Saturday, May 27, 2023

Natural Resource Partners L.P. ($NRP)

Natural Resource Partners L.P. (NRP) is a limited partnership that owns mineral rights throughout the U.S. (totaling 13 million acres) as well as a 49% minority interest in Sisecam Wyoming, a trona ore mining and soda ash production business located in the Green River Basin of Wyoming. 

NRP does not produce any minerals - they lease acreage to operators in exchange for royalties. The majority of their mineral rights revenues come royalties on coal production in Appalachia, the Illinois Basin, and the Powder River Basin. Production last year (2022) was split 55/45 between thermal coal (mostly from Illinois Basin) and met coal (mostly from Central Appalachia). Something nice from the investor presentation [PDF]: 

NRP owns the right to sequester CO2 underground in approximately 3.5 million acres located primarily in the southern United States – NRP currently has approximately 140,000 acres of pore space under lease with an estimated carbon storage capacity of at least 800 million metric tons. [...] We do not plan to develop or operate any carbon sequestration or renewable energy projects ourselves but lease our acreage to companies that will conduct those operations in exchange for payment of royalties and other fees to us.

The market capitalization of NRP (at $47.50) is $595 million. Total liabilities net of current assets and deferred revenue were $128 million at the end of the first quarter (10-Q). The liquidation value of the convertible preferred (which has a 12% coupon) is $200 million, so the enterprise value is $923 million. 

In 2022 (10-K), NRP had total revenue of $389 million and $317 million of adjusted EBITDA, with $294 million of adjusted EBITDA contributed by mineral rights, $45 million from the soda ash partnership, less $22 million of overhead.

For the first quarter of 2023, NRP reported adjusted EBITDA of $78 million. Mineral rights contributed $73 million, soda ash $11 million, and corporate overhead subtracted $6 million. The Q1 adjusted EBITDA annualizes to $312 million (running behind the 2022 figure) and would represent a 34% yield on the current enterprise value.

NRP has been working hard on deleveraging, getting out from under expensive debt and preferred stock. (Management talks about liabilities as "obligations remaining to be settled.") This is what they said in the fourth quarter 2022 earnings release:

"Early in 2023, one of the preferred holders exercised their right to convert $47.5 million of the preferred units into NRP common units. After considering our financial position, liquidity, and comparing the market value of NRP's common units to our estimate of intrinsic value, we elected to redeem the units with the payment of $47.5 million of cash instead of issuing NRP common units. After this transaction, the outstanding liquidation value of our convertible preferred units was reduced to $202.5 million."

"We remain focused on maximizing long-term free cash flow available to common unitholders and increasing our financial flexibility. We intend to achieve this by paying off all permanent debt, redeeming all preferred equity, and settling all remaining warrants. We also remain focused on becoming a key player in the transitional energy economy. During the year we made significant progress toward this goal with the execution of our first two subsurface carbon sequestration leases and our first geothermal energy lease, which have the potential to produce significant cash flow over the long term."

NRP continues to make great strides in de-levering and de-risking the partnership. In 2022, NRP fully retired its outstanding $300 million 9.125% Senior Notes due 2025, aiding in the sharp decrease in NRP's consolidated leverage ratio to 0.5x at December 31, 2022 from 2.7x at December 31, 2021.

And on the fourth quarter conference call:

I would like to begin by thanking our employees for their outstanding contributions, executing our strategy to delever and derisk the partnership. I'd also like to thank our equity investors, bondholders and banks for your enduring support. And a special word of appreciation is owed to our Board of Directors for its wise guidance and counsel.

When we embarked on our new strategy 7 years ago, the partnership was in a precarious financial position, with almost $1.5 billion of debt, representing more than 2/3 of our capital structure. Our bonds were trading at $0.65 on the dollar, and our free cash flow was negative. Our future looked bleak.

We responded by exercising extraordinary financial discipline to aggressively cut costs, eliminate capital expenditures and sell off underperforming assets with an incessant focus on delevering and derisking the capital structure. Today, I'm proud to say that the partnership is dramatically healthier and financially stronger than it was 7 years ago.

We have rightsized the business from 4 business segments down to 2. Both of which now earn returns on capital well in excess of their cost of capital. Our operating and interest expenses are each more than 70% lower than they were when we began. And our free cash flow, which had been negative, exceeded $0.25 billion in 2022, a record for the partnership.

Our debt, which has been almost $1.5 billion, had declined more than 80% to $169 million at year-end. The financial profile of today's NRP is so remarkably improved from that of 7 years ago that it would be hardly recognizable to anyone who hadn't followed the transformation.

I am especially proud that these results have been achieved without the use of sly legal maneuvers, debt forgiveness or bankruptcy. Let it be known that NRP keeps its promises, pays its debts and does exactly what it says it will do.

We have come a long way, but there's still more work to be done. Our goal remains to retire all permanent debt, redeem all of our 12% convertible preferred equity and eliminate all outstanding warrants. Taken together, these commitments currently total approximately $465 million.

If our business continues to generate free cash flow at the current run rate, I hope to reach this goal within 2 to 2.5 years. Once these obligations are eliminated, Free cash flow available for common unitholders will increase, most likely in a dramatic fashion.

Metallurgical coal prices reached historical highs and were the primary driver of strong segment performance. Numerous factors continue to provide support from net pricing as the post-COVID recovery continues.

