**Exhibit 13**

 

ANNUAL REPORT

OF THE TRUSTEES OF

MESABI TRUST

For the Year Ended January 31, 2005

 

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 will provide,however, upon the written request of any Unitholder addressed to the Trusteesat the above address and without charge to such Unitholder, a paper copy ofMesabi Trust’s Annual Report on Form 10-K for the fiscal year endedJanuary 31, 2005 as filed with the Securities and Exchange Commissionpursuant to the Securities Exchange Act of 1934, as amended.

 

Forward-Looking Information

 

Certain statements containedin this document are forward-looking, including specifically those statementsestimating 2005 production or shipments. All such forward-looking statements are based on input from the lessee/operator.  The Trust has no control over the operationsand activities of the lessee/operator except within the framework of currentagreements.  Actual results could differmaterially from those indicated in such statements.  For important factors that could cause actualresults to differ materially, see the information under the heading “ImportantFactors Affecting Mesabi Trust” set forth on page 11 of this Annual Report.

 

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**SELECTEDFINANCIAL DATA**

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003**  | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|
| Years ended on January 31             |       |     |       |     |       |      |       |     |       |     |       |
| Royalty and interest income           |       | $        | 13,575,548 |     | $          | 7,270,517 |       | $        | 5,100,759  |     | $          | 3,984,721 |   | $ | 5,753,650 |   |
| Trust  expenses                       |       | 557,961  |       | 499,177  |       | 406,228   |       | 340,315  |       | 407,505  |       |
| Net  income(a)                        |       | $        | 13,017,587 |     | $          | 6,771,340 |       | $        | 4,694,531  |     | $          | 3,644,406 |   | $ | 5,346,145 |   |
|                                  |       |     |       |     |       |      |       |     |       |     |       |
| Net income  per Unit(b)               |       | $        | .99        |     | $          | .52       |       | $        | .36        |     | $          | .28 |   | $ | .41 |   |
|                                  |       |     |       |     |       |      |       |     |       |     |       |
| Distributions declared per unit(b)(c) |       | $        | .77        |     | $          | .49       |       | $        | .36        |     | $          | .26 |   | $ | .41 |   |
|                                  |       |     |       |     |       |      |       |     |       |     |       |
| At January  31                        |       |     |       |     |       |      |       |     |       |     |       |
| Total Assets                          |       | $        | 8,252,335  |     | $          | 5,390,081 |       | $        | 3,594,102  |     | $          | 2,218,736 |   | $ | 2,556,754 |   |

 

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

 

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

 

(c)                                  During the fiscal year ended January 31,2005, the Trustees distributed $.775 per Unit (including $.30 per Unit declaredin fiscal 2004 and distributed in February 2004) and declared an additionaldistribution of $.295 per Unit, payable in February 2005.  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.  See “Reserves and Distributions” on page 23of this Annual Report.

 

**TRUSTEES’DISCUSSION AND ANALYSIS OF FINANCIAL**

**CONDITIONAND RESULTS OF OPERATIONS**

 

**Overview**

 

MesabiTrust (“Mesabi Trust” or the “Trust”), formed pursuant to an Agreement of Trustdated July 18, 1961 (the “Agreement of Trust”), is a trust organized under thelaws of the State of New York.  MesabiTrust holds all of the interests formerly owned by Mesabi Iron Company (“MIC”),including all right, title and interest in the Amendment of Assignment,Assumption and Further Assignment of Peters Lease (the “Amended Assignment ofPeters Lease”), the Amendment of Assignment, Assumption and Further Assignmentof Cloquet Lease (the “Amended Assignment of Cloquet Lease”), the beneficialinterest in the Mesabi Land Trust (as such term is defined below) and all otherassets and property identified in the Agreement of Trust.  The Amended Assignment of Peters Leaserelates to an Indenture made as of April 30, 1915 among East Mesaba IronCompany (“East Mesaba”), Dunka River Iron Company (“Dunka River”) and Claude W.Peters (the “Peters Lease”) and the Amended Assignment of

 

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Cloquet Lease relates to anIndenture made May 1, 1916 between Cloquet Lumber Company and Claude W. Peters(the “Cloquet Lease”).

 

TheTrust will terminate twenty-one (21) years after the death of the survivor oftwenty-five (25) persons named in an exhibit to the Agreement of Trust.  The youngest person on this exhibit is now 44years old.

 

TheAgreement of Trust specifically prohibits the Trustees from entering into orengaging in any business.  Thisprohibition applies even to business activities the Trustees deem necessary orproper for the preservation and protection of the Trust Estate (as such term isdefined below).  Accordingly, theTrustees’ activities in connection with the administration of Trust assets arelimited to collecting income, paying expenses and liabilities, distributing netincome to the holders of Certificates of Beneficial Interest in the Trust (“Unitholders”)after the payment of, or provision for, such expenses and liabilities, andprotecting and conserving the assets held. The Trustees do not intend to expand their responsibilities beyond thosepermitted or required by the Agreement of Trust, the Amendment to the Agreementof Trust dated October 25, 1982 (the “Amendment”), and those required underapplicable law.

 

TheTrust has no employees, but it engages independent consultants to assist theTrustees in, among other things, monitoring the amount and sales prices of ironore products shipped from Silver Bay, Minnesota, by Northshore Mining Company (“Northshore”),lessee/operator of the Mesabi Trust lands. The information regarding amounts and sales prices of shipped iron oreproducts is used to compute the royalties payable to the Trust byNorthshore.  Deutsche Bank Trust CompanyAmericas, the Corporate Trustee, also performs certain administrative functionsfor the Trust.

 

Pursuant to a ruling fromthe Internal Revenue Service, which ruling was based on the terms of theAgreement of Trust including the prohibition against entering into anybusiness, the Trust is not taxable as a corporation for Federal income taxpurposes.  Instead, the Unitholders areconsidered as “owners” of the Trust and the Trust’s income is taxable directlyto the Unitholders.

 

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

 

•                  Base overriding royalties, which historically constitute the majority of Mesabi Trust’s royaltyincome, are determined by both the volume and selling price of iron oreproducts shipped.  Northshore isobligated to pay Mesabi Trust base overriding royalties in varying amounts,based on the volume of iron ore products shipped.  Base overriding royalties are calculated as apercentage of the gross proceeds of iron ore products produced at Mesabi Trustlands (and to a limited extent other lands) and shipped from Silver Bay.  The percentage ranges from 2-1/2% of thegross proceeds for the first one million tons of iron ore products so shippedannually to 6% of the gross proceeds for all iron ore products in excess of 4million tons so shipped annually.

 

•                  Royalty bonuses areearned when iron ore products shipped from Silver Bay are sold at prices abovea threshold price.  The royalty bonus isa percentage of the gross proceeds of product shipped from Silver Bay and soldat prices above a threshold price.  Thethreshold price is adjusted (but not below $30.00) on an annual basis forinflation and deflation (the “Adjusted Threshold Price”).  The Adjusted Threshold Price was $41.13 forcalendar year 2003, $41.76 for calendar year 2004, and will be $42.89 forcalendar year 2005.  The royalty bonuspercentage ranges from 1/2 of 1% of the gross proceeds (on all tonnage shippedfor sale at prices between the Adjusted Threshold Price and $2.00 above theAdjusted Threshold Price) to 3% of the gross proceeds (on all tonnage shippedfor sale at prices $10.00 or more above the Adjusted Threshold Price).  During the calendar quarter ended December31, 2004,

 

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Northshore paid a royaltybonus of $985,584 to the Trust; a total of $1,525,480 in royalty bonuses waspaid by Northshore during fiscal year 2005. The Trust has accrued $1,829,170 of royalty bonuses earned during fiscalyear 2005, which will be received in the first quarter of fiscal year2006.  Prior to fiscal year 2005, theTrust had not received a royalty bonus for several years.  (See the section entitled “Comparison ofFiscal Years ended January 31, 2005 and January 31, 2004 – Royalty Income” onpage 6 of this Annual Report for more information.)

 

•                  Fee royalties, whichhistorically constitute a smaller component of the Trust’s royalty income, arepayable to Mesabi Land Trust, a Minnesota land trust of which Mesabi Trust isthe sole beneficiary and for which US Bank N.A. acts as trustee, and are basedon the amount of crude ore mined. Currently, the fee royalty on crude ore is based on an agreed price perton, subject to certain indexing.  Crudeore is the source of iron oxides used to make iron ore pellets and otherproducts.

 

•                  Minimum advance royalties: Generally, Northshore’s obligation to pay base overriding royaltiesand royalty bonuses with respect to the sale of iron ore products accrues uponthe shipment of those products from Silver Bay. However, regardless of whether any shipment has occurred, Northshore isobligated to pay to Mesabi Trust a minimum advance royalty.  Each year, the amount of the minimum advanceroyalty is adjusted (but not below $500,000 per annum) for inflation anddeflation.  The advance royalty was$685,630 for calendar year 2003, $696,161 for calendar year 2004, and is$714,988 for calendar year 2005.  Untiloverriding royalties (and royalty bonuses, if any) for a particular year equalor exceed the minimum advance royalty for the year, Northshore must makequarterly payments of up to 25% of the minimum advance royalty for theyear.  Because advance minimum royaltiesare essentially prepayments of base overriding royalties and royalty bonusesearned each year, any advance minimum royalties paid in a fiscal quarter arerecouped by credits against base overriding royalties and royalty bonusesearned in later fiscal quarters during the year.  Historically, advance minimum royalties havebeen paid in the first fiscal quarter and recouped in the second fiscalquarter.

 

Thecurrent royalty rate schedule became effective on August 17, 1989, which wasestablished pursuant to the Amended Assignment of Peters Lease, the AmendedAssignment of Cloquet Lease, and the Assumption and Assignment of Mesabi Lease(together with the Amended Assignment of Peters Lease and the AmendedAssignment of Cloquet Lease, the “Amended Assignment Agreements”), which theTrust entered into with Cyprus Northshore Mining Corporation (“Cyprus NMC”).  Pursuant to the Amended AssignmentAgreements, overriding royalties are determined by both the volume and sellingprice of iron ore products shipped.  In1994, Cyprus NMC was sold by its parent corporation to Cleveland-Cliffs Inc (“CCI”)and renamed Northshore Mining Company. CCI now operates Northshore as a wholly-owned subsidiary.

 

Underthe relevant documents, Northshore may mine and ship iron ore products fromlands other than Mesabi Trust lands. Northshore alone determines whether to mine off of Trust and/or suchother lands, based on its current mining and engineering plan.  The Trustees do not exert any influence overmining operational decisions.  Toencourage the use of iron ore products from Mesabi Trust lands, Mesabi Trustreceives 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 thegreater of (i) the aggregate quantity of iron ore products shipped that werefrom Mesabi Trust lands, and (ii) a portion of the aggregate quantity of alliron ore products shipped that were from any lands, such portion being 90% ofthe first four million tons shipped during such year, 85% of the next twomillion tons shipped during such year, and 25% of all tonnage shipped duringsuch year in excess of six million tons.

 

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Royaltyincome constitutes the principal source of the Trust’s revenue, which comprised99.7%, 99.4%, and 99.1% of the total revenue of the Trust in fiscal years 2005,2004, and 2003, respectively (years ending January 31).  A more complete discussion of royalty ratesand the manner in which they are determined is set forth under the headings “LeaseholdRoyalties” and “Land Trust and Fee Royalties,” on pages 19 and 22,respectively, of this Annual Report.

