Natural Resource Partners LP — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 4, 2023. NRP owns and leases U.S. mineral interests and holds a 49% non-controlling interest in Sisecam Wyoming, a trona mining and soda ash business. Amounts below are in U.S. dollars; financial-statement figures are in millions unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenues and other income | $91.3 | $99.9 | $190.5 | $189.6 |
| Income from operations | $73.8 | $79.0 | $156.0 | $152.3 |
| Net income | $70.3 | $66.8 | $149.6 | $130.7 |
| Net income attributable to common unitholders | $37.0 | $58.1 | $92.2 | $113.4 |
| Basic / diluted net income per common unit | $2.93 / $2.49 | $4.65 / $3.29 | $7.32 / $5.96 | $9.10 / $6.50 |
| Operating cash flow | Not separately stated in the summary comparison | Not separately stated in the summary comparison | $154.3 | $115.5 |
| Free cash flow (non-GAAP) | $82.0 | $63.7 | $155.4 | $116.0 |
Q2 operating expenses were $17.4 million, down 17%; net interest expense was $3.5 million, down 57%. Six-month operating expenses were $34.5 million, down 8%, and net interest expense was $6.3 million, down 64%. NRP reported six-month Adjusted EBITDA of $160.8 million, versus $156.3 million a year earlier. These are non-GAAP measures as defined by the Partnership.
Liquidity, debt and capital
- At June 30, cash was $10.7 million and total liquidity was $62.7 million, including $52.0 million of available capacity under the Opco Credit Facility.
- Total debt at face value was $183.1 million ($182.4 million net), compared with $169.1 million at year-end 2022. Debt included $103.0 million drawn on the credit facility and $80.0 million of senior notes. Leverage ratio, as defined by NRP, was 0.6x.
- NRP amended its credit facility in May: maturity extended to August 2027, lender commitments increased from $130 million to $155 million, with potential expansion to $200 million. The facility requires leverage no greater than 3.0x and interest coverage of at least 3.5x. NRP reported compliance with its debt covenants.
- Approximately $20 million of senior-note principal repayments were expected during the remainder of 2023. The filing also reports $165.0 million of facility borrowings and $132.0 million of repayments during the first six months.
- Cash used in financing activities was $183.9 million, including $128.3 million to redeem preferred units and $50.6 million of common/general partner distributions. Cash declined $28.4 million in the six-month period, ending at $10.7 million.
Material changes and business drivers
- Q2 total revenues and other income declined 9% year over year. Mineral Rights segment revenue fell 25% to $64.3 million, while Soda Ash segment income rose 84% to $27.0 million.
- Coal royalty revenue declined 24% in Q2 to $48.0 million. Coal volumes fell 15%, and average royalty revenue per ton decreased 10%. Management cited lower metallurgical coal prices; Illinois Basin volume also fell due to a temporary relocation of production off NRP reserves.
- For the first six months, Mineral Rights revenue and other income declined 10% to $144.2 million, primarily on lower metallurgical coal prices. Soda Ash revenue and other income increased 57% to $46.2 million, driven by stronger prices and demand, partly offset by lower production and sales volumes.
- Sisecam Wyoming’s Q2 net income was $57.6 million, versus $32.3 million a year earlier. NRP’s share of equity earnings was $27.0 million, versus $14.6 million. NRP received $43.1 million of distributions from the investment during the first half, versus $23.7 million.
- Despite higher consolidated net income, common-unit income and per-unit results declined. Preferred-unit redemptions reduced income available to common unitholders by $27.6 million in Q2 and $43.8 million in the first half, reflecting the difference between redemption consideration and carrying value.
Outlook, risks and unusual items
- No specific earnings or production guidance was provided. Management said global soda ash prices had fallen during the first half and expected new Chinese supply to pressure international prices in the second half. It expected Sisecam Wyoming’s domestic prices to remain strong, supported by 2023 contracts negotiated at the end of 2022.
- Management said coal prices had declined from early-2023 levels and 2022 highs but remained strong versus historical norms. It cited transportation and logistics challenges, limited capital access and labor shortages as factors that may constrain lessee production and support prices. NRP is exploring carbon-neutral revenue opportunities, including carbon sequestration and renewable energy.
- Commodity prices are a key risk: lower coal prices could reduce revenue, impair coal properties or potentially affect debt-covenant compliance; lower soda ash prices or higher energy costs could reduce Sisecam Wyoming profitability. A 1% increase in interest rates would increase annual interest expense by approximately $1.0 million, assuming unchanged facility borrowings.
- Two customers exceeded 10% of total revenue in Q2: Alpha Metallurgical Resources (22%) and Foresight Energy Resources (14%), highlighting customer concentration. Ordinary-course legal proceedings were not expected by management to have a material effect; the filing reported no material changes to previously disclosed risk factors.
- NRP redeemed or repurchased 128,333 preferred units for $128.3 million in cash during the first half, leaving 121,667 outstanding. The preferred units carry cumulative distributions at 12% annually. In August, the Board declared a $0.75-per-common-unit distribution for Q2 and a $3.7 million preferred-unit distribution.
Most important facts for investors to verify
- Whether coal royalty revenue and lessee volumes stabilize as commodity prices and production patterns change, especially in Appalachia and the Illinois Basin.
- Whether soda ash pricing, Chinese supply and Sisecam Wyoming’s production and distributions meet management’s stated expectations.
- Cash generation and liquidity after preferred redemptions, distributions and the remaining 2023 debt repayments; confirm credit-facility availability and covenant headroom.
- The continuing impact of the 12% preferred distribution obligation, future redemption or conversion activity, and related dilution or cash requirements.
- Customer concentration and NRP’s exposure to coal and soda ash commodity-price volatility.