Seeking Alpha
Special situations, arbitrage, short only, deep value
Profile| Send Message|
( followers)  

Great Northern Iron Ore (NYSE: GNI) is one of the most misunderstood stocks in America. Buyers are currently paying $67 per share for GNI, misled by stories, probably written by robots, that vaunt its 15% dividend yield. But the very word "yield" is misleading when it comes to a company like GNI. When used to describe a bond, "yield" implies that the buyer can expect not just regular interest payments, but usually a return of principal as well. When used to describe a stock, "yield" implies that they buyer can expect not just regular dividends, but some chance of price appreciation as well.

In GNI's case there is no chance of appreciation or return of principal. GNI is a royalty trust that, according to its own website, will terminate, worthless, on April 5, 2015. As the stock last went ex-dividend on December 27, 2013, there are now only 5 quarterly dividends remaining, plus a final distribution to be paid just before termination.

It is not hard to estimate what the last few distributions will be. GNI's latest distribution announcement, which was released on December 13, 2013, stated that "we anticipate earnings in 2014 to be comparable to those of 2013 and possibly slightly better." In 2013 GNI paid out $10 in distributions, or an average of $2.50 per quarter. It is reasonable to suppose that GNI will pay out an additional $10 in 2014 and then a final quarterly distribution of $2.50 in March 2015.

After the quarterly distributions, there is only the terminal distribution, for which GNI's website gives a "hypothetical" calculation suggesting that the final distribution will be in the neighborhood of $8.39. After that the shares expire worthless, and the trust's property and mineral rights pass to the reversioner, ConocoPhillips.

In short, the remaining distributions from GNI will total approximately $20.89 ($10+$2.50+$8.39) or maybe "slightly better." It certainly doesn't make sense to pay any more than that, and yet the shares are selling for $67. Anyone who pays the current price and holds until termination is guaranteed to lose about two-thirds of their investment.

The irrational price of GNI has been pointed out before; perhaps the first to notice it, more than three years ago, was Citron Research. At the moment GNI is a bit like Wile E. Coyote after he has run off the end of the cliff. GNI is held up by thin air, and it can't stay aloft for long. Clearly it will be at $0 on April 6, 2015, and in all likelihood its price will fall by two-thirds well before then.

How soon is GNI going to crash?

Source: Great Northern Iron Now Worth Less Than $21, Will Fall To $0 In 15 Months