2023-10-18 14:08:50 ET
Summary
- Mesabi Trust distributions were scrapped because Cleveland-Cliffs temporarily idled its mine.
- Iron ore demand could benefit from China's construction sector stimulus.
- Normalized annualized distributions per unit from Mesabi Trust could be as high as $2.8.
Mesabi Trust (MSB) generally passes through to shareholders the income it receives from the company's iron ore royalties. It sold off hard after Cleveland-Cliffs Inc. (CLF) CEO Lourenco Goncalves forced the trust to suspend the dividend by suspending operations at the mine underlying the royalty payments. He tried to push for a lower royalty rate, but wisely cut his losses earlier this year and restarted the mine.
As I highlighted in my most recent article , he did try to continue to lean on the trust by floating a thinly veiled threat to use the mine as a swing operation going forward:
CEO Lourenco Goncalves said Northshore Mining (the mine on which Mesabi receives royalties) would continue to serve as a " swing operation ," meaning Northshore would be used "as needed."
I didn't buy that because operating a mine as a swing operation is not a great way to generate great long-term operating profits. Goncalves talks his book, but he always appeared like a great CEO to me. I summed up the main reasons I didn't buy in the prior article as well:
The major is seeing steam coming out of the plants stacks, and everyone who wanted has been brought back. You might as well conclude the thing is starting back up again, and the Cleveland-Cliffs CEO is spinning this as if he's continuing to lean on Mesabi. Given the super low unemployment rate, it might as well be the case that he's actually not getting all his workers back very easily after laying them off so casually.
It sounds great to use the Northshore Mine as a swing operation, but if you are bringing back and paying all the workers you can, your equipment is depreciating as time goes on anyway, so you might as well produce what you can. Maybe it won't be full nameplate capacity yet, but that would likely be the most economical choice.
Meanwhile, Mesabi reinitiated the dividend on October 13th. Meanwhile, we have another 10-Q as well, and it has become clear that the mining is being put to good use. During the three months ending July 31, 2023, iron ore pellets production at Northshore from Mesabi Trust Lands totaled 1,049,281 tons. This translated into the following royalties received:
If you would extrapolate the above royalties received for a full year, it adds up to $2.8 per unit.
I understand the maximum capacity of the mine is something like 6 million tons per annum. The mine has solid reserves. I expect I won't be around when it finally runs out. Given that the mine started in April or May, production is pretty good.
A dividend of $0.35 on a stock price of $20 isn't that impressive. However, it is just an initial distribution. Meanwhile, iron ore prices are pretty good, especially with China having been in such a rut lately.
Iron ore prices don't translate exactly into dividend payout. The royalty structure is complicated. There are bonuses for annual production levels and price thresholds. However, the dividend does follow iron prices reasonably well (with a bit of lag), as may be expected:
I'd expect a normalized dividend rate in the $1.80-$2.50 range at current iron ore prices. This year, it will be lower, but as soon as a big quarterly dividend is paid, I expect investors to start extrapolating it a few years out. The recent share price appears like the market is pricing in larger future dividends, but it could also be due to iron ore strength.
China appears to be changing its tune and initiated modest stimulation efforts in September. Measures include policies targeting the construction sector. Construction is the primary market for iron ore and China is generally 70% of global iron ore demand.
Mesabi stock isn't super cheap, but it is still only back at the same price as when I wrote my last article. The royalty model benefits from high inflation, as it in essence charges a percentage of iron ore prices to the producer. In an inflationary environment (you could consider this one), this type of income vehicle should look quite attractive compared to bonds. My dividend range estimate effectively translates into a normalized annualized forward yield of 8.2% to 11.4%(full production over a full year). The income is volatile, but over the long term, it should be well protected against inflation because the distributions follow the iron ore price. Higher iron ore prices generally mean higher distributions.
For further details see:
Mesabi Trust Looks Attractive With Estimated Forward Yield Of 8.2% To 11.4%