Q3 2021 Natural Resource Partners LP Earnings Call

Good morning, My name is Rob and I will be your conference operator today.

At this time I'd like to welcome everyone to the natural resource partners L. P third quarter 2021 earnings conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like to withdraw your question again press the star one.

As Tiffany Sammis manager of Investor Relations you May now begin your conference.

Thank you good morning, and welcome to the natural resource partners third quarter 2021 conference call.

Today's call is being webcast and a replay will be available on our website.

Public disclosures and commentary for specific questions regarding our soda ash does that segment.

Now I would like to turn the call over to Craig Nunez, Our president and Chief operating Officer.

Thank you Tiffany good morning, all.

I am pleased to report that our business is delivered an impressive performance supported by strong demand for metallurgical coal thermal coal and soda ash.

Having right sized our business and cost structure in the years preceding COVID-19, the partnership showed great resiliency during the depths of the pandemic and is now ideally positioned to capitalize on the positive near an intermediate term outlook for each of our business lines.

We expect to generate robust free cash flow in the months ahead and plan to continue using that cash to pay down debt solidify our liquidity and maintain our common unit distribution.

We continue to believe that Delevering and Derisking. The partnership in this manner is the most effective way to maximize unit over hold their value.

Over the last 12 months, we generated $81 million of free cash flow and paid off $39 million of debt.

We expect our free cash flow to grow significantly in the coming months.

Our cash flow cushion, which is the free cash flow remaining after paying our private placement dead amortization and distributions on our common and preferred units came in at $3.7 million over the last 12 months after two quarters in negative territory.

Partnership continues to maintain robust liquidity and ended the quarter with $119 million of cash and $100 million of unused borrowing capacity.

Demand and prices for metallurgical coal continue their dramatic rise as strong demand for steel is more than offsetting lingering pandemic related challenges the.

The ongoing China, Australia, political and trade dispute continues to be a positive for you S. Met producers is Chinese manufacturers procure met coal from other regions, allowing north American coal to make its way to destinations previously served by Australia and producers.

We have no way to predict the timing or eventual outcome of this matter, we have yet to see signs of resolution on the horizon.

International benchmark prices for Matt coal have risen significantly since the beginning of the year in response to increase steel production driven by the recovering global economy.

The benefits of higher met prices are just now beginning to flow through our cash flow and we expect this trend to continue in coming months. We believe many of our met lessees are currently engaged in annual contract negotiations for 2022 and expect those contracts to renew at higher levels, which should provide upside to our.

Met cash flows in the year ahead.

Thermal coal demand and benchmark prices have also increase significantly over the course of the year higher.

Higher electricity demand driven by a rebounding U S economy, and a strong burn last winter are the primary drivers behind the price run up.

The positive impact for us has been modest so far since most of our thermal cashflows. This year are fixed pursuant to our contract with foresight energy that went into effect as they emerged from bankruptcy in 2020.

Fixed payment agreement terminated at the end of this year and we will begin to receive traditional royalty payments starting in January of 2022.

We expect to benefit next year to the extent demand and prices for thermal coal remains strong.

As for our investment in General Wyoming, We believe global soda Ash demand has reached prepandemic levels driven by growth in soda ash used for residential construction solar power energy storage in general industrial activity, which is more than offsetting demand destruction caused by supply Chi.

Jane disruptions in the auto industry.

Our soda Ash segment posted strong results in the third quarter with net income up over 150% from the previous quarter.

While ocean freight costs have increased significantly and have been a drag on results Jenner has been successful in passing these costs through to its customers. As we've noted before general Wyoming is one of the lowest cost soda ash producers in the world and is managed by the world's most capable operator soda ash, we believe these fat.

<unk> will continue generate attractive margins for the long term.

As a result of strong recent performance and the positive outlook for the months ahead general Wyoming will resume payments of regular quarterly distributions to us this month.

As we've mentioned repeatedly over the last year, we continue working to identify alternative revenue sources across our large portfolio of minerals timber and land.

The types of opportunities. We are exploring include the sequestration of carbon dioxide underground and then standing forests, and the generation of electricity using geothermal solar and wind energy.

I'm pleased to announce that we completed the transaction in October for which we will receive $13.8 million in exchange for sequestering 1 million metric tons of carbon dioxide in our for us. This.

This transaction will be reflected in our fourth quarter results and I expect this to be the first of what will potentially be numerous alternative revenue transactions in the coming years that will provide important benefits to the environment and add significant value to an RFP.

While the timing and likelihood of cash flows being realized from any of these activities is highly uncertain. We believe our large ownership footprint throughout the United States will provide opportunities to create value in this regard with minimal capital investment by an RFP.

