Mesabi Yield Could Hit 15% But Fair Value May Be Approaching

Mesabi Trust (NYSE: MSB) has seen strong growth in net income (see below) due to volume and price increases of iron ore from the mine it holds rights to against a revised contractual structure. 2019 should be a strong year too, as prices continue to rise for the year so far. However, it does seem we are at high prices for iron ore pellets, and MSB's double-digit yield is unlikely to persist through the cycle.
Data by YCharts
Source: Cleveland-Cliffs 2018 Annual Report
The Importance Of The Pellet Premium
The threshold price for the agreement can be found here, currently just under $57/ton, broadly similar to where producer Cleveland-Cliffs estimates cash costs per ton of $62-67 for 2019. At above this price, MSB earns incremental profits. The current iron ore spot is over $93/ton (see chart below). However, the mine produces not iron ore but iron ore pellets (see below).
Source: Harvey Henkelmann/Wikipedia Creative commons 3.0
Pellets currently trade at an estimated $70 premium to spot. There is a good primer on why pellets matter and the historical premium here.
Basically, though pellets do typically command a premium, and there are environmental reasons to use pellets over iron ore fines, current pellet premiums are very high by historical standards; in part, as China looks to improve environmental efficiency in its steel production processes.
So, MSB currently sees a double benefit. Not only are iron ore prices high relative to recent history,... Read more

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