Today we come back once again to our old friend Louis Navellier — largely because he’s pitching something that my readers ask me about all the time, a way to get a decent income yield from a mining stock (most of which, despite all the teasers about gold stocks that pay dividends, have tiny yields at this point if they produce any income at all).
With this teaser for his Emerging Growth newsletter, though ($995/year), he says that the big yield — which he touts at 9%, though that may be before the stock ran up — is not really the story, the story is dramatic capital gains that he thinks will come in the very near future. Here’s how he puts it:
“50% to 100% Profits Ahead
“All because Wall Street has miscategorized this fast-moving commodities juggernaut as just another slow-growth income play….
“I just identified a little-known commodities play with 4,881% earnings growth and 12-month gains of 350% that Wall Street views as a retirement income stock.
“How can this be?
“Because this miner has been set up as royalty income trust and not as a corporation.
“This is why only one other analyst (beside myself) is following this mining juggernaut or why so few investors are profiting from this company’s dramatic rise as the commodities bull market takes hold.”
So … a few of you might immediately know who this is (there aren’t exactly a lot of mining-related royalty trusts, almost all of those tend to be in the energy arena) … but let’s check out the rest of the clues.
“… given the company’s previous 4,881% earnings growth, 2,556% sales growth and 350% 12-month run-up, I’d be disappointed if the company didn’t triple again by this time next year.”
Gotta love those nice, precise numbers (and, frankly, it’s hard not to love that kind of growth — though it’s never sustainable). Still, Louis seems to think these growth numbers will be sustainable:
“The company’s fortunes are set to rise exponentially again in 2011, as the dollar falls, commodities prices rise, and the company delivers another 4,881% quarterly earnings growth.”
And he says that it has doubled investors money and delivered a fat 9% dividend over the last year.
Finally, we get a little more by way of hints about the share price and the institutional owners:
“If you wait until earnings reports settle in, this $57 doubler could have already hit $106.
“I’m not alone in my thinking.
“Morgan Stanley, American Century, T. Rowe Price and Oppenheimer along with other 15 mutual fund and institutional holders have loaded up on more than two million shares…
“…all in anticipation of the profit wave that’s headed their way.”
He didn’t mention in that paragraph that Navellier & Associates is also one of the larger institutional holders of the shares — though they own just about one third of one percent valued at about a million and a half dollars. They rarely show up on the major holders list, but this stock is so small that they do make the top ten.
So who is it?
This is Mesabi Trust (MSB), a grantor trust that owns interests in some pieces of of the Mesabi Iron Range in Minnesota, with the income coming from Royalties on the Peter Mitchell Mine which is operated by a subsidiary of Cleveland Cliffs (now called Cliffs Natural Resources, ticker CLF).
And yes, in the last quarter they did record massive growth (as did CLF, for that matter — thought not as dramatic) — the 4,881% earnings growth and 2,556% sales growth numbers are accurate, according to Yahoo Finance. And there is only one analyst covering the stock — for what it’s worth, he expects earnings growth to moderate dramatically, with $2.80 in earnings for the current year (ends in January) and $2.92 for next year.
The trust has no control over how much revenue comes in, and in fact the trustees are not allowed to do anything to impact the business — it all depends on how much iron ore is dug up from their lands, and what the price is. Since it’s a trust that seems to have just a bank employee as administrator and some consultants to monitor compliance, it can pass along essentially all the income as a quarterly distribution to unitholders (shareholders).
With iron ore prices climbing this year and production at the mine also going up, they generated substantially more income and cash flow than last year. Many folks expect the big players like Vale and Rio Tinto to boost prices again next year, so that would be a positive for MSB, but it is definitely not a stable, steady dividend stock — not even as stable as the several natural gas-focused trusts that we looked at for the “Mainz Income” teaser a while back.
Although aggregator sites like Yahoo Finance indicate that the expected yield is 6.5% right now based on annualizing the current payout rate, there’s not much likelihood that the quarterly dividend will remain stable over the next four quarters (the last quarter’s dividend was more than 4X as large as the comparable dividend of a year ago, but also 30% lower than two years ago). The last four payouts actually total $2.38, which was at least a 9% yield before the stock had a huge run over the year, but represents a trailing yield of closer to 5%. If the analyst is right about next year’s earnings being $2.92 (he’d have to have an iron ore crystal ball to be very accurate), that dividend would be expected to climb a bit and probably get up to at least $2.65 or so (90% of the earnings), though, as I said, there’s not any way to be very sure about what production levels will be and what iron ore pellet prices will be from the Trust’s land. I do not know what the remaining reserve life of the lands are, but though the can’t control how much iron, if any, is produced by the operator, the Trust will exist until the iron ore is gone or until a specific group of people pass away (I have no idea why this stipulation is in the Trust documents, but this is what they say: “The Agreement of Trust has a duration ending 21 years after the death of the last survivor of 25 individuals living at the inception of the Trust [that was 1961], all of whom are named in an exhibit to the Agreement of Trust and were alive several years ago when the Trustees investigated this matter. The Amendment of Assignment has a duration ending when the reserves of minerals which are the subject of that agreement are exhausted.”)
So there you have it — it is a high yield mining company, at least indirectly, and Navellier says that if it doesn’t jump at least 50% after earnings you “won’t pay a dime” (for the newsletter, not the stock). Of course, it’s your money he’d be getting in the first place, so what does he lose if he has to give it back? The last quarterly report was issued on December 3 (that’s the 10Q, the top item on their recent SEC filings list — it has a lot more details about the Trust and operations that’s worth reading if you’re interested in investing), and that release date was about ten days before this ad started running, so that means he has quite a bit of time before the next earnings report — though arguably more important will be the next distribution/dividend announcement, which if it comes three months after the most recent one should be expected in mid-January.
Which leads us to the current state of affairs, with MSB’s unit price currently tanking dramatically, down 13% today as I type this note. The shares were at $57 on Tuesday as teased, but here we are on Thursday and they’re at $46 on no particularly Mesabi-specific news that I’m aware of … though after the huge run the stock has had, the possibility of higher-than-usual seasonal dips in dividends with the midwest storms and deep freeze, or just profit taking or one of the institutional owners pulling out, could certainly help drive shares lower, and I imagine there may be a lot of new momentum-driven shareholders who might be expected to jump ship if it turns out that dividends (as in the past) go down sharply in some upcoming quarters. It takes a lot of dividend to make up a 15% capital loss, so if you love the stock you can at least be happy that you can buy it today for far less than when Navellier got excited. I have no idea whether or not the shares will recover anytime soon, but it is a unique and interesting investment.
So whaddya think? Any insight on Mesabi, or on iron ore? On the state of production in the Mesabi range or shipping in Lake Superior? Like the dividend, or expect it to fall? Let us know with a comment below.