We continue to believe we have the right strategy in place to create unitholder value.

Since 2015, when we began to Delever and Derisked the partnership in.

<unk> pay down over $925 million of debt paid over $130 million of common unitholder distributions established robust liquidity and dramatically improved our capital structure.

We remain steadfast in our commitment to focus on maximising unitholder value by continuing these efforts.

And with that I'll turn the call over to Chris to cover our financial results.

Thank you Craig and good morning, everyone.

During the third quarter, we generated 30 million of operating cash flow and 29 million emetic.

Her coal world and other segment generated 34 million of operating cash flow and $37 million of net income during the third quarter of 2021.

Our third quarter free cash flow improved 6 million and our third quarter net income improved 17 million quarter over quarter, primarily driven by stronger demand in pricing for metallurgical coal in the third quarter of 2021.

Metallurgical coal made up approximately 45% of our total coal royalties sales volumes at approximately 65% of our coal royalty revenue during the third quarter of 2021.

Moving onto our soda Ash business segment net income in the third quarter of 2021 improved $5 million as compared to the previous year quarter, primarily due to increased demand for soda ash from the lowest caused by the COVID-19 pandemic.

Free cash flow in the third quarter of 2021 was flat as compared to the prior year quarter due to general Wyoming decision to suspend their quarterly distribution in August of 2020.

However, as Craig just mention general roaming is reinstated their quarterly cash distributions as market demand continues to improve for low seen during the COVID-19 pandemic.

We expect to receive a $7 million cash distribution in the fourth quarter of 2021.

Our corporate and financing segment costs and cash used in operations were slightly lower in the third quarter of 2021 compared to our prior year quarter, primarily due to less less.

Less debt outstanding in 2021.

Our leverage ratio as of September 30th 2021 was three eight times.

Stanchion reduction from the four six ratio we had at the end of the previous quarter.

Regarding distributions in August we paid a quarterly 45 cents per common distribution and a quarterly distribution of seven $8 million to our preferred you to holders when half of which it was in cash and what happened kind as required by our bond indenture.

Today, we announced a quarterly distribution of 45 cents per come in unit and a quarterly distribution of $8 million to our preferred unitholders should we paid one half in cash and what happened kind.

These preferred unit distributions include interest on previously paid and Khan units, which will also be paid what happened cash and what happened kind.

As we've mentioned in previous quarters, the indenture governing our bonds restricts us from paying more than one half of the quarterly distribution on the preferred unison cash if our consolidated leverage ratio exceed 375 times and as of September 30th 2021, our leverage ratio was $3.

Eight times.

If our consolidated leverage ratio were to remain above $3 75 times into 2022.

We and we remain unable to redeem are expanding painting kind preferred units. We would then be required to temporarily suspend distributions on our common units until our leverage ratio drops below the 3.75 times threshold and the outstanding paid and Kai preferred units are redeemed.

However.

As a result of a strong coal in soda ash pricing expected in the fourth quarter and the forest carbon offset transaction. Craig noted earlier, we expect our leverage ratio to fall below the $3 75 times threshold by December 31st of this year.

If this occurs we plan to redeem the outstanding paid in-kind prefer units and continue to pay.

To pay cash distributions to our common unitholders.

Additionally, we expect our leverage ratio to <unk> to continue its long term decline as we pay down debt.

And with that I'll turn the call back over to the operator for questions.

Okay.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Pause for just a moment to compile to Q&A roster.

Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.

And we do have a question comes from the line of Steve Berman.

Your line is open.

Yes. Good morning. My question is I guess general what's the status in China, and I had heard something first of all how how important is.

What's going on with China is usage of coal and your outlook and I also had heard that they were putting a price freeze on what they would pay for coal.

And this was <unk> I think that this would be medical.

I mean thermal coal.

Kevin you want to take it.

[noise] Sharon's just Kevin Gregg. Thank you for your question, obviously, China in China is a market for coal as <unk>.

Important not only to <unk>.

P, but the world coal market, we've watched Chinese and Australian issues, they've had over the past year and it certainly has had an impact on U S. Cold producers and to date, we believe it's been a positive impact.

So we remain.

In tune with what is going on in China, and we've certainly seen the improvement in the coal market. It would be the past you given.

Or in spite of some of the political Wishy <unk>.

And again, if you would like to ask a question. It is star one on your telephone keypad.

And there are no further questions at this time I will turn the call back over to Mr. Craig Nunez for some closing remarks.

Thank you very much and and thank all of you for for participating in our call today and thank you for your support of N. R. P and where please call our Investor Relations line. If you have any follow up questions. You wanted to discuss matters further and we look forward to speaking with your next quarter.

Have a great day.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

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