James J. Hill rules ore profits from the grave

Call it James J. Hill's long-term investment strategy.

Hill, a fabulously wealthy 19th-century Minnesotan who built the Great Northern railroad to carry lumber and farm products, is still calling some of the shots at his St. Paul-based trust fund through century-old legal documents.

The stock of the fund, Great Northern Iron Ore Properties, has reached new records for volatility this year, even before the current Wall Street financial turmoil began. Over the past 52 weeks, it has ranged from $40 a share to $145.91. It fell $3.70 Friday to $62.50.

The reasons appear to be the volatility of steel prices -- the trust's revenue comes from iron ore mining -- and Hill's own effort to make the trust nearly immortal.

The trust's quarterly income and dividends are based on royalties paid by steel companies to mine the trust's northern Minnesota iron ore deposits. Virtually all the trust's earnings are paid out as dividends, which vary from quarter to quarter. The revenue, $13.1 million in the first nine months of 2008, is based largely on mine production, which could be hurt next year because the steel industry's commodity prices and future prospects are decidedly down after what analysts say was a good five-year run. The result is stock price volatility for the trust that goes beyond the ups and downs of the overall stock market.

In addition, Hill, a man used to having his way, found a legal way to make his trust outlive even his descendents. It was created in 1906 to last 20 years after the death of the last survivor of the 18 trust beneficiaries Hill named -- which turned out to be a boy then 2 years old. The boy died in 1995, meaning the trust will outlive Hill by 99 years.

Under the terms Hill dictated, the trust's stock will cease trading when the trust expires on April 6, 2015. Any money shareholders at that time make on the stock will be determined by the amount of the quarterly dividends -- currently $3.10 a share, up from $2 in the first quarter -- over the next seven years, plus a final shareholder payout based on the trust's financial condition in 2015.

Because no one can predict the value of future dividends or the final payout -- all determined by how lucrative the leases are -- owning the trust's stock is a gamble on what steel prices will be over the next seven years, said Stephen Mauzy, who runs an investment analysis firm in Aurora, Colo.

"The steel industry has changed. Their customers, such as General Motors, Ford and Whirlpool, are not doing very well, and that affects demand for iron," Mauzy said. "So Great Northern's mining land may not be used as much, and their lease revenue for the next five to seven years may not be as robust for them as it was in the last five years."

What's made the stock price volatility even worse is that Great Northern is highly unusual among trusts because it has a specific termination date, Mauzy said. That makes it clear to investors that there is no long-term play in the stock, and that their short-term calculations are critical.

Then there's another volatility factor -- the 1.5 million shares are thinly traded, with about 6,200 changing hands on an average day.

All of that makes predicting the stock's value difficult, said Mauzy, who earlier this year wrote on SmallCapInvestor.com that the value of dividends plus payout probably would be $102 a share (the stock then traded at about $130.) That calculation is no longer accurate because of doubts about the steel market, he said.

Given all that, it might seem the trust's stock would have a history of volatility, but price swings like these haven't been seen in the last 30 years, said longtime trust board member Robert A. Stein, a professor at the University of Minnesota's law school.

While Hill's iron will still controls the fate of the Great Northern trust, he wasn't as successful in keeping control of the mining land. Hill directed that ownership of the land revert to his railroad when the trust ended; but as a result of subsequent business deals the land will now go to Glacier Park Co., a wholly owned subsidiary of oil company ConocoPhillips.

Hill probably wouldn't have liked it; he was more of a steam-engine guy.

Steve Alexander • 612-673-4553