Great Northern Iron Properties: Are You Sure You Want This 'Free Lunch'?

Jul.24.13 | About: Great Northern (GNI)

Great Northern Iron Ore Properties (NYSE:GNI) is the stock that defies all laws of efficient financial markets. Disastrous financial results can't seem to dent the share price which is up 10.5% year over year in spite of a 36% drop in net income. Investors attracted to the company's 15.6% "yield" seem not to understand that those distributions are return of capital and not return on capital. By the time the trust terminates in April 2015, investors will only receive distribution payments equivalent to roughly 40% of the current share price; the trust has no other value. That said, someone continues to buy this stock at current trading levels as it trades roughly 1% of its shares each day. Whoever currently owns GNI or is considering buying it around current prices risks substantial financial loss.

According to the company's website GNI is a "conventional nonvoting trust organized under the laws of the State of Michigan pursuant to a Trust Agreement dated December 7, 1906. The Trust owns interests in fee, both mineral and non-mineral lands, on the Mesabi Iron Range in northeastern Minnesota…The primary purposes of the Trust are to lease its mineral interests on the Mesabi Iron Range in northeastern Minnesota to the major steel and taconite producers, collect royalties from the extraction of taconite ore by the producers…"

GNI has been written up on seeking alpha a couple of times before. They basically all say the same thing: You are either really brave or really ignorant to 'trade dimes for nickels' by purchasing GNI.

I also found this article which caused the stock to plummet when it was published back in December of 2010.

Just 4 quick facts on GNI:

1. The trust will be terminated on April 6, 2015. The company is very explicit to this fact on its website.

2. All of the trust's mineral rights and properties revert to ConocoPhilips (NYSE:COP) on April 6, 2015. There are no leftover properties for the trust.

3. GNI's recent financial results have been significantly impacted by falling iron ore prices. On Friday, GNI reported Q2 earnings with revenues down 31% yoy and net income down 36% yoy. Results have been getting worse over the past year. On a trailing 12 month basis, revenues are down 33% year over year and the dividend is also down almost 40% yoy.

 

 

Great Northern Iron Historical Results                  
                       
  Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 LTM
Revenues 5,448,894 6,571,837 6,494,435 8,223,373 7,030,545 7,328,846 5,223,395 4,573,266 4,734,180 5,028,911 19,559,752
% Change YoY 72% 24% 7% 30% 29% 12% -20% -44% -33% -31% -32.7%
Net Income 4,494,692 5,652,868 5,656,309 7,243,942 5,969,081 6,278,613 4,267,252 3,553,487 3,690,846 4,017,711 15,529,296
EPS 3.00 3.77 3.77 4.83 3.98 4.19 2.84 2.37 2.46 2.68 10.35
% Change YoY 94% 27% 8% 33% 33% 11% -25% -51% -38% -36% -38.3%
Distribution 2.25 3.00 4.00 5.75 2.25 3.00 3.50 5.25 2.25 2.50 13.50
Click to enlarge

4. There are 7 quarterly dividends left and a 'final distribution.' Investors will get nothing more. As a result of declining iron ore prices, dividends will likely average around the current $2.50 per quarter rate going forward. 7 quarters x $2.50 = $17.50 total in dividends. That's it from regular dividends.

If you use the company's guidance for how to estimate the 'final distribution' (basically total assets minus total properties minus total liabilities plus the principal charges account) and apply it to the data in the most recent 10-q filing, the 'final distribution' would be estimated to be roughly $9.22/share before any costs to wind down the trust.

 

 

 

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Total Assets

16,697,897

15,249,842

16,755,048

17,481,055

17,383,092

16,408,504

18,804,867

19,572,437

20,914,912

18,488,356

21,557,212

20,738,230

19,118,714

15,154,521

15,971,251

Total Liabilities

5,625,875

4,798,002

5,925,636

6,974,417

7,267,370

5,092,136

6,254,676

7,284,983

10,605,569

5,457,467

6,620,245

6,656,546

9,720,050

5,269,760

5,648,527

Total Properties

3,204,869

3,051,653

2,909,446

2,767,447

2,629,843

2,585,633

2,497,622

2,537,347

2,382,187

2,199,727

2,017,267

1,834,807

1,679,798

1,495,099

1,317,087

Principal Charges Account

4,931,000

4,905,604

4,878,899

4,864,514

4,840,000

4,896,665

4,915,414

5,006,204

4,962,000

4,939,211

4,911,925

4,892,237

4,871,000

4,853,323

4,821,742

# of shares

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

1,500,000

"Final Distribution Payment"

$8.53

$8.20

$8.53

$8.40

$8.22

$9.08

$9.98

$9.84

$8.59

$10.51

$11.89

$11.43

$8.39

$8.83

$9.22

Click to enlarge

GNI's stock is only worth the value of the remaining distributions. The math to value the stock is therefore very simple. $17.50 a share of expected future dividends plus an expected $9.22 a share final distribution yields a total intrinsic value of around $27 a share. The stock should trade at some discount to this value to reflect the time value of money. Instead, GNI is currently trading for more than $73 a share. Current Shareholders are pretty much guaranteed to lose over 60% of their investment.

Shareholders waiting for the next dividend before selling are playing a game of Russian Roulette. The $2.50 dividend probably isn't worth the risk of losing $40 a share overnight when some of the large shareholders decide they no longer want to be the investors left holding the bag.

GNI shareholders would be well advised to sell their stock before it's too late. This is not some kind of amorphous valuation argument; the stock is obviously worth less than $27 a share and GNI shareholders are essentially guaranteed to lose over 60% of their investment over the next 20 months if they hold on. Caveat Emptor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.