Seeking Alpha
Profile| Send Message| ()  

Great Northern Iron Ore (NYSE: GNI), a trust with mining interests near Lake Superior, closed above $75 on Friday, after briefly approaching $90 in September. Buyers' interest in GNI is driven by naïve or misleading screens that find listings with high dividends and high earnings per share, but do not ask whether the dividends and earnings are sustainable. GNI's payouts are unsustainable, as I have pointed that out before - and I am not the only one to notice. After each exposé, GNI's shares crash, but they eventually creep back to an irrational level. As the shares are selling well above their fair value, which is now less than $50, it would appear that a refresher course is in order.

To confirm that GNI's distributions are unsustainable, look no further than the description on Reuters and Google Finance, which discloses in the very first sentence that GNI "will cease to be a going concern and all shares will be cancelled, on April 6, 2015." That means there are only ten quarterly dividends remaining, plus a final distribution to be paid at termination.

It is not hard to estimate what future distributions will be. Throughout 2012, GNI's distribution releases have repeatedly stated that "2012 will be another good year for the Trust, though it is not expected to reach the historical record earnings achieved in 2011." Distributions through the first three quarters of 2012 have totaled $8.75, whereas distributions in 2012 totaled $15. That means the last quarterly distribution of 2012 will be less than $6.25 ($15 minus $8.75) - most likely $6.00, $5.75, or $5.50 since recent distributions have invariably been in round-quarter amounts. So a December 2012 distribution of $6.00, which would bring the total of 2012 distributions to $14.75, is the most shareholders can hope for.

What about distributions in 2013? GNI has not yet provided guidance, but from the 10-K we know that the Trust's income comes entirely from royalties on its taconite mines, and those royalties are linked to the "price of pellets, the iron content, the Producers Price Index ('PPI') (All Commodities), [and] the PPI (Iron and Steel subgroup)" I'm not in the business of forecasting commodity prices, but it's worth noting that the PPI (All Commodities) has been flat since April of 2011, while the PPI (Iron and Steel) was also flat before declining slightly in recent months. On that basis it seems reasonable, maybe even a little optimistic, to suppose that distributions in 2013 and 2014 will be about the same as those in 2012, and that the first two distributions of 2015 will be about the same as the first two distributions of 2014. If you want to be more optimistic, you might hope that distributions from 2013 through termination will grow at an annualized rate of 10%. But of course, the distributions could also decline at a similar rate.

After the quarterly distributions, there is only the final distribution at termination, for which GNI's website gives a "hypothetical" calculation suggesting that the final distribution will be in the neighborhood of $8.59. And then we're done; after the final distribution, the shares expire worthless, and the trust's property passes to a new owner, ConocoPhillips.

The table below gives actual and forecast distributions from March 2011 until termination. Notice that distributions follow a seasonal pattern with each year's largest distribution in December. The table shows three different scenarios-one where the distributions do not grow after 2012, one where they grow at an annual rate of 10% after 2012, and one where they decline at an annual rate of 10% after 2012. Under the growth scenario, the total of all forecast distributions if $49.52; under the no-growth scenario, the total is $46.34, and under the declining scenario, the total is $37.59-half the current price. The table doesn't apply a discount rate; if it did, the net present value would be even lower. On any rational basis, it is hard to justify a price above $50, and impossible to justify the current price of $75.

Those who buy or hold GNI anywhere above $50 are in for a cold Lake Superior bath.

Distributions

Date

With no growth after 2012

With 10% annual growth after 2012

With 10% annual decline after 2012

Actual

March 2011

$2.25

June 2011

$3.00

September 2011

$4.00

December 2011

$5.75

March 2012

$2.25

June 2012

$3.00

September 2012

$3.50

Forecast

December 2012

$6.00

$6.00

$6.00

March 2013

$2.25

$2.48

$2.05

July 2013

$3.00

$3.30

$2.73

September 2013

$3.50

$3.85

$3.18

December 2013

$6.00

$6.60

$5.45

March 2014

$2.25

$2.48

$2.05

July 2014

$3.00

$3.30

$2.73

September 2014

$3.50

$3.85

$3.18

December 2014

$6.00

$6.60

$5.45

March 2015

$2.25

$2.48

$2.05

Final distribution, April 2015

$8.59

$8.59

$2.73

Total from now until termination

$46.34

$49.52

$37.59

Source: Great Northern Iron's Shareholders Are In For A Lake Superior Bath