Natural Resource Partners LP

NYSE:NRP

Earnings Call Analysis

NRP Faces Challenges but Focuses on Debt Reduction

In Q2 2024, NRP reported $46 million in net income and $57 million in free cash flow. Despite lower prices for metallurgical coal and soda ash due to increased supply and weakened demand, the company reduced its debts by 35% to $240 million. Soda ash prices dropped significantly with a $23 million decline in net income from this segment compared to last year. Thermal coal prices saw a boost from increased demand. NRP is also exploring carbon-neutral initiatives but remains focused on cash generation to clear existing financial obligations【4:0†source】【4:1†source】【4:2†source】【4:3†source】.

Navigating Through Challenging Waters

In the second quarter of 2024, Natural Resource Partners L.P. (NRP) reported a net income of $46 million and free cash flow amounting to $57 million. Despite navigating through a challenging environment marked by declining prices in metallurgical coal and soda ash, the company has managed to sustain robust free cash flow, signaling that it continues to operate effectively even in tough market conditions.

Resilience of the Mineral Rights Segment

The Mineral Rights segment generated $53 million in net income, with operating and free cash flow reported at $56 million and $57 million, respectively. Although net income remained relatively flat year-over-year due to decreasing coal royalty revenue from weakened steel demand, notable gains from asset sales and a $2 million revenue boost from a carbon neutral initiative transaction helped offset some losses. In the current environment, approximately 75% of coal royalty revenues stem from metallurgical coal, which accounted for 60% of sales volumes.

Soda Ash Segment Faces Significant Pressure

The Soda Ash segment faced significant challenges as net income plunged to $4 million, a decrease of $23 million compared to the previous year. This decline was primarily driven by lower sales prices due to an influx of supply from China, with free cash flow declining by $25 million to just $8 million. Until the market can absorb this excess supply, NRP anticipates continued pressures on soda ash prices, impacting future distributions.

Debt Reduction Progress and Future Expectations

Despite price pressures, NRP has made significant progress in reducing its financial obligations, which currently total approximately $240 million, marking a 35% decrease from the previous year. The company successfully eliminated outstanding warrants and redeemed $40 million in preferred equity, leaving only $32 million in preferred issues. NRP is confident it can continue to generate sufficient cash to meet its obligations, aiming to pay down debt ahead of schedule.

Sector Outlook: Challenges and Opportunities

The report highlighted a mixed outlook for coal prices. Metallurgical coal prices are expected to remain supported by long-term demand trends, such as labor shortages and limited new supply investments, despite recent declines linked to slowing global economic growth. Thermal coal prices have seen moderate improvement, benefiting from higher summer temperatures and a rebound in international demand, though they still face competition from inexpensive natural gas and an overarching trend of declining domestic consumption.

Strategic Initiatives and Long-Term Value

NRP is actively exploring opportunities in carbon-neutral initiatives, including CO2 sequestration and lithium production. Although activity in these sectors has slowed, NRP sees promising long-term growth potential due to urbanization and renewable energy trends. The business remains one of the lowest-cost producers in the soda ash market, which is set to benefit from these megatrends, solidifying its strategic position for future value generation.

Commitment to Shareholder Returns

In alignment with its strategy to enhance shareholder value, NRP continues to declare consistent quarterly distributions. The company announced a second-quarter distribution of $0.75 per common unit, maintaining a steady payout to shareholders as it navigates through the current challenges and focuses on maximizing intrinsic value.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Natural Resource Partners L.P. Second Quarter 2024 Earnings Conference Call. My name is Emma, and I will be your conference manager. [Operator Instructions] At this time, I would like to turn the conference over to Tiffany Sammis, Manager of Investor Relations. You may begin.

[Tiffany Sammis, executive]

Thank you. Good morning, and welcome to the Natural Resource Partners' Second Quarter 2024 Conference Call. Today's call is being webcast, and a replay will be available on our website.

Joining me today are Craig Nunez, President and Chief Operating Officer; Chris Zolas, Chief Financial Officer; and Kevin Craig, Executive Vice President.

Some of our comments today may include forward-looking statements reflecting NRP's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in NRP's Form 10-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in our second quarter press release, which can be found on our website. I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee or detailed market fundamentals.

Now I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

[Craig Nunez, executive]

Thank you, Tiffany, and good morning, everyone.

NRP generated $57 million of free cash flow in the second quarter and $287 million of free cash flow over the last 12 months. While we began to experience the negative impacts of lower metallurgical coal and soda ash prices in the first half of the year, we continue to generate robust free cash flow and make steady progress toward our goal of eliminating all financial obligations. As of today, our total remaining obligations, which include debt and preferred equity, stand at approximately $240 million, a decrease of 35% from 1 year ago. While we believe lower prices for coal and soda ash will be with us for the foreseeable future, we expect to continue generating sufficient cash to achieve our goal of paying off all financial obligations.

In the second quarter of 2024, we eliminated the final tranche of warrants and redeemed $40 million of preferred equity, leaving only $32 million of preferreds remaining. We paid off the warrants and preferreds with a combination of internally generated cash and lower cost revolver borrowings. We expect to generate sufficient cash to pay down the revolver borrowings well in advance of the revolver's maturity date. We remain steadfast in our belief that this is the best strategy to maximize the intrinsic value of the partnership.

