Q3 2024 Natural Resource Partners LP Earnings Call
Thank you for standing by my name is Danica and I will be your conference operator today.
Speaker Change: We will continue to pay down debt with internally generated cash in the coming months and look forward to the day when common unitholders will have no competing claims on the partnerships' free cash flow, we remain steadfast in our belief that this is the best strategy to maximize intrinsic value per unit. Additionally.
Additionally in October we closed a five year bank credit facility that extends our revolvers maturity dates over two years to October 2029.
This extension provides us with greater financial flexibility and further de risks our capital structure.
We have an exceptional group of banks that have become more than lenders. They are trusted business partners.
Speaker Change: Our mineral rights segment generated $54 million of free cash flow during the third quarter.
<unk> global steel demand continues to pressure metallurgical coal prices and low priced north American natural gas and high coal inventory levels at electric generating facilities continue to depress thermal coal prices.
We do not expect material market improvement in the near term.
Longer term, we believe secular demand trends for steel industry labor shortages higher cost of production and limited investment in new coal supply will provide support for metallurgical prices at attractive levels when compared to historical norms.
Long term thermal prices should benefit from input cost inflation labor shortages and limited new investment, but we expect a positive impact on thermal prices from those factors to be more than offset by the continued long term secular decline in north American thermal demand.
Turning to soda Ash, we received a $6 million cash distribution from <unk> Jam, Wyoming in the third quarter of 2024, which is $17 million less than the distribution received for the third quarter of last year.
This decline reflects significantly lower soda ash prices, resulting from the massive influx of new soda ash production capacity over the last 18 months and softening demand for flat glass used in construction and automobiles.
Soda ash prices are at their lowest levels in decades, and while our long term outlook remains quite positive. We believe it will take several years for the market to reach an equilibrium that supports the higher price levels realized for most of the last decade. As a result, we expect distributions from <unk>, Wyoming to remain bill.
<unk> historical norms for the foreseeable future.
While our near term soda ash outlook may appear more pessimistic than that of others.
We prefer to plan conservatively and be pleasantly surprised if the market outperformed our expectations.
Long term, our soda ash facility remains one of the world's lowest cost producers of a commodity that has favorable fundamentals linked to growth in renewable energy.
Urbanization of society and the electrification of the global Auto fleet. These.
Speaker Change: These characteristics provide one of the most durable competitive moats that we've seen in a commodity producer.
Speaker Change: Regarding our carbon neutral initiatives or CNI for short, we continue to explore opportunities to lease our mineral and surface assets for underground sequestration.
Speaker Change: Forest Seo to sequestration lithium production and the generation of electricity using geothermal wind and solar energy we have observed a notable slowdown in the leasing of acreage for underground Cotwo sequestration.
Speaker Change: Developers are reluctant to invest capital in light of the uncertain regulatory and political environment on.
Speaker Change: On a positive note we are seeing increased leasing activity by lithium solar and geothermal developers.
Speaker Change: While upfront lease bonus versus bonuses from individual lithium solar and geothermal leases are not material to the overall partnership we do see these as positive steps in the expansion of our C&I portfolio.
Speaker Change: And with that I'll turn it over to Chris to cover our financial results.
Chris: Thank you Craig.
Chris: In the third quarter of 2024, and our fee generated $39 million of net income $54 million of operating cash flow and $55 million of free cash flow.
Chris: Our mineral rights segment generated 41 million of net income and $54 million of both operating cash flow and free cash flow during the third quarter of 2024.
When compared to the prior year quarter, our mineral segment net income decreased $20 million in both operating cash flow and free cash flow decreased $7 million.
Chris: These decreases were primarily due to soft co markets, resulting in lower metallurgical and thermal coal sales prices.
Chris: Regarding our third quarter 2024, net thermal coal royalty mix.
Chris: <unk> coal made up approximately 75% of our coal royalty revenues and 55% of coal royalty sales volumes.
Chris: Yes.
