,007 of total Trust expenses in fiscal 2010.  The increase in Trust expenses was due primarily to the payment of additional compensation to the Corporate Trustee in accordance with the Agreement of Trust and additional expenses related to an increase in the Trust’s director and officer liability insurance coverage limits. For the fiscal year ended January 31, 2010, total Trust expenses increased 2.3% to $818,007, as compared to $799,320 for the fiscal year ended January 31, 2009.

 

***Trust Legal Expenses***

 

Mesabi Trust paid Oppenheimer Wolff & Donnelly LLP (“Oppenheimer”) $238,023 for legal services provided to the Trust during the fiscal year ended January 31, 2011.  Comparatively, Mesabi Trust paid Oppenheimer $224,796 and $219,389 for legal services provided to the Trust during fiscal years ended January 31, 2010 and January 31, 2009, respectively.

 

In each of the last three fiscal years, Oppenheimer represented the Trust and assisted the Trustees in the preparation and filing of the Trust’s current, periodic and annual reports with the SEC and related securities law compliance.  Oppenheimer also advised the Trust on various other legal matters related to inquiries from third parties in the ordinary course of the Trust’s administration.  The total amount of Oppenheimer’s legal fees for services rendered during fiscal 2011 increased approximately $13,000, or 5.9% as compared to fiscal 2010.  The increase in legal fees in fiscal 2011, as compared to fiscal 2010, resulted primarily from Oppenheimer providing

 

32

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the Trust with services related to compliance with the SEC’s XBRL filing mandate and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

The total amount of Oppenheimer’s legal fees for services rendered during fiscal 2010 increased approximately $5,400, or 2.5%, as compared to fiscal 2009.  The increase in legal fees in fiscal 2010, as compared to fiscal 2009, resulted primarily from Oppenheimer providing the Trust with services related to the preparation of the proxy statement and the proxy solicitation to appoint Robert C. Berglund as an individual trustee of the Trust, legal review of real estate matters and cost of living increases in the billing rates of Oppenheimer attorneys who provide services to the Trust.

 

Total Trust expenses by category for fiscal 2011, 2010 and 2009 are set forth in the table below.

 
| ** **                                      | ** ** | **Fiscal Year ended on January 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2011**                                                      | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                            |       |                                                          |       |   |   |   |   |
| Compensation of Trustees                        |       | $                                                             | 223,811    |   | $ | 178,581 |   | $ | 228,053 |   |
| Corporate Trustee’s Administrative Fees    |       | 62,500                                                        |       | 62,500 |   | 62,500 |   |
| Professional fees and expenses                  |       |                                                          |       |   |   |   |   |
| Legal                                           |       | 238,023                                                       |       | 224,796 |   | 219,389 |   |
| Accounting                                      |       | 127,485                                                       |       | 125,009 |   | 109,268 |   |
| Mining consultant and field representatives     |       | 23,512                                                        |       | 22,908 |   | 22,617 |   |
| Insurance                                       |       | 69,408                                                        |       | 66,492 |   | 52,518 |   |
| Annual stock exchange fee                       |       | 38,000                                                        |       | 38,000 |   | 38,000 |   |
| Transfer agent’s and registrar’s fees |       | 11,798                                                        |       | 9,974 |   | 10,273 |   |
| Other Trust Expenses                            |       | 84,140                                                        |       | 89,747 |   | 56,702 |   |
|                                            |       | $                                                             | 878,677    |   | $ | 818,007 |   | $ | 799,320 |   |

 

**UNALLOCATED RESERVE**

 

The Trustees have determined that a portion of the Unallocated Reserve, usually within the range of $500,000 to $1,000,000 or such other amount as the Trustees may deem prudent, should be maintained as a cash reserve for unexpected losses. The actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level. Future distributions will be highly dependent upon royalty income as it is received, changes in estimated pricing, potential for future price adjustments and the level of Trust expenses.  Although the actual amount of the Unallocated Reserve will fluctuate from time to time and may increase or decrease from its current level, it is currently intended that future distributions will be highly dependent upon royalty income as it is received and the level of Trust expenses.  The amount of future royalty income available for distribution will be subject to the volume of iron ore product shipments and the dollar level of sales by Northshore.  Shipping activity is greatly reduced during the winter months and economic conditions, particularly those affecting the steel industry, may adversely affect the amount and timing of such future shipments and sales.  It is possible that future negative price adjustments could offset, or even eliminate, royalties or royalty income that would otherwise be payable to the Trust in any particular quarter, or at year end, thereby potentially reducing cash available for distribution to the Trust’s Unitholders in future quarters.  See discussion under the heading “Risk Factors” beginning on page 3 of this Annual Report.

