Natural Resource Partners L.P. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; this is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars unless stated otherwise.
Business context
NRP owns and leases U.S. mineral properties, principally coal, and holds a non-controlling 49% interest in Ciner Wyoming, a trona-mining and soda ash business. Its two operating segments are Coal Royalty and Other, and Soda Ash. The filing attributes significant market disruption to COVID-19, which weakened demand for coal and soda ash.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue and other income | $140.3 million | $263.9 million | Down 47% |
| Net loss from continuing operations | $84.8 million | $25.4 million | Loss widened |
| Asset impairment charges | $135.9 million | $148.2 million | Down $12.3 million |
| Adjusted EBITDA (non-GAAP) | $104.7 million | $199.2 million | Down $94.5 million |
| Cash from continuing operating activities | $87.6 million | $137.3 million | Down $49.8 million |
| Free cash flow (non-GAAP) | $88.7 million | $139.0 million | Down $50.4 million |
| Cash flow cushion (non-GAAP) | $(0.7) million | $7.8 million | Decreased |
Coal Royalty and Other generated $129.6 million of segment revenue and $105.0 million of Adjusted EBITDA. Soda Ash generated $10.7 million of revenue and $14.0 million of Adjusted EBITDA; NRP recorded $10.7 million of equity earnings from Ciner Wyoming but received only $14.2 million in distributions, down from $31.9 million in 2019. Coal sales from NRP properties fell 29% to 16.8 million tons, and average coal royalty revenue per ton declined 21% to $3.70.
At year-end, cash was $99.8 million and unused capacity under the Opco revolving credit facility was $100.0 million, for stated total liquidity of $199.8 million. Debt was $477.9 million at face value ($471.5 million net of issuance costs), compared with $524.1 million face value in 2019. The consolidated leverage ratio was 4.6x. Approximately $39.4 million of Opco principal was due in 2021; $300 million of NRP senior notes mature in 2025. The filing reports covenant compliance at year-end.
Material changes and unusual items
- Total revenue and other income fell $123.6 million year over year. Coal Royalty and Other revenue declined 40%, primarily amid lower coal volumes and pricing; Soda Ash revenue declined 77%, reflecting lower prices and sales volumes.
- NRP recorded $135.9 million of non-cash impairments, mainly on coal properties affected by lease terminations, mine-plan changes and weaker expected cash flows, and on aggregates properties including frac sand assets.
- NRP and Foresight amended their agreements in 2020: Foresight paid NRP $48.75 million for 2020 and is to pay $42.0 million in 2021 for specified lease and transportation obligations. Macoupin mine production ceased temporarily; the agreement provides a $2.0 million annual fee through 2023 while it remains idle, subject to the agreement’s terms.
- NRP acquired the remaining 49% interest in BRP LLC in 2020, bringing its ownership to 100%.
Outlook, distributions and principal risks
Management said coal and soda ash demand began to rebound in the second half of 2020, but markets remained challenged and prices below pre-pandemic levels. It expects coal markets to remain volatile in 2021 and could not predict the duration or ultimate effects of COVID-19. No specific consolidated earnings or cash-flow guidance is provided in the filing.
- Common-unit cash distributions are not guaranteed and are set quarterly by the board. NRP suspended the distribution for the first quarter of 2020; distributions were paid for the second and third quarters at $0.45 per unit, while the filing does not report a fourth-quarter 2020 common distribution paid by year-end.
- Because leverage exceeded the 3.75x threshold, preferred distributions were partly paid in kind in 2020. Preferred units carry a 12% annual distribution rate; if PIK units remain outstanding after January 1, 2022, the partnership agreement prohibits common-unit distributions until they are redeemed in cash.
- Ciner Wyoming suspended member distributions in 2020. NRP has limited control over the venture’s distribution and capital decisions. The expansion project, intended to raise capacity to as much as 3.5 million tons annually, was reprioritized to preserve flexibility; timing and cost remain uncertain. Deca stockpiles are expected to be substantially depleted by 2024, potentially reducing production by about 200,000 short tons annually without replacement investment.
- Ciner Corporation’s ANSAC membership ended December 31, 2020. ANSAC represented about 45% of Ciner Wyoming’s 2020 net sales. The transition to direct/global Ciner Group marketing may entail higher initial costs and uncertainty over customers and logistics. About 97% of Ciner Wyoming’s 2020 shipments initially used Union Pacific, whose service agreement expires December 31, 2021.
- Revenue concentration is material: Foresight represented 26% and Alpha Metallurgical Resources 24% of NRP’s 2020 total revenue. Coal-price volatility, declining thermal-coal demand, regulation, mine closures or bankruptcies, and customer concentration could pressure royalties and cash flow.
- Other risks include debt-service and refinancing needs, preferred-unit seniority and potential dilution, environmental and reclamation exposure, and uncertainty in reserve estimates. NRP expects to stop reporting coal and other hard-mineral reserves beginning with its 2021 annual report under new SEC rules.
Investor verification priorities
- Confirm 2021 cash generation, the $42.0 million Foresight payment, scheduled debt repayments and compliance with debt covenants; assess the 4.6x leverage ratio against distribution restrictions.
- Check the status of preferred PIK units, their accumulated distributions and the potential 2022 restriction on common distributions.
- Track any resumption of Ciner Wyoming distributions, the expansion project’s updated cost and schedule, deca-replacement plans, post-ANSAC sales economics and renewal of the Union Pacific agreement.
- Review the assumptions supporting the $135.9 million impairment charge and whether further impairments or mine closures are likely.
- Reconcile common-unit distribution declarations and payment dates, particularly the fourth-quarter 2020 period; the filing does not clearly describe a fourth-quarter 2020 common distribution payment.
The consolidated financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020. The auditor identified mineral-rights and intangible-asset impairment assessment as a critical audit matter.