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Tuesday, May 18, 2010

Great Northern Iron Ore Properties

reat Northern Iron Ore Properties (the "Trust") is a conventional nonvoting trust organized in 1906 by James J. Hill. He was the CEO of the Great Northern Railway and was a railroad tycoon back in the late 1800s and due to the size of the size of this region and the economic dominance exerted by his lines, Hill became known during his lifetime as The Empire Builder. Hill set up a trust to provide income for his youngest heirs. The beneficiaries were 18 children who at the inception of the trust were less than six years old.

The terms of the Great Northern Iron Ore Properties Trust Agreement, created December 7, 1906, state that the Trust shall continue for twenty years after the death of the last survivor of eighteen persons named in the Trust Agreement. The last survivor of these eighteen persons died on April 6, 1995. Accordingly, the Trust terminates twenty years from April 6, 1995, that being April 6, 2015.

The Trust owns interests in fee, both mineral and non-mineral lands, on the Mesabi Iron Range in northeastern Minnesota. The Trust's properties, which span two counties (St. Louis and Itasca) in northeastern Minnesota, extend from Hoyt Lakes on the east end of the Mesabi Iron Range to Grand Rapids on the west end of the Mesabi Iron Range. Many of these properties are leased to steel and mining companies that mine the mineral lands for taconite iron ore. The Trust has no subsidiaries.

The primary purposes of the Trust are to lease its mineral interests on the Mesabi Iron Range in northeastern Minnesota to the major steel and taconite producers, collect royalties from the extraction of taconite ore by the producers, and provide a return to the shareholders, while at the same time balancing the interests of the certificate holders with those of the reversioner -- Glacier Park Company, a wholly owned subsidiary of ConocoPhillips.

Deriving its royalty income from Taconite, as one would expect the Trust's distributions are highly correlated to the price of steel. Seeing how the trust has been operating for over 100 years it seems logical that additional discovers of Taconite are highly unlikely.

At the end of the Trust, the shares in the Trust will cease to trade on the New York Stock Exchange and thereafter will represent only the right to receive certain distributions payable to the certificate holders of record at the time of the termination of the Trust. Upon termination, the Trust is obligated to distribute ratably to shareholders the net monies remaining in the hands of the Trustees (after paying and providing for all expenses and obligations of the Trust), plus the balance in the Principal Charges account (the balance in this account consists of attorneys’ fees and expenses of counsel for adverse parties pursuant to the Court Order in connection with litigation commenced in 1972 relating to the Trustees’ powers and duties under the Trust Agreement and the costs of homes and surface lands acquired in accordance with provisions of a lease with U.S. Steel Corporation, net of an allowance to amortize the cost of the land based on actual shipments of taconite and net of a credit for disposition of tangible assets). All other Trust property (most notably the Trust’s mineral properties and the active leases) must be conveyed and transferred to the Glacier Park Company, a wholly owned subsidiary of Conoco Phillips.

This termination payment is currently (as of 12/31/09 which is the last estimate) at $8.53/share (for frame of reference it was: $8.20 in 2008, $8.78 in 2007, $8.80 in 2006, and $10.53 in 2005).

Over the past 12 months the company has declared $8.20 in annual dividends (with the last dividend being paid on April 30, 2010) which makes for some intimidating - an 8.8% trailing dividend yield.

The bet quite simply is that the Trust's accumulated dividends from here until April 6, 2015 plus the termination payment will total less than the current stock price.

Without going into great detail (which I highly recommend readers build out their own models as they can see how sensitive the Trust is to steel prices), lets assume that steel prices are back to the wild days of 2008 and the Trust's payments rise accordingly to their 2008 highs - which was $11.70/share. If we take this and multiple it by 20 payments (20 quarters to April 6, 2015 - assuming the April 30, 2015 dividend is paid on April 6, 2015) it results in total distributions of $58.5/share. We then add in the termination payment which should be around $9. This results in total payments to shareholders of $67.5/share. So in the absolute worst case (assuming steel at prices 50% higher than today) you can still expect a 9.2% IRR, if steel prices remain in a more normalized range it is a fairly attractive high double digit IRR, which could be accelerated should the shares trade closer to intrinsic value more rapidly than I am assuming.

Only negative is the cost the short - this is one reason why it may be worth sitting on the sidelines and selling into the rallies. Overall it is a fairly simple idea that should produce adequate returns.

Variant View:
There is no variant opinion, this stock has zero coverage. But the real keys to focus on in my mind are:

Higher steel prices leading to larger distributions
Some additional discovery of Taconite that can meaningfully increase their royalty stream (highly unlikely as described above)
Something funky that makes the distribution from the Principal Charges Account meaningfully higher (not even sure if this is possible).

Target: $67.50 by expiration, current price: $91.42

1 comment:

billy gates said...

last trustee not dead!

Conclusions bogus