 

The Trustees will continue to monitor the economic circumstances of the Trust to strike a responsible

 

33

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balance between distributions to Unitholders and the need to maintain reserves at a prudent level, given the unpredictable nature of the iron ore industry, the Trust’s dependence on the actions of the Cliffs and Northshore, and the fact that the Trust essentially has no other liquid assets.

 

**CERTIFICATES OF BENEFICIAL INTEREST**

 

The Mesabi Trust’s Certificates of Beneficial Interest are traded on the New York Stock Exchange.  Distributions paid to Unitholders during the fiscal year ended January 31, 2011 totaled $31,291,223 as compared to $9,315,207 during fiscal year ended January 31, 2010, and $37,851,229 during the fiscal year ended January 31, 2009.  Unitholders received distributions of $2.385 per Unit for the fiscal year ended January 31, 2011, compared with distributions of $0.71 and $2.885 per Unit for the fiscal years ended January 31, 2010 and 2009, respectively.

 

During the past two fiscal years, the market ranges of the certificates for each quarterly period and the distributions declared for such quarterly periods were as follows:

 
| **Fiscal Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** | **Distribution********Declared** | ** ** | **Distribution********Per Unit** | ** ** |
|------------------------------------|------------|----------|------------|---------|------------|----------------------------------|------------|---------------------------------------|------------|
| April 30, 2010                |       | $        | 26.77      |    | $          | 13.20                            |       | $                                     | 1,640,001  |   | $ | 0.125 |   |
| July 31, 2010                 |       | $        | 24.99      |    | $          | 15.90                            |       | 10,496,008                            |       | 0.80 |   |
| October 31, 2010              |       | $        | 42.98      |    | $          | 22.97                            |       | 11,939,209                            |       | 0.91 |   |
| January 31, 2011              |       | $        | 56.44      |    | $          | 33.21                            |       | 8,528,006                             |       | 0.65 |   |
|                               |       |     |       |    |       | $                                | 32,603,224 |                                  | $          | 2.485 |   |

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

 

As of the close of business on April 1, 2011, the beneficial interest in Mesabi Trust was represented by 13,120,010 Units registered in the names of approximately 1,175 registered holders, holding of record approximately 799,878 Units, and in the names of approximately 124 brokers, nominees, or fiduciaries holding of record approximately 12,320,132 Units.

 

34

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**THE TRUSTEES**

 

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

 
| **Name and Address of Trustee**                                                                                                                        | ** ** | **Principal Occupation**                                                                 |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                       |       |                                                                                          |
| Deutsche   Bank Trust Company Americas   Corporate Trustee   60 Wall Street   27th Floor   New York, New York 10005                                                   |       | New   York banking corporation                                                                |
|                                                                                                                                                                       |       |                                                                                          |
| Robert   C. Berglund   PO Box 351   Corona, New Mexico 88318                                                                                                               |       | Retired   Mining Engineer                                                                     |
|                                                                                                                                                                       |       |                                                                                          |
| James   A. Ehrenberg   Individual Trustee   295 Kopp Drive   West St. Paul, Minnesota 55118                                                                                |       | Until   April 2005, Senior Vice   President, Corporate Trust Services,   U.S. Bank, N.A. |
|                                                                                                                                                                       |       |                                                                                          |
| Richard   G. Lareau   Individual Trustee   Oppenheimer Wolff & Donnelly LLP   Plaza VII, Suite 3300   45 South Seventh Street   Minneapolis, Minnesota 55402 |       | Senior   Partner in the law firm of   Oppenheimer Wolff & Donnelly   LLP             |
|                                                                                                                                                                       |       |                                                                                          |
| Norman   F. Sprague III   Individual Trustee   11726 San Vicente Blvd.   Suite 625   Los Angeles, California 90049                                                    |       | Private   investor; orthopedic surgeon                                                        |

 

 
| New   York, New York   April 11, 2011 |   | Respectfully   submitted,              |
|--------------------------------------------|--------|----------------------------------------|
|                                       |   | DEUTSCHE BANK TRUST   COMPANY AMERICAS |
|                                       |   |                                   |
|                                       |   | ROBERT   C. BERGLUND                   |
|                                       |   | JAMES   A. EHRENBERG                   |
|                                       |   | RICHARD   G. LAREAU                    |
|                                       |   | NORMAN   F. SPRAGUE III                |

 

