As I’ve said before, the basic materials sector is one of the deepest cyclical economic sectors. This is the basis for my newest recommendation.
More specifically, I’m talking about mining iron ore in the great Mesabi Pass in Minnesota. There, the big player is Mesabi Trust (NYSE:MSB).
I’m familiar with MSB, as I’ve held it twice in recent years, so I’ll give you some background on this unique company before I delve into the trust’s technical information and why I think now is the time to buy.
The trust began in 1961, mining ore at the eastern end of the Mesabi Iron Range in Minnesota. Cliffs Natural Resources (NYSE:CLF), formerly Cleveland-Cliffs, together with its subsidiary, Northshore Mining Company, owns the rights to operate the mine, though the vast lands there are owned by MSB.
What I like about MSB is the unique relationship it has with Northshore. First, you should know that Northshore’s role is to mine the ore and derive the iron particles from the hard rock. It then ships the resulting iron to CLF’s customers, who use it in steel-producing blast furnaces.
Enter MSB. Mesabi receives royalties from Northshore, which are based on the selling price of the iron pellets it ships. It also receives a smaller royalty that is based on the tons of ore that are extracted at the mine.
MSB is a publicly held trust, run by fewer than 10 people. According to its website, the trust is registered as a pass-through entity and its revenues are taxed not to the trust, but to the unit holders. Therefore, MSB is not able to engage in any other business than the collection and distribution of royalties and payment of expenses.
It All Starts With Raw Material
It’s all about end demand and how much Cliffs extracts from quarter to quarter, most of which ends up overseas in emerging markets in the form of what is called pig iron, or iron bars, that then are fashioned into gleaming steal bars or other steal fabrications, such as rolled steel. As you can imagine, this falls right into the infrastructure theme of building bridges, dams, harbors, shipbuilding, skyscrapers, autos, trucks and all manner of heavy construction.
Click to Enlarge From a technical standpoint, shares of MSB have commenced a new rally phase. If you connect all the tops dating back to April, you’ll see how the stock had broken the downtrend channel two weeks ago. This is pretty exciting because, at its current price, MSB is carrying a yield of 7.2% and has a 14.4% projected yield as of its most recent quarterly results. And the fact that the stock has cleared its 200-day moving average only invites further interest from the crowd who live and die by the charts.
In the chart to your right, note the reverse head-and-shoulders formation established in early October, a pattern that gets the attention of market technicians. Earnings estimates aren’t even worth discussing, as they can range from $2 to $5 depending on the many factors that effect how Cleveland Cliffs sells into its end markets.
I’ve been in MSB twice before, once in 2007 and again in 2009. In 2007, MSB delivered huge results for me in the form of a 65% gain. In 2009, I recommended selling MSB for a loss when the S&P was trading around 700. At that time, there was great fear that it would fall to 500 and throw me into a deep depression. Consider that this time around we are coming out of a recession, and I expect to see the cycle for iron ore to pick up. Remember that commodities as a sector are highly volatile, just like the high-yield stocks associated with them.
I recommend purchase of MSB for investors looking to make an aggressive, high-yield portfolio as I believe the time to own Mesabi Trust is now, and that you will be rewarded richly.