Natural Resource Partners LP — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. NRP owns and leases U.S. mineral and coal properties and holds a 49% non-controlling interest in Ciner Wyoming, a trona mining and soda ash business.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue and other income | $37.2 million | $40.2 million |
| Operating income | $18.4 million | $29.1 million |
| Net income | $8.4 million | $18.8 million |
| Net income attributable to common unitholders | $0.6 million; $0.05 per unit | $11.1 million; $0.90 per unit |
| Cash from operating activities | $23.2 million | $31.9 million |
| Free cash flow (non-GAAP) | $23.7 million | $30.4 million |
| Adjusted EBITDA (non-GAAP) | $29.4 million | $31.9 million |
Operating margin was approximately 49% versus 72% a year earlier; net margin was approximately 23% versus 47%, calculated from reported revenue and income. Operating expenses rose 69% to $18.8 million, including a $4.0 million impairment related primarily to a coal lease termination and higher depletion expense.
At March 31, cash was $96.8 million and the Opco credit facility had $100.0 million available, for reported total liquidity of $196.8 million. Net debt was $455.2 million, down from $471.5 million at year-end 2020; face-value debt was $461.2 million. The company reported a 4.5x consolidated leverage ratio and compliance with its debt covenants. Approximately $23 million of Opco senior-note principal repayments were due during the remainder of 2021.
Changes and operating drivers
- Total revenue and other income declined 8%. Coal Royalty and Other segment revenue increased 4% to $35.2 million, while Soda Ash segment equity earnings fell 69% to $2.0 million.
- Coal sales from NRP properties rose 46% to 6.6 million tons, but average coal royalty revenue per ton fell 27%. Reported coal royalty revenue declined 20%; excluding reclassifications caused by Foresight lease amendments, management said it increased $1.2 million.
- Foresight-related production minimum and straight-line lease revenue increased following 2020 contract modifications that fixed payments over a two-year period.
- Ciner Wyoming’s net sales increased to $127.8 million from $114.4 million, but its gross profit and net income declined to $12.7 million and $6.6 million, respectively, from $21.4 million and $15.3 million. NRP received $3.9 million in Ciner distributions, down from $7.1 million.
- Operating cash flow and free cash flow decreased year over year, principally reflecting lease amendment fee receipts in Q1 2020 and lower Ciner distributions in Q1 2021.
Outlook, distributions and risks
- Management said coal and soda ash markets remained challenged by the COVID-19 pandemic, despite recovery from 2020 lows. It cited continuing uncertainty around demand and prices; no specific earnings or revenue guidance was provided.
- Management expected leverage to rise through Q2 2021 and then decline as debt is repaid. If leverage remains above 3.75x into 2022, NRP said it may have to temporarily suspend common-unit distributions until leverage falls below that threshold and outstanding paid-in-kind preferred units are redeemed.
- The 2025 notes indenture restricts cash payment of more than half of preferred distributions when consolidated leverage exceeds 3.75x. NRP had paid half of preferred distributions in kind for the prior three quarters. In May 2021, the board declared a $0.45 per common unit distribution for Q1 2021 and a preferred distribution split between $3.86 million cash and additional preferred units.
- The board determines distributions quarterly based on factors including cash flow, debt service, covenants, market conditions and reserves. Ciner Wyoming had suspended regular quarterly distributions in Q3 2020; management did not expect their resumption until it had more confidence in soda ash markets. Ciner also reprioritized expansion and infrastructure capital spending to preserve flexibility.
- Customer concentration is significant: Foresight and Alpha Metallurgical Resources represented 23% and 22% of Q1 2021 revenue, respectively. NRP identified potential additional impairment if pandemic effects are worse than estimated. Ordinary-course legal matters were not expected to have a material effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether coal production, royalty rates and Foresight’s fixed-payment arrangements support future revenue as those arrangements run their course.
- Ciner Wyoming’s soda ash pricing, operating performance, capital spending and ability to resume regular distributions.
- Debt-repayment progress and leverage relative to the 3.75x preferred-distribution threshold, including the potential effect on common-unit distributions.
- The sustainability of reported free cash flow and liquidity after required debt service, preferred distributions and any changes in customer collections.
- Potential further asset impairments and credit losses, given the lease termination, pandemic uncertainty and customer concentration.