35

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INDEX TO FINANCIAL STATEMENTS

 
| Trustees’   Report on Internal Control over Financial Reporting                                             | Page F-2              |
|------------------------------------------------------------------------------------------------------------------|----------------------------|
|                                                                                                             |                       |
| Report   of Independent Registered Public Accounting Firm                                                        | Pages F-3             |
|                                                                                                             |                       |
| Balance   Sheets as of January 31, 2011 and 2010                                                            | Page F-4              |
|                                                                                                             |                       |
| Statements   of Income for the years ended January 31, 2011, 2010, and 2009                                 | Page F-5              |
|                                                                                                             |                       |
| Statements   of Unallocated Reserve and Trust Corpus for the years ended January 31,   2011, 2010, and 2009 | Page F-6              |
|                                                                                                             |                       |
| Statements   of Cash Flows for the years ended January 31, 2011, 2010, and 2009                             | Page F-7              |
|                                                                                                             |                       |
| Notes   to Financial Statements                                                                                  | Pages F-8 – F-14 |

 

F-1

----

 

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

 

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

 

All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

The Mesabi Trustees assessed the effectiveness of the Trust’s internal control over financial reporting as of January 31, 2011.  In making this assessment, they used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework.  Based on their assessment, the Trustees believe that, as of January 31, 2011, the Trust’s internal control over financial reporting is effective, based on those criteria.

 

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

 

F-2

----

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Trustees

Mesabi Trust

New York, New York

 

We have audited the accompanying balance sheets of Mesabi Trust (the “Trust”) as of January 31, 2011 and 2010, and the related statements of income, unallocated reserve and trust corpus, and cash flows for each of the years in the three-year period ended January 31, 2011.  We also have audited Mesabi Trust’s internal control over financial reporting as of January 31, 2011, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Mesabi Trust’s trustees are responsible for these financial statements, for maintaining effective internal control over financial reporting, and for their assessment of the effectiveness of the Trust’s internal control over financial reporting, included in the accompanying Trustees’ Report on Internal Control Over Financial Reporting.  Our responsibility is to express an opinion on these financial statements and an opinion on the Trust’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by the Trustees, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

 

An organization’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  An organization’s internal control over financial reporting includes those policies and procedures that 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the organization; 2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the organization are being made only in accordance with authorizations of the Trustees; and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the organization’s assets that could have a material effect on the financial statements.

 

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

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mesabi Trust as of January 31, 2011 and 2010, and the results of its operations and its cash flows for each of the years in the three-year period ended January 31, 2011 in conformity with accounting 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 reporting as of January 31, 2011, based on criteria established in *Internal Control—Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

**/s/ WIPFLI LLP**

St. Paul, Minnesota

April 11, 2011

 

 

F-3

----

 

**MESABI TRUST**

**BALANCE SHEETS**

**YEARS ENDED JANUARY 31, 2011 AND 2010**

 
| ** **                                                                  | ** ** | **2011**      | ** **    | **2010**   | ** ** |
|-----------------------------------------------------------------------------|------------|---------------|---------------|------------|------------|
|                                                                        |       |          |          |       |       |
| **ASSETS**                                                                  | ** ** | ** **    |          |       |       |
|                                                                        |       |          |          |       |       |
| CASH AND CASH EQUIVALENTS                                                   | ** ** | **$**         | **8,693,691** |       | $          | 8,444,697 |   |
| U.S. GOVERNMENT SECURITIES, at amortized cost   (which approximates market) | ** ** | **668,889**   |          | 499,939    |       |
| ACCRUED INCOME RECEIVABLE                                                   | ** ** | **232,786**   |          | 873,938    |       |
| PREPAID EXPENSE                                                             | ** ** | **50,207**    |          | 30,422     |       |
|                                                                        | ** ** | **9,645,573** |          | 9,848,996  |       |
|                                                                        |       |          |          |       |       |
| U.S. GOVERNMENT SECURITIES, at amortized cost   (which approximates market) | ** ** | **—**    |          | 1,350,576  |       |
|                                                                        |       |          |          |       |       |
| 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          |       |
|                                                                        |       |          |          |       |       |
|                                                                        | ** ** | **$**         | **9,645,576** |       | $          | 11,199,575 |   |
|                                                                        |       |          |          |       |       |
| **LIABILITIES, UNALLOCATED RESERVE   AND TRUST CORPUS**                     | ** ** | ** **    |          |       |       |
|                                                                        |       |          |          |       |       |
| DISTRIBUTION PAYABLE                                                        | ** ** | **$**         | **8,528,006** |       | $          | 7,216,005 |   |
| ACCRUED EXPENSES                                                            | ** ** | **129,765**   |          | 85,735     |       |
| DEFERRED ROYALTY REVENUE                                                    | ** ** | **—**    |          | 2,770,000  |       |
|                                                                        | ** ** | **8,657,771** |          | 10,071,740 |       |
|                                                                        |       |          |          |       |       |
| UNALLOCATED RESERVE                                                         | ** ** | **987,802**   |          | 1,127,832  |       |
|                                                                        |       |          |          |       |       |
| TRUST CORPUS                                                                | ** ** | **3**         |          | 3          |       |
|                                                                        |       |          |          |       |       |
|                                                                        | ** ** | **$**         | **9,645,576** |       | $          | 11,199,575 |   |

