Natural Resource Partners Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 4 speakers on the call.

Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Natural Resource Partners LP Third Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. I would now like to turn the call over to Tiffany Sammis, Manager of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning and welcome to the Natural Resource Partners' 3rd quarter 2023 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.

Speaker 1

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 ks and the other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward looking statements for the 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 Q3 press release, which can be found on our website.

Speaker 1

I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal SE or detailed market fundamentals. Now, I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

Speaker 2

Thank you, Tiffany, and good morning, everyone. NRP generated $80,000,000 of free cash flow in the 3rd quarter and $304,000,000 of free cash flow over the last 12 months. We continue to utilize this cash to aggressively retire debt, preferred equity and warrants. During the Q3, We permanently retired $50,000,000 of our 12.5 percent preferred equity, increasing our total preferred equity retirement for the year to $178,000,000 and lowering our outstanding balance of preferred equity to $72,000,000 We also repurchased 1,460,000 warrants, which included 812,500 warrants in the 3rd quarter and 650,000 warrants in October for a total of $52,000,000 in cash. After these transactions, we only have 1,540,000 warrants outstanding with a strike price of $34 As of today, our total obligations, which includes debt, preferred equity and warrants are around $325,000,000 We continue to believe that aggressive retirement of debt, preferred equity and settlement of warrants, while maintaining common unit distributions is the right strategy to maximize long term common unitholder value.

Speaker 2

Our mineral rights business generated $62,000,000 of free cash flow during the 3rd quarter. Metallurgical coal prices improved during quarter, but remained below the record levels seen in 2022. The global supply demand balance for met coal remains well supported, and we believe it will remain so for the foreseeable future due to solid long term demand trends and somewhat muted investment in new met supply. Thermal coal prices stabilized in the 3rd quarter after mild winter weather and decreased utility burn drove prices down in the first half of the year. While we believe domestic thermal coal burn will continue to face near term headwinds and continue its long term secular decline, We have seen an increase year over year in thermal coal export demand, which has provided support for pricing.

Speaker 2

We continue to believe Under investment in new sources of thermal coal production coupled with continued international thermal coal demand will likely provide price support at levels that are relatively strong when compared to historical norms. Turning to soda ash, we have received $66,000,000 of cash distributions from Sissajam, Wyoming so far in 2023, which is the highest level of regular distributions we've ever received for the 1st We believe the distribution policy at Sisajam Wyoming has shifted since our 51% managing partner, Sysajam Resources completed its conversion from a publicly traded master limit partnership to a private company earlier this year. Previously, distributions were paid relatively evenly throughout the year, smoothing quarter over quarter variances, consistent with the public MLP model. Going forward, we believe quarterly distributions will be more closely tied to actual cash generated This is Yam, Wyoming. This will introduce greater volatility to cash distributions, but it will bring future distributions more in line with the actual operating performance of the business.

Speaker 2

We saw significantly lower soda ash export prices in the Q3 of 2023 compared to the first half of the year, primarily due to new supply from China. We believe this unfavorable price trend will persist in the coming years until the market absorbs the additional supply. However, our long term view has not changed. We believe the long term fundamentals of the soda We remain favorable, driven in part by the ongoing increase in renewable energy, the electrification of the global auto fleet and urbanization. We continue to evaluate opportunities to expand our carbon neutral portfolio with the goal of monetizing our mineral and surface assets for permanent underground CO2 sequestration, forest sequestration and the generation of electricity using geothermal wind and solar energy.

Speaker 2

While the carbon neutral economy is in an early stage of development and requires significant investment and further development to become viable, We believe the potential upside for our carbon neutral initiatives could be significant, all while requiring no capital investment by NRP. Both our mineral rights and soda ash businesses have witnessed significant price volatility over the last year. We expect this volatility to continue for the foreseeable future. However, we are confident that the strides taken to delever and de risk our business in recent years, position us well to generate robust free cash flow in the months years ahead. And with that, I'll turn the call over to Chris to cover the financials.

Speaker 3

Thank you, Craig, and good morning, everyone. During the Q3, we generated $79,000,000 of operating cash flow $64,000,000 of net income. Our Mineral Rights segment generated net income and operating cash flow of $61,000,000 and free cash flow of $62,000,000 this quarter. When compared to the prior year Q3, segment net income and free cash flow decreased $11,000,000 $15,000,000 respectively, primarily due to carbon neutral initiative transactions entered into during the prior year Q3 and Higher oil and gas royalty revenues driven by higher natural gas prices and sales volumes last year. Regarding our met thermal coal royalty mix, Metallurgical coal made up approximately 60% of our coal royalty revenues and 45% of our coal royalty sales volumes for the Q3 of 2023.

Speaker 3

Moving to our soda ash business segment. Net income in the Q3 of 2023 was $2,000,000 lower as compared to the prior year quarter, primarily due to lower international sales prices and an increased sales mix into the international market in the Q3 of 2023 as compared to the prior year period. Free cash Flow from our soda ash business segment in the Q3 of 2023 increased $13,000,000 as compared to the prior year period. This increase was due to a higher cash distribution received from This is Yam, Wyoming. Shifting to our Corporate and Financing segment, costs for the Q3 of 2023 improved $3,000,000 primarily due to a loss on early extinguishment of debt recognized in 2022.

Speaker 3

Our Corporate and Financing Segment free cash flow decreased $1,000,000 as compared to the prior year period because of higher cash paid for interest on credit facility borrowings in 2023 that were used to redeem preferred units and to settle warrants. As Craig mentioned, our strong Q3 operating performance enabled us to make Great strides in permanently retiring outstanding preferred units and warrants. In the Q3, we redeemed $50,000,000 of our preferred units at par with cash, Bringing our total preferred unit redemptions in 2023 to 178,000,000 and lowering the outstanding amount of preferred units to 72,000,000 We will save over $20,000,000 annually in preferred unit cash distributions as a result of these redemptions. In addition, we repurchased $1,460,000 of warrants for a total of $56,000,000 in cash, reducing our outstanding warrants to $1,540,000 Finally, regarding quarterly distributions, in August of this year, We paid a 2nd quarter distribution of $0.75 per common unit and a $3,650,000 cash distribution to our preferred unitholders. And this morning, We announced a 3rd quarter distribution of $0.75 per common unit and a $2,150,000 cash distribution to our preferred unitholders.

Speaker 3

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

Operator

Thank you. Ladies and gentlemen, there are no questions at this time. I would now like to turn the call back over to Craig Nunez for closing remarks. Please go ahead.

Speaker 2

Thank you, operator. And thank you everyone for joining our call and for your continued support of NRP and we look forward to talking to you next quarter.

Operator

Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect your lines.

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Earnings Conference Call
Natural Resource Partners Q3 2023
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