Q4 2023 Natural Resource Partners LP Earnings Call

Good morning, and welcome to the natural resource Partners L. P fourth quarter 2023 earnings conference call.

All participants are in a listen only mode. After the speaker's presentation, we will conduct a question answer session.

To ask a question you will need to press star followed by the number one on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Tiffany Sammis manager of Investor Relations. Thank you. Please go ahead.

Thank you and good morning, and welcome to the natural resource partners fourth quarter 2023 Conference call today's call is being webcast and a replay will be available on our website.

Joining me today are Craig Nunez, President and Chief operating Officer Christopher <unk>.

<unk> financial Officer, and Kevin Craig Executive Vice President.

Some of our comments today may include forward looking statements, reflecting <unk> views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward looking statements.

These risks are discussed in <unk> Form 10-K, and other security Securities and Exchange Commission filings.

We undertake no obligation to revise or update publicly any forward looking statements for any reason.

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

We'd like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee are detailed market fundamentals.

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.

And RP generated a record $313 million of free cash flow in 2023 <unk>.

17% increase over our previous record set in 2022.

These results are a testament to our success in executing on the strategy, we set out in 2015 to Delever and Derisk the partnership.

We have stuck to this strategy through good times and bad never wavering in our commitment to do exactly what we told you we were going to do.

Years of hard work and persistence are paying off the.

The business is generating robust levels of free cash flow the capital structure is solid and our financial outlook is much improved.

As of today, our total remaining obligations, which include debt preferred equity and warrants stand at approximately $270 million a 40% decrease from just one year ago.

I'd like to express my sincere thanks for the support of our employees external stakeholders and board of directors without which none of these results would have been possible.

We retired $178 million of preferred equity at par in 2023 and settled $1 5 million warrants both with cash.

And early this year, we settled an additional $1 2 million warrants utilizing cash and common units.

There are two factors, we consider when deciding whether to settle warrants with cash or common units first do we have ample liquidity, which we define quite conservatively I might add.

And second is the market value of the common units less than our estimate of intrinsic value.

If the answer to both of those questions is yes, we settled with cash.

While we will not comment specifically.

Or directly on our view of intrinsic value.

I will say that it was our inability to answer yes to the liquidity question. They caused us to issue units to settle a portion of the warrant exercises early this year.

We continue to add additional bank revolver capacity that will provide financial flexibility to settle warrants with cash and accelerate redemptions of preferreds.

The borrowing capacity of our revolver currently stands at $200 million, an increase of $70 million from one year ago.

Our mineral rights business generated $71 million of free cash flow during the fourth quarter and $262 million of free cash flow for the year.

Metallurgical coal prices improved during the fourth quarter and remained strong compared to historical norms, although below the record highs seen during 2022.

Global supply demand for metallurgical coal remains in reasonable balance and we believe it will stay that way for the foreseeable future due to long term demand trends and continued muted investment in new supply.

Thermal coal prices appear to have stabilized after several quarters of downward pressure, resulting from elevated coal and natural gas inventories.

Over the near term, we believe underinvestment in new sources of thermal coal production, coupled with continued international thermal coal demand will provide price support at levels that are competitive when compared to historical norms.

Longer term. However, we believe the domestic thermal market will continue its long term secular decline.

Turning to soda Ash, we received $81 million in cash distributions from <unk> in 2023, which is the highest amount annual amount of regular distributions we've ever received.

This result was driven by record high sales prices, both domestic and export during the first half of the year.

Unfortunately, global soda ash export prices fell significantly in the back half of the year as new low cost soda ash supply came online in China, Turkey, and the United States.

We expect 2024 to be a challenging year as global soda ash markets absorbed significant new production volumes a process that we believe will take several years to complete cash distributions to in RP will adjust accordingly as profit margins compressed due to the combination of lower sales prices.

Inflation driven cost increases.

Despite the head current headwinds facing the soda ash industry, our long term view of our investment in <unk>, Wyoming has not changed we are one of the world's lowest cost producers of a product that has favorable long term fundamentals driven by urbanization the megatrends for renewable energy in the electrification.

<unk> of the global auto free fleet.