 

See Notes to Financial Statements

 

F-4

----

 

**MESABI TRUST**

**STATEMENTS OF INCOME**

**YEARS ENDED JANUARY 31, 2011, 2010, AND 2009**

 
| ** **                                      | ** ** | **2011**       | ** **     | **2010**   | ** ** | **2009**   | ** ** |
|-------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
|                                            |       |           |           |       |       |       |       |
| REVENUES                                        | ** ** | ** **     |           |       |       |       |       |
| Royalties under amended lease agreements        | ** ** | **$**          | **32,751,210** |       | $          | 12,924,330 |       | $ | 34,896,798 |   |
| Royalties under Peters Lease fee                | ** ** | **576,428**    |           | 305,407    |       | 525,851    |       |
| Interest                                        | ** ** | **14,233**     |           | 11,932     |       | 46,456     |       |
|                                            |       |           |           |       |       |       |       |
| Total revenues                                  | ** ** | **33,341,871** |           | 13,241,669 |       | 35,469,105 |       |
|                                            |       |           |           |       |       |       |       |
| EXPENSES                                        | ** ** | ** **     |           |       |       |       |       |
| Compensation of Trustees                        | ** ** | **223,811**    |           | 178,581    |       | 228,053    |       |
| Corporate Trustee’s administrative fees    | ** ** | **62,500**     |           | 62,500     |       | 62,500     |       |
| Professional fees and expenses:                 | ** ** | ** **     |           |       |       |       |       |
| Legal                                           | ** ** | **238,023**    |           | 224,796    |       | 219,389    |       |
| Accounting                                      | ** ** | **127,485**    |           | 125,009    |       | 109,268    |       |
| Mining consultant and field representatives     | ** ** | **23,512**     |           | 22,908     |       | 22,617     |       |
| Insurance                                       | ** ** | **69,408**     |           | 66,492     |       | 52,518     |       |
| Annual stock exchange fee                       | ** ** | **38,000**     |           | 38,000     |       | 38,000     |       |
| Transfer agent’s and registrar’s fees | ** ** | **11,798**     |           | 9,974      |       | 10,273     |       |
| Other Trust expenses                            | ** ** | **84,140**     |           | 89,747     |       | 56,702     |       |
|                                            |       |           |           |       |       |       |       |
| Total expenses                                  | ** ** | **878,677**    |           | 818,007    |       | 799,320    |       |
|                                            |       |           |           |       |       |       |       |
| NET INCOME                                      | ** ** | **$**          | **32,463,194** |       | $          | 12,423,662 |       | $ | 34,669,785 |   |
|                                            |       |           |           |       |       |       |       |
| WEIGHTED AVERAGE NUMBER OF UNITS OUTSTANDING    | ** ** | **13,120,010** |           | 13,120,010 |       | 13,120,010 |       |
|                                            |       |           |           |       |       |       |       |
| NET INCOME PER UNIT                             | ** ** | **$**          | **2.474**      |       | $          | 0.947      |       | $ | 2.643 |   |

 

See Notes to Financial Statements

 

F-5

----

 

