**Exhibit 13**

 

ANNUAL REPORTOF THE TRUSTEES OFMESABI TRUSTFor the Year Ended January 31, 2004

 

ADDRESS

 

Mesabi Trust

c/o Deutsche Bank Trust Company Americas

Trust & Securities Services – GDS

60 Wall Street

27th Floor

New York, NY 10005

(615) 835-2749 (telephone)

 

COUNSEL

 

Oppenheimer Wolff & Donnelly LLP, General Counsel

 

TRANSFER AGENT

 

Deutsche Bank Trust Company Americas

 

REGISTRAR

 

Deutsche Bank Trust Company Americas

 

Mesabi Trust does notmaintain a Website and therefore does not make available through a Website theannual, quarterly, or other reports it files with the Securities and ExchangeCommission.

 

Mesabi Trust willprovide, however, upon the written request of any certificate holder addressedto the Trustees at the above address and without charge to such certificateholder, a paper copy of Mesabi Trust’s Annual Report on Form 10-K for thefiscal year ended January 31, 2004 as filed with the Securities andExchange Commission pursuant to the Securities Exchange Act of 1934, asamended.

 

Forward-Looking Information

 

Certain statementscontained in this document are forward-looking, including specifically thosestatements estimating 2004 production or shipments.  All such forward-looking statements are based on input from thelessee/operator.  The Trust has nocontrol over the operations and activities of the lessee/operator except withinthe framework of current agreements. Actual results could differ materially from those indicated in suchstatements.  For important factors thatcould cause actual results to differ materially, see the information under theheading “Important Factors Affecting Mesabi Trust” set forth on page 6 of thisAnnual Report.

 

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**SELECTEDFINANCIAL DATA**

** **

 
| **Years ended on  January 31**        |   | **2004** |      | **2003** |   | **2002**  |   | **2001** |      | **2000** |   |
|---------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|                                  |   |     |      |     |   |      |   |     |      |     |   |
| Royalty and interest income           |   | $        | 7,270,517 |     | $      | 5,100,759 |   | $        | 3,984,721 |     | $      | 5,753,650 |   | $ | 5,359,893 |   |
| Trust expenses                        |   | 499,177  |      | 406,228  |   | 340,315   |   | 407,505  |      | 389,465  |   |
| Net income(a)                         |   | $        | 6,771,340 |     | $      | 4,694,531 |   | $        | 3,644,406 |     | $      | 5,346,145 |   | $ | 4,970,428 |   |
| Net income per Unit(b)                |   | $        | .52       |     | $      | .36       |   | $        | .28       |     | $      | .41 |   | $ | .38 |   |
| Distributions declared per unit(b)(c) |   | $        | .49       |     | $      | .36       |   | $        | .26       |     | $      | .41 |   | $ | .38 |   |
|                                  |   |     |      |     |   |      |   |     |      |     |   |
| At January 31                         |   |     |      |     |   |      |   |     |      |     |   |
| Total Assets                          |   | $        | 5,390,081 |     | $      | 3,594,102 |   | $        | 2,218,736 |     | $      | 2,556,754 |   | $ | 3,179,863 |   |

 

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

 

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

 

(c)                                  During the fiscal year ended January 31,2004, the Trustees distributed $.38 per Unit (including $.19 per Unit declaredin fiscal 2003 and distributed in February 2003) and declared an additionaldistribution of $.30 per Unit, payable in February 2004.  During the fiscal year ended January 31,2003, the Trustees distributed $.25 per Unit (including $.08 per Unit declaredin fiscal 2002 and distributed in February 2002) and declared an additionaldistribution of $.19 per Unit, payable in February 2003.  During the fiscal year ended January 31,2002, the Trustees distributed $.305 per Unit (including $.13 per Unit declaredin fiscal 2001 and distributed in February 2001) and declared an additionaldistribution of $.08 per Unit, payable in February 2002.  During the fiscal year ended January 31,2001, the Trustees distributed $.455 per Unit (including $.18 per Unit declaredin fiscal 2000 and distributed in February 2000) and declared an additionaldistribution of $.13 per Unit, payable in February 2001.  During the fiscal year ended January 31,2000, the Trustees distributed $.35 per Unit (including $.155 per Unit declaredin fiscal 1999 and distributed in February 1999) and declared an additionaldistribution of $.18 per Unit, payable in February 2000.  See “Reserves and Distributions” on page 13of this Annual Report.

 

**TRUSTEES’ DISCUSSION AND ANALYSIS OFFINANCIALCONDITION AND RESULTS OF OPERATIONS**

** **

**Overview**

** **

Mesabi Trust (“MesabiTrust” or the “Trust”), formed pursuant to an Agreement of Trust dated July 18,1961 (the “Agreement of Trust”), is a trust organized under the laws of theState of New York.  Mesabi Trust holdsall of the interests formerly owned by Mesabi Iron Company, including allright, title and interest in the Amendment of Assignment, Assumption andFurther Assignment of Peters Lease (the “Amended Assignment of Peters Lease”),the Amendment of Assignment, Assumption and Further Assignment of Cloquet Lease(the “Amended Assignment of Cloquet Lease”), the beneficial interest in theMesabi Land Trust (as such term is defined below) and all other assets andproperty identified in the Agreement of Trust. The Amended Assignment of Peters Lease relates to an Indenture made asof April 30, 1915 among East Mesaba Iron Company, Dunka River Iron Company andClaude W. Peters (the “Peters Lease”) and the Amended Assignment of CloquetLease relates to an Indenture made May 1, 1916 between Cloquet Lumber Companyand Claude W. Peters (the “Cloquet Lease”).

 

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The Trust will terminatetwenty-one (21) years after the death of the survivor of twenty-five (25)persons named in an exhibit to the Agreement of Trust.  The youngest person on this exhibit is now43 years old.

 

The Agreement of Trustspecifically prohibits the Trustees from entering into or engaging in anybusiness.  This prohibition applies evento business activities the Trustees deem necessary or proper for thepreservation and protection of the Trust Estate.  Accordingly, the Trustees’ activities in connection with the administrationof Trust assets are limited to collecting income, paying expenses andliabilities, distributing net income to the Trust’s Certificate Holders afterthe payment of, or provision for, such expenses and liabilities, and protectingand conserving the assets held.

 

Pursuant to a ruling fromthe Internal Revenue Service, which ruling was based on the terms of theAgreement of Trust including the prohibition against entering into anybusiness, the Trust is not taxable as a corporation for Federal income taxpurposes.  Instead, the holders of theUnits of Beneficial Interest (the “Unitholders”) are considered as “owners” ofthe Trust and the Trust’s income is taxable directly to the Unitholders.

 

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

 

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

 

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

 

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

 

The current royalty rateschedule became effective on August 17, 1989, which was established pursuant tothe Amended Assignment of Peters Lease, the Amended Assignment of CloquetLease, and the Assumption and Assignment of Mesabi Lease (together with theAmended Assignment of Peters Lease and the Amended Assignment of Cloquet Lease,the “Amended Assignment Agreements”), which the Trust entered into with CyprusNorthshore Mining Corporation NMC (“Cyprus NMC”).  Pursuant to the Amended Assignment Agreements, overridingroyalties are determined by both the volume and selling price of iron oreproducts shipped.  In 1994, Cyprus NMCwas sold by its parent corporation to Cleveland-Cliffs Inc (“CCI”) and renamedNorthshore Mining Company (“Northshore”). CCI now operates Northshore as a wholly-owned subsidiary.

 

Fee royalties payable tothe Mesabi Land Trust are based on the amount of crude ore mined.  Crude ore is used to produce iron orepellets and other products.  Under theAmended Assignment Agreements, overriding royalties are determined by both thevolume and selling price of iron ore products sold.  For more information on overriding royalties and the manner inwhich they are determined, see the section entitled “Leasehold Royalties” setforth on page 10 of this Annual Report.

 

Under the relevant documents,Northshore may mine and ship iron ore products from lands other than MesabiTrust lands.  To encourage the use ofiron ore products from Mesabi Trust lands, Mesabi Trust receives royalties onstated percentages of iron ore shipped from Silver Bay, whether or not the ironore products are from Mesabi Trust lands. Mesabi Trust receives royalties at the greater of (i) the

 

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aggregate quantity of iron ore products shipped thatwere from Mesabi Trust lands, and (ii) a portion of the aggregate quantity ofall iron ore products shipped that were from any lands, such portion being 90%of the first four million tons shipped during such year, 90% of the next twomillion tons shipped during such year, and 25% of all tonnage shipped duringsuch year in excess of six million tons.