 

Duringthe course of its fiscal year some portion of royalties expected to be paid toMesabi Trust are based in part on estimated prices for iron ore products soldunder term contracts between Northshore, CCI and certain of their customers(the “CCI Pellet Agreements”). Mesabi Trust is not party to these CCI PelletAgreements. The estimated prices under these agreements are subject to interimand final pricing adjustments, which can be positive or negative, and whichadjustments are dependent in part on multiple price and inflation index factorsthat are not known until after the end of a contract year. This can result insignificant and frequent variations in royalties received by Mesabi Trust (andin turn the resulting amount available for distribution to Unitholders by theTrust) from quarter to quarter and on a comparative historical basis, and thesevariations, which can be positive or negative, cannot be predicted by MesabiTrust.

 

Under the CCI PelletAgreements, upward price adjustments were made during the first three months ofcalendar 2005 with respect to iron ore shipped by Northshore/CCI to customersfrom Silver Bay during 2003 and 2004. The pricing adjustments in turn resultedin increased royalty revenue to the Mesabi Trust, which are reflected in theAccrued Income Receivable on the Mesabi Trust balance sheet as of January 31,2005.  The Mesabi Trustees are not ableto predict whether adjustments in the future, if any, will be upward ordownward.  See “Reserves andDistributions” on page 23 of this Annual Report for further discussion of thepricing adjustments.

 

**Results of Operations**

** **

As shown in the table below,production of iron ore pellets at Northshore from Mesabi Trust lands duringfiscal year 2005 totaled approximately 4.60 million tons, and actual shipmentsover the same period totaled approximately 4.56 million tons.  By comparison, actual pellet production forfiscal year 2004 approximated 4.68 million tons, and actual shipmentsapproximated 4.99 million tons.

 
| **Fiscal  Year Ended** | ** ** | **Pellets Produced from  Trust Lands** | ** ** | **Shipments from  Trust Lands** | ** ** |
|------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
|                   |       |                                   |       |                            |       |
| January 31, 2005       |       | 4,597,956                              |       | 4,557,842                       |       |
|                   |       |                                   |       |                            |       |
| January 31,  2004      |       | 4,679,431                              |       | 4,990,757                       |       |
|                   |       |                                   |       |                            |       |
| January 31,  2003      |       | 4,145,782                              |       | 3,946,387                       |       |

 

These decreases inproduction and shipments are attributable to increased mining by Northshore offof lands not owned by the Trust, resulting in a lower percentage of totalpellet production and shipments being attributed to Trust lands.  In fiscal year 2005, the percentages of ironore pellets produced, and shipments of iron ore products, attributed to MesabiTrust lands were 90.4% and 90.6%, respectively. In fiscal year 2004, 97.1% of pellet production and 96.2% of shipmentswere attributed to Mesabi Trust lands.

 

Notwithstanding thedecreases in production and shipments attributed to Mesabi Trust lands, totalroyalty income for fiscal year 2005 increased 87.4% over fiscal year 2004, dueto royalty bonuses payable to the Trust, as well as increased pellet pricing.

 

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**Comparison of Fiscal Years ended January 31, 2005 and January31, 2004**

 

***Revenues, Expenses and Net Income***

 
| ** **   | ** ** | **Fiscal Years Ended on January 31** | ** ** | **% increase (decrease)** | ** ** |
|--------------|------------|--------------------------------------|------------|---------------------------|------------|
| ** **   | ** ** | **2005**                             | ** ** | **2004**                  | ** ** | ** ** | ** ** |
| Gross Income |       | $                                    | 13,575,548 |                      | $          | 7,270,517 |   | 86.72 | % |
| Expenses     |       | 557,961                              |       | 499,177                   |       | 11.78 | % |
| Net Income   |       | $                                    | 13,017,587 |                      | $          | 6,771,340 |   | 92.25 | % |

 

Gross income for fiscal 2005increased over that of fiscal 2004 primarily due to increased pellet prices dueto increased market demand.  Fiscal 2005expenses were higher than those for fiscal 2004, mainly due to increases inlegal and accounting fees associated with SEC and Sarbanes-Oxley complianceefforts.  (Expenses are disclosed infurther detail under “Income and Expense” on page 23 of this AnnualReport.)  Net income increased primarilydue to increased pellet prices.

 

***Reserves and Distributions***

 
| ** **              | ** ** | **As of January 31** | ** ** | **% increase (decrease)** | ** ** |
|-------------------------|------------|----------------------|------------|---------------------------|------------|
| ** **              | ** ** | **2005**             | ** ** | **2004**                  | ** ** | ** ** | ** ** |
| Unallocated  reserve    |       | $                    | 4,323,763  |                      | $          | 1,408,584 |   | 206.96 | % |
| Distributions  per Unit |       | .775                 |       | .380                      |       | 103.95 | % |
|                         |            |                      |            |                           |            |  |  |  |  |

 

Total distributions toUnitholders in fiscal 2005 equaled $10,168,008, compared to total distributionsof $4,985,603 in fiscal 2004. The increase of $.395 per unit was primarily dueto increased pellet prices (including contract price adjustments and royaltybonuses) due to increased market demand.

 

***Royalty Income***

 
| ** **                               | ** ** | **Fiscal Years Ended on January 31** | ** ** | **% increase (decrease)** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | **2005**                             | ** ** | **2004**                  | ** ** | ** ** | ** ** |
| Base  overriding royalties               |       | $                                    | 9,819,464  |                      | $          | 6,845,302 |   | 43.45 | % |
| Bonus  royalties                         |       | 3,354,650                            |       | —                    |       | — |   |
| Minimum  advance royalty paid (recouped) |       | —                               |       | —                    |       |   |   |
| Fee  royalties                           |       | 361,191                              |       | 378,086                   |       | (4.47 | )% |
| Total  royalty income                    |       | $                                    | 13,535,305 |                      | $          | 7,223,388 |   | 87.38 | % |

 

Royalties increased infiscal 2005 primarily due to increased royalty revenue recognized at the end offiscal 2005 resulting from contract pricing adjustments of pellets shippedduring 2003 and 2004 pursuant to the CCI Pellet Agreements.  Mesabi Trust is not a party to the CCI PelletAgreements.  These contract pricingadjustments and the resulting royalty revenue increases (including increasedrevenue from bonus royalties) were calculated by Northshore/CCI during thefirst three months of 2005 and communicated in the final royalty payment letterto the Trust in early April 2005. The increased royalty revenue is included inAccrued Income Receivable on the Trust’s balance sheet at January 31, 2005 (atotal of approximately $3,520,000) and is expected to be received by MesabiTrust on April 29, 2005.

 

Royalties received inJanuary 2005 also included a royalty bonus payment, reflecting prices ofpellets shipped that exceeded the then current Adjusted Threshold Price of$41.76 per ton.  This royalty bonuspayment resulted from pricing adjustments by Northshore that affected shipmentsmade throughout calendar year 2004 and January 2005.

 

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The contract pricingadjustments under the CCI Pellet Agreements are included as revenue in 2005, theperiod for which the pricing adjustments were determined.  Because the Trust is not a party to theunderlying CCI Pellet Agreements, the Trustees cannot predict with certaintywhether any pricing adjustments under these agreements will or will not occurin the future, or if there are pricing adjustments, whether they will bepositive or negative. In either case, these price adjustments will impactfuture royalties received by the Trust that become available for distributionto Unitholders.

 

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

 

***Revenues, Expenses and 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 2004increased over that of fiscal 2003 primarily due to increased pellet shipmentsand prices due to increased market demand. Fiscal 2004 expenses were higher than those for fiscal 2003, mainly dueto increases in stock exchange fees and legal fees associated with SEC andSarbanes-Oxley compliance.  (Expenses aredescribed in further detail under “Income and Expense” on page 23 of thisAnnual Report.)  Net income increasedprimarily due to increased pellet shipments and prices.

 

***Reserves and Distributions***

 
| ** **              | ** ** | **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 toUnitholders in fiscal 2004 equaled $4,985,603, compared to total distributionsof $3,280,003 in fiscal 2003.  Theincrease of $0.13 per unit was 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 | % |
|                                          |            |                                      |            |                           |            |  |  |  |  |  |  |

 

Base overriding royaltiesincreased $2,116,981, or 44.8%, primarily due to increased pellet shipments andprices due to increased market demand. Fee royalties increased $53,451, or 16.5%, primarily due to an increasein crude ore mined by Northshore.

 

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**Liquidity and Capital Resources**

 

The Trust’s operations arelimited to the collection of leasehold royalty income, payment of expenses andliabilities, distribution of net income to the Trust’s Unitholders andprotection and conservation of Trust assets. Trust monies are invested solely in U.S. government securities in amanner that, combined with cash flows from royalties received, is deemedadequate by the Trustees 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 23 of this Annual Report.

 

**Current Developments**

 

***2005 Estimates***.  In its 2004 annual report onForm 10-K, CCI estimated total calendar year 2005 Northshore production to beapproximately 5.2 million tons of iron ore pellets (using iron ore mined fromboth Mesabi Trust lands and from other than Mesabi Trust lands).  In a press release dated February 16, 2005,CCI stated all its operations are expected to operate at or near capacity in2005.  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 nor Northshorehas provided the Trust with an estimate for total calendar year 2005shipments.  (See the description of theuncertainty of market conditions in the iron ore and steel industry under “ImportantFactors Affecting Mesabi Trust” below.) During calendar years 2004, 2003, 2002, 2001, and 2000, the percentageof shipments of iron ore products from Mesabi Trust lands was approximately92.0%, 95.5%, 97.5%, 99.2%, and 99.8%, respectively, of total shipments.  Northshore has not advised the Trustees as tothe percentage of iron ore products from Mesabi Trust lands it anticipatesshipping in calendar year 2005.

 

***Capacity Expansions***.   In a November 9, 2004 pressrelease, CCI’s chief executive officer stated that pellet demand for 2005appears to exceed CCI’s production capacity and, further, that iron oreproduction does not appear to be keeping up with anticipated global demand,despite industry-wide capacity expansions. As part of its efforts to capitalize on the anticipated demand, CCI hadpreviously announced in a September 14, 2004 press release that its board ofdirectors approved the planned reactivation of an idled furnace atNorthshore.  According to CCI’s Form 10-Kfiled February 22, 2005, the reactivated furnace is expected to beginproduction in the first quarter of 2005 and will increase Northshore’s annualpellet production capacity by approximately 800,000 tons.  CCI’s board simultaneously approved theplanned restart of an idled pellet furnace at United Taconite, CCI’s mine inEveleth, Minnesota.  CCI stated in itsForm 10-K filed February 22, 2005 that a further expansion at United Taconiteis being evaluated.  In addition to theplanned furnace reactivation, CCI announced in its October 28, 2004 earningsconference call that its board approved the restart of an additional 1,000,000tons of concentrate capacity at Northshore, which could be sold to independentthird parties.   At this time theTrustees are unable to make any projections as to the extent to which CCI’s plannedcapacity expansions may impact future royalties payable to the Trust.