**MESABI TRUST**

**STATEMENTS OF UNALLOCATED RESERVE AND TRUST CORPUS**

**YEARS ENDED JANUARY 31, 2011, 2010, AND 2009**

 
| ** **                                                                                | ** ** | **Unallocated Reserve** | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------|------------|
| ** **                                                                                | ** ** | **Number of**           | ** ** | ** **  | ** ** | **Trust** | ** ** |
| ** **                                                                                | ** ** | **Units**                    | ** ** | **Amount**  | ** ** | **Corpus** | ** ** |
|                                                                                      |       |                         |       |        |       |   |   |
| BALANCE, JANUARY 31, 2008                                                                 |       | 13,120,010                   |       | $           | 1,660,021  |   | $ | 3 |   |
|                                                                                      |       |                         |       |        |       |   |   |
| Net income                                                                                |       | —                       |       | 34,669,785  |       | — |   |
| Distribution paid May 20, 2008, $.12 per unit                                        |       | —                       |       | (1,574,401  | )          | — |   |
| Distribution paid August 20, 2008, $1.00 per   unit                                  |       | —                       |       | (13,120,010 | )          | — |   |
| Distribution paid November 20, 2008, $1.25   per unit                                |       | —                       |       | (16,400,013 | )          | — |   |
| Distribution declared January 16, 2009, paid   February 20, 2009, $.11 per unit |       |                         |       |        |       |   |   |
|                                                                                      |       | —                       |       | (1,443,201  | )          | — |   |
|                                                                                      |       |                         |       |        |       |   |   |
| BALANCE, JANUARY 31, 2009                                                                 |       | 13,120,010                   |       | $           | 3,792,181  |   | $ | 3 |   |
|                                                                                      |       |                         |       |        |       |   |   |
| Net income                                                                                |       | —                       |       | 12,423,662  |       | — |   |
| Distribution paid May 20, 2009, $.38 per unit                                        |       | —                       |       | (4,985,604  | )          | — |   |
| Distribution paid November 20, 2009, $.22 per   unit                                 |       | —                       |       | (2,886,402  | )          | — |   |
| Distribution declared January 15, 2010, paid   February 20, 2010, $.55 per unit |       | —                       |       | (7,216,005  | )          | — |   |
|                                                                                      |       |                         |       |        |       |   |   |
| BALANCE, JANUARY 31, 2010                                                                 |       | 13,120,010                   |       | $           | 1,127,832  |   | $ | 3 |   |
|                                                                                      |       |                         |       |        |       |   |   |
| Net income                                                                                |       | —                       |       | 32,463,194  |       | — |   |
| Distribution paid May 20, 2010, $.125 per   unit                                     |       | —                       |       | (1,640,001  | )          | — |   |
| Distribution paid August 20, 2010, $.80 per   unit                                   |       | —                       |       | (10,496,008 | )          | — |   |
| Distribution paid November 20, 2010, $.91 per   unit                                 |       | —                       |       | (11,939,209 | )          | — |   |
| Distribution declared January 14, 2011, paid   February 20, 2011, $.65 per unit |       | —                       |       | (8,528,006  | )          | — |   |
|                                                                                      |       |                         |       |        |       |   |   |
| BALANCE, JANUARY 31, 2011                                                                 |       | 13,120,010                   |       | $           | 987,802    |   | $ | 3 |   |

 

See Notes to Financial Statements

 

F-6

----

 