 

Royalty incomeconstitutes the principal source of the Trust’s revenue, which comprised 99.4%,99.1%, and 98.7% of the total revenue of the Trust in fiscal years 2004, 2003,and 2002, respectively (years ending January 31).  A more complete discussion of royalty rates and the manner inwhich they are determined is set forth under the headings “Leasehold Royalties”and “Land Trust and Fee Royalties,” on pages 10 and 12, respectively, of thisAnnual Report.

 

**Results of Operations**

** **

Production of iron ore pellets at Northshore fromMesabi Trust lands during fiscal year 2004 totaled approximately 4.68 milliontons, and actual shipments over the same period totaled approximately 4.99million tons.  By comparison, actualpellet production for fiscal year 2003 approximated 4.15 million tons, andactual shipments approximated 3.95 million tons.  These increases in production and shipments are attributable toincreases in sales volume of Northshore’s iron ore pellets during 2003, whichresulted from CCI’s capture of additional term supply agreements and somewhathigher demand from its customers.

 

**Liquidity and Capital Resources**

** **

The Trust’s operations are limited to the collectionof leasehold royalty income, payment of expenses and liabilities, distributionof net income to the Trust’s certificate holders and protection andconservation of Trust assets.  Trustmonies are invested solely in U.S. government securities in a manner that,combined with cash flows from royalties received, is deemed adequate by theTrustees to meet currently foreseeable liquidity needs.  A more complete discussion of the Trustees’management of liquidity is set forth under the heading “Reserves andDistributions” on page 13 of this Annual Report.

 

**Current Developments**

** **

***2004 Estimates***.  In its 2003annual report, CCI estimated total calendar year 2004 Northshore productionfrom Mesabi Trust lands to be approximately 4.9 million tons of iron orepellets.  In a press release datedFebruary 4, 2004, CCI stated all its operations are currently scheduled to runat or near capacity and that it expects to sell all production in 2004.  In addition, in a February 27, 2004 pressrelease, CCI projected a 5% average increase in its pellet sales price for2004, due primarily to increases in the international pellet price adjustmentfactor.  The Trustees are unable todetermine how CCI’s projections will impact shipments from Northshore and theresulting effect, if any, on Mesabi Trust royalties.

 

Neither CCI norNorthshore has provided the Trust with an estimate for total calendar year 2004shipments.  (See description of theuncertainty of market conditions in the iron ore and steel industry under“Important Factors Affecting Mesabi Trust” below.)  During calendar years 2003, 2002, 2001, 2000, and 1999, thepercentage of shipments of iron ore products from Mesabi Trust lands wasapproximately 95.5%, 97.5%, 99.2%, 99.8%, and 98.9%, respectively, of totalshipments.  Northshore has not advisedthe Trustees as to the percentage of iron ore products it anticipates shippingfrom Mesabi Trust lands in calendar year 2004.

 

***Mesabi Nugget Project***. ** **CCI is participating in the MesabiNugget Project with Kobe Steel, Ltd. (“Kobe”), Steel Dynamics, Inc. (“SDI”),Ferrometrics, Inc. (“Ferrometrics”) and the State of Minnesota.  The project’s objective is to develop a newiron making technology (Kobe Steel’s Itmk3 process) for converting iron oreinto nearly pure iron nugget form (the term “nugget” is apparently used to

 

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differentiate the product from lower-iron content pellets produced fromcurrent technology).  Phase I of theproject was completed in the early part of fiscal year 2003.  Phase II, involving construction of a pilotplant at Northshore to test the Itmk3 process, commenced in September2002.  CCI, through its wholly ownedsubsidiary IronUnits LLC and all other project participants have committed toparticipating through Phase II.

 

Construction of the pilotplant at the Northshore facility was completed in May 2003.  According to published reports, the pilotplant has since produced about 4,300 metric tons of nuggets.  CCI stated in its 2003 annual report thatall project participants have agreed to enter into a second six-month operatingphase of the pilot plant, which is expected to be completed in May 2004, toexplore the commercial viability of the Kobe Steel Itmk3 technology.  A ninety-day production run commenced inearly March 2004 and is expected to produce an additional 5,000 metric tons ofnuggets.  In a published interview withthe president of Mesabi Nugget LLC (which is owned by CCI, Kobe, SDI andFerrometrics), if this second phase is successful, the LLC could be starting upa 320,000 tons-per-year prototype module by mid-2005, and a full-size 1.5million tons-per-year commercial plant in 2007.

 

Although the pilot plantwas located at Northshore, it is not certain that, if a fully operationalfacility is constructed, it will be on Mesabi Trust lands.  The Skillings Mining Review reported onMarch 11, 2004 that CCI, Kobe, SDI and Ferrometrics may seek to construct thecommercial nugget facility in Indiana.  Inaddition, Minnesota lawmakers have proposed a financial incentive package to developthe plant at another site owned by CCI in Northeastern Minnesota.  Construction of a fully operational facilityin Minnesota, Indiana or in both states would be subject to Mesabi Nugget LLC’sobtaining the necessary governmental permits.

 

Although Mesabi Trust isnot a direct party to the Mesabi Nugget Project and its involvement in thisproject was not solicited, in the event that a fully-operational plant were tobe located at the Northshore facility, the project would expectedly use ironore from the Mesabi Trust lands.  Inaddition, iron ore from Trust lands could potentially still be used, were afully-operational plant to be located in Indiana or at another location otherthan Northshore.  It is still uncertainas to whether the Mesabi Nugget Project will successfully achievecommercialization, or where a fully-operational plant would be located, orwhether it would use iron ore from the Mesabi Trust lands.  Therefore, the Trustees are unable to makeprojections as to prospective future royalties payable to the Trust.

 

CCI has indicated that ifthe Mesabi Nugget Project successfully achieves commercialization, iron nuggetsfrom this new process would be used as an alternative or supplement to steelscrap as a raw material for electric steel furnaces.

 

***Repeal of Steel Tariffs.***  On March 20,2002, a three-year tariff schedule adopted by President Bush took effect,imposing tariffs on a significant number of imported steel products.  On July 11, 2003, the World TradeOrganization (WTO) made public its final ruling that the steel tariffs were inviolation of global trade rules.  TheUnited States’ appeal was rejected by the WTO on November 10, 2003.  On December 4, 2003, President Bushannounced an end to the tariffs, citing “changed economic circumstances” andstating the tariffs had “achieved their purpose.”  The Bush Administration announced plans to continue licensing andtracking steel imports in order to allow for prior notice of any future surgesin imports.

 

The Trustees do nottransact business directly with steel producers and are therefore not in aposition to determine how, if at all, the steel tariffs impacted the demand andpricing of iron ore pellets mined from the Mesabi Trust lands.  At this time, the Trustees are unable todetermine the effect that the enactment, and subsequent repeal, of the steeltariffs may ultimately have on royalties payable to the Trust in the currentfiscal year and beyond.

 

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***Securities Regulation***.  The Trust is a publicly-traded trust listedon the New York Stock Exchange (“NYSE”) and is therefore subject to extensiveregulation under, among others, the Securities Act of 1933, the SecuritiesExchange Act of 1934, NYSE rules and regulations and the Sarbanes-Oxley Act of2002 (“Sarbanes-Oxley”).  Issuersfailing to comply with such authorities risk serious consequences, includingcriminal as well as civil and administrative penalties.  In most instances, these law, rules andregulations do not specifically address their applicability to publicly-tradedtrusts such as Mesabi Trust.  Inparticular, Sarbanes-Oxley provides for the adoption by the Securities andExchange Commission (the “SEC”) and NYSE of certain rules and regulations thatmay be impossible for the Trust to literally satisfy because of its nature as apass-through trust.  During fiscal 2004,the SEC and NYSE adopted rules and regulations pursuant to Sarbanes-Oxley thatrequire a publicly-traded company’s board of directors, audit committee orexecutive directors (or similar body) to act with respect to certain corporategovernance matters.  The Trust does nothave, nor does the Agreement of Trust provide for, a board of directors, anaudit committee or any executive officers. Therefore, the Trust cannot literally comply with many of these rulesand regulations.  The Trustees intend tofollow the SEC’s and NYSE’s rulemaking closely and attempt to comply with suchrules and regulations where possible.

