DULUTH – Northshore Mining operations in Silver Bay and Babbitt could shut down occasionally after owner Cleveland-Cliffs said it will move its high-grade iron ore pellet production to a different mine to avoid royalty payments to Mesabi Trust.
"The royalty component at Northshore is absurdly high. ... And that's why we're moving from the Northshore with a very bad royalty structure to Minorca," Cliffs CEO Lourenco Goncalves said in a call with investors last week. "And we're going to keep Northshore idle every now and then."
The move could affect the more than 500 employees who work at Northshore, which Cliffs spent $100 million upgrading in 2019 in order to produce the direct-reduced-grade iron it needs for modern steelmaking.
It will also be a blow to Mesabi Trust, which derives nearly all its income from the Peter Mitchell Mine near Babbitt where Northshore operates. Mesabi Trust received $37.1 million in royalty payments in the first half of 2021.
"Cliffs has not notified Mesabi Trust of any of the aforementioned operational changes," Mesabi Trust wrote in a Securities and Exchange Commission filing Monday. "Separately, Cliffs has not recently requested any changes to the royalty structure and has historically failed to engage in meaningful negotiations requested by Mesabi Trust to address the interpretation of the royalty structure."
The publicly traded trust was formed in 1961 for the collection and distribution of royalty payments on the lands the trust owns. The trust has no control over mining operations there, however. Mesabi Trust pays proceeds of royalty payments to shareholders as dividends, the most recent of which was $1.42 per share — the highest payout in years.
An arbitrator awarded Mesabi Trust $2.7 million in underpaid royalties and interest on Oct. 1 and declared that "for purposes of calculating royalties on intercompany sales, Northshore shall reference all third-party pellet sales, regardless of grade, and select the highest price arm's length pellet sale from the preceding four quarters," according to a news release.
Goncalves has frequently used earnings calls as a bully pulpit, but Friday's announcement on Northshore appeared more than a bargaining tactic. When pressed by investors about the move, Goncalves said: "I will not use iron ore from the Peter Mitchell Mine in Babbitt, Minnesota, because I don't want to pay that royalty. And it's my decision to use the iron ore from another location. So, I use iron ore from another location."
Cliffs did not respond to requests for comment Tuesday.
Cliffs is the largest producer of taconite on the Iron Range after purchasing ArcelorMittal USA last year; the company is now an integrated steelmaker after spending most of its history solely as an iron mining firm.
Cliffs stock rose sharply Friday after the company reported a record $1.27 billion in quarterly earnings on $6 billion in revenue.
Mesabi Trust saw its stock plummet 14% Friday on news it could be seeing lower royalty payments. On Tuesday the trust's market value was $357.6 million.
Brooks Johnson • 218-491-6496