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Keweenaw Land Association (OTCPK:KEWL) traces its history back to the Civil War when a land grant was promised by Congress to the company that completed the canal across the Keweenaw Peninsula in Michigan. The Portage Lake & Lake Superior Ship-Canal Company suffered financial difficulties and sold the canal and land to the original financiers which formed Lake Superior Ship Canal Railway and Iron Company to complete the canal. The canal was sold to the U.S. government in 1891 and the 400,000 acres of land was transferred to Keweenaw Land Association, Limited.

Today Keweenaw owns 161,531 surface acres and 405,976 acres of both severed and attached mineral rights in the Upper Peninsula of Michigan. Approximately 2,500 of these acres are considered commercial, recreational or city properties. The company's operations consist of the management of timber properties, the buying and selling of land and the management of the company's mineral rights. Below I discuss each of these operations in more detail.

Timber

The primary business of Keweenaw is the management of its approximately 153,000 acres of productive timberlands in the Upper Peninsula of Michigan. The company is only in the business of selling logs and does not own any milling operations. The logging and transportation services are provided by outside contractors. The company is dedicated to harvesting its forests in an environmentally sensitive manner and was the first timber management company in the United States to be certified under the Forest Stewardship Council's Smartwood program which assures consumers that the wood products they purchase come from well-managed forests. This certification allows company to market its products as "Green Certified".

The timberlands of Keweenaw are comprised of prime northern hardwoods consisting of species such as Hard Maple, Red Maple, Basswood, Yellow Birch, White Birch, White Ash, Black Ash and Black Cherry. Timber harvesting occurs primarily in the Michigan counties of Gogebic, Ontonagon, Houghton, Iron and Dickinson where 97.5% of its total surface acres are owned. The company also owns a log sorting and sales facility in Ironwood, Michigan.

Results for 2010 saw revenues increase 3% and harvest production increase 4%. While slightly beating 2009 revenue and harvest numbers, these numbers are still well below the levels seen in 2008 as the timber industry as a whole continues to suffer from a poor housing market. Income from timber operations also saw a modest increase to $89 thousand in 2010, but well below the $1,550,676 recorded in 2008. This is in part is due to harvesting a higher percentage of lower-margin pulpwood.

During 2010 the company looked into the growing opportunities in alternative energy using woody biomass. Unfortunately, due to the location of the company's timberlands, viable markets within the region do not currently exist.

Real Estate Development

In addition to managing its properties for the purposes of timber harvesting, the company buys, sells and develops properties in the Upper Peninsula of Michigan, and Northern Wisconsin, in an effort to upgrade and consolidate its timber properties. The company also sells and develops properties it believes has a higher value and better use than timber operations. The company maintains an inventory of developed home sites and other vacant properties for sale through its subsidiary Keweenaw Properties, LLC. The company will also sell isolated timberlands and better use properties in conjunction with an IRS 1031 like-kind exchange to purchase additional timberlands.

Real estate sales have contributed very little to the bottom line since 2008. The real estate market in the Upper Peninsula of Michigan remains very depressed. In 2010, the company recorded the sale of only one rural residential lot.

Mineral Rights

While the company's mineral rights currently generate a very small amount of revenue activity surrounding these rights has been on the rise over the last few years. In the late 1800s through the mid-1990s there were discoveries and mining of large copper and iron ore deposits in the Upper Peninsula of Michigan. In the past, the company has received royalty payments related to the mining of copper, silver and iron ore.

In 2008 Keweenaw entered into a mining lease with a subsidiary of Orvana Minerals Corp.(OTCPK:ORVMF) for mineral rights known as the "Western Syncline" located in Gogebic County, Michigan. Orvana has proceeded with the required preliminary studies and intends to file its mining permit application by June 1, 2011. In addition to the Orvana agreement, the company entered into a similar mineral exploration lease with Bitterroot Resources, Ltd. (OTCPK:BITTF) of Canada. This lease covers 1,240 of mineral rights in central Ontonagon County, Michigan for a term of 20 years. Bitterroot intends to begin exploration activity in the summer of 2011.

Currently, all income from mineral royalties is generated from sand and gravel operations. Royalties showed a modest increase to $55.4 thousand in 2010.

Conclusion

The operations of Keweenaw are highly cyclical and very dependent upon the real estate and housing markets. These markets remain very depressed and recent improvements have been sporadic at best. While it has been a difficult few years the company has weathered the storm and maintains a strong balance sheet. The company's properties are recorded at cost less depreciation. Given most of the properties were acquired many years ago, this is not an accurate measure of value. However, under the FASB Accounting Standards Codification Topic 820 the company reported the fair value of its properties at $131.4 million. This is nearly $120 million more than the net carrying value. Taking into account the fair value estimate, the book value would be approximately $103 per share which is a 15% premium over the current market price.

In February of this year, Keweenaw completed a two-for-one stock split which increased the shares outstanding to 1,290,890. The company is also seeking to increase the authorized level of common shares from 2,500,000 to 10,000,000. This could be a sign the company wants to be prepared for future acquisition opportunities.

If you are looking for a nearly pure play on timber, Keweenaw may be worth a closer look. If you do put this on your watch list, expect Keweenaw to be a long-term investment. Without a catalyst, I do not expect much near-term increase in the share price, however the value of the land holdings are likely to limit the downside. When the real estate and housing markets recover, earnings should improve and push the share price higher. Finally, due to the geographic limitation of Keweenaw land holdings, I would consider Keweenaw as only part of an overall timber investment strategy.

Source: Keweenaw Land Association: Northern 'Timber' Exposure