 

***Other Information.***  Mesabi Trust has no employees, but itengages independent consultants to assist the Trustees in monitoring, amongother things, the amount and sales prices of iron ore products shipped byNorthshore from Silver Bay, Minnesota. As noted above, the information regarding amounts and sales prices ofshipped iron ore products is used to compute the royalties payable to MesabiTrust by Northshore.  Deutsche BankTrust Company Americas, the Corporate Trustee, also performs certainadministrative functions for Mesabi Trust.

 

**Important Factors Affecting Mesabi Trust**

** **

The Agreement of Trustspecifically prohibits the Trustees from entering into or engaging in anybusiness.  This prohibition seeminglyapplies even to business activities the Trustees deem necessary or proper forthe preservation and protection of the Trust Estate.  Accordingly, the Trustees’ activities in connection with theadministration of Trust assets are limited to collecting income, payingexpenses and liabilities, distributing net income to the Trust’s CertificateHolders after the payment of, or provision for, such expenses and liabilities,and protecting and conserving the assets held.

 

Accordingly, the incomeof the Trust is highly dependent upon the activities and operations ofNorthshore, and the terms and conditions of the Amended AssignmentAgreements.  The Trust and the Trusteeshave no control over the operations and activities of Northshore, except withinthe framework of the Amended Assignment Agreements.

 

Due to winter weather,and the increasing royalty percentages based on tonnage shipped in a calendaryear, results for a particular calendar quarter are typically not indicative ofresults for future quarters or the year as a whole.  Factors which can impact the results of the Trust in any quarteror year include:

 

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

 

2.                             Operationsof Northshore.  Because the primaryportion of the Trust’s revenues derive from iron ore product shipped byNorthshore from Silver Bay, Northshore’s processing and shipping activitiesdirectly impact the Trust’s revenues in each quarter and for each year.  In turn, a number of factors affectNorthshore shipment volume.  Thesefactors include, among others, economic

 

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conditions in theiron ore industry, pricing by domestic and international competitors, long-termcustomer contracts or arrangements by Northshore or its competitors,availability of ore boats, production at Northshore’s mining operations, andproduction at the pelletizing/processing facility.  If any pelletizing line becomes idle for any reason, productionand shipments (and, consequently, Trust income) could be adversely impacted.

 

3.                             IncreasingRoyalties.  As described elsewherein this Report, the royalty percentage paid to the Trust increases as the aggregatetonnage of iron ore products shipped, attributable to the Trust, in anycalendar year increases.  Assuming aconsistent sales price per ton throughout a calendar year, shipments of ironore product attributable to the Trust later in the year generate a higherroyalty to the Trust.

 

4.                             Percentageof Mesabi Trust Ore.  As describedelsewhere in this Report, Northshore has the ability to process and ship ironore products from lands other than Mesabi Trust lands.  In certain circumstances, the Trust may beentitled to royalties on those other shipments, but not in all cases.  In general, the Trust will receive higherroyalties (assuming all other factors are equal) if a higher percentage ofshipments are from Mesabi Trust lands. The percentages of shipments that came from Mesabi Trust lands were95.5%, 97.5%, 99.2%, 99.8%, and 98.9%, in calendar years 2003, 2002, 2001,2000, and 1999, respectively.

 

5.                             Uncertaintyof Market Conditions in the Steel and Iron Ore Industry.  Although CCI reported in its Form 10-K forits fiscal year ending December 31, 2003 that it experienced a secondconsecutive record year in iron ore pellet sales and is projecting a furtherincrease of pellet sales for its fiscal year 2004, CCI cautioned in such Form10-K that significant risks and uncertainties may impact its forecast,including, but not limited to, lower customer demand, an increase in certainsteel imports and iron ore substitutes, a decrease in iron ore production inNorth America, customer failure, and customer or potential customerrestructuring and financial difficulty (which could result in reducedproduction capacity over time). Furthermore, there still exists uncertainty, consolidation andrestructuring in the domestic steel market.

 

Inlight of the current steel industry environment, uncertainties arising from warand other global events, and the above-mentioned risks and factors, it isuncertain whether prices on domestic steel products will be maintained at thesecurrent relatively higher levels, and whether steel mills will be able tooperate at capacity levels in 2004 and beyond. Furthermore, although overall there appears to have been an increase inthe demand for domestic steel products over the last fiscal year, it isnevertheless uncertain whether this increase in demand will continue and theextent to which it will impact royalties paid to the Trust in fiscal year 2005and beyond.

 

**Comparison of Fiscal Years ended January 31, 2004 and January31, 2003**

 

***Revenues, Expensesand Net Income***

 
|         |   | **Fiscal  Years Ended on January 31** |      | **% increase  (decrease)** |   |
|--------------|--------|---------------------------------------|-----------|----------------------------|--------|
|         |   | **2004**                              |      | **2003**                   |   |   |   |
| Gross Income |   | $                                     | 7,270,517 |                       | $      | 5,100,759 |   | 42.5 | % |
| Expenses     |   | 499,177                               |      | 406,228                    |   | 22.9 | % |
| Net Income   |   | $                                     | 6,771,340 |                       | $      | 4,694,531 |   | 44.2 | % |

 

Gross income for fiscal 2004 increased over that offiscal 2003 primarily due to increased pellet shipments and prices due toincreased market demand.  Fiscal 2004expenses were higher than those for fiscal 2003, mainly due to increases instock exchange fees and legal fees associated with SEC and Sarbanes-Oxley compliance.  (Expenses are described in further detailunder

 

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“Income and Expense” on page 13 of this AnnualReport.)  Net income increased primarilydue to increased pellet shipments and prices.

 

***Reserves andDistributions***

 
|                   |   | **As of  January 31** |      | **% increase  (decrease)** |   |
|------------------------|--------|-----------------------|-----------|----------------------------|--------|
|                   |   | **2004**              |      | **2003**                   |   |   |   |
| Unallocated reserve    |   | $                     | 1,408,584 |                       | $      | 1,066,048 |   | 32.1 | % |
| Distributions per Unit |   | .380                  |      | .250                       |   | 52.0 | % |
|                        |        |                       |           |                            |        |  |  |  |  |

 

Total distributions to Unitholders in fiscal 2004equaled $4,985,603, compared to total distributions of $3,280,003 in fiscal2003.  The increase of $0.13 per unitwas primarily due to increased pellet shipments.

 

***Royalty Income***

 
|                                    |   | **Fiscal  Years Ended on January 31** |      | **% increase  (decrease)** |   |
|-----------------------------------------|--------|---------------------------------------|-----------|----------------------------|--------|
|                                    |   | **2004**                              |      | **2003**                   |   |   |   |
| Base overriding royalties               |   | $                                     | 6,845,302 |                       | $      | 4,728,321 |   | 44.8 | % |
| Bonus royalties                         |   | —                                |      | —                     |   | — |   |
| Minimum advance royalty paid (recouped) |   | —                                |      | —                     |   | — |   |
| Fee royalties                           |   | 378,086                               |      | 324,635                    |   | 16.5 | % |
| Total royalty income                    |   | $                                     | 7,223,388 |                       | $      | 5,052,956 |   | 43.0 | % |

 

Baseoverriding royalties increased $2,116,981, or 44.8%, primarily due to increasedpellet shipments and prices due to increased market demand.  Fee royalties increased $53,451, or 16.5%,primarily due to an increase in crude ore mined by Northshore.

 

**Comparison of Fiscal Years ended January 31, 2003 and January31, 2002**

 

***Revenues, Expensesand Net Income***

 
|         |   | **Fiscal  Years Ended on January 31** |      | **% increase  (decrease)** |   |
|--------------|--------|---------------------------------------|-----------|----------------------------|--------|
|         |   | **2003**                              |      | **2002**                   |   |   |   |
| Gross Income |   | $                                     | 5,100,759 |                       | $      | 3,984,721 |   | 28.0 | % |
| Expenses     |   | 406,228                               |      | 340,315                    |   | 19.4 | % |
| Net Income   |   | $                                     | 4,694,531 |                       | $      | 3,644,406 |   | 28.8 | % |

 

Gross income for fiscal 2003 increased over that offiscal 2002 primarily due to increased pellet shipments.  Fiscal 2003 expenses were higher than thosefor fiscal 2002, mainly due to increasing legal fees.  (Expenses are described in further detail under “Income andExpense” on page 12 of this Annual Report.)

