Natural Resource Partners LP

Ladies and gentlemen, thank you for standing by and welcome to the Natural Resource Partners LP second quarter 2020 earnings. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Ms. Tiffany Sammis, Manager of Investor Relations. Ma'am, you may begin.

Good morning and welcome to the Natural Resource Partners second quarter 2020 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, Chris Zolas, Chief Financial Officer, and Kevin Craig, Executive Vice President of COLE. Some of our comments today may include forward-looking statements reflecting NRP's 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 NRP's Form 10-K and other 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 second 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 coalesce or detailed market fundamentals. In addition, I refer you to general resources, public disclosures, and commentary for specific questions regarding our SEDASH. 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 hope you and your loved ones are safe and healthy. NRP continues to operate under CDC guidelines, government-imposed rules, and company remote work protocols. Our employees are safe, and the partnership is conducting business as usual. Our management protection plans and delegations of authorities are in place should we need them. The COVID-19 pandemic has had a significant negative impact on demand for steel, electricity, and glass, which translates to lower demand for the coal and soda ash we produce. Year-to-date coal production in the United States is down 27% compared to 2019, and global soda ash production is down approximately 15% year-over-year. The outlook for coal and soda ash markets remains uncertain as COVID-19 numbers continue to rise across the U.S. However, we believe that our liquidity, free cash flow generation, and the fact that our parent company bonds do not mature until 2025 provide us with the financial flexibility to manage through a prolonged downturn. At the beginning of the pandemic, and in order to best prepare for extreme adverse economic conditions, Our board has decided to reserve cash by suspending our first quarter common distribution and electing to pay in kind one half of our preferred unit distribution. Based on the performance of our businesses since those decisions, we announce today that our board has decided to pay a common distribution and pay in cash the full distribution on our preferred units for the second quarter. In addition, in June, We redeemed in cash the preferred distribution that was paid in kind for the first quarter. Despite the negative economic backdrop, NRP continues to generate cash and pay down debt. We generated $112 million of free cash flow over the last 12 months, paid off $48 million of debt, and added $40 million to common unitholders' equity before non-cash accounting impairments. Our cash flow cushioned which is our free cash flow remaining after paying our private placement debt amortizations and distributions on our common and preferred units was $18 million over the same period. It is likely our cash flow cushion will trend lower in the near future absent a significant improvement in global economic activity. We ended the quarter with $211 million of liquidity consisting of $111 million of cash and $100 million of unused borrowing capacity. We believe that metallurgical and thermal coal prices are near or below operators' costs of production in the United States. While almost all of our lessees are currently operating, including those that had temporarily idled mines at the start of the pandemic, production levels are down and inventories are up. A significant positive development in our coal segment in the second quarter relates to our largest lessee, Foresight Energy. We worked with Foresight to help them develop a plan that enabled them to emerge from bankruptcy, and we entered into lease amendments pursuant to which Foresight agreed to make fixed payments to us totaling $49 million this year and $42 million next year. These fixed payments provide cash flow certainty for NRP at a level greater than had been anticipated as the coal industry manages through difficult market conditions compounded by the COVID-19 pandemic. Beginning in 2022, the pre-bankruptcy provisions of our leases will kick back in, providing economic upside if coal markets improve. Global soda ash prices are down roughly 25% from a year ago, to levels that are below the cost of production of many of the world's synthetic soda ash producers and near the cost of production for some of the natural soda ash producers. Although we've begun to see modest increases in activity in the global auto, container, and construction industries, which should drive increased demand for soda ash, we expect the soda ash industry to face headwinds until the global economy gets back on track. Our investment in Jenner, Wyoming has not been immune to these adverse economic forces, and Jenner announced earlier this week that it is suspending cash distributions until conditions improve. With that said, We believe our facility is competitively positioned as one of the lowest cost producers of soda ash in the world, and we have a positive view of its long-term prospects. In many respects, we now face the most uncertain business environment in decades, but I believe the numerous transformative actions completed in recent years to right-size our business, solidify our capital structure, and build liquidity have positioned NRP to continue deleveraging, and de-risking the partnership by using internally generated cash to pay down debt. And with that, I'll turn the call over to Chris to cover our financial results.