We continue to expand our cooler carbon neutral initiatives, which include exploring and identifying opportunities to lease our mineral and surface assets for permanent underground cotwo sequestration forests sequestration lithium production and the generation of electricity using geothermal wind and solar energy while the.

Carbon neutral economy is in an early stage of development and require significant investment and changes in the regulatory environment to become fully viable we believe the potential upside from our carbon neutral initiatives could be significant all while requiring no capital investment by an RFP.

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

Great. Thank you Craig and good morning, everyone.

In the fourth quarter of 2023, and our P generated $78 million of operating cash flow and $65 million of net income and for the full year of 2023, and our P generated $311 million of operating cash flow and $278 million of net income.

Moving to our segment results during the fourth quarter of 2023, our mineral rights segment generated $70 million of operating cash flow and $63 million of net income.

For the full year of 2023, this segment generated $260 million of operating cash flow and 246 million of net income.

When compared to the prior year, our minerals segment net income decreased $22 million, primarily due to lower metallurgical coal and natural gas prices lower transportation and processing revenues and certain carbon neutral initiative transactions that we entered into in the prior year.

Regarding our med thermal coal royalty mix metallurgical coal made up approximately 70% of our coal royalty revenues in both the fourth quarter and full year of 2023.

The mix for sales volumes in the fourth quarter and full year of 2023, we're 45% and 50% met respectively.

Shifting to our soda ash business segment.

Net income in 2023 increased $14 million as compared to the prior year, primarily due to higher sales prices in the first half of 2023.

Free cash flow from this segment in the fourth quarter and full year of 2023 increased as compared to the prior year periods $5 million and $37 million respectively.

These increases were also driven by higher sales prices, resulting in higher cash distributions from <unk>, Wyoming in 2023.

Moving to our corporate and financing segment costs for the fourth quarter and full year of 2023 improved $3 million and $18 million respectively.

These improvements are primarily driven due to a noncash loss on early extinguishment of debt recognized in 2022 and full year results also benefited from less interest expense because of less debt outstanding in 2023.

Our corporate and financing segment free cash flow for the fourth quarter and full year of 2023 improved $3 million and $11 million, respectively as compared to the prior year periods due to lower cash paid for interest to get the less debt outstanding in 2023.

As Craig mentioned, our strong 2023 free cash flow generation enabled us to make significant progress and permanently retiring outstanding preferred warrants preferred units and warrants.

Redeemed $178 million of preferred units in 2023 at par with cash.

<unk>, the outstanding amount from $250 million down to $72 million.

As a result of these redemptions, we save over 20 million annually and preferred unit cash distributions.

We settled $1 5 million warrants with cash in 2023, including 650000 in the fourth quarter.

And just last month, we settled an additional $1 2 million warrants with a combination of $56 million of cash and issuing a bit less than 200000 and RP common units.

Of the 4 million warrants that were that were originally issued we now have only 320000 outstanding that have a current settlement value of approximately $20 million.

I'd also like to note we have now fully utilized the accordion feature on our existing credit facility, reaching $200 million borrowing capacity in 2023, we increased our borrowing capacity $25 million and added another.

Another $45 million earlier, this year, resulting in a borrowing capacity increasing from $130 million, one year ago to the $200 million as of today.

We've used this credit facility, along with our free cash flow generation to permanently retire the preferred units and warrants I just described and we plan to continue to execute this strategy until all outstanding preferred units and warrants are retired.

And finally regarding our quarterly distributions in November of 2023, we paid a third quarter distribution of <unk> 75 per common unit and a $2 5 million cash distribution to our preferred unit holders.

In February of 2024, we announced and paid a fourth quarter distribution of <unk> 75 per common unit and at $2 5 million cash distribution to our preferred unit holders and.

And today, we announced a special distribution of $2 44 per common unit to help cover unit holder tax liabilities associated with owning NRC common units in 2023.

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

Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad.

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

As a reminder to ask a question. Please press star one.

Our first question comes from Victor Ho from Urs Square. Please go ahead. Your line is open.

Good morning, guys. Thank you for taking the questions and congratulations on continuing very strong results I had a couple of questions. Firstly on use of cash I understand sort of.