**MESABI TRUST**

**STATEMENTS OF CASH FLOWS**

**YEARS ENDED JANUARY 31, 2011, 2010, AND 2009**

 
| ** **                                                           | ** ** | **2011**        | ** **     | **2010**   | ** ** | **2009**    | ** ** |
|----------------------------------------------------------------------|------------|-----------------|----------------|------------|------------|-------------|------------|
|                                                                 |       |            |           |       |       |        |       |
| OPERATING ACTIVITIES                                                 | ** ** | ** **      |           |       |       |        |       |
| Royalties received                                                   | ** ** | **$**           | **31,195,990** |       | $          | 17,841,808  |       | $ | 33,658,880 |   |
| Interest received                                                    | ** ** | **17,033**      |           | 17,901     |       | 48,173      |       |
| Expenses paid                                                        | ** ** | **(854,432**    | **)**          | (843,818   | )          | (765,190    | )          |
|                                                                 |       |            |           |       |       |        |       |
| NET CASH FROM OPERATING ACTIVITIES                                   | ** ** | **30,358,591**  |           | 17,015,891 |       | 32,941,863  |       |
|                                                                 |       |            |           |       |       |        |       |
| INVESTING ACTIVITIES                                                 | ** ** | ** **      |           |       |       |        |       |
| Maturities of U.S. Government securities                             | ** ** | **2,180,000**   |           | 329,000    |       | 586,953     |       |
| Purchases of U.S. Government securities                              | ** ** | **(998,374**    | **)**          | (1,839,094 | )          | (383,181    | )          |
|                                                                 |       |            |           |       |       |        |       |
| NET CASH FROM (USED FOR) INVESTING ACTIVITIES                        | ** ** | **1,181,626**   |           | (1,510,094 | )          | 203,772     |       |
|                                                                 |       |            |           |       |       |        |       |
| FINANCING ACTIVITY                                                   | ** ** | ** **      |           |       |       |        |       |
| Distributions to unitholders                                         | ** ** | **(31,291,223** | **)**          | (9,315,207 | )          | (37,851,229 | )          |
|                                                                 |       |            |           |       |       |        |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                              | ** ** | **248,994**     |           | 6,190,590  |       | (4,705,594  | )          |
|                                                                 |       |            |           |       |       |        |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                         | ** ** | **8,444,697**   |           | 2,254,107  |       | 6,959,701   |       |
|                                                                 |       |            |           |       |       |        |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                               | ** ** | **$**           | **8,693,691**  |       | $          | 8,444,697   |       | $ | 2,254,107 |   |
|                                                                 |       |            |           |       |       |        |       |
| RECONCILIATION OF NET INCOME TO NET CASH FROM   OPERATING ACTIVITIES | ** ** | ** **      |           |       |       |        |       |
| Net income                                                           | ** ** | **$**           | **32,463,194** |       | $          | 12,423,662  |       | $ | 34,669,785 |   |
| Decrease (increase) in accrued income receivable                     | ** ** | **641,152**     |           | 1,848,040  |       | (1,762,053  | )          |
| Decrease (increase) in prepaid expense                               | ** ** | **(19,785**     | **)**          | 1          |       | (5,736      | )          |
| Increase (decrease) in accrued expenses                              | ** ** | **44,030**      |           | (25,812    | )          | 39,867      |       |
| (Decrease) increase in deferred royalty revenue                      | ** ** | **(2,770,000**  | **)**          | 2,770,000  |       | —      |       |
|                                                                 |       |            |           |       |       |        |       |
| NET CASH FROM OPERATING ACTIVITIES                                   | ** ** | **$**           | **30,358,591** |       | $          | 17,015,891  |       | $ | 32,941,863 |   |
|                                                                 |       |            |           |       |       |        |       |
| NON CASH FINANCING ACTIVITY                                          |       |            |           |       |       |        |       |
| Distributions declared                                               | ** ** | **$**           | **8,528,006**  |       | $          | 7,216,005   |       | $ | 1,443,201 |   |

 

See Notes to Financial Statements

 

F-7

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 

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

 

*Nature of Business*

 

Mesabi Trust was created in 1961 upon the liquidation of Mesabi Iron Company. The sole purpose 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 distribute the income and proceeds there from to the Trust’s certificate holders after the payment of, or provision for, expenses and liabilities. The Agreement of Trust prohibits the Trust from engaging in any business.  In accordance with the Agreement of Trust, the Trust will terminate twenty-one years after the death of the survivor of twenty-five persons named in an exhibit to the Agreement of Trust, the youngest of whom is believed to be fifty years old.

 

The lessee/operator of Mesabi Trust’s mineral interests is Northshore Mining Corporation (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 Company and was named Cyprus Northshore Mining Corporation (Cyprus NMC).

 

*Organization*

 

The beneficial interest in Mesabi Trust is represented by 13,120,010 transferable units distributed on July 27, 1961 to shareholders of Mesabi Iron Company.

 

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

 

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

 

*Cash and Cash Equivalents*

 

The Trust considers all highly liquid investments with an**original maturity of three months or less to be cash equivalents.  As of January 31, 2011 and 2010, the Trust held $157,742 and $24,788, respectively, in a money market fund that invests primarily in obligations of the U.S. Treasury, which it considers to be cash and cash equivalents.

 

*Investments*

 

The Trust invests solely in U.S. Government securities. The Trustees determine the appropriate classifications of the securities at the time they are acquired and evaluate the appropriateness of such classifications as of each balance sheet date.

 

F-8

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 

The U.S. Government securities are classified as held-to-maturity securities as the Trust has the positive intent and ability to hold to maturity and are therefore stated at amortized cost.

 

*Revenue Recognition*

 

Royalty income under the amended lease agreements with NMC is recognized as it is earned. Under such agreements, royalties are earned upon shipment from Silver Bay, Minnesota (NMC’s location), regardless of whether the actual sales proceeds for any shipment are received by NMC’s parent, Cliffs.  The amount of base overriding royalties and royalty bonuses payable are determined on the volume of tonnage shipped from Silver Bay, Minnesota during each calendar quarter and the actual proceeds to Cliffs resulting from such shipments.