 

***Mesabi Nugget Project***. ** **CCI is participating in the MesabiNugget Project with Kobe Steel, Ltd. (“Kobe Steel”), Steel Dynamics, Inc.,Ferrometrics, Inc. and the State of Minnesota. The project’s objective is to develop and apply a new iron makingtechnology (Kobe Steel’s Itmk3 process) for converting iron ore into nearlypure iron nugget form.  CCI has indicatedthat if the Mesabi Nugget Project successfully achieves commercialization, ironnuggets from this new process would be used as an alternative to steel scrap asa raw material for electric steel furnaces and blast furnaces or basic oxygenfurnaces of integrated steel producers.

 

Apilot plant to test the Itmk3 process was constructed at the Northshorefacility and operated through August 3, 2004. CCI stated in its Form 10-K filed February 22, 2005 that the thirdoperating

 

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phase of the pilot plant test confirmed thecommercial viability of the Itmk3 technology, and that four electric furnaceproducers and one foundry had used the nugget product with favorable results.

 

In May 2004, the Minnesotastate legislature enacted legislation to shorten the environmental permittingtimeline for the development of a nugget plant at Cliffs Erie, another siteowned by CCI in Hoyt Lakes, Minnesota. On September 23, 2004, the Iron Range Resources board approved a $10million loan to Mesabi Nugget, LLC, a joint venture in which CCI holds a minorityequity position, to support the development of a 600,000 metric-ton-per-yearcommercial nugget plant at Cliffs Erie. In addition, St. Louis County, Minnesota is considering issuing $8million in revenue bonds to support the plant’s development.

 

Inits Form 10-K filed February 22, 2005, CCI stated that preliminary constructionengineering and environmental permitting activities have been initiated for twopotential commercial plant locations, and that earliest environmental approvalwas expected in the first half of 2005. (CCI had previously indicated in a September 9, 2004 press release thatit was proceeding with plans to participate in the development of a 500,000 tonnugget demonstration plant at Cliffs Erie and that efforts to permit commercialnugget modules at the Northshore facility had been terminated.)  CCI further stated in its Form 10-K that adecision to proceed on construction of a commercial plant could be made in thefirst half of 2005, and that CCI would be the supplier of iron ore and have aminority interest in the first commercial plant.

 

CCIannounced in its September 9, 2004 press release that any future Minnesotaconstruction of commercial nugget modules would be at CCI’s Cliffs Eriefacility, and added that Northshore would be capable of supplying ironconcentrates to the initial iron nugget demonstration plant expected at CliffsErie, as well as subsequent commercial modules. CCI’s chief executive officer stated in CCI’s October 28, 2004 earningsconference call that no decision had been made as to which of the two locationswould be used for the first nugget plant, but in either case that plant wouldbe supplied with concentrate from Northshore.

 

AlthoughMesabi Trust is not a party to the Mesabi Nugget Project and its involvement inthis project was not solicited, iron ore from Mesabi Trust lands is likely tobe used to supply concentrate to the iron nugget demonstration plant orcommercial modules.  At this time,however, the Trustees are unable to make projections as to whether any possiblefuture royalties might be payable to the Trust with respect to any commercialnugget plants.

 

***ISG Agreement*****.**  AlthoughMesabi Trust is not a party to any iron ore supply contract with any customerof Northshore/CCI, the royalties it receives under the Amended AssignmentAgreements are basically dependent on volume and price of iron ore productsthat are shipped from Silver Bay.  A substantialportion of shipments of iron ore from Mesabi Trust lands are sold under one ofthe CCI Pellet Agreements, the Pellet Sale and Purchase Agreement dated April10, 2002 between CCI (together with Northshore and other affiliates) andInternational Steel Group, Inc. (together with its affiliates, “ISG”) (the “ISGAgreement”)*. *According to the terms of the ISG Agreement, CCI is ISG’ssole supplier of iron ore through 2016 for its Cleveland and Indiana HarborWorks.  The term of the ISG Agreement is throughDecember 31, 2016, unless either party gives the other written notice toterminate by December 31, 2014 (two years prior to the end of the term).  If no notice of termination is given, theagreement will continue on an annual basis, subject to termination with 2-years’prior written notice.  The ISG Agreementalso provides for upward or downward adjustments of iron ore prices, whichadjustments are dependent in part on multiple price and inflation index factorsthat are not known until after the end of a contract year.  Many portions of the ISG Agreement such asprices, price adjustments and price adjustment formula have receivedconfidential treatment in accordance with the rules of the Securities andExchange Commission and the Trustees have not been permitted to review theentire agreement.

 

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Ina December 30, 2004 press release, CCI announced it had amended the ISGAgreement.  According to the pressrelease, the amendment significantly raised the base price for iron ore pelletsto better reflect current market rates. Sales from Northshore pursuant to the ISG Agreement accounted forapproximately 74% of iron ore pellet shipments attributed to Trust lands incalendar year 2004.  The Trustees are notable to quantify the effect of the amendment to the ISG Agreement on futureroyalties payable to the Trust.

 

***Increased Iron Ore Pricing***. During its fiscal year endedJanuary 31, 2005, Mesabi Trust experienced two significant developments thatare likely to affect royalties it receives and the resulting funds that will beavailable for distribution by the Trust in the foreseeable future.  First, the Trust earned a royalty bonus forthe first time since its inception during the fiscal year ended January 31,2005 for iron ore shipments from Silver Bay sold at prices above the Adjusted ThresholdPrice.  (See the discussion under theheading “Royalty Income” under “Comparison of Fiscal Years ended January 31,2005 and January 31, 2004” on page 6 of this Annual Report.)  In addition, during the course of its fiscalyear some portion of the royalties paid to Mesabi Trust were based on estimatedprices for iron ore products sold under the CCI Pellet Agreements. These priceswere subject to interim and final pricing adjustments, which can be positive ornegative, and which adjustments are dependent in part on multiple price andinflation index factors that are not known until after the end of a contractyear. This can result in significant and frequent variations in royaltiesreceived by Mesabi Trust (and in turn the resulting amount available fordistribution to Unitholders by the Trust) from quarter to quarter and on acomparative historical basis, and these variations, which can be positive ornegative, cannot be predicted by Mesabi Trust.

 

Underthe CCI Pellet Agreements, upward price adjustments were made during the firstthree months of calendar 2005 to iron ore shipped by Northshore to customersfrom Silver Bay during 2003 and 2004 due to increased pricing.  The pricing adjustments in turn resulted inincreased royalty revenue to the Mesabi Trust, which are reflected in theAccrued Income Receivable on the Mesabi Trust balance sheet as of January 31,2005.  The Mesabi Trustees are not ableto predict whether adjustments in the future, if any, will be upward ordownward.  See “Reserves and Distributions”on page 23 of this Annual Report for further discussion of the pricingadjustments.

 

CCIreported in its Form 10-K filed February 22, 2005 that it experienced highersales prices for 2004, primarily attributable to the effect of higher steelprices on CCI’s term sales contract escalators, as well as an increase ininternational pellet pricing of approximately 20%.  In a press release dated February 16, 2005,CCI’s chief executive officer stated that sentiment surrounding theinternational benchmark pricing negotiations seems to indicate the market isexpecting a material increase in international iron ore prices.  He stated further that the price increase in2004 was the largest in ten years and that steel pricing remains strong.

 

Additionally,steel prices continue to rise, resulting in recent iron ore increases beingannounced by international iron ore suppliers. The increased demand in steel is attributed primarily to economic growthin China, where iron ore imports have more than tripled since 2000, accordingto published reports.

 

OnApril 7, 2005, CCI announced that the estimated effect of the increase ininternational pellet pricing will result in increased CCI sales revenues andthat CCI will realize an increase in pricing representing a combination ofknown contractual base price increases, lag year adjustments, and cappedpricing on one of its contracts. Because the shipments of iron ore productsusing iron ore mined from Mesabi Trust lands represent only a fraction of CCI’soverall sales and because Mesabi Trust is not party to CCI’s customercontracts, while this news indicates that the trend of prices realized by CCIappears higher, the actual impact on royalties (and ultimately distributions byMesabi Trust) cannot be estimated.

 

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TheTrustees cannot project whether iron ore prices will continue to increase orany potential impact on future royalties payable to the Trust.

 

OnApril 8, 2005, the Mesabi Trustees declared a distribution of $0.33 per Unit ofBeneficial Interest of Mesabi Trust payable on May 20, 2005 to Mesabi Trust Unitholdersof record at the close of business on April 30, 2005. This compares to $0.05per Unit for the same period last year. Normally, only a minimum advanceroyalty is received by Mesabi Trust for the first calendar quarter of each yearas little or no shipments of iron ore are typically made in the first calendarquarter by Northshore because the Great Lakes shipping lanes are frozen duringmost of the period.

 

***Securities Regulation***.  TheTrust is a publicly-traded trust listed on the New York Stock Exchange (“NYSE”)and is therefore subject to extensive regulation under, among others, theSecurities Act of 1933, the Securities Exchange Act of 1934, NYSE rules andregulations and the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”).  Issuers failing to comply with suchauthorities risk serious consequences, including criminal as well as civil andadministrative penalties.  In mostinstances, these laws, rules and regulations do not specifically address theirapplicability to publicly-traded trusts such as Mesabi Trust.  In particular, Sarbanes-Oxley provides forthe adoption by the Securities and Exchange Commission (the “SEC”) and NYSE ofcertain rules and regulations that may be impossible for the Trust to literallysatisfy because of its nature as a pass-through trust.  During fiscal 2004, the SEC and NYSE adoptedrules and regulations pursuant to Sarbanes-Oxley that require a publicly-tradedcompany’s board of directors, audit committee or executive directors (orsimilar body) to act with respect to certain corporate governance matters.  The Trust does not have, nor does theAgreement of Trust provide for, a board of directors, an audit committee or anyexecutive officers.  Therefore, the Trustcannot literally comply with many of these rules and regulations.  The Trustees intend to follow the SEC’s andNYSE’s rulemaking closely and attempt to comply with such rules and regulationswhere possible.

 

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

 

**Important Factors Affecting Mesabi Trust**

** **

TheAgreement of Trust specifically prohibits the Trustees from entering into orengaging in any business.  Thisprohibition seemingly applies even to business activities the Trustees deemnecessary or proper for the preservation and protection of the Trust Estate (assuch term is defined below). 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 Unitholdersafter the payment of, or provision for, such expenses and liabilities, andprotecting and conserving the assets held.

 

Accordingly,the income of the Trust is highly dependent upon the activities and operationsof Northshore, 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.  Northshore alone controls (i) historical operatingdata, including iron ore production volumes, marketing of iron ore products,operating and capital expenditures as they relate to Northshore, environmentaland other liabilities and the effects of regulatory changes; (ii) plans forNorthshore’s future operating and capital expenditures; (iii) geological datarelating to reserves and (iv) projected production of iron ore products.  Northshore alone determines whether to mineoff of Trust and/or state lands, based on its current mining and engineeringplan.  The Trustees do not exert anyinfluence over mining operational decisions, nor do the Trustees provide anyinput regarding the ore

 

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reserve estimate reported byCCI.  While the Trustees request materialinformation for use in periodic reports as part of their evaluation of theTrust’s disclosure controls and procedures, the Trustees do not control thisinformation and they rely on Northshore to provide accurate and timelyinformation for use in the Trust’s reports filed with the SEC.

