MSB — Q2 2026 Financial Report Analysis

Legal costs outran royalty income: Mesabi Trust posts a rare quarterly loss as bonus royalties go to zero

Mesabi Trust reported a net loss of $95,013 (-$0.0072 per unit) for its fiscal second quarter ended July 31, 2026 (the Trust's fiscal year ends January 31, so this quarter covers May through July 2026), against net income of $4,743,882 ($0.3616 per unit) a year earlier. Two things went wrong at once, and neither had much to do with how much iron ore came out of the ground: the price used to calculate the Trust's royalties fell below the level that triggers bonus royalties, wiping out $2.0 million of high-margin income, and legal spending on the Trust's arbitration against Cleveland-Cliffs pushed expenses to $2,575,369 — more than the $2,328,523 of royalty income the Trust earned in the entire quarter.

Shipment volumes were not the problem. Pellets produced and shipped from Trust lands rose 3.4% year over year to 975,722 tons, which the Trust attributes to "higher demand from Northshore's customers as compared to the prior comparable period."

What a royalty trust is, and why that matters here

Mesabi Trust does not mine anything. It is a passive New York trust that owns mineral rights on land in northern Minnesota leased to Northshore Mining Company, a subsidiary of Cleveland-Cliffs Inc. Northshore mines and pelletizes the ore; the Trust collects a percentage of the proceeds and, after paying its own (normally small) expenses, passes the cash to its 13,120,010 unitholders as quarterly distributions. The trust agreement explicitly forbids the trustees from operating any business, so there are no cost levers to pull and no way to grow into a downturn. Unitholders own a stream of payments whose size is set entirely by someone else's tonnage and someone else's selling prices.

The Trust earns money in three ways, and the distinction is the whole story this quarter:

• Base overriding royalties — a percentage of gross proceeds on tons shipped, rising from 2.5% on the first million tons of a calendar year to 6% above four million tons. This is the bulk of income.
• Bonus royalties — an extra 0.5% to 3% of gross proceeds, but only on tons sold above an inflation-adjusted threshold price, set at $71.70 per ton for calendar 2026 (up from $69.41 in 2025). Because it is a slice of gross proceeds with no offsetting cost, a swing in the bonus royalty flows through to unitholders almost dollar for dollar.
• Fee royalties — a smaller, price-insensitive payment based on tons of crude ore mined.

The quarter in numbers

Three months ended July 31:

* Calculated: base overriding royalties divided by tons shipped from Trust lands. Not a figure disclosed by the Trust; base royalties accrue at an estimated full-calendar-year rate rather than the rate earned on each individual ton, so this is an approximation of realized pricing, not a contractual rate.

Six months ended July 31: royalty income of $4,406,335 (-54.9% from $9,766,376), net income of $992,450 (-88.1% from $8,375,091), and 1,881,853 tons shipped (+19.0% from 1,581,141 — the prior-year comparison is flattered by an extended maintenance shutdown at Northshore in February 2025). Distributions declared totaled $0.29 per unit versus $0.68.

Why the bonus royalty went to zero

The mechanism matters more than the number. Under the royalty agreement, sales from Northshore to other Cleveland-Cliffs entities are not arm's-length, so royalties on them cannot be priced off the internal transfer. Instead the agreement requires reference to the highest contract price Northshore obtained in an arm's-length sale to an unaffiliated buyer during the preceding four calendar quarters. Since Cliffs brought its Toledo hot-briquetted-iron plant online in 2021 it has steadily redirected Northshore's output to its own facilities; the filing states that marketing pellets to third parties "is no longer a core aspect of Northshore's business."

That leaves a very thin pool of reference prices. Cliffs' royalty reports show just three third-party pellet sale transactions to a single customer, in September and December 2025, which the Trust describes as "comprised of lower volumes than historically typical shipment volumes." Cliffs priced the deemed shipments for the calendar quarter ended June 30, 2026 off the September 2025 third-party sale — a price below the $71.70 threshold. Hence zero bonus royalty, for the second consecutive quarter. The Trust notes that apart from the May 2022–April 2023 period when Cliffs idled Northshore entirely, these are the first quarterly royalty reports in many years showing no bonus royalty.

The Trust is blunt that it cannot forecast this: "The Trustees are unable to project whether Cliffs will continue to sell iron ore products at prices above, at or below the applicable adjusted bonus royalty threshold price." It also flags that the pricing of intercompany tonnage off sparse third-party trades "could result in potential disputes regarding the amount of bonus royalties owed to the Trust."

Note the divergence between the two tonnage measures in this filing. The Trust's own fiscal quarter (May–July) saw 975,722 tons shipped, up 3.4%. Cliffs' royalty report, which covers the calendar quarter ended June 30, credited the Trust with 902,331 tons versus 924,442 a year earlier — down 2.4%. The two windows do not overlap exactly, so this is a timing artifact rather than a contradiction, but the cash-relevant number is the one Cliffs reports.

Expenses: arbitration is now the largest item in the income statement

Expenses of $2,575,369 were up $1,712,496 year over year, which the trustees attribute "primarily" to higher legal fees tied to the arbitration. The Trust does not disclose a separate legal-fee line, so the exact split is not knowable from this filing — but the direction is unambiguous: accrued expenses on the balance sheet rose to $1,596,686 from $542,250 at January 31, 2026, reflecting arbitration work performed but not yet paid.

