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Summary

  • Great Northern will terminate on April 6th, 2015 and the stock will go to zero.
  • The final three dividends, not including June's, and final liquidation distribution will total about $15 per share not taking into account the time value of money.
  • The same price action leading up to and after GNI's March ex-dividend date, is playing out for June's as well.
  • With declining iron ore prices, and increasing expenses of the trust, it's likely shareholders will get smaller distributions than they expect.

Great Northern Iron Ore Properties (NYSE:GNI) is an iron ore royalty trust that terminates on April 6, 2015. Because its termination date is so close, the stock naturally has a very high distribution yield. The next ex-dividend date is June 26, 2014. Looking at the 4-month chart of the stock, it's predictable how this story will play out:

As shown in the above chart, GNI ran up all the way to the ex-dividend date on March 26th. Its close that day of $24.17 was the three-month high. Then, the next day, after the dividend was announced to be $2.25, the stock plummeted to $19.12. So those who bought on the ex-dividend date and sold the next day received the $2.25 dividend, but lost over $5 in share value. Then, the next couple weeks GNI drifted down to the low $17 (around its true value) and stayed there for a couple months. GNI didn't start going back up until the beginning of June, when investors started getting excited again anticipating the next dividend. However, GNI will likely fall more dramatically this next time because it has one less dividend in its future than it had in March. The dividend for June will likely be between $2 and $2.50. So it's likely that this time, a couple weeks after June 26th, again the stock will trade at its true value, which will be around $15 per share or less.

Great Northern's Termination

As explained in the latest 10-K, April 6, 2015 is the last day that GNI will be in existence. On that date, the stock price will go to zero. Before termination, investors will receive four more dividends of approximately $2-$2.50 each, on June 26th, September 26th, December 27th, and March 27th. Then, according to the 10-K, around the end of 2016, investors will receive a final distribution of the net asset value (NAV) of the trust, minus the expenses involved in the wind-down process.

Therefore, investors will have to wait a year and a half to get that final liquidation distribution after their stock evaporates on April 6, 2015.

As explained in the 10-K, the final distribution will turn out to be somewhere in the range of $7-$9 per share. Ignoring the time value of money and just adding up the distributions, at most GNI shareholders will receive $2.50x3 + $9 = $16.5 per share in distributions, not including June's dividend. However, since iron ore has been declining, there's a good chance that the distributions will be less than $2.50 per quarter, to total around $7 at best, and that the net final distribution will be less than $9, or around $8 at best. Realistically, investors can expect to receive around $17 in total distributions. With the time value of money at a 5% rate, the total value of the future cash flows per share is about $7(.975) + $8(.925) = $6.825 + $7.4 = $14.225.

With the decrease in iron ore prices, the dividends will possibly be under $2 per share per quarter. The following is the iron ore chart:

(click to enlarge)

The following are the historical dividends:

As shown above, the size of the dividends is correlated with iron ore prices. However, because iron ore prices are lower now than they were in March, it will result in lower production at the mine. GNI only collects a royalty, it doesn't actually do the work mining the iron ore and has no say in how much production is done. The party that mines the iron ore does less production when iron ore is at a lower price because it naturally wants to save the iron ore for when it's in more demand. From the Annual report to certificate holders:

(click to enlarge)

From the above operations, the lower the price of iron ore is, the less production is done. Notice that even though less production has been done each year, expenses for Great Northern have risen every year consecutively since 2009. That is not good for shareholders, and it indicates that the future dividends and final distribution will be lower than shareholders expect.

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 Will Likely Fall To $15 Soon After The June 26th Ex-Dividend Date