We recently came across GNI with unusually high dividend yield. It is a special situation that warranted a deeper look to see if there is a hidden opportunity here somewhere.
Great Northern Iron Ore Properties (“GNI” or “Trust”) owns interests in fee, both mineral and non-mineral lands, on the Mesabi Iron Range in north eastern Minnesota. The trust was created on December 7, 1906 and was formed such that it will cease to exist twenty years after the death of the last survivor of the eighteen persons named in the Trust Agreement. The last survivor died on April 6, 1995 and thus the trust will cease to exist on the 6th of April 2015.
The trust will liquidate its assets and pay out net monies (after fees) to its shareholders and therefore we are looking to calculate the price at which we would pay for a share in the trust. The main assets (the mineral properties and the active leases) will go back to Glacier Park Company that is a wholly owned subsidiary of ConocoPhillips Company as per the terms of the Trust Agreement.
As per their filings the Trust is only involved in leasing and maintenance of their mineral properties. Their main income comes from the leases and the royalty income generated by the number of taconite (an iron-bearing sedimentary rock) shipped by the steel and mining companies.
In the last quarter filings they recited the figures they used in their 2012 annual report. “To offer a hypothetical example, without factoring in any expenses and obligations of the Trust upon its termination, and using the financial statement values as of December 31, 2012, the net monies were approximately $7,719,000 and the Principal Charges account balance was approximately $4,871,000, resulting in a final distribution payable of approximately $12,590,000, or about $8.39 per share.” This does not mean much as the final distribution will fluctuate from this figure but it’s interesting to note that if the Trust were to shut at the end of 2012 the Trust would only pay approximately $8.39 yet the share is currently trading at > $20 thus suggesting that they expect the company to earn substantial amounts between now and then. We will go through the profitability of the business in the next section and make our own adjusted liquidated value as at the last financials 30 Sept, 2013.
As of today there are 5 full quarters and 1 extra month (or 16 months) of trading before GNI has to close their doors. I have done a cash flow analysis for the next 5 quarters based on average revenue and earnings from the last four quarters.
As mentioned previously GNI receives revenue from their leases and a royalty based on how much taconite has been extracted. This means there is a fixed and a variable component to their earnings and for this reason I have decided to look at two scenarios where GNI’s revenue decreases (10% / 20%). Management believe the 2014 results will be very similar to 2013 and therefore taking the average as a base seems reasonable.
In the following scenarios I have chosen to keep the expenses the same even with lower revenue to be conservative and in the short term I believe expenses are fixed. As with the revenue, the expenses were calculated as an average over the last four quarters.
There is a $2.65 dividend per share being paid out on the 31st of Jan 2014 to the certificate holders of record on December 31, 2013. This has not been added to the future earnings as we do not know what the earnings were and not entitled to receiving it.
|Average last 4 quarters||Per Quarter||5 Quarters|
|10% Decline in Revenue|
|20% Decline in Revenue|
Due to the low interest rates and the short term nature of this investment I have not made any adjustments for time value of money or inflation. I have also only included the 5 full quarter and not included any profit that may be received in the last month of trading.
If we were to take the conservative example and look at the returns if there was a 20% reduction in revenue and no adjustments in costs we would expect to make just over $9 per share.
Liquidated Valuation as at 30 Sept 2013.
|Other Current Assets||31,000||–||0.00%|
|Total Current Assets||9,852,000||9,407,900||95.49%|
|Buildings And Improvements||336,000||–||0.00%|
|Property, Plant and Equipment||1,146,000||–||0.00%|
|Other Long Term Assets||3,585,000||1,792,500||50.00%|
|Accounts Payable & Accrued Expenses||189,000||189,000||100.00%|
|Other Current Liabilities||3,900,000||3,900,000||100.00%|
|Total Current Liabilities||4,089,000||4,089,000||100.00%|
|Pension And Retirement Benefit||268,000||268,000||100.00%|
|Other Long-Term Liabilities||497,000||497,000||100.00%|
– As per their Trust Agreement I have given no value to the property as it will be transferred to Glacier Park Company. There is a Principle Account to the value of $4,805,753 noted below.
– No value was given to their other current assets as the value is not significant and 10% reduction given to their accounts receivable to be prudent
|Adjusted Book Value||6,614,400||4.41||19.30%|
As per my analysis if the Trust were to liquidate as at 30 Sept 2013 their assets would only disburse $4.41 per share before costs.
There is also a Principle Account which at 30 Sept 2013 is at $4,805,753 or just over $3 a share. This account is “neither an asset nor a liability of the Trust. Rather, this account maintains and represents a balance which will be payable to the certificate holders of record from the reversioner (Glacier Park Company) at the end of the Trust.”
A summation of the conservative future earnings and the principle account and balance sheet as at 30 Sept, 2013. This does not take into consideration any profit as per the 31 December 2014 quarter no the dividends to be paid out on the 31th of Jan.
|Adjusted Book Value||4.41||6,614,400.00|
|Current Market Value||22.85||34,275,000.00|
On April 6 2015 the trust needs to be terminated thus there will costs associated with final audits, contracts terminations and property transfers etc. We do not have any information regarding what these costs could be from the trustees and don’t hold any knowledge more than a speculated guess.
If the Revenue were to fall more than 20% or the costs were to increase this analysis would mean the calculations were too optimistic.
We do not know the timeframe between when the Trust stops trading and when the final distributions will be paid by the lawyers.
The mining industry is unstable at the moment due to natural resource prices and thus we cannot predict if all the contracts will continue uninterrupted.
We know the Trust will cease to exist on the 6th of April 2015 but predicting what the final distributions will be is another story. The Trust is trading profitably but due to the unusual nature of their agreement the future value will depend on how much it distribute to its shareholders over approximately 16 months.
After my analysis I believe the market is still pricing GNI too high to be considered a safe buy and would not look to invest until the price were to fall another 50%. There are far too many unknown fees in the near future and as time continues the value of GNI will fall closer and closer to 0. A case can be made to take a short position in the issue but this might be a little complicated due to the end of life situation and anyhow at Value Stock Guide we tend to stay on the long side.
Note: Analysis by Erwin, reviewed by me.