The underlying dispute: on September 26, 2025 the Trust filed an American Arbitration Association claim against Northshore and Cliffs seeking damages and declaratory relief over the May 2022–April 2023 idling of Northshore and "underpayment of royalties on intercompany shipments from 2023 through the present." The filing says only that the matter "is progressing pursuant to the schedule set by the AAA Tribunal" — no hearing date, no reserve, no estimate of recovery. This is the Trust's second run at Cliffs: a September 6, 2024 award upheld the accrual of royalties on internal-use pellets regardless of pellet grade.

For a vehicle whose normal quarterly expense load is under $1 million, litigation spending of this size is not a rounding error — it is currently the difference between a profit and a loss.

Takeaway: The loss was not caused by weak mining activity — tons shipped rose 3.4%. It was caused by the collapse of the pricing reference that sets the Trust's royalties, because Cliffs consumes nearly all of Northshore's output internally and the handful of small third-party sales left to price off were struck below the bonus threshold. The same structural problem is what the Trust is now spending roughly its entire royalty income to litigate, which means unitholders are funding the fight out of the distribution.

Cash, distributions, and what is actually distributable

The Trust declared a distribution of $0.05 per unit on July 14, 2026, payable August 20 to holders of record July 30 — $656,001 in total, against $0.12 a year earlier. Distributions are set from cash actually received, not from accrual accounting income, and they lag: the trustees declare roughly eleven weeks after receiving Cliffs' royalty report for the prior calendar quarter. The July 30, 2026 payment from Cliffs totaled $1,807,779 ($1,585,696 of base royalty to the Trust plus $222,083 to the Mesabi Land Trust), with no adjustments for prior quarters.

Two balance-sheet items explain why reported royalty income overstates near-term distributable cash. The contract asset — revenue recognized at the estimated full-year escalating royalty rate but not yet collected — grew to $1,050,186 from $263,982 at January 31, 2026, and the Trust states plainly that it "is not available for distribution to the Unitholders until the applicable royalties are actually received." Accrued income receivable of $967,961 is likewise earned-but-unreceived.

The unallocated reserve — the retained cushion the trustees hold back against expenses and contingencies — fell 22.8% year over year to $17,590,519, and is down $2,812,353 since the January 31, 2026 fiscal year end. Within it, accrued expenses (a deduction) swelled to $1,157,024 net from $102,853 a year ago, a direct drag from unpaid legal bills. Cash stands at $17,385,397, or roughly $1.33 per unit.

Cash distributions paid during the six months were $6,560,005 versus $85,411,267 a year earlier. The prior-year figure is not a like-for-like comparison: distributions declared in that same six-month window were only $0.68 per unit (about $8.9 million), so the vast majority of the cash paid out reflected a far larger distribution declared in an earlier quarter.

Outlook

The Trust offers no guidance — it is contractually barred from operating a business and, in its own words, is "unable to project" pricing, volumes, or bonus royalties. What the filing does provide:

• No new arm's-length sales. Cliffs' latest royalty report "reflected no additional third-party sale transactions of iron ore pellets" since the low-volume September and December 2025 shipments. Until Northshore sells meaningfully to unaffiliated buyers above $71.70 per ton, the bonus royalty stays at zero. Because the reference is a rolling four-calendar-quarter lookback, the September 2025 trade drops out of the window after the third calendar quarter of 2026 — leaving the December 2025 sale, also below threshold, as the governing comparable. Absent a new third-party sale, the mechanical path points to continued zero bonus royalty rather than recovery.
• Cliffs still treats Northshore as a swing asset. The Trust repeats Cliffs' 2023 characterization of Northshore as a "swing operation" and states that the trustees "have not been provided with any additional information regarding the anticipated volume of production, stockpiling or shipping." The trustees also note Cliffs "has not fully responded to the Trust's inquiries."
• A new Minnesota supply source is coming, effect unknown. The Trust flags Mesabi Metallics' $2.5 billion DR-grade mine and pellet plant at Nashwauk (23-year estimated mine life, the first new Minnesota iron ore mine in roughly five decades) and the related sale of a royalty interest to The Metals Royalty Company, while stating the trustees "are unable to predict what impact, if any" it will have. Despite the shared name, it is unrelated to Mesabi Trust's own royalty stream.

Our read. Assume base royalties near the recent run rate — the July payment of $1.59 million annualizes to roughly $6.3 million — while legal spending continues at something close to this quarter's pace. On those assumptions the quarterly distribution has little room to recover from $0.05 until either the litigation ends or bonus royalties return, and the Trust is likely to keep drawing the unallocated reserve down. A $17.6 million reserve absorbs that for a long time, so this is a cash-flow compression problem rather than a solvency one. The asymmetry sits in the arbitration: a favorable award covering the 2022–23 idling and the intercompany-pricing claim would be a lump-sum event against a $17 million cash base, while an unfavorable one leaves the Trust permanently priced off whatever sparse third-party trades Cliffs chooses to make. Note also that unitholders owe tax on their share of Trust income whether or not it is distributed, so the gap between accrual income and cash paid is not a neutral one for holders. Volume is currently the only part of this that is working; investors watching tons shipped as the signal are watching the wrong variable.