 

Royalty income includes accrued income receivable.  Accrued income receivable represents royalty income earned but not yet received by the Trust under the royalty agreements described elsewhere in these notes.   Accrued income receivable is calculated based on (i) shipments during the last month of Mesabi Trust’s fiscal year, if any, and (ii) net positive price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from Silver Bay, Minnesota.

 

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

 

During the fourth quarter of fiscal 2010, negative price adjustments were recorded by Mesabi Trust as deferred royalty revenue due to price adjustment mechanisms in the agreements between Cliffs and its customers that determine the final sales price of the shipments from NMC with respect to certain shipments during calendar 2008 and calendar 2009.  As of January 31, 2011, the Trust recognized revenue related to approximately 770,000 tons of iron ore that were shipped by NMC as of December 31, 2010, but for which Cliffs has indicated that final pricing is not yet known.  Pricing related to these tons is expected to be finalized in the first calendar quarter of 2012.

 

Royalty income under the Peters Lease fee agreement also is recognized quarterly as it is earned. Under such agreement, however, royalties are earned at the option of NMC either upon mining of crude ore from Peters Lease lands or upon shipment from Silver Bay of iron ore product produced from Peters Lease lands.

 

*Fixed Property, Including Intangibles*

 

The Trust’s fixed property, including intangibles, is recorded at nominal values and includes the following:

 

1.                                       The entire beneficial interest as assignor in the Amended Peters Lease Assignment and the Amended Cloquet Lease Assignment covering taconite properties in Minnesota which are leased to NMC.

 

F-9

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 

2.                                       The entire beneficial interest in Mesabi Land Trust which owns a 20% fee interest in the lands subject to the Peters Lease and the entire fee interest in other properties in Minnesota.

 

*Deferred Royalty Revenue*

 

Deferred royalty revenue, if any, represents an estimate of decreases in pellet revenue related to tons of iron ore that were shipped by Northshore, but for which Northshore has indicated that final pricing is not yet known and is adjusted in accordance with the Trust’s revenue recognition policy each quarter as updated pricing information is received.

 

*Net Income Per Unit*

 

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

 

*Concentration of Credit Risk*

 

Financial instruments which potentially subject the Trust to concentrations of credit risk consist primarily 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.

 

As further described in Note 1, NMC is the lessee/operator of the Mesabi Trust land.  All royalty income earned by the Trust is received from NMC, and accordingly, substantially all of the accrued income receivable is also due from NMC.

 

*Accounting Estimates*

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Trustees to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Specifically, the accrued income receivable, deferred royalty revenue and related royalty revenue are significant estimates which are subject to change in the near term, and changes to these estimates could have a material effect on the Trust’s financial statements.

 

*Fair Value Measures*

 

*Valuation Hierarchy*

 

GAAP establishes a three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

F-10

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 

·        Level 1 — Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets.

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

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

 

The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.

 

The carrying amounts of financial instruments approximated fair value as of January 31, 2011 and 2010, because of the relative short maturity of these instruments.

 

*Recent Accounting Pronouncements*

 

In January 2010, the Financial Accounting Standards Board (“FASB”) amended the guidance on fair value to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The revised guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The new guidance was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Trust adopted the provisions of the guidance required for the period beginning January 1, 2010; however, adoption of this amendment did not have a material impact on the Trust’s financial statements. The Trust will adopt the provisions of the guidance required for the period beginning January 1, 2011, beginning with the interim period ended April 30, 2011.

 

In February 2010, the FASB issued amended guidance on subsequent events to remove the requirement to disclose the date through which an SEC filer has evaluated subsequent events. The amended guidance was effective upon issuance and was adopted as of the interim period ended April 30, 2010.

 

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

 

U.S. government securities at January 31, 2011 and 2010 are classified as held-to-maturity and mature as follows:

 

F-11

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 
| ** **                             | ** ** | **2011**     | ** **  | **2010**            | ** ** |
|----------------------------------------|------------|--------------|-------------|---------------------|------------|
| ** **                             | ** ** | **Carrying** | ** **  | ** **          | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Value**    | ** **  | **Fair Value** | ** ** | **Value** | ** ** | **Fair Value** | ** ** |
|                                   |       |         |        |                |       |   |   |   |   |
| Due within one year                    | ** ** | **$**        | **668,889** | ** **          | **$**      | **669,338** |   | $ | 499,939 |   | $ | 502,755 |   |
|                                   |       |         |        |                |       |   |   |   |   |
| Due after one year through three years | ** ** | **—**   | ** **  | **—**          |       | 1,350,576 |   | 1,352,791 |   |
|                                   |       |         |        |                |       |   |   |   |   |
|                                   | ** ** | **$**        | **668,889** | ** **          | **$**      | **669,338** |   | $ | 1,850,515 |   | $ | 1,855,546 |   |