 

Additionally,as permitted by the terms of the Agreement of Trust and the Amendment, theTrustees are entitled to, and in fact do rely, upon certain experts in goodfaith, including (i) the independent consultants with respect to monthlyproduction and shipment reports, which include figures on crude ore productionand iron ore pellet shipments, and discussions concerning the condition andaccuracy of the scales and plans regarding the development of the Trust’smining property; and (ii) the accounting firm they have contracted with fornon-audit services, including reviews of financial data related to shipping andsales reports provided by Northshore and a review of the schedule of leaseholdroyalties payable to the Trust.

 

Dueto winter weather, and the increasing royalty percentages based on tonnageshipped in a calendar year, results for a particular calendar quarter aretypically not indicative of results for future quarters or the year as a whole.  Factors which can impact the results of theTrust in any quarter or year include:

 

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

 

2.                                       Operations of Northshore. Because the primary portion of the Trust’s revenues derive from iron oreproduct shipped by Northshore from Silver Bay, Northshore’s processing andshipping activities directly impact the Trust’s revenues in each quarter andfor each year.  In turn, a number offactors affect Northshore shipment volume. These factors include, among others, economic conditions in the iron oreindustry, pricing by domestic and international competitors, long-term customercontracts or arrangements by Northshore or its competitors, availability of oreboats, production at Northshore’s mining operations, and production at thepelletizing/processing facility.  If anypelletizing line becomes idle for any reason, production and shipments (and,consequently, Trust income) could be adversely impacted.  In addition, as noted in CCI’s November 9,2004 press release, the planned reactivation of a previously idled furnace atNorthshore may be impacted by such factors as failure to obtain requiredenvironmental permits for or otherwise implement planned capital expansions, aninability to generate sufficient concentrate to support the reactivatedfurnace, an inability of the planned expansions to achieve expected additionalproduction, and increases in the cost and length of time required to completethe capacity expansions.

 

3.                                       Increasing Royalties.  Asdescribed elsewhere in this Annual Report, the royalty percentage paid to theTrust increases as the aggregate tonnage of iron ore products shipped,attributable to the Trust, in any calendar year increases past each of thefirst 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 yeargenerate a higher royalty to the Trust, as total shipments for the year exceedincreasing levels of royalty percentages and pass each of the first four one-millionton volume thresholds.

 

Royaltiesincreased in fiscal 2005 primarily due to increased royalty revenue recognizedat the end of fiscal 2005 resulting from contract pricing adjustments ofpellets shipped during 2003 and 2004 pursuant to the CCI Pellet Agreements.Mesabi Trust is not party to these agreements. The

 

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Trusteescannot predict with certainty whether any pricing adjustments under theseagreements will or will not occur in the future, or if there are pricingadjustments, whether they will be positive or negative. In either case, theseprice adjustments will impact future royalties received by the Trust thatbecome available for distribution to Unitholders.

 

4.                                       Increasing Iron Ore Prices and Royalty Bonus.  Asdescribed elsewhere in this Annual Report, the Trust receives a royalty bonusequal to a percentage of the gross proceeds of iron ore products (mined fromMesabi Trust lands) shipped from Silver Bay and sold at prices above theAdjusted Threshold Price ($41.76 per ton for calendar year 2004 and $42.89 perton for calendar year 2005).  AlthoughNorthshore was able to sell some product at prices higher than the AdjustedThreshold Price in 2004 and January 2005, the Trustees are unable to makeprojections as to whether Northshore will continue to be able to sell pelletsat prices above the Adjusted Threshold Price, entitling the Trust to any futureroyalty bonus payments.

 

Furthermore,although Mesabi Trust has an Accrued Income Receivable of $3,519,923 on itsbalance sheet as of January 31, 2005 reflecting positive price adjustmentsunder the CCI Pellet Agreements, there is no assurance that there will be anyadditional positive price adjustments in the future, and it is possible thatnegative adjustments under those agreements can also occur.

 

5.                                       Percentage of Mesabi Trust Ore.  Asdescribed elsewhere in this Annual Report, Northshore has the ability toprocess and ship iron ore products from lands other than Mesabi Trustlands.  In certain circumstances, theTrust may be entitled to royalties on those other shipments, but not in allcases.  In general, the Trust willreceive higher royalties (assuming all other factors are equal) if a higherpercentage of shipments are from Mesabi Trust lands.  The percentages of shipments that came fromMesabi Trust lands were 92.0%, 95.5%, 97.5%, 99.2%, and 99.8%, in calendaryears 2004, 2003, 2002, 2001, and 2000, respectively.

 

6.                                       Uncertainty of Market Conditions in the Steeland Iron Ore Industry.  CCI reported in its Form 10-K for its fiscalyear ending December 31, 2004 that it experienced a record year in revenues,earnings and iron ore pellet production volume, and is projecting that 2005pellet production will exceed that of 2004, given previously announced capacityexpansions at two facilities (including Northshore).  However, CCI cautioned in its Form 10-K thatsignificant risks and uncertainties may impact its forecast, including, but notlimited to, lower customer demand, an increase in certain steel imports andiron ore substitutes, a decrease in iron ore production in North America,customer failure, and customer or potential customer restructuring andfinancial difficulty (which could result in reduced production capacity overtime).  Furthermore, there still existsuncertainty, consolidation and restructuring in the domestic steel market.

 

In light of the current steel industry environment, uncertaintiesarising from war and other global events, and the above-mentioned risks andfactors, it is uncertain whether prices on domestic steel products will bemaintained at these current relatively higher levels, and whether steel millswill be able to operate at capacity levels in 2005 and beyond.  Furthermore, although overall there appearsto have been an increase in the demand for domestic steel products over thelast fiscal year, it is nevertheless uncertain whether this increase in demandwill continue and the extent to which it will impact royalties paid to theTrust in fiscal year 2006 and beyond.

 

**Critical Accounting Policies**

 

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

 

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the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources.  TheTrustees base their estimates and judgments on historical experience and onvarious other assumptions that the Trustees believe are reasonable under thecircumstances.  However, future eventsare subject to change and the best estimates and judgments may requireadjustment.  For a complete descriptionof the Trust’s significant accounting policies, please see Note 2 to thefinancial statements on pages F-9 through F-12.

 

Criticalaccounting policies are those that have meaningful impact on the reporting ofthe Trust’s financial condition and results, and that require significantmanagement judgment and estimates.  TheTrustees have determined that there are no critical accounting policies.

 

**Off-Balance Sheet Arrangements**

 

TheTrust has no off-balance sheet arrangements.

 

**Contractual Obligations**

** **

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

 

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**TO THEHOLDERS OF**

**CERTIFICATESOF BENEFICIAL INTEREST IN**

**MESABITRUST**

 

**THE TRUST ESTATE**

 

Theprincipal assets of Mesabi Trust consist of two different interests in certainproperties in the Mesabi Iron Range: (i) Mesabi Trust’s interest asassignor in the Amended Assignment of Peters Lease and the Amended Assignmentof Cloquet Lease, which together cover properties aggregating approximately9,750 contiguous acres in St. Louis County, Minnesota (the “Peters Lease Lands”and the “Cloquet Lease Lands,” respectively, and collectively, the “Peters andCloquet Lease Lands”), and (ii) Mesabi Trust’s ownership of the entirebeneficial interest in Mesabi Land Trust, which has a 20% interest as fee ownerin the Peters Lease Lands and a 100% fee ownership in certainnon-mineral-bearing lands adjacent to the Peters and Cloquet Lease Lands (the “MesabiLease Lands,” together with the Peters Lease Lands and the Cloquet Lease Lands,the “Trust Estate”).  The following mapshows the approximate location of the Trust Estate:

 

 

o             *The boxedarea indicates the approximate location of Mesabi Trust’s Trust Estate (notdrawn  to scale), as defined above under“The Trust Estate,” which is a small part of the region with an iron ore bodyknown as the Mesabi Iron Range.  TheMesabi Trust does not own any property interests other than in the TrustEstate.*

 

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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 Cloquet LeaseLands are located at the northeastern end of the Mesabi Iron Range and containmineral deposits consisting of a sedimentary bed of banded magnetite insilicious gangue, a form of low-grade iron ore known as taconite, approximatelythree tons of which must be beneficiated to produce one ton of high-gradepellets.  By far the larger holding is underthe Peters Lease.  The Trustees have nothad any surveys or test drillings performed to ascertain the iron ore reserveson the Peters and Cloquet Lease Lands. In CCI’s 2004 Annual Report, CCI estimated that there currently remainsenough ore reserve in the Peter Mitchell mine to produce approximately 315million tons of pellets; an undetermined portion of this reserve, however, isattributable to lands other than Trust lands. The Mesabi Lease Lands contain substantially no commercial ore depositsand have been used principally in connection with mining the taconite from thePeters and Cloquet Lease Lands, such as the provision of an area for locationof service roads, supporting plants and equipment and dump sites foroverburden.

 

Underthe Amended Assignment Agreements, Northshore produces iron ore from the Petersand Cloquet Lease Lands for the manufacture of iron ore products to be sold tovarious users. Mesabi Trust receives royalties on the crude ore extracted fromsuch Lands and the pellets produced from such crude ore, and in each case theroyalties are based upon the volume of iron ore products shipped and the pricesreceived by Northshore.

 

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

##  

Priorto the creation of the Mesabi Trust and the Mesabi Land Trust on July 18, 1961,MIC, the Trust’s predecessor in interest, owned the interests in the Peters,Cloquet and Mesabi Lease Lands.  MICobtained its interests as follows:

 

PetersLease Lands. MICowned a 20% interest in the fee ownership in the Peters Lease Lands.  Originally, the Peters Lease Lands were ownedby East Mesaba and Dunka River which were wholly owned subsidiaries ofDunka-Mesaba Security Company (“Dunka-Mesaba”). In August 1951, East Mesaba and Dunka River conveyed the Peters LeaseLands to their parent company, Dunka-Mesaba, which in turn conveyed to each ofits stockholders an undivided interest in the Peters Lease Lands in proportionto each stockholder’s ownership in the parent company.  Accordingly, MIC, which had been the owner of20% of the outstanding capital stock of Dunka-Mesaba, acquired a 20% undividedinterest in the Peters Lease Lands and the right to receive a 20% fee royaltyunder the Peters Lease.

 

Byan instrument dated October 1, 1917, as of April 30, 1915, East Mesaba andDunka River leased their properties to Claude W. Peters.  (This instrument, as modified by instrumentsdated February 3, 1921, July 17, 1939 and July 31, 1951, is known as the “PetersLease.”)  Claude W. Peters acquired thePeters Lease on behalf of MIC and an assignment of the Peters Lease from ClaudeW. 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 netprofits.  Later, these payments were changedto royalty payments.

 

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

 

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MesabiLease Lands.  MIC held a fee interest in the Mesabi LeaseLands. In 1939, MIC leased its interest in the Mesabi Lease Lands to Reserve.

 

Acquisition of Interestsfrom MIC.  MIC had not engaged in actual mining operationssince 1939, with all of its ownership of land in fee having been leased out andits leaseholds in land assigned to Reserve in exchange for royaltypayments.  Because MIC’s activities inconnection with the administration of its assets were limited to the collectionof income, the payment of expenses and liabilities, the distribution of the netincome and the protection and conservation of the assets held, in July 1961 itsboard of directors proposed, and its stockholders subsequently approved, to adopta plan of complete liquidation as a result of which MIC’s assets weretransferred to and administered by two trust entities.

