Business context and reporting period
Natural Resource Partners L.P. (NRP) is a U.S. mineral-rights owner and lessor, with interests including coal, aggregates, oil and gas, and a 49% non-controlling interest in Sisecam Wyoming, a trona mining and soda ash business. This unaudited Form 10-Q covers the three months ended March 31, 2023; comparisons are with the first quarter of 2022 unless noted.
Financial performance and condition
- Revenue and earnings: Revenue and other income rose 11% to $99.2 million. Operating income increased to $82.1 million from $73.3 million; net income was $79.3 million versus $63.9 million. Net income attributable to common unitholders was nearly unchanged at $55.3 million, reflecting a $16.2 million preferred-unit redemption charge. Basic and diluted earnings per common unit were $4.40 and $3.44, respectively, versus $4.45 and $3.11.
- Segment drivers: Mineral Rights revenue and other income rose 7% to $80.0 million, including $2.1 million from carbon-neutral initiatives, primarily a subsurface CO2 storage transaction. Soda Ash revenue rose 30% to $19.3 million, mainly on higher prices. Equity earnings from Sisecam Wyoming were $19.3 million, up from $14.8 million.
- Cash flow: Operating cash flow was $72.9 million versus $52.3 million. Management-reported non-GAAP distributable cash flow (DCF) was $73.6 million and free cash flow (FCF) was $73.5 million. Capital expenditures were $2,000. Financing activities used $95.0 million, and cash declined $21.4 million to $17.7 million.
- Debt and liquidity: Debt was $172.9 million net ($173.6 million at face value), compared with $168.3 million net at year-end 2022. Total liquidity was $56.5 million: $17.7 million cash plus $38.8 million available under the credit facility. The reported leverage ratio was 0.5x; NRP said it was in compliance with debt covenants. Approximately $23 million of senior-note principal repayments were due during the rest of 2023.
- Other financial items: Net interest expense fell to $2.9 million from $9.4 million. Comprehensive income was $59.7 million, down from $66.4 million, including a $19.6 million comprehensive loss related to the unconsolidated investment and other items.
Material changes versus the prior period
- Total revenue and other income increased $9.5 million; Mineral Rights growth reflected higher metallurgical coal volumes and carbon-neutral revenue, while Soda Ash benefited from higher sales prices.
- Operating cash flow increased $20.6 million. Management attributed the Mineral Rights improvement primarily to timing of minimum and royalty payments and prior-year recoupments; this may not represent a recurring improvement.
- NRP redeemed 47,499 Class A Preferred Units for $47.5 million cash in February, rather than issuing common units. 202,501 preferred units remained outstanding at quarter-end.
- NRP paid a $0.75-per-unit common distribution in February for the prior quarter and a $2.43-per-unit special distribution in March to help cover unitholder tax liabilities relating to 2022.
Outlook, commentary, risks and contingencies
- No quantified earnings or production guidance was provided. The board determines distributions quarterly based on profitability, cash flow, debt service, market outlook, tax considerations and reserves. In May, it declared a $0.75-per-common-unit distribution and a $6.1 million preferred-unit distribution for the first quarter of 2023.
- Management said metallurgical coal prices had eased from 2022 peaks but expected continued support; thermal coal prices had declined and were expected to remain elevated relative to historical levels. These are management views, not guarantees. Soda Ash markets remained supply-constrained, with strong prices reported.
- Commodity prices and demand, lessee production and contracting, permitting, labor and transportation constraints, and soda ash pricing and energy costs could affect results. NRP noted that materially lower coal prices could reduce revenue, impair coal properties or threaten debt covenant compliance.
- Variable-rate credit-facility borrowings were $91.2 million; management estimated a 1% rate increase would add about $0.9 million to annual interest expense if borrowings remained unchanged. Ordinary-course legal proceedings were not expected by management to materially affect financial position, liquidity or operations. No material risk-factor changes were reported.
- Preferred units carry cumulative distributions at 12% annually and have conversion and redemption provisions; their terms also restrict increases in common distributions under specified leverage or coverage conditions. NRP adopted ASU 2020-06 in January 2023 with no material financial-statement impact.
Important facts for investors to verify
- Whether operating cash flow and DCF/FCF growth persists after accounting for the timing of royalty and minimum payments and prior-year recoupments; DCF and FCF are non-GAAP measures.
- Cash available after scheduled 2023 principal repayments, preferred distributions and common-unit distributions, and the remaining credit-facility capacity.
- The continuing cost and dilution implications of the preferred units and warrants, including future redemption or conversion options and preferred distribution obligations.
- Exposure to coal-market prices, lessee concentration (Alpha Metallurgical Resources represented 24% of first-quarter revenue and Foresight 13%), and Sisecam Wyoming’s operating performance and distributions.
- The source and sustainability of carbon-neutral initiative revenue, including the subsurface CO2 storage transaction, and the effect of the sizable investment-related comprehensive loss.