Chris: Shifting to our soda Ash business segment net income in the third quarter of 2024 was $8 million, a decrease of $4 million compared to the prior year quarter.
Chris: This decrease was due to lower sales prices driven by an oversupplied market and weakened demand for construction flat glass.
Chris: Free cash flow from this segment was $6 million in the third quarter of 2024, a decrease of $17 million as compared to the prior year quarter.
Chris: Soda ash pricing has declined from the record highs seen last year and until demand for flat glass rebounds in the market is able to absorb the additional supply from China, we expect prices to remain muted and our distributions received from <unk>, Wyoming to reflect the business performance.
Chris: Moving to our corporate and financing segment in the third quarter of 2024, we achieved another milestone towards our goal of eliminating our financial obligations by redeeming the final $32 million outstanding preferred units I'm pleased to note that we were able to redeem all of the originally issued $250 million preferred units at par.
Chris: With cash.
Chris: Having the preferred units redeemed saves us $30 million in annual cash flow compared to when all of the originally issued preferred units were outstanding.
Chris: We're also pleased to have settled the final tranche of outstanding warrants last last quarter.
Chris: In aggregate, we settled the originally issued 4 million warrants with $131 million of cash and by issuing just under 288000 common units.
Chris: For your reference if all the originally issued warrants were still outstanding today, the settlement amount would be approximately $265 million or $2 8 million common units.
Chris: As a result of accomplishing these milestones are remaining financial obligations consist only of debt instead of just under $200 million at the end of the third quarter.
Chris: As of today, our debt balance is $181 million as we continue to make progress paying down our credit facility with internally generated free cash flow.
Chris: And just last month, we further derisked the partnership by many of our 200 million credit facility, which lengthened the runway of our of liquidity available to us by over two years to October 2029, and gives us greater financial flexibility.
Chris: For the segments third quarter 2024 financial results net income operating cash flow and free cash flow each decreased $1 million compared to the prior year quarter, primarily as a result of higher interest expense and cash paid for interest due to the increased borrowings outstanding on the credit.
Chris: Facility in 2024 that were used to permanently retire the preferred units and warrants.
Chris: And lastly regarding our quarterly distributions in August of 2024, we declared and paid a first quarter distribution of <unk> 75 per common unit and a $1 million cash distribution to our preferred unit holders and today, we announced our third quarter distribution of <unk> 75 cents per common unit.
Chris: To be paid later this month.
Chris: And with that I'll turn the call back over to Danica, our operator for questions.
Danica: Thank you.
Danica: This time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Danica: We will pause for just a moment to compile the Q&A roster.
Danica: It looks like we have one question from Mark Zand with Wexford. Please go ahead.
Mark Zand: Greg how are you doing.
Danica: Hello, Mark how are you doing well we're good.
Danica: It's good it's good to hear you and congratulations.
Mark: I missed the very beginning of the call so I'm unclear.
Danica: Hum.
Danica: What exactly you need to do if anything in order to basically be unconstrained and your ability to pay dividends I'd heard part about.
Danica: Wanted to pay down debt.
Danica: But with the redemption of the preferred and the extinguishment of the warrants is it just you just explain to me whats your thoughts are going forward in terms of distributions.
Speaker Change: Our goal is still to.
Speaker Change: Get to the point, where we have eliminated our practically eliminated all of our liabilities, which currently stand at $181 million of debt before.
Danica: We consider doing other things with the free cash that we have generated.
Danica: And as we've talked to you about in the past.
Danica: Where we.
Danica: We're not making forecasts of the specific date that we believe that that will happen, but it is.
Danica: You can look at our run rate of of cash flow free cash and you can look at the outstanding balance and you can see that.
Danica: We appear to be coming up on the cusp of reaching that point.
Danica: So as you go really to get to.
Danica: Net debt down to zero.
Speaker Change: Well, yes that is our goal, but the reality of it is that.
Speaker Change: Does it have to be exactly zero does it could it be $10 million share can be $10 million.