Supply chain disruptions, labor shortages and years of underinvestment in new coal production capacity continue to undermine producers' ability to bring new production online to meet demand. While met prices have pulled back from the peaks reached last year, we continue to believe met prices will remain well supported for the foreseeable future.

Thermal coal prices also reached record highs in 2022, but have declined significantly in recent months due to usually warm weather in Europe and North America. Thermal prices traded at a premium to met for much of last year, even pulling lower quality met coal into thermal markets at times. That situation no longer exists as thermal coal now sells at significant discounts to met.

While we do not see thermal prices rebounding to last year's record levels, many of the factors that provide support to prices over the last year still exists. Boycotts of Russian coal continue to force European buyers to source coal from other regions, including the U.S. Operators will continue to be burdened by labor shortages, pressure from governments, regulators, activists and capital providers, which will limit ability to increase thermal production to meet demand. [...]

And with that, I'll turn the call back over to the operator for questions.


(Operator Instructions) It appears that we have no questions. I'll turn it over to Craig Nunez for any closing comments.

Interestingly, there were no questions on the fourth quarter conference call, despite the fact that the company trades at 3x EBITDA (with a pure royalty business model) and is committed to shareholder returns!

Some color from the Q1 conference call:

Metallurgical coal prices remained highly volatile, and while strong relative to historical price levels, they have declined significantly from the record levels reached last year. While we expect price volatility to continue, we believe the supply-demand balance for met coal will remain well supported for the foreseeable future, primarily due to the lack of industry investment in new metallurgical supply.

Thermal coal prices also remained strong but have weakened significantly in recent months as unusually warm weather in North America and Europe has impacted electricity demand. While weather will always pose unavoidable uncertainty with thermal coal demand, we believe the same constraints that have prevented met producers from adding capacity are also affecting thermal producers. The lack of thermal supply additions is likely to provide support for thermal coal pricing at levels that are relatively high by historical standards for the foreseeable future, albeit with continued volatility.

Soda ash demand growth continued to exceed new soda ash capacity in the first quarter of 2023. Consequently, international prices remained near record levels, which allowed Sisecam Wyoming to negotiate a strong domestic order book for 2023. Coupled with Sisecam Wyoming's global low-cost position, these robust prices generated a 29% increase in earnings versus the prior year quarter. We continue to believe that the long-term outlook for Sisecam Wyoming remains favorable due to its low-cost position and positive long-term demand characteristics for soda ash, driven in part by the ongoing increase in renewable energy, the electrification of the global auto fleet and urbanization.

Once again, there were no questions on the call. 


Anonymous said...

Once again, there were no questions on the call."

come on dude, it's been written up on value investors club 5 times in the past 5 years. not to mention a recent sumzero write up and numerous articles on seekingalpha. the sell side may be MIA but the buyside has swarmed to this shitco like flies.

Anonymous said...

why didn't you post my 100% factual comment? thanks for the reminder of what a thin skinned doofus you are.

CP said...

This quarter (Q2 2023) there were actually people on the call:

Unidentified Analyst

Okay. Great. That makes sense. So what are the priorities? Obviously this has just been a tremendous paydown of diluted securities over the past couple of years. It looks like it's going to leave a tremendous amount of ability to pay distributions and not all that long from now. What are the priorities for paying that down? Is anything changing? I think you surprised me a little bit with the magnitude of the paydown of preferred securities this year. I think it went above 33%. So how is that -- what's the thinking there for the next six months or maybe even beyond that?

Craig Nunez

This is Craig. Good question. We intend to continue to pay down our preferred and debt as rapidly as we can to the extent we can borrow on our credit revolver at a lower cost than the 12% on the preferreds and to the extent that we can have the preferred holders waive the make-whole premium, which is called a MOIC, M-O-I-C, so that we're able to buy those bonds back at par.

If we can replace 12% obligations with something more like 7% or 8% obligations, we're going to do that as much as we can and then immediately begin paying down the revolver with cash that we generate as well. And our goal is to pay down the preferreds, the bank revolver and then of course continue paying down our private placement notes, which are on an amortization schedule and also by the time they settle in first quarter of 2025, settle our warrants that are outstanding. We're going to want to get rid of all of those obligations as soon as we possibly can.

CP said...

Unidentified Analyst

If you pay down your entire preferred and have less than 1x leverage, I mean is there any reason why you can't reinstate a more full payout ratio in the first half of 2024 prior to taking debt down to zero?

Craig Nunez

There's no legal reason. There's no contractual reason that we could not do that, but that is not our strategy. Our strategy is to eliminate all of these obligations we have the preferreds, the debt and settle our warrants before such time as we begin to raise the distributions or look at consider raising the distributions. And the reason for that is that we have learned firsthand that it would be imprudent for a company such as ours with our business profile to rely at all on sourcing capital from banks or from capital markets to fund our business in the future. So when you can no longer rely on rolling forward or refinancing your credit obligations, you have to assume that you operate with no permanent debt in your capital structure.

So we want to clean everything up, stay on the same path we've been on now for quite a while. And once we have the capital structure fully clean, then we will evaluate capital deployment strategies. It's not going to be too long in the grand scheme of things, we see light at the end of the tunnel. But early 2024, is too soon. Because remember even when we take out those preferreds, we're simply switching the obligation from preferred units to debt. So that's our philosophy. And when we look at it, we think in the long run on a risk-adjusted basis this is going to maximize value for common unitholders.