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Summary

  • Both GYRO and WHX fell by more than 50 percent after we exposed them.
  • We are 100-percent certain GNI will be worth ZERO after all distributions have been paid. We expect the present value of the remaining distributions to total around $16.
  • Don't become a naive investor and chase high yields, as GNI is a trust that in mid-2015 will cease to trade.

Introduction:

It is easy to estimate the value of Great Northern Iron Ore Properties (NYSE:GNI), and we strongly believe it currently should be trading at around $16. Investors shouldn't pay much attention to current yield because GNI should be valued solely on the present value of its remaining distributions. Consequently, we assign a sell rating on the stock with a $16 price target.

GYRO has fallen by more than 50 percent since our article was published:

On Jan. 6, 2014, we wrote an article for Seeking Alpha on Gyrodyne Co. of America Inc. (NASDAQ:GYRO) and initiated a sell rating on the stock with a $5.70 price target. On Jan. 3, the Friday before that article's release, the stock closed at $10.79. In the 5 ½ months since the article's release, the stock plummeted by 52 percent. It now is trading at $5.19.

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WHX has fallen by more than 50 percent since our article was published:

On Feb 18, 2014, we wrote an article for Seeking Alpha on Whiting USA Trust I (NYSE:WHX) and initiated a sell rating with a price target of $2.30. In the four months following that call, WHX has fallen to $2.03. After distribution payouts are accounted for, that is a 55-percent drop.

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About the trust:

GNI is a conventional nonvoting trust under the laws of Michigan. It was created on Dec. 7, 1906. The trust owns more than 67,000 acres in Northeastern Minnesota for the purpose of leasing mineral rights to steel and taconite producers. GNI collects royalties, which it pays back to shareholders, from the extraction of these minerals. GNI's properties have yielded more than 700 million tons of natural iron ore and taconite ore. The trust will legally terminate on April 6, 2015.

Worth ZERO (after all distributions are paid) when trust terminates:

As stated in the previous paragraph, GNI will terminate on April 6, 2015. On this date, the shares will cease to trade on the New York Stock Exchange and will represent only a right to receive the remaining distributions after the wind-down of assets. GNI estimates this process could take until the end of 2016. Shareholders potentially could wait more than a year and a half to receive the termination value of their shares. GNI estimates the final distribution will be worth $9.72 per share.

With 100-percent certainty, we predict GNI will have ZERO value after all distributions have been paid to shareholders. Therefore, GNI value should be based on the remaining cash distributions plus the final distribution at the end of 2016, the total of which is estimated in the next paragraph.

Estimated value of the trust:

On June 16, 2014, GNI declared the second-quarter 2014 distribution of $2.50 per share payable on July 31, 2014, when it will trade with an ex-dividend date of June 26, 2014. Following the second-quarter distribution, there will be three more regular quarterly distributions declared (two in 2014, one in 2015) before the termination date of the Trust. GNI estimates the final distribution payment will be around $9.72. To calculate an estimated value for GNI, we used a present-value calculation with a discount rate of 4 percent. This led us to conclude GNI should be trading at around $16 per share.

Conclusion:

We believe GNI is overvalued because naive investors are purchasing shares for the high yield. What these investors don't understand is that GNI is a trust that will terminate and that it will be worth ZERO after all distributions are paid. Therefore, GNI value should be based solely on the remaining dividends. Consequently, we assign a sell rating on the stock with a $16 price target.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Great Northern Iron Ore Properties: Likely To Drop Back To Its Fair Value In The Coming Days; $16 Price Target