Thank you, Craig, and good morning, everyone. I'd like to start out summarizing some significant items that are impacting comparisons between the second quarters of 2020 and 2019. First, we recognize $132 million of asset impairment expense Thank you for joining us today. in connection with the refinancing of our bonds and revolving credit facility in last year's second quarter. These refinancings reduced our ongoing interest costs, extended the maturity of our parent company bonds as of 2025, and significantly improved our liquidity and financial flexibility. I will now turn to our overall and segment-specific results. During the second quarter of 2020, we generated $20 million of operating cash flow and $7 million of net income from continuing operations, excluding the impact of asset impairment. Our coal royalty and other segments generated $34 million of revenue and $32 million of operating cash flow during the second quarter of 2020. These results were lower as compared to the prior quarter, primarily due to a weakened market for metallurgical coal because of the decline in global steel demand. Both sales volumes and prices for our metallurgical coal sold were lower in the second quarter of 2020 compared to the prior year quarter. In terms of our coal royalty sales mix, metallurgical coal made up approximately 70% of our total coal royalty sales volume and approximately 80% of our coal royalty revenue during the second quarter of 2020.

In addition,

Weaker domestic and export thermal coal markets resulted in lower revenue from our thermal coal properties compared to prior year quarters. Domestic and export thermal coal markets remain challenged by lower utility demand, continued low natural gas prices, and a secular shift to renewable energy. The COVID-19 pandemic has compounded already weak coal pricing and demand, and our coal lessees are having a difficult time. With that being said, I'd like to reiterate Craig's comments regarding the positive outcome for Foresight Energy, our largest lessee. Foresight continues to operate the Hillsborough, Williamson, and Sugar Camp mining complexes with long wall mining systems. Its highly productive mining method, coupled with the favorable coal geology, has resulted in these mines being among the safest, most productive, and lowest cost underground coal mines in the U.S. Foresight emerged from bankruptcy in the second quarter of 2020, With the significant improved capital structure, well positioned to compete in the domestic and global thermal home market. As Craig noted earlier, they will be paying us a total of $49 million this year and $42 million in 2021. Through the first six months of 2020, we received $21 million of the $49 million due to us this year. Beginning in January of 2022, foresight payment obligations will be calculated in accordance with the provisions of the original lease agreement, except with respect to the Macoupin model. While the Macoupin model is idle, Forsyth will pay an annual fee to us of $2 million each year for 2023 to continue to lease our full reserves at Macoupin. And finally, as previously mentioned, our second quarter 2020 full royalty saving results were impacted by $132 million in non-cash asset impairments. Moving to our second business segment, SODASH, we received $7 million of cash distributions from General Wyoming during the second quarter of 2020, compared to $9 million in the prior quarter. In the second half of 2019, General Wyoming decided to reduce annual cash distributions to approximately $28 million in order to fund a multiyear capacity expansion project. However, as Craig noted, The COVID-19 pandemic has caused a negative impact on the soda ash industry, and we expect significant headwinds until the global economy gets back on track. Our soda ash revenues and other income in the second quarter of 2020 were lowered by $14 million compared to the prior year quarter. And General Wyoming suspended distributions beginning this month to conserve its cash and provide greater financial flexibility to weather these weakened market conditions. While we were unable to predict the ultimate impact that COVID-19 may have on our SODASH business, General Oil has taken a number of steps to reduce both operating and capital costs and maintain financial flexibility amid the current market volatility. And we remain confident in the long-term fundamentals of the business. Our corporate and financing segment costs declined $32 million in the second quarter of 2020 compared to the prior year quarter. primarily due to the $29 million loss on early extinguishment of debt in connection with refinancing of our bonds and revolving credit facility in last year's second quarter. The remaining $3 million of cost reduction was primarily due to lower interest expense because of the $48 million of debt we have repaid over the last 12 months. Operating cash flow was $7 million lower compared to the prior quarter, primarily due to the timing of interest payments on the parent company bonds that were refinanced in the second quarter of 2019. Interest payments are now due in June and December for our 9.18% notes compared to due in March and September on the previous 10.5% notes. We have been and remain focused on the things we can control in protecting our business with a clear priority on cash and liquidity in this uncertain industry and global environment. And with that, I'll turn the call back over to the operator for questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mark Levin with Benchmark.

Great. Thanks very much. Congratulations on the quarter. Some questions. Let me start off, if I can, with the distribution and the decision to resume the quarterly payment. I guess it reflects several factors, but I guess what caught me off guard was just given how weak the underlying coal markets are and your decision or the board's decision to resume it. Maybe you can give some color around what went into that decision and why you decided to do it now.

Mark, this is Craig. I would say that the board considered a variety of factors. The performance of the business since the COVID crisis hit and the near and intermediate term outlook that we have, our liquidity, our cash generation that we currently have, and And when weighing all those, it appeared that it was a prudent move to make the distribution. It doesn't mean that if there's – there could be some significant event in the future that causes our results to come in considerably worse than the run rates we're currently generating could cause us to change our mind. But at this point, it just it appeared like a good move to pay the distribution.

