Natural Resource Partners LP — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. NRP owns and leases U.S. mineral properties, principally coal, and holds a 49% non-controlling interest in Ciner Wyoming, a soda ash producer. Amounts below are in millions unless noted.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue and other income | $29.9 | $63.7 | $101.2 | $212.2 |
| Operating income (loss) | $17.5 | $49.6 | $(68.6) | $160.4 |
| Net income (loss) | $7.2 | $39.2 | $(99.5) | $94.2 |
| Net income (loss) per common unit, basic | $(0.02) | $2.53 | $(9.76) | $5.73 |
| Cash from continuing operations | $24.3 | $41.7 | $74.4 | $117.9 |
- Nine-month net loss included $133.2 million of asset impairments, mainly reflecting weaker coal markets, lease terminations, changes in lessee mine plans and reduced frac sand outlook. Mineral rights declined to $465.9 million from $605.1 million at year-end 2019.
- Nine-month adjusted EBITDA was $79.8 million, down from $161.3 million. Management-reported distributable cash flow was $76.3 million and free cash flow was $74.9 million; these are non-GAAP measures.
- At September 30, cash was $115.6 million, with $100.0 million available under the credit facility, for reported liquidity of $215.6 million. Debt, net of issuance costs, was $491.5 million, including $39.1 million current; reported consolidated leverage was 4.2x. No facility borrowings were outstanding, and the partnership reported compliance with debt covenants.
- Cash from operating activities for the nine months was $76.1 million, compared with $117.9 million. Cash increased $17.3 million from year-end to $115.6 million.
Material changes and management commentary
- Revenue fell 53% in Q3 and 52% for the nine-month period year over year. Coal Royalty and Other segment revenue declined 44% in Q3 and 45% year to date; Soda Ash segment revenue declined 86% in both comparisons.
- For the first nine months, coal sales from NRP properties were 12.1 million tons, down 33%; average coal royalty revenue per ton fell 21%. Management attributed weakness to pandemic-related demand impacts, lower metallurgical coal demand and challenged thermal coal markets. Demand for coal and soda ash began to rebound in Q3, but prices remained below pre-pandemic levels.
- NRP amended Foresight Energy leases in June for fixed payments of $48.75 million in 2020 and $42.0 million in 2021. It had received $35.0 million of the 2020 amount by September 30. Foresight and Contura represented 27% and 23%, respectively, of nine-month revenue, creating significant customer concentration.
- Ciner Wyoming suspended its quarterly distribution in August and did not pay distributions for Q2 or Q3. Its sales volumes increased 26.7% and production volumes 1.5% from Q2, but soda ash prices remained depressed. A planned capacity expansion was delayed pending greater visibility on pandemic effects.
Outlook, distributions and risks
- Management said liquidity provided flexibility to navigate COVID-19 impacts, but expected leverage to remain above 3.75x for the foreseeable future. Under the 2025 notes indenture, this limits cash payment of preferred distributions to one-half of the required amount. The Q3 preferred distribution was declared half in cash ($3.75 million) and half in kind (3,750 additional preferred units); PIK distributions accrue at 12% annually and cannot be redeemed until leverage falls below the threshold.
- In November, the board declared a Q3 common distribution of $0.45 per unit. Future distributions remain subject to quarterly board decisions and business, cash-flow, debt-service and market conditions.
- Key risks include volatile coal and soda ash prices, pandemic-related demand uncertainty, potential further impairments, customer and lessee concentration, and possible effects of lower commodity prices on cash flows and debt covenants. Management stated ordinary-course legal proceedings were not expected to materially affect the partnership.
- The filing reported no material changes to previously disclosed risk factors. Disclosure controls were considered effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether coal volumes and realized prices recover, and whether any further mineral-right impairments are required.
- Foresight Energy’s ability to make the contracted fixed payments, and the ongoing financial condition of major customers and lessees.
- Whether Ciner Wyoming restores distributions and how soda ash demand, pricing and its expansion plans develop.
- Leverage against the 3.75x preferred-distribution restriction, the resulting PIK-unit balance and the sustainability of common-unit distributions.
- Credit-loss estimates on receivables: the filing reported a $3.9 million allowance against receivables and the long-term contract receivable.