Mesabi Trust (NYSE:MSB) is an iron ore trust whose income is solely tied to one asset, a mine in eastern Minnesota. The company distributes the income in quarterly dividends, with the value of the shares being tied to the profitability of iron ore mines in North America. Trusts such as this one have a limited life span; Mesabi Trust (NYSE:MSB) expires 21 years following the last death of the 25 named individuals in the lease of the Peter Mitchell mine. The youngest individual named in the lease is 51 years old. That means the value of the shares is derived from the cash flows investors will receive over this time period.
Mesabi Trust (NYSE:MSB) is a royalty trust that services its income from an iron ore mine located in Minnesota. The trust’s sole purpose is to collect and distribute proceeds from the Peter Mitchell mine and is forbidden from engaging in any other business. A subsidiary of Cliffs Natural Resources Inc (NYSE:CLF) operates the mine. Cliffs Natural Resources Inc (NYSE:CLF) is a global miner/producer of iron ore with $5.8 billion in sales. Over the past year Cliffs has experienced a 71.5% drop in net income. As a result Cliff’s stock price is down 65% in the past 52 weeks.
The iron ore industry is facing some pressures due to softer steel demand in China and rising costs to extract it from the ground. Analysts and the futures curve for iron ore indicate that prices are expected to fall over t he next 1-2 years. Currently swaps are for a price of $102-$104/mt in 2014, below the benchmark price of $120/mt. This can change though with improvements or a worsening of the global economic and construction outlooks, which influence steel demand, which in turn increases/decreases iron ore demand.
Even at these prices, the Mesabi Trust (NYSE:MSB) and other Cliff’s operations would generate profit however movement in the shares is largely correlated to the price of iron ore. With Mesabi Trust (NYSE:MSB) this is particularly true since it cannot acquire assets or make other moves to grow the dividend.
The iron ore industry dynamics are not incredibly attractive at this point. Mining firms have invested heavily in new iron ore production in recent years based on growing emerging market demand and depletion of some mines. There is significant production capacity coming on stream in 2013-2015 which has muted the response of iron ore prices to increases in demand. The iron ore market will shift from operating in a supply deficit to demand into a period of excess supply for about five years according to analysts.