Mesabi Trust (MSB) is a royalty trust engaged in the mining and shipping of iron ore pellets, which are mostly used in the steel industry. The value of MSB is primarily based off its stream of royalty income (a product of tons shipped and prices received), and unlike some other trusts, the liquidation date of the trust is far off in the future and not a factor, which creates more volatility, since the value cannot be precisely determined. What is known is that the dividends are seasonal in nature, with the largest distribution coming after the strong summer shipping months and insignificant distributions occurring in the winter months when the waters in Minnesota freeze up. The lessee/operator of Mesabi Trust's mineral interests is Northshore Mining Corporation, a subsidiary of Cliffs Natural Resources Inc. (CLF), which is one of the world largest iron ore producers.
On October 12, MSB announced a dividend of $1.12, which was equal to last year's dividend. Given the strong shipping numbers that MSB had been reporting, this was actually a disappointment, caused by a realized sales price for iron ore of only $78, which was a reflection of the slowdown in demand for global steel. Iron ore prices bottomed around $80 last quarter and have since rebounded to above $110, but it is important to note that pricing is soft, and the last time iron ore prices hit $80, MSB was trading as low as $18, so a further softening in iron ore could have a significant impact
More germane to the current situation is the seasonal nature of MSB's stock price and the opportunity to use this recent run-up to short a company with poor to mediocre fundamentals. Since the October dividend is almost always the strongest distribution by far, many investors buy the stock just to receive it, and then, faced with the prospect of receiving dividends over the next 364 days that barely exceed the October dividend, there is a rush to the door to sell the stock.
Keeping in mind that the recently announced distribution was actually a disappointment (and 2011 was a huge positive surprise), I have prepared data to show skilled traders where MSB was on the day of the announcement - the high after the announcement, and where MSB was trading a month after the "dividend squeeze."
|Year||Pre Div Price||Post Div Hi||1 Month Later|
As you can see from the above data, the decrease from the post-dividend squeeze has ranged between (9%) and (18%). The huge decline last year was partially the result of the run-up from the positive dividend surprise, but given that this year's announcement was Below Projection, and the stock has already run 14% in a weak market, I would expect the price to fall back to at least the pre-dividend price of $27.05. If the iron ore market continues to soften and the prospect of dividends going to 60 cents and then 5 cents over the next two quarters, we could once again test the lows of $23, which were made at the end of last year.
Take advantage of the post-dividend run-up and short MSB for a quick profit after the dividend is paid out.