Q3 2022 Natural Resource Partners LP Earnings Call

Our comments today also include non-GAAP financial measures additional details and reconciliation to the most directly comparable GAAP measures are included in our third quarter press release, which can be found on our website.

I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee or detailed market fundamentals and.

In addition, I refer you to a gym resources public disclosures and commentary for specific questions regarding our soda ash business segment.

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

Thank you Tiffany and good morning, everyone.

P generated $83 million of free cash flow in the third quarter and has produced $199 million of free cash flow in the first nine months of the year, resulting in the best start to a year in the history of the partnership with <unk>.

<unk> seized this opportunity to accelerate our plan to become debt free and redeem all of our preferred units.

Year to date through today, we have paid off $319 million of debt, including all of our higher cost public bonds that were due to mature in just two years two.

$249 million of this debt has been permanently retired with cash on hand, with the remainder temporarily refinanced under our lower cost five year revolving credit facility established in August .

Our leverage ratio now stands at 0.6 times down from four six times, just 16 months ago.

Look forward to becoming debt free as our business continues to generate cash.

We have paid out $24 million of common unitholder distributions through the first three quarters, which is a 46% increase over the same period a year ago.

We believe it is important to provide meaningful distributions to common unitholders, while continuing to delever and derisk the partnership.

Proof of our commitment to this principle is the fact that we have paid common distributions for every quarter in the 20 years since the partnership's public debut with the exception of one quarter in the depths of the COVID-19 pandemic.

We entered into our second subsurface Cotwo sequestration transaction during the third quarter with a lease to a subsidiary of Occidental for 65000 acres of poor space, We control in South East, Texas. This acreage has the potential to store at least 500 million metric tons of carbon dioxide.

And we look forward to the opportunity to benefit from oxy capabilities and capital investment.

When combined with our Baldwin.

The Alabama transaction entered into with <unk> earlier. This year. We currently have approximately 140000 acres and 800 million metric tonnes of subsurface Seo to capacity under lease.

The industry for Cotwo capture and sequestration is in the early stages of its development and the success of sequestration projects will not be known for a number of years.

That said, we are excited to be at the forefront of this nascent industry and believe that these two projects along with the approximately $3 3 million acres of additional carbon sequestration rights owned by the partnership provide us a unique opportunity to benefit from the transitional energy economy with al.

The need for capital investment by an RP.

Year to date revenue from our mineral rights segment is more than double what we saw last year.

Metallurgical coal prices remained strong by historical standards, but are down from record to record levels earlier in the year.

Supply chain disruptions labor shortages and years of Underinvestment in new coal production capacity continue to undermine producers' ability to bring new production online to meet demand. Additionally, this summer.

Oil prices are pooling lower quality met coal into the thermal market, providing further support to met coal pricing for these reasons, we think the supply demand balance for met coal will remain well supported for the foreseeable future.

Thermal coal markets continued to benefit from solid energy demand and constrained growth in thermal coal supplies.

Many operators continue to structure with labor shortages transportation challenges and pressure from governments regulators actavis and capital capital providers.

These factors are limiting the ability to increase thermal production to meet demand.

The war in Ukraine, amplifies, the tightness and thermal coal markets as boycotts of Russian coal exports are foreseeing European buyers to source coal from other regions, including the United States. We expect these factors to keep thermal prices elevated relative to historical levels for the foreseeable future.

Our investment in <unk> benefited from near record International Soda ash prices in the third quarter, while global soda ash prices have softened recently in response to slowing economic growth and increased soda ash exports from China.

This is Jim Wyoming continues to maintain market share and are an attractive netback prices in margins due to its position as one of the world's lowest cost producers.

Moderating ocean freight costs are providing an additional benefit for net export pricing and we believe that this is Jim Wyoming will continue to realize strong margins and cash flow for the foreseeable future.

Negotiations for 2023 domestic sales have begun and we expect domestic prices to increase to levels commensurate with export prices as contracts allow.

Therefore, we continue to believe the outlook for CGM around Wyoming remains favorable given the secular trends of renewable energy the electrification of the global lot of safely and urbanization.

The global economy is in a period of transition following the post COVID-19 recovery and business forecasting is particularly difficult at this time unexpected.

Unexpected inflation the war in Ukraine, slowing economic growth, along with volatile and recently weakening prices for metallurgical coal soda ash and thermal coal further complicate the forecasting process.

Over the past 12 months, the partnership generated $255 million of free cash flow.

We are cautiously optimistic that this run rate will be representative of the partnership's performance going forward over the near and intermediate term.

During much of the last eight years, the most significant risk to the partnership's common unit holders was the ability to refinance maturing debt.

High debt levels relative to free cash flow and the shutting of companies with exposure to coal by numerous equity and debt investors made sourcing capital for many companies, including an RP difficult.

We were early to recognize the pending exit this of capital from coal and to announce a long term plan to de risk our capital structure.

In the seven year since there were times when we were tempted to deviate from our plan and divert cash to other seemingly more interesting pursuits and paying off debt.

