GNI - Great Northern Iron Ore (short idea)

[oddballstocks]

Looking for anyone to poke holes in this, seems like a slam dunk so I am guessing I must be obviously missing something.

 

GNI current price $122, they are a mineral trust that is set to expire on April 6 2015 with a dissolution payment of $8.22.

 

From now to April 6 2012 the trust will be paying out twelve dividends and the final dissolution payment as mentioned above.

 

2011 earnings were a record and the company paid out $5.75 a share in the fourth quarter, the company has stated they don't expect the same level of earnings going forward.  They actually expect earnings to be more or less average and average payouts are in the $3 per share a quarter range.

 

Worst case: $5.75 * 12 + $8.22 = $77.22

Most likely case: $3 * 12 + $8.22 = $44.22

 

So it seems the minimum return is 36%

The more likely return is 64%

 

Granted you'd need to hold this short for three years but even in the worst case it's 14.14% annualized, more likely case is 28.7% annualized. 

 

So this seems like a slam dunk, what am I missing?  Why shouldn't I enter into this short?

 

[Guest Hester]

Looking for anyone to poke holes in this, seems like a slam dunk so I am guessing I must be obviously missing something.

 

GNI current price $122, they are a mineral trust that is set to expire on April 6 2015 with a dissolution payment of $8.22.

 

From now to April 6 2012 the trust will be paying out twelve dividends and the final dissolution payment as mentioned above.

 

2011 earnings were a record and the company paid out $5.75 a share in the fourth quarter, the company has stated they don't expect the same level of earnings going forward.  They actually expect earnings to be more or less average and average payouts are in the $3 per share a quarter range.

 

Worst case: $5.75 * 12 + $8.22 = $77.22

Most likely case: $3 * 12 + $8.22 = $44.22

 

So it seems the minimum return is 36%

The more likely return is 64%

 

Granted you'd need to hold this short for three years but even in the worst case it's 14.14% annualized, more likely case is 28.7% annualized. 

 

So this seems like a slam dunk, what am I missing?  Why shouldn't I enter into this short?

 

 

I love this stock, it's the best example in the world of how the market is not always efficient.

 

But unfortunately there is no opportunity here. You will not be able to borrow the stock from anywhere. Interactive Brokers will probably be the only retail broker with the borrow, and last I checked IB had the HTB fee at -45% annualized.

 

Believe me, if I could borrow the stock for free I'd make it my biggest short position.

 

There might be a chance during the last year of trading if the stock is still high, despite the high HTB fees. It has coasted between 100 and 150 for a while and just gets less valuable every quarter.

 

P.S I think I know how you heard of this stock

[beerbaron]

If I borrow shares of GNI, how can I give them back to the lender if all the shares have been cancelled?

 

BeerBaron

[Guest Hester]

You won't have to return the shares if you hold until expiration (April 2015). You'll just have to cover the final distribution of about $8 per share and then the trade will be over, and the shares cancelled.

 

But again, borrowing costs you 45% per year if you can even get it.

[oddballstocks]

Hester,

 

Great information, I appreciate the response.

 

I guess the question is then is it possible to buy the shares and lend them out?  You'd be able to collect the distributions and some part of the 45% lending costs right?

[moore_capital54]

You are missing one thing and that is what happens if iron ore prices rise by 30-40%...

 

Barring that event, you should be fine on your short...

[Hielko]

Hester,

 

Great information, I appreciate the response.

 

I guess the question is then is it possible to buy the shares and lend them out?  You'd be able to collect the distributions and some part of the 45% lending costs right?

Yes you would be able to do that, but with a small/retail account it's probably hard to find a broker that gives you a fair part of these lending proceeds. Think IB is the best and they basically give you 50% of the proceeds (if you have a larger account you can actually lend the shares out yourself and collect the full amount). But it would still be a risky bet even with the current rates; it would basically be a bet that the market is going to remain stupid for a long time (and that could certainly be the case, remember looking at this company a year ago). But if people realize what going to happen between now and next year and the stock price collapses you'll be screwed, and hard to handicap the odds of something like this.

[Guest Hester]

You are missing one thing and that is what happens if iron ore prices rise by 30-40%...

 

Barring that event, you should be fine on your short...

 

Actually for the stock to break even from here iron ore would have to go up almost 50% tomorrow and stay there the whole time, whilst ignoring the time value of money.

 

But again, the borrow isn't possible.

[Guest Hester]

Hester,

 

Great information, I appreciate the response.

 

I guess the question is then is it possible to buy the shares and lend them out?  You'd be able to collect the distributions and some part of the 45% lending costs right?

 

I guess you could do this, but I wouldn't

 

The stock really is probably worth $45 over the next three years, but if you discount the future payments to account for the time value of money the stock is not worth anymore than the mid 30's.

 

So for the investor to get a reasonable return the stock would have to fall over 80%, negating a heck of a lot of fees earned. It will fall at some point, but when is a mystery. So holding a long while collecting the fees and dividends is incredibley risky because that cliff could be tomorrow or 3 years.