Speaker Change: Okay.
Speaker Change: And then do you have a sense on what's your payout policy would be after that.
Speaker Change: No. We don't have you know, we're not going to tell you here in advance a year in advance potentially we're not going to tell you know what to decide now what our distribution policy will be but I do think that we will approach. It the same way we have approached distributions for the last 10 years and that is do we.
Speaker Change: <unk> has a more intelligent use for the cash than paying it out as distributions to owners.
Speaker Change: And up to this point in time, we believe we had have have had a more intelligent use for the cash.
Danica: Be it redeeming.
Danica: 12% preferreds or 10% debt or.
Danica: Et cetera.
Danica: Yes.
Danica: When we get to the point, where our debt balances are zero or practically zero.
Danica: And we don't have as many opportunities to do more intelligent things.
Danica: Yes.
Danica: The decision to make a distribution becomes much easier I would just say that we do not have a bias against distributions.
Danica: At all.
Danica: Bias is that we need to have an intelligent use for the money internally.
Danica: To increase intrinsic value of the business.
Danica: Or else, we send it out.
Speaker Change: Okay, well I mean do you have any sense that you would do that there'd be some line of business that you would invest in.
Speaker Change: Something that you would use the cash for other than a distribution and if so what might possibly be.
Speaker Change: Do not have any any ideas about that at the moment do not have any plans at the moment.
Speaker Change: Right now we're trying to finish out the strategy that we've had in place for a long time.
Speaker Change: And as we get near the little bit closer to the end of that process.
Danica: We will be looking at the next step and we will be explaining to the public quite clearly what we plan to do.
Speaker Change: At that time.
Speaker Change: How many shares of stock are outstanding now.
Speaker Change: I guess after the redemption of the warrants go on.
Speaker Change: Roughly $13 3 million, okay that makes sense.
Speaker Change: And I don't know if anybody else has got any questions, but let me just ask one final one and we can see.
Speaker Change: Can you just give US you had said that you expect the sort of weak conditions in the met coal market to persist.
Speaker Change: For an extended period of time could you just too.
Speaker Change: To elaborate on what your thoughts are on the market.
Speaker Change: Yes, we have.
Speaker Change: Excess capacity and we have sluggish demand in all three of our key commodities Thats metallurgical coal.
Speaker Change: Dash and thermal coal.
Danica: And at the moment.
Danica: I can't see any specific drivers that are going to change this environment here in the near to intermediate future now I'm always surprised about that because I never do you see the the factor the drivers that youre going to turn the market for these commodities, but they eventually do turn but just right now I cannot.
Danica: Point to any of that.
Danica: Good news.
Danica: I think would be important to note here for us is that.
Speaker Change: Despite the fact that this is the.
Speaker Change: A very.
Speaker Change: <unk>.
Speaker Change: Negative time in terms of the collective sentiment of all three of our collective outlook for all three of our key commodities.
Speaker Change: Actually pretty robust time for the business outlook for our common equity simply because of the fact that we are coming to the end of eliminating our obligations at which time there will be a lot of free cash that's freed up for common equity. So it's sort of a tale of two cities.
Speaker Change: It's a bad time for the business outlook.
Speaker Change: Actually collectively for all three of our commodities together I would say that with the exception of Covid. This is the the worst collective business outlook. We've had in my almost 10 year tenure here at an RP, but it's.
Speaker Change: The best outlook from the standpoint of an equity holder that we've had in almost 10 years that I've been in an RP.
Speaker Change: Yes, <unk> got and everything.
Speaker Change: Fixed.
Speaker Change: It's taken a while but it's done so congratulations.
Speaker Change: Well. Thank you for that but also thanks to to all of our stakeholders and to you and and everyone who has supported us along the way.
Speaker Change: No.
Speaker Change: Good for you. Thank you and I'll, just listen Steve Andriole censoring questions. Thanks. Thank.
Speaker Change: Thank you Mark.
