Cliffs’ announcement during its July 22, 2022 earnings call follows comments made by Cliffs’ CEO on October 22, 2021, about its plans to shift DR-grade pellet production away from Northshore and into Minorca, making Northshore a swing operation and idling the Northshore operations from time to time, and on February 11, 2022 to idle all production at the Northshore mine, starting in the spring, carrying through at least to the fall period, and maybe beyond. Cliffs had not previously notified Mesabi Trust of any of the aforementioned operational changes. Further, Cliffs has not recently requested any changes to the royalty structure, which is governed by a 1989 royalty agreement, and Cliffs has historically failed to engage in meaningful negotiations requested by Mesabi Trust to address the interpretations of the royalty structure. Finally, since Cliffs’ announcements that began in October 2021, Mesabi Trust has not received requests from Cliffs or any other party to discuss renegotiation of the 1989 royalty agreement.
As previously disclosed by Mesabi Trust, Cliffs’ current idling of Northshore operations, and the announced extended idling through at least April 2023, will result in a reduction to the Trust’s royalty income which, in turn, will reduce funds available for cash distribution to Unitholders.
Mesabi Trust notes that the existing 1989 royalty agreement was bargained for and agreed to by Mesabi and Cyprus Northshore (predecessor to Northshore Mining Company), and then approved by Mesabi Trust unitholders, to facilitate the resumption of operations following the three-year idling due to the bankruptcy of Reserve Mining. The existing royalty structure provided Cyprus Northshore with the benefit of lower royalty payments at start-up, and when market conditions were poor and unfavorable, and in return it allowed Mesabi Trust the opportunity to receive higher royalty payments when market conditions were favorable.
Mesabi Trust notes that any change to the existing royalty structure would require an amendment to the royalty agreement, which would require the approval of the Trustees as well as approval of 66 2/3% in interest of the Trust Certificate Holders.
The Trustees of Mesabi Trust also wish to clarify that with respect to royalties, the royalty agreement also provides that regardless of whether any production or shipment of iron ore pellets has occurred, Northshore is obligated to pay Mesabi Trust a minimum advance royalty. Each year, the amount of the minimum advance royalty is adjusted (but not below $500,000 per annum) for inflation and deflation. The minimum advance royalty was $964,659 for calendar year 2020, was $976,765 for calendar year 2021 and is $1,034,237 for calendar year 2022. Until overriding royalties (and royalty bonuses, if any,) for a particular year equal or exceed the minimum advance royalty for the year, Northshore must make quarterly payments of up to 25% of the minimum advance royalty for the year. Because minimum advance royalties are essentially pre-payments of base overriding royalty and royalty bonuses (if any) earned during the year each year, any minimum advance royalties paid in a fiscal quarter are recouped by credits against base overriding royalties and royalty bonuses earned in later fiscal quarters during the year.
Forward-looking Statements
This report contains certain forward-looking statements based on Cliffs’ publicly announced plans with respect to DR-grade pellet production, third party sales, and use of Northshore in the future, which statements are intended to be made under the safe harbor protections of the Private Securities Litigation Reform Act of 1995, as amended. Cliffs’ implementation of, or changes to, these plans are beyond Mesabi Trust’s control. As such, such statements are subject to risks and uncertainties, which could cause actual results to differ materially. Additional information concerning these and other risks and uncertainties is contained in Mesabi Trust’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended January 31, 2022 (filed April 27, 2022) and Quarterly Report on Form 10-Q for the quarter ended April 30, 2022 (filed June 13, 2022). Mesabi Trust undertakes no obligation to publicly update or revise any of the forward-looking statements made herein to reflect events or circumstances after the date hereof.
In accordance with general instruction B.2 to Form 8-K, the information in this Form 8-K shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.