 

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

 

Alsopursuant to an Agreement of Trust, the Mesabi Trust was created under New Yorklaw on July 18, 1961.  MIC transferred tothe Mesabi Trust instruments assigning the Amended Assignment of Peters Leaseand the Amended Assignment of Cloquet Lease (covering its interest as assignorof the entire leasehold interest in the Peters Lease Lands and the CloquetLease Lands), together with cash, marketable securities and other assets.  The Mesabi Trust also received all of thebeneficial interest in the Mesabi Land Trust.

 

Sincethe creation of the Mesabi Land Trust and the Mesabi Trust, although the miningoperators have changed (Reserve, the original lessee, operated the mine untilit closed on July 31, 1986.  Cyprus MineralsCompany (“Cyprus”) purchased substantially all of Reserve’s assets on August17, 1989 and resumed operations as Cyprus NMC. On September 30, 1994, CCI purchased all of Cyprus NMC’s capital stockfrom Cyprus.  CCI renamed the operationNorthshore Mining Corporation.) and the Peters Lease, the Cloquet Lease and theMesabi Lease have been further amended and assigned, the Trust Estate has notchanged.

 

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Thefollowing diagram illustrates the relationships of the various parties that ownthe lands and have interests in the lands the Trust has interests in:

 

 

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

 

Mineand Rock Formation.  The Mesabi Trust properties, including theore mine, are located in northeastern Minnesota, approximately two miles southof Babbitt, Minnesota.  The ore mine onthe Mesabi Trust properties is called the Peter Mitchell mine, an open pit mineconsisting a 10-mile long segment of a host rock called the Biwabik IronFormation, which is a very hard cherty rock containing magnetite as the oremineral.  The Biwabik Iron Formationextends west and southwest for over 100 miles and constitutes the Mesabi IronRange.  Recoverable iron grades rangefrom 21% in the west end of the mine open pit to 26% in the central portion andeast end, with 19% as the cut off grade. The ore body dips south under the hanging wall called the VirginiaFormation.  To date, the Mesabi Trustproperties have been explored for their iron ore potential.  To the knowledge of the Mesabi Trustees, noother minerals have been explored on the Mesabi Trust properties.

 

MiningProperties.  As disclosed elsewhere in this filing,Northshore, a wholly-owned subsidiary of CCI, currently conducts the miningoperation upon the Mesabi Trust properties. The main entrance to the Northshore mine is accessed by means of agravel road and is located off County Road 20.  Northshore’sprocessing facilities are located in Silver Bay, Minnesota, near Lake Superior,on U.S. Highway 61.  Each year, theTrustees visit the Northshore mine and the processing plant.  During such visits, the Trustees inspect thecondition of the mining properties as well as mining equipment andfacilities.  Based on the Trustees’ pastinspection trips, including the most recent one in October 2004, the Trusteesbelieve that the mining properties and facilities are in good operatingcondition.

 

Northshore’sMining Operations.  Because the Mesabi Trust is not involved inNorthshore’s mining operations, the Trustees do not have detailed firsthandinformation relating to such operations, or the equipment and facilities usedby Northshore.  Northshore has notprovided such information to the Trustees. Therefore, the Trustees rely on information disclosed by CCI in itsperiodic reports filed with the SEC and other reports published by independentorganizations, such as Skillings Mining Review, in

 

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providing the followinginformation relating to Northshore’s mining operations, its equipment andfacilities.

 

Drilling at the Northshore mine is conducted with three 120 GD 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 three 295-B Bucyrus-Erie shovels with 20 cubic-yard buckets, and a Cat 994 loader.  A haulage fleet of Model 730 Dresser Haulpaks 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 by 70-inch secondary crushers for reduction to a nominal 3-inch size.  Coarse ore is then fed into 80-ton capacity ore cars for transportation to Silver Bay via a 47-mile long, twin track railroad owned by Northshore. Each train is pulled by three or four diesel electric locomotives.

 

Uponarrival at the Silver Bay plant, the coarse taconite ore is then loaded intoone of the active grinding lines. Each line includes one 10-foot by 18-foot rodmill and two 10-foot by 18-foot ball mills. The final grinding of the crude taconite is to 90% minus 325 mesh.During the concentrating process, ore concentrate is separated by a two-stagemagnetic separation, which removes low grade tailings from the oreconcentrate.  The tailings are pumpeduphill to the Mile Post 7 disposal site. The concentrate is then fed into hydro-separators and vacuum filters,during which process the moisture content in the concentrate is reduced and thefinal concentrate is ready for pelletizing. The pelletizing process first feeds the ore concentrate to which cornstarch has been added as a binder into a balling drum 14 foot long and 7 footin diameter.  The revolving action of thedrum causes the concentrate to build up into pellets.  Next, pellets over one-half inch in diameterare conveyed to a moving grate and enter into a high temperature furnace forfinal treatment.  From the furnace thepellets are conveyed to a dockside storage bin with a 5-million ton storagecapacity.  Northshore’s sheltered harborat Silver Bay can handle 55,000-ton ore carriers.

 

**LEASEHOLDROYALTIES**

 

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

 

***Base overriding royalties.***  Baseoverriding royalties are calculated on the basis of an escalating scale ofpercentages of gross sales proceeds of iron ore shipped.  The applicable percentage is determined byreference to the tonnage of pellets previously shipped in the then currentcalendar 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                                                                                                 | %          |

 

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***Royalty bonuses.***  Royalty bonuses are payable onall iron ore products produced from Mesabi Ore shipped from Silver Bay during acalendar quarter and sold at prices above the Adjusted Threshold Price.  The Adjusted Threshold Price was $41.13 forcalendar year 2003, $41.76 for calendar year 2004, and will be $42.89 forcalendar year 2005.  The AdjustedThreshold Price is subject to adjustment (but not below $30 per ton) forinflation and deflation and is determined each year on the basis of the changein the Gross Domestic Product Implicit Price Deflator, a broad based index ofinflation and deflation published quarterly by the U.S. Department of Commerce.

 

The amount of royaltybonuses payable for any calendar quarter is calculated on the basis of anescalating scale of percentages of the gross sales proceeds to Northshore ofpellets produced from Mesabi Ore that are sold at prices above the AdjustedThreshold Price.  The applicablepercentage is determined by reference to the amount by which the sales pricesfor a particular quantity of pellets exceeds the Adjusted Threshold Price, asfollows:

 
| **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.***  Toillustrate the calculation of base overriding royalties and royalty bonuses,assume that no shipments of iron ore products were made during the firstcalendar quarter of 2005, and further assume that pellets were shipped fromSilver Bay in the second and third calendar quarters of 2005 in the followingtonnage 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   |       | $                       | 42.00      |               | $          | 63,000,000 |   |
|                    |            |             |            |                         |            |                    |            |  |  |  |  |  |

 

In this example, the baseoverriding royalties payable in respect of the second and third calendarquarters of 2005 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 |   |
|         |   | $ 63,000,000 x 6%     |   | = |   | $ | 3,780,000 |   |

 

Based on the same example,the base overriding royalty percentage applicable for all iron ore productsshipped in the fourth calendar quarter of 2005 would be 6%, because more thanfour million tons were shipped during the first three quarters.

 

20

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Further, the royalty bonusespayable in respect of the second and third calendar quarters of 2005 would beas follows (with reference to the Adjusted Threshold Price (“ATP”) of $42.89):

 
| 2nd Quarter: |   | Below ATP: no bonus payable |   | = |   | None |      |
|--------------|--------|-----------------------------|--------|---|--------|------|-----------|
| 3rd Quarter: |   | $22,000,000  x 0-1/2%       |   | = |   | $    | 110,000   |   |
|         |   | $46,000,000  x 1%           |   | = |   | $    | 460,000   |   |
|         |   | $48,000,000  x 1-1/2%       |   | = |   | $    | 720,000   |   |
|         |   | $50,000,000  x 2%           |   | = |   | $    | 1,000,000 |   |
|         |   | Below ATP: no bonus payable |   | = |   | None |      |

 

Theabove figures are provided only to illustrate the method for calculating baseoverriding royalties and royalty bonuses and do not indicate the amount of baseoverriding royalties or royalty bonuses the Trustees expect Mesabi Trust toearn in calendar 2005 or any other calendar or fiscal year.  Accordingly, the foregoing exampleillustrating the calculation of base overriding royalties and royalty bonusesshould not be considered a prediction of the amount of base overridingroyalties or royalty bonuses Mesabi Trust will receive.

 

***Bonuses on other ore.*** Northshore also must pay base overriding royalties and royalty bonuseson pellets produced from lands other than Mesabi Lease Lands (“Other Ore”) tothe extent necessary to assure payment of base overriding royalties and royaltybonuses on at least 90% of the first four million tons of pellets shipped fromSilver Bay in each calendar year, at least 85% of the next two million tons ofpellets shipped therefrom in each calendar year, and at least 25% of alltonnage of pellets shipped therefrom in each calendar year in excess of sixmillion tons.  Base overriding royaltiesand royalty bonuses payable on Other Ore can be recouped by Northshore out ofbase overriding 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.

 

***Advance royalties.*** Northshore is obligated to pay to Mesabi Trust advance royalties inequal quarterly installments.  Theadvance royalty was $685,630 for calendar year 2003, $696,161 for calendar year2004, and is $714,988 for calendar year 2005. The amount of advance royalties payable is subject to adjustment (butnot below $500,000 per annum) for inflation and deflation and is determinedeach year in the same manner as the Adjusted Threshold Price.  All payments of advance royalties arecredited against payments of base overriding royalties and royalty bonusespayable on Mesabi Ore until fully recouped. The amount of advance royalties payable inrespect of each calendar quarter constitutes the minimum overriding royaltyamount payable by Northshore in respect of that calendar quarter.

 

***Other leasehold royalty information.***  Baseoverriding royalties and royalty bonuses are payable quarterly and accrue uponshipment, whether or not the actual sales proceeds for any shipment arereceived by Northshore.  The amount ofbase overriding royalties and royalty bonuses payable with respect to the firstthree quarters in any calendar year are determined on the basis of tonnageshipped during each such calendar quarter and the actual sales proceeds of suchshipments, with an adjustment made to the royalties payable with respect to thelast quarter in any calendar year to account for adjustments.

 

Inaddition, in the event that Northshore commences mining and production ofquarry stone for shipment, Northshore must pay base overriding royalties on allquarry stone so shipped on the basis of the same scale of percentages used incalculating base overriding royalties payable on pellets and other iron oreproduct.  Northshore has not informedMesabi Trust of any present intention to commence mining and production ofquarry stone.

 

21

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**LAND TRUST AND FEE ROYALTIES**

 

MesabiLand Trust holds a 20% interest as fee owner in the Peters Lease Lands and a100% interest as fee owner in the Mesabi Lease Lands as lessor of the MesabiLease.  Mesabi Trust holds the entirebeneficial interest in Mesabi Land Trust and is entitled to receive the netincome of Mesabi Land Trust after payment of expenses.  Northshore is not obligated to pay royaltiesor rental to Mesabi Land Trust as fee owner of the non-mineral bearing MesabiLease Lands, a consideration having been paid in that respect at the inceptionof the Mesabi Lease.

