2023-04-27 13:15:02 ET
Summary
- Mesabi Trust's stock dropped after the Cleveland-Cliffs Inc. CEO announced Northshore Mining would serve as a "swing operation."
- Mesabi cancelled April distributions due to uncertainties surrounding those Cleveland-Cliffs plans.
- Recent reports suggest Cleveland-Cliffs has brought back workers to the mine and it is partially operational.
- Mesabi's income and yield could increase if production and iron ore prices go up.
- Patient investors may want to slowly add units, as Mesabi Trust could generate substantial distributions in the long term.
Mesabi Trust (MSB) dropped hard after Cleveland-Cliffs Inc. (NYSE: CLF ) 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." It was effectively shut down prior to this quarter, so it isn't actually continuing as a swing operation. Mesabi recently said it cancelled April distributions:
the decision to declare no distribution reflects its caution about uncertainties related to a number of factors, including principally Cleveland-Cliffs’ previously announced plans to idle Northshore Mining Company’s iron ore operations until April 2023 or maybe beyond.
MSB said recent press reports of CLF’s public statements were not definitive on a date or scope of a possible restart of Northshore operations.
MSB said it received no royalty payments in the last two fiscal quarters, and that there has been no apparent iron ore production or shipping at Northshore during the most recent quarter.
However, in actuality, it appears that Cleveland-Cliffs has brought back the workers it could (emphasis mine):
State Sen. Grant Hauschild, DFL-Hermantown, said Tuesday he was told that Cliffs gave offers to all Northshore employees to return to work.
Wade LeBlanc, Silver Bay's mayor, said the same, and like Hauschild said some workers did not return. They had found new jobs, including at other taconite plants or railroads, LeBlanc said.
"Everybody who wanted to come back came back," LeBlanc added. "The fact that they are mining — that is good news for our community, for our schools and for everybody. It's good to see steam coming out of [the plant's] stacks."
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.
It is not surprising to me that the period of uncertainty is now being extended, as I wrote in my previous article :
the longer CLF waits, the more it will rack up costs idling the mine and finding people. I would never want to own this if I wasn't prepared for the mine to get idled for an extended period. Ultimately, CLF will become a rational actor and get this asset producing (it has done so for over 60 years already). In the near term, I think the stock will fall as fears will rise as the period of non-production gets extended.
But it seems clear to me that production (and thus royalties) are now going to be at least partially resumed. Meanwhile, the U.S.-based iron ore in the ground remains just fine, it is just Cleveland's infrastructure assets that are depreciating. With current inflation rates and geopolitical tensions, iron ore is getting more valuable at a pretty good clip. The mine has a very long life ahead of it (see my last article ), and historically Mesabi dividends have shown a very nice growth rate:
Assuming full production at current iron ore prices, I'd expect the Mesabi Trust to pay out dividends akin to the 2011-2014 period. Perhaps slightly better. That means around $2 per year. But iron ore prices are currently not particularly strong:
If Cleveland-Cliffs keeps production low, it can also limit the funds Mesabi receives because the royalty rate goes up as production goes up. The royalty also increases as the iron ore price is higher. The exact royalty structure can be read in the 10-K , but in summary income (and thus yield) will increase tremendously once production and price go up. Expect a trickle to start but don't be fooled this trust can generate very substantial distributions like in 2022 when it paid out ~$3.60 in 3 distributions or the $3 unit in 4 distributions in 2021.
To wrap this up; Mesabi Trust has been hit hard recently due to uncertainties surrounding Cleveland-Cliffs' plans for Northshore Mining, the mine on which Mesabi receives royalties. However, recent reports indicate that Cleveland-Cliffs has actually brought back as many workers as it can, and the mine is now partially operational. While it may not be at full capacity yet, the resumption of production is good news for Mesabi holders. Although current iron ore prices are not particularly strong, if production and prices increase, Mesabi's income and yield will also increase tremendously.
While it may take some time for Mesabi Trust to generate substantial distributions for patient investors, it could be a good time to slowly add some units. In my last article, I expected Mesabi Trust to decline a bit further, but now that the mine is re-opening, that isn't so clear to me anymore.
For further details see:
Mesabi Trust: Patient Investor's Opportunity Amid Cleveland-Cliffs' Uncertainty