 

***Reserves andDistributions***

 
|                   |   | **As of /  Fiscal Years Ended January 31** |      | **% increase  (decrease)** |   |
|------------------------|--------|--------------------------------------------|-----------|----------------------------|--------|
|                   |   | **2003**                                   |      | **2002**                   |   |   |   |
| Unallocated reserve    |   | $                                          | 1,066,048 |                       | $      | 1,094,721 |   | (2.6 | )% |
| Distributions per Unit |   | .250                                       |      | .305                       |   | (18.0 | )% |
|                        |        |                                            |           |                            |        |  |  |  |  |

 

Total distributions to Unitholders in fiscal 2003equaled $3,280,003, compared to total distributions of $4,001,603 in fiscal2002.

 

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***Royalty Income***

*** ***
|                                     |   | **Fiscal Years  Ended on January 31** |      | **% increase  (decrease)** |   |
|------------------------------------------|--------|---------------------------------------|-----------|----------------------------|--------|
|                                     |   | **2003**                              |      | **2002**                   |   |   |   |
| Base  overriding royalties               |   | $                                     | 4,728,321 |                       | $      | 3,709,014 |   | 27.5 | % |
| Bonus  royalties                         |   | —                                |      | —                     |   |   |   |
| Minimum  advance royalty paid (recouped) |   | —                                |      | —                     |   |   |   |
| Fee  royalties                           |   | 324,635                               |      | 224,857                    |   | 44.4 | % |
| Total royalty income                     |   | $                                     | 5,052,956 |                       | $      | 3,933,871 |   | 28.4 | % |

 

**Critical Accounting Policies**

 

Accounting policies andestimates are disclosed in the financial statement footnotes on pages F-6though F-9.

 

**Off-BalanceSheet Arrangements**

 

The Trust has nooff-balance sheet arrangements.

 

**Contractual Obligations**

 

The Trust has no paymentobligations under any long-term borrowings, capital lease, operating lease, orpurchase agreement.

 

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

 

**THE TRUST ESTATE**

** **

The principal assets ofMesabi Trust consist of two different interests in certain properties in theMesabi Iron Range: (i) Mesabi Trust’s interest as assignor in the AmendedAssignment of Peters and the Amended Assignment of Cloquet Lease, which togethercover properties aggregating approximately 9,750 contiguous acres in St. LouisCounty, Minnesota (the “Peters Lease Lands” and the “Cloquet Lease Lands,”respectively, and collectively, the “Peters and Cloquet Lease Lands”), and(ii) Mesabi Trust’s ownership of the entire beneficial interest in MesabiLand Trust, which has a 20% interest as fee owner in the Peters Lease Lands anda 100% fee ownership in certain non-mineral-bearing lands adjacent to thePeters and Cloquet Lease Lands (the “Mesabi Lease Lands”).

 

The Peters Lease providesthat each leasehold estate will continue until the reserves of iron ore,taconite and other minerals or materials on the land subject to the PetersLease are exhausted.  The Mesabi Leaseterminates when the Peters Lease terminates. The Cloquet Lease, executed in 1916, terminates in the year 2040.  If Northshore decides to terminate orsurrender one or more of these leases, it must first give Mesabi Trust at leastsix 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 leaseinterests to Mesabi Trust free and clear of liens, except public highways.  In return, Mesabi Trust must assumeNorthshore’s future obligations as lessee under the reassigned leases.

 

The Peters and CloquetLease Lands are located at the eastern end of the Mesabi Iron Range and containlow-grade iron ore known as taconite, approximately three tons of which must bebeneficiated to produce one ton of high-grade pellets.  The Trustees have not had any surveys ortest drillings performed to ascertain the iron ore reserves on the Peters andCloquet Lease Lands.  However, initialsurveys and

 

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test drillings made by Mesabi Iron Company many yearsago indicated that these lands contained accessible taconite reserves capableof yielding approximately 500 million tons of high grade iron ore pellets.  In CCI’s 2003 Annual Report, CCI estimatedthat there currently remains enough ore reserve in the Peters and Cloquet LeaseLands to produce, at capacity-level extraction rates, concentrated product forapproximately 66 years of mining.  TheMesabi Lease Lands provide an area for location of service roads, supportingplants and equipment and dump sites for overburden.

 

Under the AmendedAssignment Agreements, Northshore produces iron ore from the Peters and CloquetLease Lands for the manufacture of pellets to be sold to various users, andMesabi Trust receives royalties on the crude ore extracted from such Lands andthe pellets produced from such crude ore.

 

**LEASEHOLD ROYALTIES**

** **

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

 

Base overriding royaltiesare calculated on the basis of an escalating scale of percentages of grosssales proceeds of iron ore shipped.  Theapplicable percentage is determined by reference to the tonnage of pelletspreviously 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%     |   |

 

For example, assume thatno shipments of iron ore products were made during the first calendar quarterof 2004, and further assume that pellets were shipped from Silver Bay,Minnesota in the second and third calendar quarters of 2004 in the followingtonnage quantities and rendering the following gross proceeds:

 

 
|         |   | **Tonnage** |   | **Gross  Proceeds** |       |
|--------------|--------|-------------|--------|---------------------|------------|
|         |   |        |   |                |       |
| 2ndQuarter:  |   | 500,000     |   | $                   | 14,000,000 |   |
| 3rd Quarter: |   | 500,000     |   | $                   | 14,000,000 |   |
|         |   | 1,000,000   |   | $                   | 27,000,000 |   |
|         |   | 1,000,000   |   | $                   | 26,000,000 |   |
|         |   | 1,000,000   |   | $                   | 25,000,000 |   |
|         |   | 1,500,000   |   | $                   | 37,500,000 |   |

 

10

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In this example, the baseoverriding royalties payable in respect of the second and third calendarquarters of 2003 would be as follows:

 
| 2ndQuarter:  |   | $ | 14,000,000 x 2-1/2 | %      | $ | (350,000   | ) |
|--------------|--------|---|--------------------|--------|---|------------|---|
| 3rd Quarter: |   | $ | 14,000,000 x 2-1/2 | %      | $ | (350,000   | ) |
|         |   | $ | 27,000,000 x 3-1/2 | %      | $ | (945,000   | ) |
|         |   | $ | 26,000,000 x 5%    |   | $ | (1,300,000 | ) |
|         |   | $ | 25,000,000 x 5-1/2 | %      | $ | (1,375,000 | ) |
|         |   | $ | 37,500,000 x 6%    |   | $ | (2,250,000 | ) |

 

Based on the same example, the percentage applicablefor all iron ore products shipped in the fourth calendar quarter of 2004 wouldbe 6%, because more than four million tons were shipped during the first threequarters.

 

The above figures areprovided only to illustrate the method for calculating base overridingroyalties and do not indicate the amount of base overriding royalties theTrustees expect Mesabi Trust to earn in calendar 2004 or any other calendar orfiscal year.  Accordingly, the foregoingexample illustrating the calculation of base overriding royalties should not beconsidered a prediction of the amount of base overriding royalties Mesabi Trustwill receive.

 

Royalty bonuses arepayable on all iron ore products sold at prices above a threshold price (the“Adjusted Threshold Price”).  TheAdjusted Threshold Price was $40.61 per ton for calendar year 2002, $41.13 forcalendar year 2003, and will be $41.76 for calendar year 2004.  The Adjusted Threshold Price is subject toadjustment (but not below $30 per ton) for inflation and deflation and isdetermined each year on the basis of the change in a broad based index ofinflation and deflation published quarterly by the U.S. Department of Commerce.

 

The amount of royaltybonuses payable for any period is calculated on the basis of an escalatingscale of percentages of the gross sales proceeds to Northshore of pellets soldat prices above the Adjusted Threshold Price. The applicable percentage is determined by reference to the amount bywhich the sales prices for a particular quantity of pellets exceeds theAdjusted 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%        |   |
|                                                                             |        |                            |           |  |  |

 

Nevertheless, because thesales price for pellets has not exceeded the applicable Adjusted ThresholdPrice for several years, no royalty bonus has been paid to the Trust in recentyears.