 

Northshoreis required to pay a base royalty to the fee owners in an amount which, at itsoption, is either (a) 11-2/3¢ per gross ton of crude ore it mines from thePeters Lease Lands, or (b) $.0056 for each 1% of metallic iron ore naturalcontained in each gross ton of pellets it produces from the Peters Lease Landsand ships.  The base fee royalty rate isadjusted up or down each quarter (but not below the base royalty specifiedabove) by addition or subtraction of an amount to be determined by reference tochanges in Lower Lake Mesabi Range pellet prices and the All CommoditiesProducer Price Index.  The adjustmentfactor is computed by multiplying the base fee royalty rate specified above bya percentage that is the sum of (a) one-half of the percentage change, if any,by which the then prevailing price per iron unit of Mesabi Range taconitepellets delivered by rail or vessel at Lower Lake Erie ports exceeds 80.5¢ (theprice per iron unit in effect in January 1982), plus (b) one-half of thepercentage change, if any, by which the All Commodities Producer Price Indexexceeds 295.8 (the level of the Index for December 1981).

 

Feeroyalties aggregating $361,191 with respect to crude ore mined by Northshorewere earned by Mesabi Land Trust during the fiscal year ended January 31,2005.

 

22

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**INCOME AND EXPENSE**

 

Totalincome for Mesabi Trust for the fiscal year ended January 31, 2005 was$13,575,548, consisting of $40,243 in interest earned on the investment of theUnallocated Reserve, $361,191 in fee income, $0 in minimum advance royaltyincome, $3,354,650 in bonus royalties, and $9,819,464 in overriding royaltyincome, compared with $7,270,517 in total income for the previous fiscalyear.  Total expenses for the fiscal yearwere $557,961, compared with $499,177 in total expenses for the previous fiscalyear.  There were distributions paid perUnit of Beneficial Interest totaling $.775 for the fiscal year ended January31, 2005, compared with distributions paid for the fiscal year ended January31, 2004 of $.38 per Unit.

 

Totalexpenses by categories were as follows:

 
| ** **                                                                             | ** ** | **Fiscal Years ended on January 31** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                   |       |                                 |       |   |   |   |   |
| Compensation  of Trustees                                                              |       | $                                    | 141,791    |   | $ | 140,680 |   | $ | 134,907 |   |
| Fees and  Disbursements                                                                |       |                                 |       |   |   |   |   |
| Administrative                                                                         |       | 67,548                               |       | 62,500 |   | 62,500 |   |
| Accounting                                                                             |       | 49,880                               |       | 32,850 |   | 28,577 |   |
| Inspection  trips, travel and other expenses of Trustees                               |       | 31,122                               |       | 32,942 |   | 33,785 |   |
| Legal                                                                                  |       | 158,314                              |       | 121,317 |   | 88,322 |   |
| Mining  consultant and field representatives                                           |       | 19,616                               |       | 20,758 |   | 13,786 |   |
| Stock  exchange listing fee                                                            |       | 35,000                               |       | 35,000 |   | — |   |
| Printing of  annual, quarterly and current reports, and letters to certificate holders |       | 9,875                                |       | 5,785 |   | 8,644 |   |
| Transfer  Agent and Registrar                                                          |       | 13,856                               |       | 17,569 |   | 15,838 |   |
| Transfer  Agent miscellaneous disbursements                                            |       | 30,959                               |       | 29,776 |   | 19,869 |   |
|                                                                                   |       | $                                    | 557,961    |   | $ | 499,177 |   | $ | 406,228 |   |
|                                                                                        |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

Pursuant to the Amendment,each Individual 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’s UnallocatedReserve aggregated $4,323,763 at January 31, 2005, compared with an UnallocatedReserve of $1,408,584 at January 31, 2004. The Trustees have determined that the Unallocated Reserve should bemaintained at a prudent level, usually within the range of $500,000 to$1,000,000.  Accordingly, although theactual amount of the Unallocated Reserve will fluctuate from time to time, andmay increase or decrease from its current level, it is currently intended thatfuture distributions will be highly dependent upon royalty income as it isreceived and the level of Trust expenses. The amount of future royalty income available for distribution will besubject to the volume of iron ore product shipments and the dollar level ofsales by Northshore.  Shipping activityis greatly reduced during the winter months and economic conditions,particularly those affecting the steel industry, may adversely affect theamount and timing of such future shipments and sales.

 

23

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The Trust’s UnallocatedReserve as of the end of fiscal year ended January 31, 2005 was  $4,323,763, representing an increaseof $2,915,179 compared with the Trust’s unallocated reserve as of the end offiscal year ended January 31, 2004. The increase is due to royalty revenue thatwas accrued for on the Trust’s balance sheet at the end of fiscal 2005, but notyet paid to the Trust (expected in late April 2005), resulting from contractpricing adjustments of pellets sold under the CCI Pellet Agreements with itscustomers that were finalized during the first three months of 2005. The MesabiTrust is not a party to the CCI Pellet Agreements. These price adjustmentsrelate to 2003 and 2004 shipments of pellets that resulted in increased royaltyrevenue (including increased revenue due to bonus royalties) recognized inJanuary 2005 compared to January 2004 due to increased pricing. The increased royaltyrevenue accrual is reflected as Accrued Income Receivable on the balance sheetat January 31, 2005,****which theTrustees anticipate will be distributed, after providing for expenses andreserves, during the quarter in which it is received.

 

TheTrustees will continue to monitor the economic circumstances of the Trust tostrike a responsible balance between distributions to Unitholders and the needto maintain adequate reserves at a prudent level, given the unpredictablenature of the iron ore industry, the Trust’s dependence on the actions of thelessee/operator, and the fact that the Trust essentially has no other liquidassets.

 

Paymentsto Unitholders during the fiscal year ended January 31, 2004 totaled $4,985,603and payments to Unitholders during the fiscal year ended January 31, 2005totaled $10,168,008.

 

**CERTIFICATES OF BENEFICIAL INTEREST**

 

TheCertificates of Beneficial Interest are traded on the New York StockExchange.  During the past two fiscalyears, the market ranges of the certificates for each quarterly period and thedistributions declared for such quarterly periods were as follows:

 
| **Fiscal  Quarter Ended** | ** ** | **High** | ** ** | **Low** | ** ** | **Amount  Declared** | ** ** | **Per Unit** | ** ** |
|---------------------------|------------|----------|------------|---------|------------|----------------------|------------|--------------|------------|
|                      |       |     |       |    |       |                 |       |         |       |
| April 30, 2004            |       | $        | 6.80       |    | $          | 6.52                 |       | $            | 656,000    |   | $ | .050 |   |
| July 31,  2004            |       | $        | 8.16       |    | $          | 8.00                 |       | 2,296,002    |       | .175 |   |
| October 31,  2004         |       | $        | 9.75       |    | $          | 9.62                 |       | 3,280,003    |       | .250 |   |
| January 31,  2005         |       | $        | 18.25      |    | $          | 16.93                |       | 3,870,403    |       | .295 |   |
|                      |       |     |       |    |       | $                    | 10,102,408 |         | $          | .770 |   |

 
| **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 |   |

 

As of the close of businesson March 18, 2005, the beneficial interest in Mesabi Trust was represented by13,120,010 Units registered in the names of approximately 1736****individuals holding of recordapproximately 1,411,190 Units, and in the names of approximately 133 brokers,nominees, or fiduciaries holding of record approximately 11,708,820 Units.

 

24

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**THE TRUSTEES**

 

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

 
| **Name  and Address of Trustee**                                                                                                                   | ** ** | **Principal Occupation**                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|
|                                                                                                                                               |       |                                                                  |
| Deutsche Bank Trust Company Americas  Corporate Trustee  60 Wall Street  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 13, 2005 |   | DAVID J. HOFFMAN  RICHARD G. LAREAU  IRA A. MARSHALL, JR.  NORMAN F. SPRAGUE III |

 

25

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

 

The Mesabi Trustees areresponsible for establishing and maintaining adequate internal control overfinancial reporting for Mesabi Trust. The Trust’s internal control system was designed to provide reasonableassurance to the Trustees regarding the preparation and fair presentation ofpublished financial statements.

 

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

 

The Mesabi Trustees assessedthe effectiveness of the Trust’s internal control over financial reporting asof January 31, 2005.  In making thisassessment, they used the criteria set forth by the Committee of SponsoringOrganizations of the Treadway Commission in Internal Control – IntegratedFramework.  Based on their assessment,the Trustees believe that, as of January 31, 2005, the Trust’s internal controlover financial reporting is effective, based on those criteria.

 

Gordon, Hughes and Banks,LLP, the Trust’s independent registered public accounting firm, has issued anaudit report on its assessment of the Trust’s internal control over financialreporting.  This report appearsimmediately below.

 

F-1

----

 

**REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Trustees

MESABI TRUST

New York, New York

 

We have audited the accompanying balancesheet of MESABI TRUST (the “Trust”) as of January 31, 2005, and the relatedstatements of income, unallocated reserve and trust corpus, and cash flows forthe year then ended.  We also haveaudited the Trustee’s assessment, included in the accompanying Trustee’sReport, that the Trust maintained effective internal control over financialreporting as of January 31, 2005, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  The Trustees are responsible for thesefinancial statements, for maintaining effective internal control over financialreporting, and for its assessment of the effectiveness of internal control overfinancial reporting.  Our responsibilityis to express an opinion on these financial statements, an opinion on theTrustee’s assessment, and an opinion on the effectiveness of the Trust’sinternal control over financial reporting based on our audit.  The financial statements of MESABI TRUST, asof January 31, 2004 and 2003, were audited by other auditors whose report datedMarch 8, 2004, expressed an unqualified opinion on those statements.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects.  Our audit of financial statements includedexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by the Trustees, and evaluating the overall financial statementpresentation.  Our audit of internalcontrol over financial reporting included obtaining an understanding ofinternal control over financial reporting, evaluating the Trustee’s assessment,testing and evaluating the design and operating effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

An organization’s internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles.  An organization’s internal control overfinancial reporting includes those policies and procedures that 1) pertain tothe maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the organization; 2)provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of theorganization are being made only in accordance with authorizations of thetrustees of the organization; and, 3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the organization’s assets that could have a material effect on the financialstatements.

 

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

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of MESABI TRUST as ofJanuary 31, 2005, and the results of its operations and its cash flows for theyear then ended in conformity with accounting principles generally accepted inthe United States of America.  Also, inour opinion, the Trustee’s assessment that MESABI TRUST maintained effectiveinternal control over financial reporting as of January 31, 2005 is fairlystated, in all material respects, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).  Furthermore, in our opinion, MESABI TRUSTmaintained, in all material respects, effective internal control over

 

F-2

----

 

financial reporting as of January 31, 2005, based on criteriaestablished in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO).

 
| ***/s/ Gordon, Hughes & Banks, LLP*** |   |
|-------------------------------------------|--------|
| Greenwood Village, Colorado               |
| March 9, 2005                             |

 

F-3

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**INDEPENDENT AUDITOR’S REPORT**

 

To the Trustees

**Mesabi Trust**

New York, New York

 

Wehave audited the accompanying balance sheet of **Mesabi Trust** as of January 31, 2004, and the relatedstatements of income, unallocated reserve and trust corpus and cash flows forthe years ended January 31, 2004 and 2003. These financial statements are theresponsibility of the Trustee’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable 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, andthe results of its operations and cash flows for the years ended January 31,2004 and 2003, in conformity with accounting principles generally accepted inthe United States of America.