Speaker Change: Yes.
Speaker Change: Alright. Our next question comes from John Nelson with agents Company. Please go ahead.
John Nelson: Hey, guys. Thanks for taking my question.
John Nelson: I just wanted to ask really quickly how strict is the plan to eliminate all debt, including both the facility and the senior notes before you initiate a return of capital.
John Nelson: No you just mentioned it doesn't F&B zero I'm, just trying to understand the order of priority in the capital allocation flexibility.
Speaker Change: Given how attractive the yield and the communists now, especially.
Speaker Change: Relative to the senior notes like could you pay off the facility and just begin distributions then and let the senior notes roll off at maturity I think in like December 26th or if it is really strict on we want to get to that tender basically zero number first totally understand just wanted to get a sense.
Speaker Change: No.
Speaker Change: No it's not that strict it is as you described actually we're going to use a common sense approach.
Speaker Change: <unk>.
Speaker Change: And we're going to pay off the highest highest cost debt first.
Speaker Change: And then when we.
Speaker Change: Yes. So it is a common sense approach, it's it's not.
Speaker Change: <unk> to the Penny.
Speaker Change: Great. Thanks, so much.
Speaker Change: You bet.
Speaker Change: Alright, we have a question from Neil <unk> with <unk>. Please go ahead.
Speaker Change: Good morning, everyone.
Speaker Change: <unk> Chris.
Neil: Thanks for answering my quick for responding to my question.
Speaker Change: Very impressed with all the work you and the team have done over the past few years in terms of deleveraging and sticking to that discipline.
Speaker Change: So curious about as now you're kind of on the preferreds and the warrants out of the way and are now deleveraging debt at a rapid speed. If there's any thought put into repurchasing common units, especially when the current kind of yield as I am calculating it could be around 15% or more.
Speaker Change: So curious I know, there's some language that change within the most recent credit agreement I'm not sure if that's related but I'd mention equity interests. So curious about your philosophy on that just given where the prices and I know you've already.
Speaker Change: Bought back warrants kind of price was earlier in the year.
Speaker Change: This is Craig I'll take a first stab at that and answer to your question have we thought and do we consider and would we consider in the future repurchases of units if they traded at material discounts to our estimates of intrinsic value. The answer is yes.
Speaker Change: I do want to clarify you made a comment about a 15% yield I want to clarify that what I believe youre, referring to there is our free cash flow yield it is not our actual current yield of our.
Speaker Change: Common equity common equity at this point in time, just just wanted to clarify that.
Speaker Change: And then the third thing you mentioned the credit agreement.
Speaker Change: Yes the U.
Speaker Change: Did pick up on that.
Speaker Change: There were two main reasons too.
Speaker Change: Put the new credit agreement in place that.
Speaker Change: Chris and his team did the first was to extend the maturity to get us a longer period of time to a longer maturity. The second was too.
Speaker Change: Loosen up some of the handcuffs.
Speaker Change: That had been put in place when we were a.
Speaker Change: Less credit worthy borrower.
Speaker Change: And the loosening of the handcuffs frees up.
Speaker Change: It makes it easier for us and going forward to do things such as repurchase units.
Speaker Change: Yeah.
Speaker Change: Got it.
Speaker Change: Yes.
Speaker Change: You bet.
Speaker Change: Okay.
Speaker Change: At this time I will now turn the call back over to Craig.
Speaker Change: For closing remarks.
Speaker Change: Yes.
Craig: Thank you very much Denis deneke.
Speaker Change: Deneke and thank everyone for participating in our call today and thank.
Speaker Change: Thank you for your continued support of an RFP.
Speaker Change: Have a good day.
Speaker Change: Please wait the conference will begin shortly.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change:
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Thanks.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Sure.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Thanks.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Sure.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: <unk>.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Please wait the conference will begin shortly.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: And.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: No.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Thanks.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: <unk>.
Speaker Change: Okay.
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Thanks.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: Yes.