 

Northshore also must paybase overriding royalties and royalty bonuses on pellets produced from landsother than Mesabi Lease Lands (“Other Ore”) to the extent necessary to assurepayment of base overriding royalties and royalty bonuses on at least 90% of thefirst four million tons of pellets shipped from Silver Bay in each calendaryear, at least 85% of the next two million tons of pellets shipped therefrom ineach calendar year, and at least 25% of all tonnage of pellets shippedtherefrom in each calendar year in excess of six million tons.  Base overriding royalties and royaltybonuses payable on

 

11

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Other Ore can be recouped by Northshore out of baseoverriding royalties and royalty bonuses paid on Mesabi Ore.  The amount of Other Ore royalties and OtherOre 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 areotherwise payable on that payment date.

 

Northshore is obligatedto pay to Mesabi Trust advance royalties in equal quarterly installments.  The advance royalty was $676,814 forcalendar year 2002, $685,630 for calendar year 2003, and is $696,161 forcalendar year 2004.  The amount ofadvance royalties payable is subject to adjustment (but not below $500,000 perannum) for inflation and deflation and is determined each year in the samemanner as the Adjusted Threshold Price. All payments of advance royalties are credited against payments of baseoverriding royalties and royalty bonuses payable on Mesabi Ore until fullyrecouped.  The amount of advanceroyalties payable in respect of each calendar quarter constitutes the minimumoverriding royalty amount payable by Northshore in respect of that calendarquarter.

 

Base overriding royaltiesand royalty bonuses are payable quarterly and accrue upon shipment, whether ornot the actual sales proceeds for any shipment are received by Northshore.  The amount of base overriding royalties androyalty bonuses payable with respect to the first three quarters in anycalendar year are determined on the basis of tonnage shipped during each suchcalendar quarter and the actual sales proceeds of such shipments, with anadjustment made to the royalties payable with respect to the last quarter inany calendar year to account for errors, adjustments and returns.

 

In addition, in the eventthat Northshore commences mining and production of quarry stone for shipment,Northshore must pay base overriding royalties on all quarry stone so shipped onthe basis of the same scale of percentages used in calculating base overridingroyalties payable on pellets and other iron ore product.  Northshore has not informed Mesabi Trust ofany present intention to commence mining and production of quarry stone.

 

**LAND TRUST AND FEE ROYALTIES**

** **

Mesabi Land Trust holds a20% interest as fee owner in the Peters Lease Lands and a 100% interest as feeowner in the Mesabi Lease Lands as lessor of the Mesabi Lease.  Mesabi Trust holds the entire beneficialinterest in Mesabi Land Trust and is entitled to receive the net income ofMesabi Land Trust after payment of expenses. Northshore is not obligated to pay royalties or rental to Mesabi LandTrust as fee owner of the non-mineral bearing Mesabi Lease Lands, aconsideration having been paid in that respect at the inception of the MesabiLease.

 

Northshore is required topay a base royalty to the fee owners in an amount which, at its option, iseither (a) 11-2/3¢ per gross ton of crude ore it mines from the Peters LeaseLands, or (b) $.0056 for each 1% of metallic iron ore natural contained in eachgross ton of pellets it produces from the Peters Lease Lands and ships.  The base fee royalty rate is adjusted up ordown each quarter (but not below the base royalty specified above) by additionor subtraction of an amount to be determined by reference to changes in LowerLake Mesabi Range pellet prices and the All Commodities Producer PriceIndex.  The adjustment factor iscomputed by multiplying the base fee royalty rate specified above by apercentage that is the sum of (a) one-half of the percentage change, if any, bywhich the then prevailing price per iron unit of Mesabi Range taconite pelletsdelivered by rail or vessel at Lower Lake Erie ports exceeds 80.5¢ (the priceper iron unit in effect in January 1982), plus (b) one-half of the percentagechange, if any, by which the All Commodities Producer Price Index exceeds 295.8(the level of the Index for December 1981).

 

Fee royalties aggregating$378,086 with respect to crude ore mined by Northshore were earned by MesabiLand Trust during the fiscal year ended January 31, 2004.

 

12

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**INCOME AND EXPENSE**

** **

Total income for MesabiTrust for the fiscal year ended January 31, 2004 was $7,270,517, consisting of$47,129 in interest earned on the investment of the Unallocated Reserve,$378,086 in fee income, $0 in minimum advance royalty income, and $6,845,302 inoverriding royalty income, compared with $5,100,759 in total income for theprevious fiscal year.  Total expensesfor the fiscal year were $499,177, compared with $406,228 in total expenses forthe previous fiscal year.  There weredistributions paid per Unit of Beneficial Interest totaling $.38 for the fiscalyear ended January 31, 2004, compared with distributions paid for the fiscalyear ended January 31, 2003 of $.25 per Unit.

 

Total expenses bycategories were as follows:

 
|                                                                          |   | **Fiscal  Years ended on January 31** |    |
|-------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                          |   | **2004**                              |    | **2003** |   | **2002** |   |
|                                                                          |   |                                  |    |   |   |   |   |
| Compensation of Trustees                                                      |   | $                                     | 140,680 |   | $ | 134,907 |   | $ | 131,767 |   |
| Fees and Disbursements                                                        |   |                                  |    |   |   |   |   |
| Administrative                                                                |   | 62,500                                |    | 62,500 |   | 62,500 |   |
| Accounting                                                                    |   | 32,850                                |    | 28,577 |   | 32,155 |   |
| Inspection trips, travel and other expenses  of Trustees                      |   | 32,942                                |    | 33,785 |   | 31,684 |   |
| Legal                                                                         |   | 121,317                               |    | 88,322 |   | 39,590 |   |
| Mining consultant and field representatives                                   |   | 20,758                                |    | 13,786 |   | 14,217 |   |
| Stock exchange listing fee                                                    |   | 35,000                                |    | — |   | — |   |
| Printing of annual and quarterly reports,  and letters to certificate holders |   | 5,785                                 |    | 8,644 |   | 267 |   |
| Transfer Agent and Registrar                                                  |   | 17,569                                |    | 15,838 |   | 18,635 |   |
| Transfer Agent miscellaneous disbursements                                    |   | 29,776                                |    | 19,869 |   | 9,500 |   |
|                                                                          |   | $                                     | 499,177 |   | $ | 406,228 |   | $ | 340,315 |   |

 

Pursuant to the Amendmentto the Agreement of Trust dated October 25, 1982 (the “Amendment”), eachIndividual Trustee receives annual compensation for services as Trustee of$20,000, adjusted up or down (but not below $20,000) in accordance with changesfrom the November 1981 level of 295.5 (the “1981 Escalation Level”) in the AllCommodities Producer Price Index (with 1967 = 100 as a base), which ispublished by the U.S. Department of Labor. The adjustment is made at the end of each fiscal year and is calculatedon the basis of the proportion between (a) the level of such index for theNovember preceding the end of such fiscal year, and (b) the 1981 EscalationLevel.

 

**RESERVES AND DISTRIBUTIONS**

** **

Mesabi Trust’sUnallocated Reserve aggregated $1,408,584 at January 31, 2004, compared with anUnallocated Reserve of $1,066,048 at January 31, 2003.  The Trustees have determined that theUnallocated Reserve should be maintained at a prudent level.  Accordingly, although the actual amount ofthe Unallocated Reserve will fluctuate from time to time, and may increase ordecrease from its current level, it is currently intended that futuredistributions will be highly dependent upon royalty income as it is receivedand the level of Trust expenses.  Theamount of future royalty income available for distribution will be subject tothe volume of iron ore product shipments and the dollar level of sales byNorthshore.  Shipping activity isgreatly reduced during the winter months and economic conditions, particularlythose affecting the steel industry, may adversely affect the amount and timingof such future shipments and sales.

 

13

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The Trustees willcontinue to monitor the economic circumstances of the Trust to strike a responsiblebalance between distributions to Unitholders and the need to maintain adequatereserves at a prudent level, given the unpredictable nature of the iron oreindustry, the Trust’s dependence on the actions of the lessee/operator, and thefact that the Trust essentially has no other liquid assets.

 

Payments to Unitholdersduring the fiscal year ended January 31, 2003 totaled $3,280,003 and paymentsto Unitholders during the fiscal year ended January 31, 2004  totaled $4,985,603.