 

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

 

F-4

----

 

**MESABITRUST**

**BALANCESHEETS**

**JANUARY31, 2005 AND 2004**

 
| ** **                                                                 | ** ** | **2005**      | ** **    | **2004**   | ** ** |
|----------------------------------------------------------------------------|------------|---------------|---------------|------------|------------|
| ** **                                                                 | ** ** | ** **    | ** **    | ** ** | ** ** |
| **ASSETS**                                                                 |       |          |          |       |       |
|                                                                       |       |          |          |       |       |
| CASH                                                                       | ** ** | **$**         | **3,970,870** |       | $          | 98,692 |   |
| U.S.  GOVERNMENT SECURITIES, at amortized cost (which approximates market) | ** ** | **748,193**   |          | 4,826,046  |       |
| ACCRUED  INCOME RECEIVABLE                                                 | ** ** | **3,519,923** |          | 449,780    |       |
| PREPAID  EXPENSE                                                           | ** ** | **13,346**    |          | 15,560     |       |
| ** **                                                                 |       | **8,252,332** |          | 5,390,078  |       |
|                                                                       |       |          |          |       |       |
| 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          |       |
|                                                                       |       |          |          |       |       |
| ** **                                                                 |       | **$**         | **8,252,335** |       | $          | 5,390,081 |   |
| ** **                                                                 | ** ** | ** **    | ** **    | ** ** | ** ** |
| **LIABILITIES,  UNALLOCATED RESERVE AND TRUST CORPUS**                     |       |          |          |       |       |
|                                                                       |       |          |          |       |       |
| DISTRIBUTION  PAYABLE                                                      | ** ** | **$**         | **3,870,403** |       | $          | 3,936,003 |   |
| ACCRUED  EXPENSES                                                          | ** ** | **58,166**    |          | 45,491     |       |
| ** **                                                                 |       | **3,928,569** |          | 3,981,494  |       |
|                                                                       |       |          |          |       |       |
| UNALLOCATED  RESERVE                                                       | ** ** | **4,323,763** |          | 1,408,584  |       |
|                                                                       |       |          |          |       |       |
| TRUST CORPUS                                                               | ** ** | **3**         |          | 3          |       |
|                                                                       |       |          |          |       |       |
| ** **                                                                 |       | **$**         | **8,252,335** |       | $          | 5,390,081 |   |

 

See Notes to Financial Statements 

 

F-5

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**MESABITRUST**

**STATEMENTSOF INCOME**

**YEARSENDED JANUARY 31, 2005, 2004 AND 2003**

 
| ** **                                       | ** ** | **2005**       | ** **     | **2004**   | ** ** | **2003**   | ** ** |
|--------------------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| ** **                                       | ** ** | ** **     | ** **     | ** ** | ** ** | ** ** | ** ** |
| REVENUES                                         |       |           |           |       |       |       |       |
| Royalties  under amended lease agreements        | ** ** | **$**          | **13,174,114** |       | $          | 6,845,302  |       | $ | 4,728,321 |   |
| Royalties  under Peters Lease fee                | ** ** | **361,191**    |           | 378,086    |       | 324,635    |       |
| Interest                                         | ** ** | **40,243**     |           | 47,129     |       | 47,803     |       |
|                                             |       |           |           |       |       |       |       |
| Total  revenues                                  | ** ** | **13,575,548** |           | 7,270,517  |       | 5,100,759  |       |
|                                             |       |           |           |       |       |       |       |
| EXPENSES                                         |       |           |           |       |       |       |       |
| Compensation  of Trustees                        | ** ** | **141,791**    |           | 140,680    |       | 134,907    |       |
| Corporate  Trustee’s administrative fees    | ** ** | **67,548**     |           | 62,500     |       | 62,500     |       |
| Professional  fees and expenses:                 |       |           |           |       |       |       |       |
| Legal and  accounting                            | ** ** | **208,193**    |           | 154,167    |       | 116,899    |       |
| Mining  consultant and field representatives     | ** ** | **19,616**     |           | 20,758     |       | 13,786     |       |
| Transfer  agent’s and registrar’s fees | ** ** | **13,856**     |           | 17,569     |       | 15,838     |       |
| Other Trust  expenses                            | ** ** | **106,957**    |           | 103,503    |       | 62,298     |       |
|                                             |       |           |           |       |       |       |       |
| Total  expenses                                  | ** ** | **557,961**    |           | 499,177    |       | 406,228    |       |
|                                             |       |           |           |       |       |       |       |
| NET INCOME                                       | ** ** | **$**          | **13,017,587** |       | $          | 6,771,340  |       | $ | 4,694,531 |   |
|                                             |       |           |           |       |       |       |       |
| WEIGHTED  AVERAGE NUMBER OF UNITS OUTSTANDING    | ** ** | **13,120,010** |           | 13,120,010 |       | 13,120,010 |       |
|                                             |       |           |           |       |       |       |       |
| NET INCOME  PER UNIT                             | ** ** | **$**          | **0.99**       |       | $          | 0.52       |       | $ | 0.36 |   |

 

See Notes to FinancialStatements

 

F-6

----

 

**MESABI TRUST**

**STATEMENTS OF UNALLOCATED RESERVE AND TRUSTCORPUS**

**YEARS ENDED JANUARY 31, 2005, 2004 AND 2003**

 
| ** **                                                                      | ** ** | **Unallocated Reserve** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                                                                      | ** ** | **Number of  Units**    | ** ** | **Amount** | ** ** | **Trust  Corpus** | ** ** |
|                                                                            |       |                    |       |       |       |   |   |
| 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 |   |
|                                                                            |       |                    |       |       |       |   |   |
| Net income                                                                      |       | —                  |       | 13,017,587 |       | — |   |
| Distribution  paid May 20, 2004, $.05 per unit                                  |       |                    |       | (656,000   | )          |   |   |
| Distribution  paid August 20, 2004, $.175 per unit                              |       | —                  |       | (2,296,002 | )          | — |   |
| Distribution  paid November 22, 2004, $.25 per unit                             |       | —                  |       | (3,280,003 | )          | — |   |
| Distribution  declared January 20, 2005, paid February 22, 2005, $.295 per unit |       | —                  |       | (3,870,403 | )          | — |   |
|                                                                            |       |                    |       |       |       |   |   |
| BALANCE,  JANUARY 31, 2005                                                      |       | 13,120,010              |       | $          | 4,323,763  |   | $ | 3 |   |

 

See Notes to FinancialStatements

 

F-7

----

 

**MESABITRUST**

**STATEMENTSOF CASH FLOWS**

**YEARSENDED JANUARY 31, 2005, 2004 AND 2003**

 
| ** **                                                          | ** ** | **2005**        | ** **     | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------------------|------------|-----------------|----------------|------------|------------|------------|------------|
| ** **                                                          | ** ** | ** **      | ** **     | ** ** | ** ** | ** ** | ** ** |
| OPERATING  ACTIVITIES                                               |       |            |           |       |       |       |       |
| Royalties  received                                                 | ** ** | **$**           | **10,461,572** |       | $          | 6,950,514  |       | $ | 4,972,730 |   |
| Interest  received                                                  | ** ** | **43,834**      |           | 46,202     |       | 50,274     |       |
| Expenses  paid                                                      | ** ** | **(543,073**    | )              | (493,075   | )          | (452,463   | )          |
|                                                                |       |            |           |       |       |       |       |
| NET CASH  FROM OPERATING ACTIVITIES                                 | ** ** | **9,962,333**   |           | 6,503,641  |       | 4,570,541  |       |
|                                                                |       |            |           |       |       |       |       |
| INVESTING  ACTIVITIES                                               |       |            |           |       |       |       |       |
| Maturities  of U.S. Government securities                           | ** ** | **11,074,154**  |           | 3,718,540  |       | 3,384,186  |       |
| Purchases of  U.S. Government securities                            | ** ** | **(6,996,301**  | )              | (7,653,343 | )          | (3,382,513 | )          |
|                                                                |       |            |           |       |       |       |       |
| NET CASH  FROM (USED FOR) INVESTING ACTIVITIES                      | ** ** | **4,077,853**   |           | (3,934,803 | )          | 1,673      |       |
|                                                                |       |            |           |       |       |       |       |
| FINANCING  ACTIVITY                                                 |       |            |           |       |       |       |       |
| Distributions  to unitholders                                       | ** ** | **(10,168,008** | )              | (4,985,603 | )          | (3,280,003 | )          |
|                                                                |       |            |           |       |       |       |       |
| NET CHANGE  IN CASH                                                 | ** ** | **3,872,178**   |           | (2,416,765 | )          | 1,292,211  |       |
|                                                                |       |            |           |       |       |       |       |
| CASH,  BEGINNING OF YEAR                                            | ** ** | **98,692**      |           | 2,515,457  |       | 1,223,246  |       |
|                                                                |       |            |           |       |       |       |       |
| CASH, END OF  YEAR                                                  | ** ** | **$**           | **3,970,870**  |       | $          | 98,692     |       | $ | 2,515,457 |   |
|                                                                |       |            |           |       |       |       |       |
| RECONCILIATION  OF NET INCOME TO NET CASH FROM OPERATING ACTIVITIES |       |            |           |       |       |       |       |
| Net income                                                          | ** ** | **$**           | **13,017,587** |       | $          | 6,771,340  |       | $ | 4,694,531 |   |
| Decrease  (increase) in accrued income receivable                   | ** ** | **(3,070,143**  | )              | (273,802   | )          | (77,754    | )          |
| Decrease  (increase) in prepaid expense                             | ** ** | **2,214**       |           | (4,139     | )          | (7,074     | )          |
| Increase  (decrease) in accrued expenses                            | ** ** | **12,675**      |           | 10,242     |       | (39,162    | )          |
|                                                                |       |            |           |       |       |       |       |
| NET CASH  FROM OPERATING ACTIVITIES                                 | ** ** | **$**           | **9,962,333**  |       | $          | 6,503,641  |       | $ | 4,570,541 |   |

 

See Notes to FinancialStatements

 

F-8

----

 

**MESABITRUST**

**NOTES TOFINANCIAL STATEMENTS**

**JANUARY31, 2005 AND 2004**

 

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

 

*Nature of Business*

 

MesabiTrust was created in 1961 upon the liquidation of Mesabi Iron Company. The solepurpose of the Trust, as set forth in the Agreement of Trust dated as of July18, 1961, is to conserve and protect the Trust Estate and to collect anddistribute the income and proceeds therefrom to the Trust’s certificate holdersafter the payment of, or provision for, expenses and liabilities. The Agreementof Trust prohibits the Trust from engaging 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 was confirmedby letter ruling addressed to Mesabi Iron Company from the Internal RevenueService in 1961. As a grantor trust, Mesabi is exempt from Federal income taxesand its income is taxable directly to the Unitholders.

 

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

 

*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 classified asheld-to-maturity securities as the Trust has the positive intent and ability tohold to maturity and are stated at amortized cost.

 

*Revenue Recognition*

 

Royalty income under the amended lease agreementswith NMC (Cyprus NMC through September 30, 1994) 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 forany shipment are received by NMC.

 

The amount of base overriding royalties and royaltybonuses payable with respect to the first three quarters in any calendar yearare determined on the basis of tonnage shipped during each calendar quarter andthe actual proceeds of such shipments, with an adjustment made to the royaltiespayable with respect to the last quarter in any calendar year to account foradjustments.