 

**NOTE 4 -               ROYALTY AGREEMENT**

 

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

 

Pursuant to the Amended Assignment Agreements, NMC is obligated to pay Mesabi Trust base overriding royalties, in varying amounts constituting a percentage of the gross proceeds of shipments, from Silver Bay, Minnesota, of iron ore product produced from Mesabi Trust lands or, to a limited extent, other lands.  NMC is obligated to make payments of overriding royalties on product shipments within 30 days following the calendar quarter in which such shipments occur.  NMC resumed mining operations and shipping product from Silver Bay in the second calendar quarter of 1990, and the first payment of overriding royalties was made in July 1990.

 

Royalty bonuses are payable on all iron ore products produced from Mesabi Ore shipped from Silver Bay during a calendar quarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $48.48 (per ton) for calendar year 2009, $48.81 (per ton) for calendar year 2010 and will be $49.35 (per ton) for calendar year 2011.  The Adjusted Threshold Price is subject to adjustment (but not below $30 per ton) for inflation and deflation and is determined each year on the basis of the change in the Gross Domestic Product Implicit Price Deflator, a broad based index of inflation and deflation published quarterly by the U.S. Department of Commerce.

 

NMC also is obligated to pay to Mesabi Trust a minimum advance royalty of $500,000 per annum, subject to adjustment for inflation and deflation (but not below $500,000), which is credited against base overriding royalties and royalty bonuses. NMC is obligated to make quarterly payments of the minimum advance royalty in January, April, July and October of each year. For the calendar year ending December 31, 2011, the minimum advance royalty is $822,783. The minimum annual advance royalty was $813,729 and $808,177, for the calendar years ended December 31, 2010 and 2009, respectively.

 

F-12

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 

**NOTE 5 -              UNALLOCATED RESERVE AND DISTRIBUTIONS**

 

The Trustees have determined that the unallocated cash and U.S. Government securities portion of the Unallocated Reserve should be maintained at a prudent level, usually within the range of $500,000 to $1,000,000, to meet present or future liabilities of the Trust.  The actual amount of the unallocated cash and U.S. Government securities portion of the Unallocated Reserve will fluctuate from time to time, and it may increase or decrease from its current level.

 

The Trustees determine the level of distributions on a quarterly basis after receiving notification from NMC as to the amount of royalty income that will be received and after determination of any known or anticipated expenses, liabilities and obligations of the Trust.  As a result of fluctuations in the accrued income receivable portion of the Unallocated Reserve, future distributions may vary depending upon the adjustments to royalty income, which are determined by NMC, and the level of Trust expenses that the Trustees anticipate occurring in subsequent quarters.

 

During the fiscal years ended January 31, 2011, 2010, and 2009, the Trustees distributed cash payments totaling $31,291,223 ($2.385 per Unit), $9,315,207 ($.71 per Unit), and $37,851,229 ($2.89 per Unit), respectively. In addition, in January 2011 the Trustees declared a distribution of $0.65 per Unit of beneficial interest, which was paid in February 2011.

 

F-13

----

 

**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2011, 2010 AND 2009**

 

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

 

The quarterly results of operations for the years ended January 31, 2011 and 2010 are presented below:

 
| ** **          | ** ** | **2011**    | ** **    |
|---------------------|------------|-------------|---------------|
| ** **          | ** ** | **First**   | ** **    | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| ** **          | ** ** | **Quarter** | ** **    | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **          | ** ** | ** **  | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue             | ** ** | **$**       | **4,992,827** | ** ** | **$** | **11,233,980** | ** ** | **$** | **11,576,313** | ** ** | **$** | **5,538,751** | ** ** |
| Expenses            | ** ** | **207,862** | ** **    | **224,686** | ** ** | **179,747** | ** ** | **266,382** | ** ** |
| ** **          | ** ** | ** **  | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income          | ** ** | **$**       | **4,784,965** | ** ** | **$** | **11,009,294** | ** ** | **$** | **11,396,566** | ** ** | **$** | **5,272,369** | ** ** |
| ** **          | ** ** | ** **  | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income per unit | ** ** | **$**       | **0.365**     | ** ** | **$** | **0.839** | ** ** | **$** | **0.869** | ** ** | **$** | **0.401** | ** ** |

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

 

F-14

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