 

**CERTIFICATES OF BENEFICIAL INTEREST**

** **

The Certificates ofBeneficial Interest are traded on the New York Stock Exchange.  During the past two fiscal years, the marketranges of the certificates for each quarterly period and the distributionsdeclared for such quarterly periods were as follows:

 
| **Fiscal  Quarter Ended** |   | **High** |   | **Low** |   | **Amount  Declared** |      | **Per Unit** |   |
|---------------------------|--------|----------|--------|---------|--------|----------------------|-----------|--------------|--------|
|                      |   |     |   |    |   |                 |      |         |   |
| April 30, 2003            |   | $        | 5.10   |    | $      | 4.11                 |      | $            | — |   | $ | — |   |
| July 31, 2003             |   | $        | 5.25   |    | $      | 4.50                 |      | 918,400      |   | .07 |   |
| October 31, 2003          |   | $        | 5.20   |    | $      | 4.60                 |      | 1,574,401    |   | .12 |   |
| January 31, 2004          |   | $        | 7.76   |    | $      | 5.08                 |      | 3,936,003    |   | .30 |   |
|                      |   |     |   |    |   | $                    | 6,428,804 |         | $      | .49 |   |

 
| **Fiscal Quarter Ended** |   | **High** |   | **Low** |   | **Amount  Declared** |      | **Per Unit** |   |
|--------------------------|--------|----------|--------|---------|--------|----------------------|-----------|--------------|--------|
|                     |   |     |   |    |   |                 |      |         |   |
| April 30, 2002           |   | $        | 4.30   |    | $      | 2.98                 |      | $            | — |   | $ | — |   |
| July 31, 2002            |   | $        | 4.74   |    | $      | 3.00                 |      | 656,001      |   | .05 |   |
| October 31, 2002         |   | $        | 4.24   |    | $      | 3.25                 |      | 1,574,401    |   | .12 |   |
| January 31, 2003         |   | $        | 4.90   |    | $      | 3.65                 |      | 2,492,802    |   | .19 |   |
|                     |   |     |   |    |   | $                    | 4,723,204 |         | $      | .36 |   |

 

As of the close ofbusiness on March 26, 2004, the beneficial interest in Mesabi Trust wasrepresented by 13,120,010 Units registered in the names of approximately 2,100individuals holding of record approximately 1,803,878 Units, and in the namesof approximately 113 brokers, nominees, or fiduciaries holding of recordapproximately 11,316,132 Units.

 

14

----

 

**THE TRUSTEES**

** **

The name and address ofeach Trustee and the principal occupation of each individual Trustee are asfollows:

 
| **Name and Address of Trustee**                                                                                                                    |   | **Principal Occupation**                                        |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------|
|                                                                                                                                               |   |                                                            |
| Deutsche Bank Trust Company America  Corporate Trustee  60 Wall Street  28th Floor  New York, New York 10005                                       |   | New York banking corporation                                    |
|                                                                                                                                               |   |                                                            |
| David J. Hoffman  Individual Trustee  P.O. Box 10444  Sedona, Arizona 86339                                                                        |   | Mining geologist                                                |
|                                                                                                                                               |   |                                                            |
| Richard G. Lareau  Individual Trustee  Oppenheimer Wolff & Donnelly LLP  3400 Plaza VII  45 South Seventh Street  Minneapolis, Minnesota 55402 |   | Partner in the law firm of Oppenheimer Wolff & Donnelly LLP |
|                                                                                                                                               |   |                                                            |
| Ira A. Marshall, Jr.  Individual Trustee  12 Fincher Way  Rancho Mirage, California 92270                                                          |   | Private investor; self-employed petroleum engineer              |
|                                                                                                                                               |   |                                                            |
| Norman F. Sprague III  Individual Trustee  11726 San Vicente Blvd.  Suite 625  Los Angeles, California 90049                                       |   | Private investor; orthopedic surgeon                  |

 
|                               |   | Respectfully submitted,                                                          |
|------------------------------------|--------|----------------------------------------------------------------------------------|
|                               |   |                                                                             |
|                               |   | DEUTSCHE  BANK TRUST  COMPANY AMERICAS                                           |
| New York, New York  April 19, 2004 |   | DAVID J. HOFFMAN  RICHARD G. LAREAU  IRA A. MARSHALL, JR.  NORMAN F. SPRAGUE III |

 

15

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**INDEPENDENT AUDITOR’S REPORT**

 

To the Trustees

**Mesabi Trust**

New York, New York

 

We have audited the accompanying balance sheets of **Mesabi Trust** as of January 31, 2004 and2003, and the related statements of income, unallocated reserve and trustcorpus and cash flows for the years ended January 31, 2004, 2003, and 2002.These financial statements are the responsibility of the Trustee’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of **Mesabi Trust** as of January 31, 2004 and2003, and the results of its operations and cash flows for the years endedJanuary 31, 2004, 2003, and 2002, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
|                | EIDE BAILLY LLP     |
|---------------------|---------------------|
| Fargo, North Dakota |                |
| March 8, 2004       |                |
|                | /s/ Eide Bailly LLP |   |

 

F-1

----

 

**MESABITRUST**

**BALANCESHEETS**

**JANUARY31, 2004 AND 2003**

 
|                                                                       |   | **2004**      |          | **2003**   |   |
|----------------------------------------------------------------------------|--------|---------------|---------------|------------|--------|
|                                                                       |   |          | ** **    |       |   |
| **ASSETS**                                                                 |   |          | ** **    |       |   |
|                                                                       |   |          | ** **    |       |   |
| CASH                                                                       |   | **$**         | **98,692**    | ** ** | $      | 2,515,457 |   |
| U.S. GOVERNMENT SECURITIES, at amortized  cost (which approximates market) |   | **4,826,046** |          | 891,243    |   |
| ACCRUED INCOME                                                             |   | **449,780**   | ** **    | 175,978    |   |
| PREPAID EXPENSE                                                            |   | **15,560**    | ** **    | 11,421     |   |
|                                                                       |   | **5,390,078** |          | 3,594,099  |   |
|                                                                       |   |          | ** **    |       |   |
| FIXED PROPERTY, including intangibles, at  nominal values                  |   |          | ** **    |       |   |
| Assignments of leased property                                             |   |          | ** **    |       |   |
| Amended assignment of Peters Lease                                         |   | **1**         | ** **    | 1          |   |
| Assignment of Cloquet Leases                                               |   | **1**         | ** **    | 1          |   |
| Certificate of beneficial interest for  13,120,010 units of Land Trust     |   | **1**         |          | 1          |   |
|                                                                       |   | **3**         |          | 3          |   |
|                                                                       |   |          | ** **    |       |   |
|                                                                       |   | **$**         | **5,390,081** |       | $      | 3,594,102 |   |
|                                                                       |   |          | ** **    |       |   |
| **LIABILITIES, UNALLOCATED RESERVE AND TRUST  CORPUS**                     |   |          | ** **    |       |   |
|                                                                       |   |          | ** **    |       |   |
| DISTRIBUTION PAYABLE                                                       |   | **$**         | **3,936,003** | ** ** | $      | 2,492,802 |   |
| ACCRUED EXPENSES                                                           |   | **45,491**    | ** **    | 35,249     |   |
|                                                                       |   | **3,981,494** |          | 2,528,051  |   |
|                                                                       |   |          | ** **    |       |   |
| UNALLOCATED RESERVE                                                        |   | **1,408,584** | ** **    | 1,066,048  |   |
|                                                                       |   |          | ** **    |       |   |
| TRUST CORPUS                                                               |   | **3**         | ** **    | 3          |   |
|                                                                       |   |          | ** **    |       |   |
|                                                                       |   | **$**         | **5,390,081** |       | $      | 3,594,102 |   |

 

See Notes to Financial Statements

 

F-2

----

 

