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Natural Resource Partners LP (NRP) |
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WIKI ANALYSIS
Houston, TX-based Natural Resource Partners, L.P. (NRP) is a master limited partnership engaged mainly in owning and managing coal properties in the Appalachian region, the Illinois basin, and the Powder River basin. The partnership generates the majority of its revenues by leasing coal reserves to mine operators under long-term contracts, which grant the lessee the right to mine coal in exchange for royalty payments. As of December 31st, 2006, the partnership controlled approximately 2.1 billion tons of proved and probable reserves. This reserve level has risen from 1.2 billion tons in 2002.
The partnership's status as a coal-royalty MLP reduces its exposure to the inherent risks involved in coal mining: worker accidents, land reclamation, etc. Also, it is sheltered from the capital-intensive nature of direct mining and thus, has very little operating expenses and working capital.
The partnership has recently experienced slower than expected production ramp-ups from two recent acquisitions. The partnership issued a large amount of equity to finance its acquisitions from the Cline Group and Dingess-Rum. Although, operational difficulties in '07 have prompted the management to scale back previously issued production guidance, they maintain their forecast for full ramp-up of production at the delayed mines in mid 2008. Overall we believe that in the near term, operational difficulties at the acquired mines will put a strain on royalty revenue but this story should improve by the second half of 2008.
Aside from recently acquired properties, the partnership's remaining portfolio of coal royalty assets continues to perform well. Further, we continue to expect distribution growth going forward. Investors in the partnership are likely to receive a safe and growing yield and are well positioned to benefit from any additional acquisitions, lessee production gains, and long-term coal price increases.
BULL AND BEAR
BULL
Over the past year, Natural Resource Partners has made several strategic and accretive acquisitions that have helped solidify its coal royalty revenue stream while also creating two new platforms for growth and profitability in processing and transports, and aggregates production and sales. In 2008, processing and transportation are poised to double in revenue from 2007. Transportations and processing offer not only and increased revenue stream, but the opportunity to decrease their own operating risk by handling other producers' coal supplies. One of the deals made in 2007 gives NRP the option to purchase up to 3 Billion tons of reserves and processing infrastructure in the Illinois basin. This option gives NRP the ability to double its current coal reserve base and guarantee a growth avenue for the future.
From an operational standpoint, several expensive costs (legacy, mining, labor) associated with operating coal mines are negated. Because NRP leases its properties, they get a cut of the top line from the greater of gross sales or a fixed royalty per ton payment. This also reduces capital expenditures tremendously. The mining industry is extremely capital intensive and the fact that NRP does not have to but the big machines that dig and move coal this greatly increases their cash flow stream.
Of the coal that is mined from its properties, nearly 30% is of the metallurgical nature. This bodes well for the company because metallurgical coal typically sells at a premium to the more abundant thermal coal. In a market where prices have recently been increasing, this will serve to increase overall royalty per ton for NRP.
BEAR
Nearly 80% of coal production comes out of the Appalachian Basin. In this region the coal content is high in sulfur which creates several logistical and environmental problems. Recently, production has been curtailed in the region due to governmental injunctions and other costly operational hazards. NRP is overly exposed to this area and its production can be adversely impacted if demand and production in that region slows. Exacerbating the production and infrastructure bottlenecks is the fact that NRP is paid royalties only when coal is, shipped not sold. Any slowdown in production or delays in delivery due to rail and sea related issues could put downward pressure on the unit price of the company.
Although accretive acquisitions have helped diversify and grow NRP's operating portfolio, they have procured these assets with limited and general partner interests and debt. This has been very dilutive to earnings and may continue to be if this method of acquisition persists. Additionally, with slowdowns and delays like the kind experienced by NRP in 2007, unit holders face low returns on their capital and may be forced to take their money elsewhere in order to get a better return.
Lastly, the total distributable cash per unit has reached the tipping point in terms of general partner compensation. Going forward, the general partner and other holders of IDR's will receive higher splits 50% of all incremental distributable cash will go to general partners (2%) and IDR holders (48%) above distributions of $0.381 per unit.
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