Natural Resource Partners Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 4 speakers on the call.

Operator

Thank you for standing by. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Natural Resource Partners LP First 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

LP. Thank you. Tiffany Sammis, you may begin your conference.

Speaker 1

Thank you. Good morning and welcome to the Natural Resource Partners' Q1 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 other Securities and Exchange Commission filings. We undertake no obligation to revise or update LP, to discuss 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 Q1 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. In addition, I refer you to Cisajam Resources' public disclosures and commentary for specific questions regarding our soda ash business segment. Now, I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer. Craig?

Speaker 2

Thank you, Tiffany, and good morning, everyone. NRP generated $73,000,000 of Performance over the last 12 months has been equally impressive with our business generating $290,000,000 of free cash flow. We continue to take advantage of this strong financial performance to make significant progress toward our goal of becoming debt free and redeeming all our preferred equity, which will in turn maximize future free cash flow available for common unitholders. We redeemed $47,500,000 of our 12% preferred equity in February and our leverage ratio ended the 1st quarter at 0 point 5 times, down from 4.5 times just 24 months ago. We have about 4 $40,000,000 of obligations remaining to be settled consisting of $174,000,000 of debt, $202,000,000 of preferred equity and warrants convertible into common units with a current settlement value of approximately $63,000,000 Metallurgical coal prices remain highly volatile And while strong relative to historical price levels, they have declined significantly from the record levels reached last year.

Speaker 2

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 remain 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 Q1 of 2023.

Speaker 2

Consequently, international prices remain near record levels, which allowed Sysajam Wyoming to negotiate a strong domestic order book for 2023. Coupled with Sysajam 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 Sissajam Wyoming remains favorable due to its low cost position and positive long term demand characteristics We remain committed to doing our part to address climate change by identifying opportunities to utilize our land, mineral and forest assets to reduce carbon in the atmosphere. In the Q1, we expanded our portfolio of leases within our carbon neutral initiatives by executing a new solar lease for the development of a solar project in Montana.

Speaker 2

This transaction, In addition to our previously announced transactions for CO2 subsurface sequestration, forest land CO2 sequestration and Geothermal Electricity Generation have expanded our potential future long term cash flows related to carbon neutral revenue, all while requiring no capital investment by NRP. We continue working to identify opportunities on our large acreage footprint to provide benefits to the environment, provide meaningful value for NRP and capitalize on the transitional energy economy. And with that, I'll turn the call over to Chris to cover our financial results.

Speaker 3

Thank you, Craig, and good morning, everyone. During the Q1, we generated $73,000,000 of operating cash flow and $79,000,000 of net income. Our Mineral Rights segment generated operating cash flow and free cash flow of $74,000,000 and net income of $69,000,000 the Q1 of 2023. When compared to the prior year quarter, segment net income was $6,000,000 higher, primarily due to increased metallurgical sales volumes and additional revenue from our carbon neutral initiatives. Segment free cash flow increased $26,000,000 as compared to the prior year quarter, primarily due to these factors plus the timing of minimum and royalty payments and prior year recoupments.

Speaker 3

Many producing coal leases utilized their recoupable balances in 2022 as metallurgical and thermal coal prices were strong and we received royalty payments significantly greater than their lease minimums. Metallurgical Coal made up 75% of our coal royalty revenues and 55% of our coal royalty sales volumes for the Q1 of 2023. As a consequence, the variability of our mineral rights segment cash flow is significantly more sensitive to changes in metallurgical coal prices as compared to changes in thermal coal prices. Moving to our soda ash business segment. Net income in the Q1 of 2023 was $19,000,000 as compared to $15,000,000 in the prior year period.

Speaker 3

This $4,000,000 increase in net income was primarily driven by strong demand and higher soda ash sales prices in 2023. Free cash flow from our soda ash business segment in the Q1 of 2023 was $11,000,000 as compared to $13,000,000 in the prior year period. This decrease was due to receiving a significantly lower a slightly higher quarterly cash distribution from Mississauga and Wyoming in the Q1 of 2022. Shifting to our Corporate and Financing segment, Costs for the Q1 of 2023 were $9,000,000 compared to $14,000,000 in the prior year period. This $5,000,000 decrease was primarily due to lower interest expense in 2023 because of less debt outstanding.

Speaker 3

Our Corporate and Financing segment Free cash flow in the Q1 of 2023 decreased $3,000,000 as compared to the prior year period, primarily due to increased incentive compensation paid in 2023 because of the improved business performance in 2022 and higher cash paid for interest due to the timing of payments on our Credit Facility borrowings in 2023. As we communicated in our last earnings call, in February 2023, we received notice from a hold of our preferred units exercising their right to redeem or convert at our election $47,500,000 of their preferred units. Upon receiving notice, we considered our liquidity position and the intrinsic value of our common units and determined to exercise our redemption rights to redeem these preferred units for $47,500,000 in cash. As a result The original issued $250,000,000 of preferred units, dollars 202,500,000 now remain outstanding, saving us $6,000,000 annually in distributions. We expect our total annual interest payments and distributions to our preferred unitholders to decline as we continue to repay debt and Redeem Preferred Units.

Speaker 3

Regarding Commune Distributions, in February of 2023, The partnership paid a Q4 2022 distribution of $0.75 per common unit and a quarterly cash distribution of $7,500,000 to our preferred unitholders. In March 2023, the partnership paid a special cash distribution of $2.43 for common to help common unitholders cover their 2022 tax liability associated with owning our common units. And finally, today we announced the Q1 2023 cash distribution of $0.75 per common unit and a $6,100,000 cash distribution to our preferred unitholders. And with that, I'll turn the call back over to the operator for questions.

Operator

We'll pause for just a moment to compile the Q and A roster. And at this time, I'm showing there are no questions.

Speaker 2

Thank you, operator. Thank you everyone for participating in our call today and thank you for your continued support of NRP. Goodbye.

Operator

Thank you. And this does conclude today's conference call. You may now disconnect.

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