**MESABI TRUST**

**STATEMENTS OF INCOME**

**YEARS ENDED JANUARY 31, 2004, 2003 AND 2002**

 
|                                            |   | **2004**       |          | **2003**   |   | **2002**   |   |
|-------------------------------------------------|--------|----------------|---------------|------------|--------|------------|--------|
|                                            |   |           | ** **    |       |   |       |   |
| REVENUES                                        |   |           | ** **    |       |   |       |   |
| Royalties under amended lease agreements        |   | **$**          | **6,845,302** | ** ** | $      | 4,728,321  |   | $ | 3,709,014 |   |
| Royalties under Peters Lease fee                |   | **378,086**    | ** **    | 324,635    |   | 224,857    |   |
| Interest                                        |   | **47,129**     | ** **    | 47,803     |   | 50,850     |   |
|                                            |   |           | ** **    |       |   |       |   |
| Total revenues                                  |   | **7,270,517**  | ** **    | 5,100,759  |   | 3,984,721  |   |
|                                            |   |           | ** **    |       |   |       |   |
| EXPENSES                                        |   |           | ** **    |       |   |       |   |
| Compensation of Trustees                        |   | **140,680**    | ** **    | 134,907    |   | 131,767    |   |
| Corporate Trustee’s administrative fees    |   | **62,500**     | ** **    | 62,500     |   | 62,500     |   |
| Professional fees and expenses:                 |   |           | ** **    |       |   |       |   |
| Legal and accounting                            |   | **154,167**    | ** **    | 116,899    |   | 71,745     |   |
| Mining consultant and field representatives     |   | **20,758**     |          | 13,786     |   | 14,217     |   |
| Transfer agent’s and registrar’s fees |   | **17,569**     | ** **    | 15,838     |   | 18,635     |   |
| Other Trust expenses                            |   | **103,503**    | ** **    | 62,298     |   | 41,451     |   |
|                                            |   |           | ** **    |       |   |       |   |
| Total expenses                                  |   | **499,177**    | ** **    | 406,228    |   | 340,315    |   |
|                                            |   |           | ** **    |       |   |       |   |
| NET INCOME                                      |   | **$**          | **6,771,340** | ** ** | $      | 4,694,531  |   | $ | 3,644,406 |   |
|                                            |   |           | ** **    |       |   |       |   |
| WEIGHTED AVERAGE NUMBER OF UNITS  OUTSTANDING   |   | **13,120,010** |          | 13,120,010 |   | 13,120,010 |   |
|                                            |   |           | ** **    |       |   |       |   |
| NET INCOME PER UNIT                             |   | **$**          | **0.52**      | ** ** | $      | 0.36       |   | $ | 0.28 |   |

 

See Notes toFinancial Statements

 

F-3

----

 

**MESABITRUST**

**STATEMENTSOF UNALLOCATED RESERVE AND TRUST CORPUS**

**YEARSENDED JANUARY 31, 2004, 2003 AND 2002**

 
|                                                                           |   | **Unallocated  Reserve** |   |       |      |
|--------------------------------------------------------------------------------|--------|--------------------------|--------|------------|-----------|
|                                                                           |   | **Number of  Units**     |   | **Amount** |      | **Trust  Corpus** |   |
|                                                                           |   |                     |   |       |      |   |   |
| BALANCE, JANUARY 31, 2001                                                      |   | 13,120,010               |   | $          | 795,918   |   | $ | 3 |   |
|                                                                           |   |                     |   |       |      |   |   |
| Net income                                                                     |   | —                   |   | 3,644,406  |      | — |   |
| Distribution paid August 20, 2001, $.07 per  unit                              |   | —                   |   | (918,401   | )         | — |   |
| Distribution paid November 20, 2001, $.105  per unit                           |   | —                   |   | (1,377,601 | )         | — |   |
| Distribution declared January 16, 2002,  paid February 20, 2002, $.08 per unit |   | —                   |   | (1,049,601 | )         | — |   |
|                                                                           |   |                     |   |       |      |   |   |
| BALANCE, JANUARY 31, 2002                                                      |   | 13,120,010               |   | 1,094,721  |      | 3 |   |
|                                                                           |   |                     |   |       |      |   |   |
| Net income                                                                     |   | —                   |   | 4,694,531  |      | — |   |
| Distribution paid August 20, 2002, $.05 per  unit                              |   | —                   |   | (656,001   | )         | — |   |
| Distribution paid November 20, 2002, $.12  per unit                            |   | —                   |   | (1,574,401 | )         | — |   |
| Distribution declared January 14, 2003,  paid February 20, 2003, $.19 per unit |   | —                   |   | (2,492,802 | )         | — |   |
|                                                                           |   |                     |   |       |      |   |   |
| BALANCE, JANUARY 31, 2003                                                      |   | 13,120,010               |   | 1,066,048  |      | 3 |   |
|                                                                           |   |                     |   |       |      |   |   |
| Net income                                                                     |   | —                   |   | 6,771,340  |      | — |   |
| Distribution paid August 20, 2003, $.07 per  unit                              |   | —                   |   | (918,400   | )         | — |   |
| Distribution paid November 20, 2003, $.12  per unit                            |   | —                   |   | (1,574,401 | )         | — |   |
| Distribution declared January 17, 2004,  paid February 20, 2004, $.30 per unit |   | —                   |   | (3,936,003 | )         | — |   |
|                                                                           |   |                     |   |       |      |   |   |
| BALANCE, JANUARY 31, 2004                                                      |   | 13,120,010               |   | $          | 1,408,584 |   | $ | 3 |   |

 

See Notes to Financial Statements

 

F-4

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**MESABI TRUST**

**STATEMENTS OF CASHFLOWS**

**YEARS ENDED JANUARY31, 2004, 2003 AND 2002**

 
|                                                                |   | **2004**       |          | **2003**   |   | **2002**   |   |
|---------------------------------------------------------------------|--------|----------------|---------------|------------|--------|------------|--------|
|                                                                |   |           |          |       |   |       |   |
| OPERATING ACTIVITIES                                                |   |           | ** **    |       |   |       |   |
| Royalties received                                                  |   | **$**          | **6,950,514** | ** ** | $      | 4,972,730  |   | $ | 3,941,797 |   |
| Interest received                                                   |   | **46,202**     | ** **    | 50,274     |   | 43,593     |   |
| Expenses paid                                                       |   | **(493,075**   | **)**         | (452,463   | )      | (321,136   | )      |
|                                                                |   |           | ** **    |       |   |       |   |
| NET CASH FROM OPERATING ACTIVITIES                                  |   | **6,503,641**  | ** **    | 4,570,541  |   | 3,664,254  |   |
|                                                                |   |           | ** **    |       |   |       |   |
| INVESTING ACTIVITIES                                                |   |           | ** **    |       |   |       |   |
| Maturities of U.S. Government securities                            |   | **3,718,540**  | ** **    | 3,384,186  |   | 5,010,366  |   |
| Purchases of U.S. Government securities                             |   | **(7,653,343** | **)**         | (3,382,513 | )      | (5,397,467 | )      |
|                                                                |   |           | ** **    |       |   |       |   |
| NET CASH FROM (USED FOR) INVESTING  ACTIVITIES                      |   | **(3,934,803** | **)**         | 1,673      |   | (387,101   | )      |
|                                                                |   |           | ** **    |       |   |       |   |
| FINANCING ACTIVITY                                                  |   |           | ** **    |       |   |       |   |
| Distributions to unitholders                                        |   | **(4,985,603** | **)**         | (3,280,003 | )      | (4,001,603 | )      |
|                                                                |   |           | ** **    |       |   |       |   |
| NET CHANGE IN CASH                                                  |   | **(2,416,765** | **)**         | 1,292,211  |   | (724,450   | )      |
|                                                                |   |           | ** **    |       |   |       |   |
| CASH, BEGINNING OF YEAR                                             |   | **2,515,457**  | ** **    | 1,223,246  |   | 1,947,696  |   |
|                                                                |   |           | ** **    |       |   |       |   |
| CASH, END OF YEAR                                                   |   | **$**          | **98,692**    | ** ** | $      | 2,515,457  |   | $ | 1,223,246 |   |
|                                                                |   |           | ** **    |       |   |       |   |
| RECONCILIATION OF NET INCOME TO NET CASH  FROM OPERATING ACTIVITIES |   |           | ** **    |       |   |       |   |
| Net income                                                          |   | **$**          | **6,771,340** | ** ** | $      | 4,694,531  |   | $ | 3,644,406 |   |
| Decrease (increase) in accrued income                               |   | **(273,802**   | **)**         | (77,754    | )      | 669        |   |
| Decrease (increase) in prepaid insurance                            |   | **(4,139**     | **)**         | (7,074     | )      | —     |   |
| Increase (decrease) in accrued expenses                             |   | **10,242**     | ** **    | (39,162    | )      | 19,179     |   |
|                                                                |   |           | ** **    |       |   |       |   |
| NET CASH FROM OPERATING ACTIVITIES                                  |   | **$**          | **6,503,641** | ** ** | $      | 4,570,541  |   | $ | 3,664,254 |   |

 

See Notes to Financial Statements

 

F-5

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**MESABI TRUST**

**NOTES TO FINANCIAL STATEMENTS**

**JANUARY 31, 2004, 2003 AND 2002**

 

**NOTE1 -  NATURE OF BUSINESS AND ORGANIZATION**

 

*Nature of Business*

 

Mesabi Trust was created in 1961 upon the liquidationof Mesabi Iron Company. The sole purpose of the Trust, as set forth in theAgreement of Trust dated as of July 18, 1961, is to conserve and protect theTrust Estate and to collect and distribute the income and proceeds therefrom tothe Trust’s certificate holders after the payment of, or provision for,expenses and liabilities. The Agreement of Trust prohibits the Trust fromengaging in any business.