 

F-9

----

 

Adjustments could result from changes in finalreconciliations of tonnage shipped by NMC with the final amounts received fromNMC customers. Such adjustments have historically had minimal effect on theamount of royalties reported in the fourth quarter. Adjustments can also resultfrom sales of tonnage shipped where the final sales price may be adjustedupward or downward from the original price used by NMC in computing theroyalties payable to Mesabi Trust. Historically, these adjustments have not had a material effect on thefinancial statements. In the fourth quarter of fiscal 2005, there weresubstantial adjustments relating to final pricing adjustments by NMC which arereflected in increased Accrued Income Receivable on the Balance Sheet andRevenue on the Statement of Income. Of these pricing adjustments, $1,388,844relate to calendar 2003 shipments of pellets in which the final sales price wasnot determinable until immediately following the end of fiscal year 2005.

 

Royaltyincome under the Peters Lease fee agreement also is recognized as it is earned.Under such agreement, however, royalties are earned at the option of NMC(Cyprus NMC through September 30, 1994) either upon mining of crude ore fromPeters Lease lands or upon shipment from Silver Bay of iron ore productproduced 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 entirebeneficial interest as assignor in the Amended Peters Lease Assignment and theAmended Cloquet Lease Assignment covering taconite properties in Minnesotawhich are leased to NMC (Cyprus NMC through September 30, 1994).

 

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

 

*Concentration of CreditRisk*

 

SFAS No. 105, “*Disclosureof Information about Financial Instruments with Off-Balance-Sheet Risk andFinancial Instruments with Concentrations of Credit Risk”*requiresdisclosure of significant concentrations of credit risk regardless of thedegree of such risk. Financial instruments which potentially subject the Trustto concentrations of credit risk consist primarily of cash. The Trust maintainsits cash deposits in an international bank.

 

*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 FinancialInstruments*

 

The carrying amounts of financial instruments including cash,investments, accrued income receivable, distributions payable and accruedexpenses approximated fair value as of January 31, 2005 and 2004, because ofthe relative short maturity of these instruments.

 

F-10

----

 

***Recent Accounting Pronouncements***

** **

In December 2004, the Financial Accounting Standards Board, orFASB, issued SFAS No. 123R *“Share-BasedPayment,”* a revision to FASB No. 123.  SFAS No. 123R replaces existing requirementsunder SFAS No. 123 and APB Opinion No. 25, and requires publiccompanies to recognize the cost of employee services received in exchange forequity instruments, based on the grant-date fair value of those instruments,with limited exceptions.  SFAS No. 123Ralso affects the pattern in which compensation cost is recognized, theaccounting for employee share purchase plans, and the accounting for income taxeffects of share-based payment transactions. For small-business filers, SFAS No. 123R will be effective for interimperiods beginning after December 15, 2005. The Trustees believe thisStatement will have no impact on the financial statements of the Trust onceadopted.

 

The FASB has proposed FASB Staff Position No. SFAS No. 109 a, “Applicationof FASB Statement No. 109, Accounting for Income Taxes, for the TaxDeduction Provided to U.S. Based Manufacturers by the American Jobs CreationAct of 2004.”  On October 22, 2004, the American Jobs Creation Act of2004 (the “Act”) was signed into law by the President. This Act includes taxrelief for domestic manufacturers by providing a tax deduction up to 9 percent(when fully phased-in) of the lesser of (a) ”qualified productionactivities income,” as defined in the Act, or (b) taxable income (afterthe deduction for the utilization of any net operating loss carryforwards).  As a result of this Act, anissue has arisen as to whether this deduction should be accounted for as aspecial deduction or a tax rate reduction under Statement 109.  The FASB staff believes that the domesticmanufacturing deduction’s characteristics are similar to special deductionsbecause the domestic manufacturing deduction is based on the future performanceof specific activities, including the level of wages.  Accordingly, the FASB staff believes that thededuction provided for under the Act should be accounted for as a specialdeduction in accordance with Statement 109 and not as a tax rate reduction.  This provision of the Act is not expected tohave an impact on the Trust’s financial statements.

 

In November 2004, the FASB issued FASB Statement No. 151, which revisedARB No.43, relating to inventory costs. This revision is to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs and wasted material (spoilage).  This Statement requires that these items berecognized as a current period charge regardless of whether they meet thecriterion specified in ARB 43.  Inaddition, this Statement requires the allocation of fixed production overheadsto the costs of conversion be based on normal capacity of the productionfacilities.  This Statement is effectivefor financial statements for fiscal years beginning after June 15, 2005.  Earlier application is permitted forinventory costs incurred during fiscal years beginning after the date thisStatement is issued. The Trustees believe this Statement will have no impact onthe financial statements of the Trust once adopted.

 

In December 2004, the FASB issued FASB Statement No. 152, which amendsFASB Statement No. 66, Accounting for Sales of Real Estate, to reference thefinancial accounting and reporting guidance for real estate time-sharingtransactions that is provided in AICPA Statement of Position (“SOP”) 04-2, *Accounting for Real Estate Time-Sharing Transactions*.  This Statement also amends FASB Statement No.67, *Accounting for Costs and Initial RentalOperations of Real Estate Projects*, to state that the guidance for(a) incidental operations and (b) costs incurred to sell real estate projectsdoes not apply to real-estate time-sharing transactions.  The accounting for those operations and costsis subject to the guidance in SOP 04-2. This Statement is effective for financial statements for fiscal years beginningafter June 15, 2005.  The Trusteesbelieve this Statement will have no impact on the financial statements of theTrust once adopted.

 

F-11

----

 

In December 2004, the FASB issued FASB Statement No. 153.  ThisStatement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*, is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged.  The guidance in that Opinion, however, includedcertain exceptions to that principle.  This Statement amends Opinion 29 toeliminate the exception for nonmonetary exchanges of similar productive assetsand replaces it with a general exception for exchanges of nonmonetary assetsthat do not have commercial substance.  A nonmonetary exchange hascommercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange.  This Statement iseffective for financial statements for fiscal years beginning after June 15,2005. Earlier application is permitted for nonmonetary asset exchanges incurredduring fiscal years beginning after the date of this Statement is issued. The Trustees believe this Statement will have no impact on the financialstatements of the Trust once adopted.

 

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

 

U.S. government securities at January 31, 2005 and2004 are classified as held-to-maturity and mature as follows:

 
| ** **                            | ** ** | **2005**            | ** **  | **2004**       | ** ** |
|---------------------------------------|------------|---------------------|-------------|----------------|------------|
| ** **                            | ** ** | **Carrying  Value** | ** **  | **Fair Value** | ** ** | **Carrying  Value** | ** ** | **Fair Value** | ** ** |
|                                  |       |                |        |           |       |   |   |   |   |
| Due within  one year                  | ** ** | **$**               | **104,000** | ** **     | **$**      | **100,199** |   | $ | 4,077,853 |   | $ | 4,075,162 |   |
| Due after  one year through six years | ** ** | **644,193**         | ** **  | **650,363**    |       | 748,193 |   | 779,794 |   |
|                                  |       |                |        |           |       |   |   |   |   |
| ** **                            | ** ** | **$**               | **748,193** | ** **     | **$**      | **750,562** |   | $ | 4,826,046 |   | $ | 4,854,956 |   |

 

**NOTE 4 - ROYALTY AGREEMENT**

 

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

 

On September 30, 1994, Cyprus Amax Minerals Companysold its iron ore operations, including Cyprus NMC, to Cleveland-Cliffs Inc(CCI).  CCI renamed the operationNorthshore Mining Corporation (NMC).  CCIis among the world’s largest producers of iron ore products.

 

Pursuantto the Amended Assignment Agreements, NMC (Cyprus NMC throughSeptember 30, 1994) is obligated to pay Mesabi Trust base overridingroyalties, in varying amounts constituting a percentage of the gross proceedsof shipments, from Silver Bay, Minnesota, of iron ore product produced fromMesabi Trust lands or, to a limited extent, other lands.  NMC (Cyprus NMC through September 30, 1994)is obligated to make payments of overriding royalties on product shipmentswithin 30 days following the calendar quarter in which such shipmentsoccur.  NMC (Cyprus NMC through September30, 1994) resumed mining operations and shipping product from Silver Bay in thesecond calendar quarter of 1990, and the first payment of overriding royaltieswas made in July 1990.

 

F-12

----

 

NMC (Cyprus NMC through September 30, 1994) also isobligated to pay to Mesabi Trust a minimum advance royalty of $500,000 perannum, subject to adjustment for inflation and deflation (but not below$500,000), which is credited against base overriding royalties and royaltybonuses. NMC (Cyprus NMC through September 30, 1994) is obligated to makequarterly payments of the minimum advance royalty in January, April, July andOctober of each year. For the calendar year ending December 31, 2005, theminimum advance royalty is $714,988. The minimum annual advance royalty was$696,161, $685,630, and $676,814 for the calendar years ended December 31,2004, 2003 and 2002, respectively.

 

**NOTE 5 - UNALLOCATED RESERVE AND DISTRIBUTIONS**

 

The Unallocated Reserve aggregated $4,323,763, at January 31, 2005, ascompared with an unallocated reserve of $1,408,584 and $1,066,048, at January31, 2004 and 2003, respectively.  TheTrustees have determined that the Unallocated Reserve should be maintained at aprudent level, usually within the range of $500,000 to $1,000,000, to meetpresent or future liabilities of the Trust. Accordingly, although the actual amount of the Unallocated Reserve willfluctuate from time to time, and may increase or decrease from its currentlevel, it is currently intended that future distributions will be highlydependent upon royalty income as it is received quarterly and the level ofTrust expenses that the Trustees anticipate occurring in subsequent quarters.  The Trustees determine the level ofdistributions on a quarterly basis after receiving notification from NMC as tothe amount of royalty income that will be received and after determination ofany known or anticipated expenses, liabilities and obligations of the Trust.

 

During the fiscal years ended January 31, 2005,2004, and 2003, the Trustees distributed cash payments totaling $10,168,008 (of$.775 per Unit), $4,985,603 (of $.38 per Unit), and $3,280,003 (of $.25 perUnit), respectively, of beneficial interest in Mesabi Trust. In addition, inJanuary 2005 the Trustees declared a distribution of $.295 per Unit ofbeneficial interest, which was paid in February 2005.

 

F-13

----

 

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

 

The quarterly results of operations for the twoyears ended January 31, 2005 and 2004 are presented below:

 
| ** **           | ** ** | **2005**           | ** **  |
|----------------------|------------|--------------------|-------------|
| ** **           | ** ** | **First  Quarter** | ** **  | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|                 |       |               |        |   |   |   |   |   |   |
| Revenue              | ** ** | **$**              | **937,709** | ** ** | **$** | **2,683,795** | ** ** | **$** | **3,306,770** | ** ** | **$** | **6,647,274** | ** ** |
| Expenses             | ** ** | **101,741**        | ** **  | **179,737** | ** ** | **130,822** | ** ** | **145,661** | ** ** |
|                 |       |               |        |   |   |   |   |   |   |
| Net income           | ** ** | **$**              | **835,968** | ** ** | **$** | **2,504,058** | ** ** | **$** | **3,175,948** | ** ** | **$** | **6,501,613** | ** ** |
| ** **           | ** ** | ** **         | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  per unit | ** ** | **$**              | **0.06**    | ** ** | **$** | **0.19** | ** ** | **$** | **0.24** | ** ** | **$** | **0.50** | ** ** |

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

 

F-14

----