Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Periods of Three and Nine Months ended September
30, 2013 and September 30, 2012
The Trust owns interest in 12,033 acres
on the Mesabi Iron Range Formation in northeastern Minnesota, most of which are under lease to major iron ore producing
companies. The Trust and matters affecting the Trust are under the jurisdiction of the Ramsey County District Court (the
“Court”) in Saint Paul, Minnesota. Due to the Trustees’ election pursuant to Section 646 of the Tax Reform
Act of 1986, as amended, commencing with year 1989 the Trust is not subject to federal and Minnesota corporate income taxes.
The Trust is now a grantor trust. Shares of beneficial interest in the Trust are traded on the New York Stock Exchange under
the ticker symbol “GNI” (CUSIP No. 391064102).
The terms of the Great Northern Iron Ore Properties
Trust Agreement, created December 7, 1906, state that the Trust shall continue for twenty years after the death of the last survivor
of eighteen persons named in the Trust Agreement. The last survivor of these eighteen persons died on April 6, 1995. Accordingly,
the Trust terminates twenty years from April 6, 1995, that being April 6, 2015.
At the end of the Trust on April 6, 2015, the
certificates of beneficial interest (shares) in the Trust will cease to trade on the New York Stock Exchange and thereafter will
represent only the right to receive certain distributions payable to the certificate holders of record at the time of the termination
of the Trust. Upon termination, the Trust is obligated to distribute ratably to these certificate holders the net monies remaining
in the hands of the Trustees (after paying and providing for all expenses and obligations of the Trust), plus the balance in the
Principal Charges account (this account is explained in the Trust’s Annual Report sent to all certificate holders every year).
All other Trust property (most notably the Trust’s mineral properties and the active leases) must be conveyed and transferred
to the reversioner (currently Glacier Park Company, a wholly owned subsidiary of ConocoPhillips Company) under the terms of the
Trust Agreement.
We have previously provided information in
our various Securities and Exchange Commission filings, including our Annual Report, about the final distribution payable to the
certificate holders upon the Trust’s termination. The exact final distribution, though not determinable at this time, will
generally consist of the sum of the Trust’s net monies (essentially, total assets less liabilities and properties) and the
balance in the Principal Charges account, less any and all expenses and obligations of the Trust upon termination. To offer a hypothetical
example, without factoring in any expenses and obligations of the Trust upon its termination, and using the financial statement
values as of December 31, 2012, the net monies were approximately $7,719,000 and the Principal Charges account balance was approximately
$4,871,000, resulting in a final distribution payable of approximately $12,590,000, or about $8.39 per share. After payment of
this final distribution, the certificates of beneficial interest (shares) would be cancelled and have no further value. It is important
to note, however, that the actual net monies on hand and the Principal Charges account balance will most likely fluctuate during
the ensuing years and will not be “final” until after the termination and wind-down of the Trust. The Trust offers
this example to further inform investors about the conceptual nature of the final distribution and does not imply or guarantee
a specific known final distribution amount.
Results of Operations:
Royalties decreased $774,489 during the three
month period ended September 30, 2013, as compared to the same period in 2012, due mainly to a lower overall average earned royalty
rate caused by lower producer price indices. Royalties decreased $5,362,944 during the nine month period ended September 30, 2013,
as compared to the same period in 2012, due mainly to reduced taconite shipments from our Trust lands and a lower overall average
earned royalty rate caused by lower producer price indices.
Interest and other income decreased $9,808
and $17,653 during the three and nine month periods ended September 30, 2013, respectively, as compared to the same periods in
2012, due mainly to reduced yields on the Trust’s investments.
Costs and expenses increased $78,952 for the
three month period ended September 30, 2013, as compared to the same period in 2012, due mainly to the timing of the accrued bonus
for the President of the Trustees per the Court-approved compensation arrangement, and an increase in pension expense pertaining
to the defined benefit pension plan. Costs and expenses increased $21,789 during the nine month period ended September 30, 2013,
as compared to the same period in 2012, due mainly to an increase in pension expense pertaining to the defined benefit pension
plan, offset in part by reduced legal expenses incurred in the prior year pertaining to lease administration, which were not required
in the current year.
At their meeting held on September 13, 2013,
the Trustees declared a distribution of $2.60 per share, amounting to $3,900,000 payable October 31, 2013, to certificate holders
of record at the close of business on September 30, 2013. The Trustees have now declared three quarterly distributions in 2013.
The first, in the amount of $2.25 per share, was paid on April 30, 2013, to certificate holders of record on March 28, 2013; the
second, in the amount of $2.50 per share, was paid on July 31, 2013, to certificate holders of record on June 28, 2013; and the
third, that being the current distribution. The first, second and third quarter 2012 distributions were $2.25, $3.00 and $3.50
per share, respectively. The Trustees intend to continue quarterly distributions and set the record date as of the last business
day of each quarter. The next distribution will be paid January 31, 2014 to certificate holders of record on December 31, 2013.
A mining agreement dated January 1, 1959, with
U.S. Steel Corporation provides that one-half of annual earned royalty income, after satisfaction of minimum royalty payments,
shall be applied, in lieu of royalty payments, to reimburse the lessee for a portion of its cost of acquisition of surface lands
overlying the leased mineral deposits, which surface lands are then conveyed to the Trustees. There are surface lands yet to be
purchased, the costs of which are yet unknown and will not be known until the actual purchases are made.
Liquidity:
In the interest of preservation of principal
of Court-approved reserves and guided by the restrictive provisions of Section 646 of the Tax Reform Act of 1986, as amended, monies
are invested primarily in United States Treasury securities with maturity dates not to exceed three years and, along with cash
flows from operations, are deemed adequate to meet currently foreseeable liquidity needs.