But we stayed the course and now see light at the end of the tunnel.

We have paid off $1 $2 billion of debt and have only $189 million remaining once our debt is repaid and the $250 million of preferred stock is redeemed common unitholders will have no competing stakeholder claims on free cash flow generated by the partnership.

We remain committed to seeing our long term strategy to completion.

<unk> confident that this path is the best approach to maximizing long term common unit holder value.

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 $82 million of operating cash flow and $75 million of net income.

Before getting into our third quarter business segment results I'd like to add a little color to the light at the end of the tunnel Craig mentioned earlier.

With the new five year revolving credit facility, we executed in the third quarter of 2022, we increased our borrowing capacity from $100 million to $130 million and now have revolving credit available to us that does not mature until 2027.

In addition to providing us with significant liquidity.

New credit facility enabled us to accelerate the full repayment of our 2025 senior notes earlier. This week and will also allow us to accelerate the repayment of our preferred units.

Moving to our business segment results, our mineral rights segment generated $76 million of our operating cash flow and $72 million of our net income in the third quarter.

When compared to the prior year quarter segment free cash flow and net income improved $42 million and $36 million, respectively, primarily driven by stronger demand and pricing for metallurgical coal.

Metallurgical coal made up 65% of our coal royalty revenues and 40% of our total coal royalty sales volumes during the third quarter of 2022.

Moving to our soda Ash business segment result, net income in the third quarter of 2022 was $15 million. This was an $8 million improvement compared to the prior year quarter, primarily as a result of higher international sales prices.

Free cash flow from our soda ash business segment in the third quarter of 2022 improved $10 million as compared to the prior year period due to Suzanne Wyoming reinstating its regularly quarterly.

Regular quarterly cash distributions beginning in the fourth quarter of last year.

Shifting to our corporate and financing segment or corporate and financing segment costs for the third quarter of 2022 decreased $2 million as compared to the prior year quarter, primarily due to lower interest expense because of less debt outstanding.

This was partially offset by loss in early extinguishment of our 2022 senior notes.

During the third quarter of 2022, we retired over $16 million of debt, which helped push our leverage ratio below 1.0 times.

In addition to the significant progress we made to Derisk and Delever the partnership and the first three quarters of 2022 on October 31, we fully retired all outstanding 91, eight senior notes due 2025 at a redemption price of 102 to eight 1%.

Utilizing cash on hand, and $70 million of borrowings on our new credit facility.

This early retirement of our 2025 senior notes will save us $27 million of interest expense next year.

After the full pay down of our senior notes, we now have $189 million of debt outstanding primarily in the form of amortizing private notes that are scheduled to be fully repaid by 2026.

Okay.

Regarding distributions.

In August of 2022, the partnership paid a quarterly distribution of <unk> 75 per common unit and a quarterly cash distribution of $7 5 million to our preferred unitholders.

And today, we announced third quarter distributions of <unk> 75 per common unit and $7 $5 million cash to our preferred unitholders to be paid later this month.

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

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 the Q&A roster.

Yes.

Yes.

Your first question comes from the line of George Berman CL Securities.

Your line is open.

Mr. Berman your line is open.

Can you hear me.

Can you hear me.

Yes, Sir we can hear you.

Great. Thanks for taking my call.

Congratulations too.

Very good quarter and I've got one quick question.

Could you detail for us.

Exact terms of the preferred shares and what interest.

The dividend that you're paying on those and if they are convertible and at what price.

Thank you.

Chris.

Sure I'll take that yeah. So we do have the disclosure of the terms of our preferred units in our filing so if you want to see more detail.

Of the terms of those preferred units or 10-K or quarterly filings will be a great place to check in the footnotes, but I can tell you we have it if they require a.

$12, a 12% coupon.

And there is no maturity date.

They are perpetual.

And they are they are preferred equity in.

The liquidation price.

Is one point, a pipeline, which which decreases as we continue to pay preferred unit distributions. So as as we are continuing to pay protium distributions that.

Premium to redeem those as units increase.

Overtime.

Okay.

So the redemption price is reduced by the payments you make on those preferreds.

Exactly.

Okay.

Then I have one quick question on <unk> can I.

Understand that the Turkish majority owner asked you had tried to acquire the rest of the company.

Where do you have those negotiations stand or are you considering selling your position off there because its a minority position.

This is Craig I believe you're referring to the fact that.

Sister Jam resources, which is our partner in this is Jim Wyoming.

Is attempting to buy out the.

The units that are held by the public of sister Jam resources.

That it does not already own theyre trying to attack the public entity private.

That does not involve the <unk> jam, Wyoming entity that we own interest in.

That's a transaction that's taking place between our the various owners of our partner and just Jim Wyoming, and we're not involved in that in any way.

Okay. So there is no worries about.

Are you being taken out.

Okay.

Now.

Okay.

Okay, great well.

Good luck for the future I think we've got a long ways to go with the stock price appreciation after year, one for Daniel reverse split, but we're definitely going into the right direction.

Thank you very much for your support and your call.

Your next question comes from the line of Mark Zand. Your line is open.

