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spk04: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Natural Resource Partners LP third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would 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. Thank you. Ms. Tiffany Samas, Manager of Investor Relations, you may now begin your conference.
spk07: Thank you. Good morning, and welcome to the National Resource Partners third quarter 2021 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. 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 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 SE or detailed market fundamentals. In addition, I refer you to Jenner Resources public disclosures and commentaries 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.
spk02: Thank you, Tiffany. Good morning, all. I am pleased to report that our business is delivering 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 and 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 de-risking the partnership in this manner is the most effective way to maximize unit holder 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 debt amortizations 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. The partnership continues to maintain robust liquidity and into 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 ongoing China-Australia political and trade dispute continues to be a positive for U.S. met producers, as Chinese manufacturers procure met coal from other regions, allowing North American coal to make its way to destinations previously served by Australian producers. While 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 met coal have risen significantly since the beginning of the year in response to increased 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 increased significantly over the course of the year. 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 cash flows this year are fixed pursuant to our contract with Foresight Energy that went into effect as they emerged from bankruptcy in 2020. That fixed payment agreement terminates at the end of this year, and we will begin to receive traditional royalty payments starting January of 2022. We expect to benefit next year to the extent demand and prices for thermal coal remain strong. As for our investment in General Wyoming, we believe global soda ash demand has reached pre-pandemic levels, driven by growth in soda ash used for residential construction, solar power, energy storage, and general industrial activity, which is more than offsetting demand destruction caused by supply chain 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, Jenner, Wyoming is one of the lowest cost soda ash producers in the world and is managed by the world's most capable operator of soda ash. We believe these factors 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 in 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 forests. 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 NRP. 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 NRP. We continue to believe we have the right strategy in place to create unit holder value. Since 2015, when we began to delever and de-risk the partnership, NRP has paid down over $925 million of debt, paid over $130 million of common unit holder distributions, established robust liquidity, and dramatically improved our capital structure. We remain steadfast in our commitment to focus on maximizing unit holder value by continuing these efforts. And with that, I'll turn the call over to Chris to cover our financial results.
spk05: Thank you, Craig, and good morning, everyone. During the third quarter, we generated $30 million of operating cash flow and $29 million of net income. Our coal royalty 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 and pricing for metallurgical coal in the third quarter of 2021. Metallurgical coal made up approximately 45% of our total coal royalty sales volumes and approximately 65% of our coal royalty revenue during the third quarter of 2021. Moving on to our SODASH 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 SODASH from the lows 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's decision to suspend their quarterly distribution in August of 2020. However, as Craig just mentioned, General Roeming has reinstated their quarterly cash distributions as market demand continues to improve from the lows 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 debt outstanding in 2021. Our leverage ratio as of September 30th, 2021 was 3.8 times, a substantial reduction from the 4.6 ratio we had at the end of the previous quarter. Regarding distributions, in August, we paid a quarterly 45 cents per common unit distribution and a quarterly distribution of 7.8 million to our preferred unit holders, one half of which was in cash and one half in kind as required by our bond indenture. Today, we announced a quarterly distribution of 45 cents per common unit and a quarterly distribution of 8 million to our preferred unit holders to be paid one half in cash and one half in kind. These preferred unit distributions include interest on previously paid in kind units, which will also be paid one half in cash and one half in 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 units in cash if our consolidated leverage ratio exceeds 3.75 times and as of september 30th 2021 our leverage ratio was 3.8 times if our consolidated leverage ratio were to remain above 3.75 times into 2022 we and we remain unable to redeem our outstanding paid in 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 preferred units are redeemed. However, as a result of the strong coal and soda ash pricing expected in the fourth quarter and the forced 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 preferred units and continue to pay cash distributions to our common unit holders. Additionally, we expect our leverage ratio 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.
spk04: 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.
spk01: We'll pause for just a moment to compile the Q&A roster.
spk03: Again, if you would like to ask a question, please press star, then the number one on your telephone keypad.
spk01: And we do have a question. It comes from the line of Steve Berman.
spk04: Your line is open.
spk00: Yes, good morning. My question is, I guess, general. What's the status in China? I had heard something. First of all, how important is what's going on with China's 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 would, I think this would be met coal. I mean, thermal cold.
spk02: Kevin, you want to take it?
spk06: Sure. And this is Kevin Craig. Thank you for your question. Obviously China and China is a market for coal is a, important not only to NRP, but to the world coal market. We have watched Chinese and Australian issues they've had over the past year, and it certainly has had an impact on U.S. coal 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 over the past year, given or in spite of some of the political issues that have occurred.
spk03: And again, if you would like to ask a question, it is star 1 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.
spk02: Thank you very much and thank all of you for participating in our call today. And thank you for your support of NRP. And please call our investor relations line if you have any follow-up questions or you want to discuss matters further. And we look forward to speaking with you next quarter. Have a great day.
spk04: this concludes today's conference call thank you for your participation you may now disconnect
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