Tuesday, January 7, 2014

Why do I spend so much time on royalty land trusts?

This is why...

Picture from Google Finance

Great Northern Iron Ore (GNI) is a company that has been around since before 1910. Paid a great double digit yield. The Street.com said just last month how GNI was a great company to buy. So what went wrong?

The problem is that GNI is not a corporation, its a royalty land trust that expires in April 2015.
Their termination clause states that there will be a final payout of assets which is estimated to be about $8. If we add up roughly a generous $3 for the last 5 or so dividend payments plus the final $8 payout we get... $23.
There can be debate about a $70 assets being worth $75 or perhaps $65 and I have been in some great discussions of land trust calculations. Thats a matter of opinion.
But a $70 asset being worth $20-$30 and the debate is to buy it or not is entirely different. Either you didn't do your research and fully understand what you were invested in or you are an idiot with an ego and cannot admit you are wrong.
I do my best trying to talk to and educate the former because we have all been there, including me.
I will however gladly take the money from the latter.

Take a look at a 5 year chart to see what's worse about GNI.

At no time did GNI longs ask the following questions
1: Why is Institutional ownership at 5%? Why won't even hedge funds touch this thing?
2: Why are there yearly 33% to 50% crashes?
3: Why is the P/E ratio of this "corporation" at a 7 (before yesterday's crash).

Looking at what happened yesterday, a person could have looked at a 5% loss and gone to lunch debating what they should do and then come back to find they now have a 40% loss.

"But Pully," you might ask "you own two trusts and they have big losses. Who are you to talk?"
Glad you asked...

WHZ: When I purchased them I estimated $20 - $25 in total payments so my purchase price of $16.34 seemed like a good margin of safety. The trust was wrong with their oringal estimates in their S-1 about their costs and I had to readjust my estimates. That's not placing blame as I am still responsible for my portfolio. Its just that I feel my research was correct with the data I had at hand as was many other WHZ longs.
At this point I estimate in the next 7 years before it expires that it will pay me $16-$20. That's a wide range and it has to be because who knows what energy prices will be over 7 years.
I currently have a share price loss of -17.76% but when we add in the distributions I have received, my total return is only at a -1.87%. Nothing to be proud about but its not a disaster. I am using an 8% depletion rate as shown in the 10y div growth column on my spreadsheet.

NDRO: This one is a bit worse but I think I am still ok. There is no termination date and its perpetual and keeps paying me until they essentially run out of natural gas and oil. If they find more reserves or new technology improves how much they can get, then I benefit from all that. Even with that, I am still being conservative and currently estimate $12-$14 in total payments which puts me at fair value.
While I currently have a -25.34% loss, after distributions its only a -20%. Still bad however unlike most trusts, I have time on my side with this one. I am using a 5% depletion rate as shown in the 10y div growth column on my spreadsheet.

Trusts give great yields but they are no joke. This is exactly why I spend so much time warning others about trusts.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. Royalty land trusts (oil) have been great hedges against rising fuel costs for me personally. Land trusts are no different than companies i.m.o where we always need to update ourselves with the most recent numbers and trends etc.