Alright, Hi, Greg Hi, Chris.

Okay.

I'm, sorry to ask but if you sort of following up can you just go over what the.

What the decrease of the premium is on the preferred what the sort of the rate is like where where do you wind up let's say in 2025, when do you get to when do you get to par.

I apologize for not remembering.

Sure thing I'll I'll take this one and good morning, Laura Thanks for the call. So right now the premium is about 20% and one way to look at each time, we pay a quarterly distribution that the premium drops about 3% each quarter.

So it's 12%.

Sent per year, and if you're 20% does that mean that your power in one and three quarter years.

Yeah.

That sounds about right.

Yes.

Yes, okay.

And at some point, maybe you can even pay the premium I would think is that reasonable or not.

It's possible.

Yes, Okay, alright, that's great.

Again, congratulations there is there any sense on if you were to look at.

So to speak.

Sequestration can you put a dollar number at all on what you would get paid per ton of.

C O two sequestered.

We do have provisions in the agreement that we have with our two lessees that specify.

What our payments would be but we are under non disclosure obligations with them, but I can frame. It for you this way.

We did a timber sequestration transaction, where we sold credits lash.

Last year in exchange for sequestering carbon in timber that we owned in Appalachia, we received about $13 per metric ton of Cotwo and that's not a direct comparison of what one would expect to receive for sequestering subsurface because in that situation. The timber has.

<unk> already grown over the last multiple decades. It was in place the buyer of the credits did not have to put any capital at work to work in order to capture the C O two.

With subsurface Sidoti sequestration.

The parties that would pay us for the use of our poor space will have significant capital expenditures as they will have to make but I think I was going to be something much less than the market value of the credits that we would receive but I would suspect that.

If you used a couple of dollars a tonne.

That's probably a good guesstimate at this time.

Simply because the industry is so new.

And that's a relatively good number.

No that makes sense and then I didn't.

The press release, but can you tell me what was it that you got in terms of upfront payments.

Where do you expect to get.

Well, we're not allowed to again, we're not allowed to disclose that because of confidentiality now the reality is in our press release and in our financials. You can go to our mineral rights revenue line breakout and we did aggregate are carbon neutral initiatives.

Income in the quarter and year to date. So you can you can see that there, but we can't tell you about specific contracts.

Okay.

And then any.

Any kind of movement on coal leasing has there been any kind of.

Sort of shifting of activity that you would think would lead to an increase in production.

Kevin you want to answer that.

Sure and thanks for your question, we have seen during the quarter.

The creation of the new lease.

In the metallurgical space, we're seeing some movement there.

But overall.

You see the limitation is still in place on ramping up production in both met and thermal impacted by Labor force access to capital on either but.

We were successful in signing.

Modifying it.

Leasing space during the quarter.

Okay. Good.

Thank you good to get caught up.

Thanks, Mark Thanks for that.

Good to talk to each quarter.

Thank you.

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

There are no further questions at this time.

Sorry, Mr. Berman Who's asking another question just a moment.

Yeah.

Hello.

Okay.

Can you hear me.

We hear you now.

Yes.

Yes.

We do not has there been any any movement on the.

Oil and gas I saw you had some oil and gas.

Royalty revenue is there any of your properties.

Possibly open for possibilities there.

We do have oil and gas royalties as as you can see from our financial.

Statements and they are a small part of our business with higher oil and natural gas prices that we have seen over the last 18 months. There has been increased drilling activity on the acreage that we hold and that is primarily in the haynesville shale of north Central Louisiana.

<unk>.

Yes.

Those wells tend to come on at fairly high rates of production and they quickly drop off.

So it's not bad.

There is no way to tell how much drilling is going to take place and how much new production is going to come on but we have had a pickup in drilling and have had a pick up in cash flows here over the course of the last year.

Okay, Great and then maybe one last question.

Would you contemplate maybe repurchasing some of your common shares.

I'm, sorry could you repeat that question. Please.

Could you would you consider repurchasing some of the common shares in the market since the preferreds have a 20% premium stood on them.

Yes.

We are.

As we've said previously our long term plan.

Is to pay down all of the debt.

Outstanding debt of the partnership.

And then and then to pay down our preferreds.

We don't intend to pay a premium on the preferreds.

When you look at our cash generating capability it will still be.

Some time before we will have finished paying off the.

The debt and the preferreds.

And two to buyback common units currently while we still have debt outstanding with actually caused the.

Leverage ratio of the company to increase all things being equal which is not the direction. We're trying to go at the moment.

Thank you.

Thanks for your questions.

Okay.

There are no further questions at this time, Greg Newman as I turn the call back over to you.

Thank you operator, and thanks, everyone for joining us today and thank you for the questions. Thanks for your support of an RFP.

Been traveling a long road here.

Our delever and Derisk strategy.

It looks as though were coming.

To the end of the tunnel as we said earlier so thank you for being with US and we look forward to working with you in the future.

Have a good day and talk to you next quarter.

Yes.

Okay.

This concludes today's conference call you may now disconnect.

Okay.