Got it. And yeah, I just you know, it was something that sort of caught me a little off guard, I guess, even in reference to Schinner, Wyoming, you know, suspending that seven million dollar distribution. But that's that's fantastic. I assume the board wouldn't have done it if they weren't confident that they could keep it going in this type of market condition. The other question I was going to ask is I think you referenced last quarter maybe free cash flow cushion or free cash flow in general just turning negative. Do you feel that way today? It sounds like it's coming down, but do you still echo those same sentiments in terms of what you see today?

Mark, I think it's very possible that our cash flow cushion could, as it trends lower, could go below zero at some point, could go negative. Thank you very much. A prolonged extended period that you could see the cash flow cushion go negative.

And related to that point, is there a minimum liquidity number that you guys would like to keep or have on hand?

We don't have a target that we're sharing, Mark, as far as liquidity. It depends on the facts and circumstances. And The more optimistic we are about the outlook going forward, the lower that number can be and vice versa. Right now, we're comfortable where we are with our liquidity number. We think over $200 million of liquidity with over $100 million of cash, we think that's a good number in light of the market and our view of the market today.

Got it. And then my last question, maybe some color around the Illinois Basin royalty rate. I noticed that it stepped below $2 a ton. I wasn't sure if there was something funky from an accounting perspective going on or if that's sort of the new run rate to think about because there's obviously a materially different from a royalty revenue per ton perspective in the Illinois Basin than it's been historically.

Well, there's a couple of factors at play at that. Chris, do you want to talk about that or Kevin?

I'd be happy to, Craig and Mark. Yeah, absolutely. We tried to mention this a few times in our remarks earlier, but this is driven by the agreements that we entered into with Foresight where we're now receiving a fixed amount over time. You know, that's the primary driver for the results here.

There's not a change in the royalty rate per se. It's just when you do the calculation, it appears that the royalty rate has changed. And it's just for this intermediate time of 2020 and 2021 when we have fixed payments.

No, that makes perfect sense. Is there any sense – I know you mentioned the distribution being suspended as it relates to the soda ash business – Any reason to believe that it would resume in the fourth quarter? Do you have any color or thoughts on how to think about it? I assume that will be a zero going forward until notified otherwise, but is there any color maybe you can give on that?

We can't give you any color other than what Jenner has announced. And just generally speaking, they've announced that they're suspending it until the market improves. I will tell you this. I think you need to be prepared for some extended period, multiple quarters for sure, of continued tough sledding in the SODASH business. I will say that there are definitely green shoots coming out if you look globally, especially global demand is starting to pick up. Flat glass and container glass is strong here in the U.S. But I think it's going to take a little while for that market to come back. And so I think for the foreseeable future, I think that business is still trying to get its legs back underneath it. But that's all I can share. And... I'd suggest directing questions about distributions to Jenner. That makes perfect sense.

Final one, just one for me, and I think I've asked this in previous calls. Can you talk a little bit about the minimum structure and maybe how to think about that as a floor from a revenue perspective? Sure. For the business, at least, as you look across your portfolio for people who might be concerned about negative net pricing, sentiment, all that kind of stuff, maybe just talk a little bit about the floor revenue composition.

Well, Mark, as we've talked before, explain to you that the real key with the minimums is the extent to which we have deficiency payments, so that if If we have a minimum obligation from a lessee to us under a lease and they do not generate sufficient royalty income to cover that minimum, then whatever the difference is between the minimum and the amount that they actually paid us in royalty income is the deficiency, and so it's the deficiency payment. We have typically, if you look back over the last couple of years, We've been seeing $15 to $20 million roughly of deficiency payments that we receive across all of our portfolio combined. Some of those, of course, have been associated with foresight. A lot of that's with foresight, which in this environment, now that we have a fixed payment structure with foresight for this year and next year, we won't be receiving deficiency payments per se from them. So I think the right way to think about it is that as you look forward, say, over the next year or so, I think that assuming that it gets really bad, maybe it stays, pricing gets even worse than we are now, I think it's fair to think of it in terms of maybe something between $10 and $20 million of deficiency payments that we would receive. Chris, do you have anything you want to add to that?

The only thing I'd like to add, Craig, I think that you summarized that well. Mark, we do include in the footnote in our TQ a disclosure of the total amount of contractual minimums we have. So if you want to get a perspective of what is that total minimum amount, we do have that in the footnote in our TQ. But really the key thing that Craig pointed out is how much of those deficiency payments do we actually receive in that That 15 to 20 million is really the important number to focus on.

Got it. Got it. Very helpful. Thank you, gentlemen, very much, and congratulations on the foresight agreement.

Thank you very much, Mark. Appreciate that.

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. Again, that's star, then the number 1. At this time, there are no further questions. I would like to turn the call back over to Mr. Craig Nunez.

Well, thank you, everyone. I appreciate you taking time to join our call and appreciate your interest in NRP. And I hope that you and your family stay safe and healthy. And until next month, take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.