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16.42% Yield on an Iron Royalty Trust

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Here’s a hot one for you precious metals investors seeking income.

Mesabi Trust (NYSE: MSB) is an interesting play on the new boom in materials.

The royalty trust pays income based on the success of its iron ore assets in Minnesota.

Royalty trusts derive their value from the volume and price of the commodity produced in the future based on the current proved reserves where it receives royalties.

Dividends are the major reason investors seek out investments in trusts, compensating you for the relative degree of risk involved in them.

They are also designed to pay out all their cash flows as dividends every quarter.

For several years, weak demand for steel production and oversupply from Chinese iron ore producers led to a collapse of prices for the industrial metal, and that sent trust shares down dramatically.

Recently, hopes for new infrastructure spending have spurred an industrial renaissance, and Mesabi shares have risen.

Mesabi Trust is a bit of a twofer, as the lessee/operator of its mining interests in the Mesabi Iron Range of Minnesota is Northshore Mining, a subsidiary of Cliffs Natural Resources.

Mesabi’s biggest stake is the Peters Lease.

On Friday, the Trustees of Mesabi Trust declared a distribution of $1.18 per Unit of Beneficial Interest payable on February 20, 2018 to Mesabi Trust Unitholders of record at the close of business on January 30, 2018.

That brings the yield on this one to 16.42%!

The big increase of $1.04 per Unit over last year, is primarily attributable to a higher volume of shipments during the third calendar quarter 2017 at higher average iron ore sales prices compared to the same quarter 2016.

And to the Trust’s receipt of total royalty payments of $15,547,953 on October 30, 2017 from Cliffs Northshore Mining Company, which was higher than the total royalty payments of $1,880,334 received by the Trust from Cliffs Northshore Mining Company during October 2016.

The inherent risks in these trusts is they come with an expiration date, meaning you can get burned buying in too late or staying too long.

For Mesabi, the lease will cease to exist 21 years after the death of the last of the 25 people named in the Peters Lease. Since several of them are only in their 50s, it presumably has many years left to operate. Even its smaller Cloquette Lease doesn’t terminate until 2040.

Because of the unique investment the royalty trust provides, the dividends it pays, and its long expected life, Mesabi Trust is an interesting play on the iron ore industry.

Yet the income Mesabi produces is substantial, and further demand for iron ore could lift prices even further. If steel keeps rebounding, Mesabi could follow suit.

They pay quarterly dividends in February, May, August, and November.

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