 

The lessee/operator of Mesabi Trust’s mineralinterests is Northshore Mining Corporation (NMC), a subsidiary ofCleveland-Cliffs Inc. (CCI). CCI is among the world’s largest producers of ironore products. Prior to September 30, 1994, the lessee/operator had been asubsidiary of Cyprus Amax Minerals Company and was named Cyprus NorthshoreMining Corporation (Cyprus NMC).

 

*Organization*

 

The beneficial interest in Mesabi Trust isrepresented by 13,120,010 transferable units distributed on July 27, 1961 toshareholders of Mesabi Iron Company.

 

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

 

**NOTE2 -  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Investments*

 

The Trust invests solely in U.S. Governmentsecurities. Management determines the appropriate classifications of thesecurities at the time they are acquired and evaluates the appropriateness ofsuch classifications as of each balance sheet date.

 

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

 

*Revenue Recognition*

 

Royalty income under the amended leaseagreements with NMC (Cyprus NMC through September 30, 1994) is recognized as itis earned. Under such agreements, royalties are earned upon shipment,regardless of whether the actual sales proceeds for any shipment are receivedby NMC.

 

Royalty income under the Peters Lease fee agreementalso is recognized as it is earned. Under such agreement, however, royaltiesare earned [at the option of NMC (Cyprus NMC through September 30, 1994)]either upon mining of crude ore from Peters Lease lands or upon shipment ofiron ore product produced from Peters Lease lands.

 

(continued on next page)

 

F-6

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*Fixed Property, IncludingIntangibles*

 

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

 

1.               Theentire beneficial interest as assignor in the Amended Peters Lease Assignmentand the Amended Cloquet Lease Assignment covering taconite properties inMinnesota which are leased to NMC (Cyprus NMC through September 30, 1994).

 

2.               Theentire beneficial interest in Mesabi Land Trust which owns a 20% fee interestin the lands subject to the Peters Lease and the entire fee interest in otherproperties in Minnesota.

 

*Accounting Estimates*

 

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

 

*Fair Value of Financial Instruments*

 

The carrying amounts of financial instrumentsincluding cash, distributions payable and accrued expenses approximated fairvalue as of January 31, 2004 and 2003, because of the relative short maturityof these instruments.

 

**NOTE3 -  U. S. GOVERNMENT SECURITIES**

 

U.S. government securities at January 31,2004 and 2003 are classified as held-to-maturity and mature as follows:

 
|                                 |   | **2004**            |          | **2003**       |   |
|--------------------------------------|--------|---------------------|---------------|----------------|--------|
|                                 |   | **Carrying  Value** |          | **Fair Value** |   | **Carrying  Value** |   | **Fair Value** |   |
|                                 |   |                |          |           |   |   |   |   |   |
| Due within one year                  |   | **$**               | **4,077,853** | ** **     | **$**  | **4,075,162** |   | $ | 199,923 |   | $ | 201,969 |   |
| Due after one year through six years |   | **748,193**         | ** **    | **779,794**    |   | 691,320 |   | 734,656 |   |
|                                 |   |                | ** **    |           |   |   |   |   |   |
|                                 |   | **$**               | **4,826,046** |           | **$**  | **4,854,956** |   | $ | 891,243 |   | $ | 936,625 |   |

 

(continued on next page)

 

F-7

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**NOTE4 -  ROYALTY AGREEMENT**

 

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

 

On September 30, 1994, Cyprus Amax Minerals Company sold its iron oreoperations, including Cyprus NMC, to Cleveland-Cliffs Inc (CCI).  CCI renamed the operation Northshore MiningCorporation (NMC).  CCI is among theworld’s largest producers of iron ore products.

 

Pursuant to theAmended Assignment Agreements, NMC (Cyprus NMC through September 30, 1994)is obligated to pay Mesabi Trust base overriding royalties, in varying amountsconstituting a percentage of the gross proceeds of shipments, from Silver Bay,Minnesota, of iron ore product produced from Mesabi Trust lands or, to alimited extent, other lands.  NMC(Cyprus NMC through September 30, 1994) is obligated to make payments ofoverriding royalties on product shipments within 30 days following the calendarquarter in which such shipments occur. NMC (Cyprus NMC through September 30, 1994) resumed mining operationsand shipping product from Silver Bay in the second calendar quarter of 1990,and the first payment of overriding royalties was made in July 1990.

 

NMC (Cyprus NMC through September 30, 1994) also is obligated to pay toMesabi Trust a minimum advance royalty of $500,000 per annum, subject toadjustment for inflation and deflation (but not below $500,000), which iscredited against base overriding royalties and royalty bonuses. NMC (Cyprus NMCthrough September 30, 1994) is obligated to make quarterly payments of theminimum advance royalty in January, April, July and October of each year. Forthe calendar year ending December 31, 2004, the minimum advance royalty is$696,161. The minimum annual advance royalty was $685,630, $676,814, and$663,682 for the calendar years ended December 31, 2003, 2002 and 2001,respectively.

 

**NOTE5 -  UNALLOCATED RESERVE ANDDISTRIBUTIONS**

 

The Unallocated Reserve aggregated $1,408,584, at January 31, 2004, ascompared with an unallocated reserve of $1,066,048 and $1,094,721 at January31, 2003 and 2002, respectively. The Trustees have determined that theUnallocated Reserve should be maintained at a prudent level. Accordingly,although the actual amount of the Unallocated Reserve will fluctuate from timeto time, and may increase or decrease from its current level, it is currentlyintended that future distributions will be highly dependent upon royalty incomeas it is received and the level of Trust expenses.

 

During the fiscal years ended January 31, 2004, 2003, and 2002, theTrustees distributed cash payments totaling $4,985,603 (of $.38 per Unit),$3,280,003 (of $.25 per Unit), and $4,001,603 (of $.305 per Unit),respectively, of beneficial interest in Mesabi Trust. In addition, in January2004 the Trustees declared a distribution of $.30 per Unit of beneficialinterest, which was paid in February 2004.

 

(continued on next page)

 

F-8

----

 

**NOTE6 -  SUMMARY OF QUARTERLY EARNINGS(UNAUDITED)**

 

The quarterly results of operations for thetwo years ended January 31, 2004 and 2003 are presented below:

 
|                |   | **2004**           |        |
|---------------------|--------|--------------------|-------------|
|                |   | **First  Quarter** |        | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|                |   |               |        |   |   |   |   |   |   |
| Revenue             |   | **$**              | **378,164** |   | **$** | **1,106,677** |   | **$** | **2,401,495** |   | **$** | **3,384,181** |   |
| Expenses            |   | **128,162**        |        | **141,231** |   | **116,912** |   | **112,872** |   |
|                |   |               |        |   |   |   |   |   |   |
| Net income          |   | **$**              | **250,002** |   | **$** | **965,446** |   | **$** | **2,284,583** |   | **$** | **3,271,309** |   |
|                |   |               |        |   |   |   |   |   |   |
| Net income per unit |   | **$**              | **0.02**    |   | **$** | **0.07** |   | **$** | **0.17** |   | **$** | **0.26** |   |

 
|                |   | **2003**           |    |
|---------------------|--------|--------------------|---------|
|                |   | **First  Quarter** |    | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|                |   |               |    |   |   |   |   |   |   |
| Revenue             |   | $                  | 266,518 |   | $ | 753,390 |   | $ | 1,964,772 |   | $ | 2,116,079 |   |
| Expenses            |   | 71,390             |    | 126,692 |   | 95,995 |   | 112,151 |   |
|                |   |               |    |   |   |   |   |   |   |
| Net income          |   | $                  | 195,128 |   | $ | 626,698 |   | $ | 1,868,777 |   | $ | 2,003,928 |   |
|                |   |               |    |   |   |   |   |   |   |
| Net income per unit |   | $                  | 0.01    |   | $ | 0.05 |   | $ | 0.14 |   | $ | 0.16 |   |

 

F-9

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