Metallurgical coal prices drifted lower during the quarter as slowing global economic growth led to softening demand for steel. Despite recent weakness, metallurgical prices remain above historical norms, and we believe that long-term demand trends for steel, industry labor shortages and limited investment in new metallurgical coal supply will provide reasonable support for metallurgical prices for the foreseeable future.

Thermal coal prices improved in the second quarter, driven by above-average summer heat in the United States and an uptick in international demand. These positives continue to be partially offset by low-priced North American natural gas and the continued long-term secular decline in U.S. demand for thermal coal.

Turning to our soda ash investment, we received an $8 million cash distribution from Sisecam, Wyoming, in the second quarter of 2024 that was paid in connection with the first quarter 2024 performance. This distribution reflects the significant decline in soda ash prices experienced in recent months, resulting from the flood of new production that has come online over the past year. We expect soda ash prices and distributions from our soda ash investment to remain under pressure for the foreseeable future as we believe it will take several years for the global market to fully absorb this new capacity.

These near-term challenges do not, however, impact our positive long-term outlook for our Soda Ash business. We are 1 of the world's lowest-cost producers of a product that has favorable long-term fundamentals, driven by urbanization, the megatrends for renewable energy and the electrification of the global auto fleet. Our Soda Ash business remains a key asset in generating value for NRP unitholders today and in the long run.

We continue to explore opportunities to lease our mineral and surface assets for permanent underground carbon dioxide sequestration, forest sequestration, lithium production, and the generation of electricity using geothermal, wind and solar energy, activities that we collectively call carbon-neutral initiatives or CNI, for short. Activity has slowed in the CNI space over the course of 2024 as project developers have grown more cautious of making large capital commitments in light of an uncertain regulatory and political environment. While we believe the potential upside from our CNI assets is significant, while requiring no capital expenditures by NRP, these industries are still decades away from full development, as you know.

And with that, I will now turn the call over to Chris to cover our financial results.

[Christopher Zolas, executive]

Wonderful. Thank you, Craig. In the second quarter of 2024, NRP generated $46 million of net income and $57 million of operating and free cash flow.

Moving to our Mineral Rights segment results. It generated $53 million of net income, $56 million of operating cash flow and $57 million of free cash flow during the second quarter of 2024. When compared to the prior year period, our Mineral Rights segment's net income was relatively flat as the decrease in coal royalty revenue primarily due to weakened steel demand was offset by nonrecurring items, which included a $5 million gain on asset sales and the receipt of $2 million from a carbon neutral initiative transaction. Mineral Rights segment's operating cash flow and free cash flow increased $1 million despite the decrease in coal sales volumes and pricing, primarily due to the timing of cash payments and the payment from the carbon neutral initiative transaction. Regarding our second quarter 2024 net thermal coal royalty mix, metallurgical coal made up approximately 75% of our coal royalty revenues and 60% of our sales volumes.

Shifting to our Soda Ash segment. Net income in the second quarter of 2024 was $4 million, a decrease of $23 million as compared to the prior year quarter. This decrease was due to the lower sales prices, primarily driven by the significant increased supply from China. Free cash flow from this segment was $8 million in the second quarter of 2024, a decrease of $25 million as compared to the prior year quarter. As we've been communicating, soda ash pricing has dramatically declined from the record highs seen last year and until the market is able to absorb the additional supply from China, we expect prices to remain muted in our distributions received from Sisecam to reflect the business' performance.

Changing over to our Corporate & Financing segment, in the second quarter of 2024, we continue to make steady progress towards our goal of eliminating our financial obligations. We settled the remaining 0.3 million of our outstanding warrants with $10 million of cash and issuing a bit over 89,000 common units, and we retired $40 million of preferred units at par with cash. During 2024, in total, we've permanently retired 1.5 million warrants using $66 million of cash and issuing just under 288,000 common units and we permanently retired $40 million of preferred units at par with cash. As a result, at the end of the second quarter, we had just over $240 million of remaining financial obligations, made up of $211 million of debt and just under $32 million of preferred units.

For the Corporate and Financing segment's financial results, net income and free cash flow decreased $1 million during the second quarter of 2024 compared to the prior year quarter, primarily due to higher interest expense and cash paid for interest because of increased borrowings outstanding on our credit facility in 2024 that were used to settle the preferred units and the remaining warrants.

Lastly, regarding our quarterly distributions, in May of 2024, we declared and paid a first quarter distribution of $0.75 per common unit and a $2.15 million cash distribution to our preferred unitholders. And today, we announced our second quarter distribution of $0.75 per common unit and a $1 million cash distribution to our preferred unitholders to be paid later this month.

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

[Operator]

[Operator Instructions] At this time, we have no questions. Craig Nunez, I turn the call back over to you for closing remarks.

[Craig Nunez, executive]

Thank you, operator, and I'd like to thank everyone for joining us today and for your interest in NRP. We have a good year ahead of us, I believe, and I look forward to going on the journey with you. Have a good day, and goodbye.

[Operator]

This concludes today's conference call. Thank you for attending. You may now disconnect.