The conservative stance, you're taking around sort of use of cash and whatnot.

But if you continue at anywhere near the current rate of free cash flow generation. Then you are going to be able to pay down both the preferred and the debt.

You know in pretty short order here.

What is your expected use of cash once you've effectively become net debt free and preferred tree.

First question.

Thanks for the question appreciate it.

The first thing that we will always do when we have what we deem to be excess cash as we will look to see if we have something intelligence that we can do with the money.

Earn returns on capital that exceed.

What we believe are our as our cost of capital and to the extent, we do not have those opportunities we would distribute it out to unit holders.

Okay.

Okay.

Do you see anything on the horizon that would justify that use of cash that something interesting that would earn above the cost of capital at the moment or Keith.

If today you had no net debt and the preferreds were paid out would you be looking to return all the cash to shareholders or unitholders.

Well right now we are still a bit out from getting to that point, where the obligations are completely paid down you are right in what you summarized initially that.

At our current run rates that it's not too long before we get to the point, where we're obligation free.

So I don't but I don't want to speculate now on what we would do.

In a year and a half two years from now if we had excess cash I can tell you at this point in time, we don't see opportunities in the market. If we were in that a theoretical situation, where we had excess cash today.

We're not on the horizon.

Overly attractive opportunities to deploy capital that being said I will point out that we are focused on the task at hand, right now and we're not out of beta.

Beating the bushes for.

Places to deploy capital I think you can rest assured that we are going to be quite thoughtful about anything we do with respect to deploying capital.

In any manner other than distributing out to unitholders.

Right.

Second question, if I my deep the carbon neutral opportunities.

<unk> signed some very interesting deals with guys, earning pipelines in.

So to your geographies, what does the pipeline of parting upon potential new deals.

Yeah.

And is there any progress on deals that you've signed in terms of those sort of coming to a full of fruition.

These are as you've heard before these are what we call our call options on greatness and they're all out of the money call options on grades at the present time.

We actually don't believe that any of the subsurface carbon sequestration projects are actually economically viable in this environment.

We think there needs to be.

Further improvements in technology.

Further developments in the permitting process and likely also some regulatory changes to make projects viable not just projects on an RP EBIT projects in the sequestration space in general large scale projects in general.

With that being said, we do understand from our two lessees that they are continuing to make progress on their projects.

Can't give you detailed information on that because we are bound by confidentiality agreements with them and we're not active participants in those projects, where just the the lessors on those as for pipeline other.

<unk> in the pipeline.

I would say that given our broad.

Swath of acreage that we have that is in the right place with the right geology.

For carbon sequestration, we are always in discussions with typically multiple parties.

About potential transactions, but that's all I can.

And they give you insight onto now I can't tell you about anything we're about to pull the trigger on or anything like that.

Okay. Thank you.

That's helpful. And then just a final question if I may in terms of your coal lessees to what extent do you know.

Have.

They all sort of come off sort of.

Contracted price caps on their output and not by OLED market pricing now or.

Can you give any color on sort of.

The price per ton, but you'll you'll let these are getting today.

What we can tell you is that we have a mix of contracted and spot markets with our lessees.

We do not have day to day information on that just so you'll know.

There are we have more met volumes that are contracted and thermal we suspect but again, we don't know exactly what the mix is and that mix changes from time to time in the lessees are not obligated to tell us we typically see after the fact, what the prices are on the the check stubs that we receive when they pay us.

The royalties.

So I think from a from your perspective, the way I would I would think about modeling out our pricing.

Is that.

I would make assumptions on what you believe the index prices for coal are going to do in the future.

And I would assume that those would eventually those percentage changes in the index would flow through in our pricing, but with a lag probably a six month lag.

Great. Thank you very much.

Excellent.

Thanks for your thanks for your questions good insight good good questions.

We have no further questions in queue I'd like to turn the call back over to Craig Nunez for closing remarks.

Thank you operator, and thank you everyone for joining the call. Thank you for your continued support of MRP, we've come on or have been on a long journey.

So far it has been quite successful and the outlook looks good and it's due in large part to all of you. So thank you for your support and 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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