Natural Resource Partners (NRP) owns and manages coal properties in several regions across the United States. It leases its properties to coal miners in exchange for royalty payments. It was formed and went public in 2002, making its first appearance in the Value Line Investment Survey in 2011. It is headquartered in Houston, Texas, and controls approximately 2.3 billion tons of proven and probable coal reserves. Its fiscal performance remains closely tied to the coal mining industry, despite a move in recent years to diversify into other energy sources.
Natural Resource Partners’ property portfolios are geographically diverse. The company has interests across the Appalachian Mountains, the Illinois Basin, and the Western United States. It owns assets in Wyoming, related to the production of trona ore mining and soda ash, and interests in North Dakota and Montana, related to the production of oil and natural gas. Other gas properties are owned in the Appalachian region, Louisiana, and Oklahoma, with an estimated 500 million tons in aggregate reserves.
Though the company has no direct mining activities, its fortunes are still highly correlated to coal production. It leases its land to operators, which pay royalties to the company based on mine production and minimum payments. Most leases span five to ten years, with additional periods available. Natural Resource Partners gets paid based on the sales price of the extracted coal and the amount retrieved from the ground. As the company doesn’t mine itself, it is not subject to the costs and risks associated with operating a mining facility. Too, the company has no direct employees, and has only eighty affiliates at the general partner who are directly involved in operations. Accordingly, gross margins are significantly higher than at other coal-related entities.
Still, the coal-mining related businesses have faced challenges of late. Prices of the commodity have fallen, as production has increased in Canada and Australia. In addition, technological advances have increased efficiency in coal mining, making previously unprofitable mines tenable and creating a global supply surplus. Moreover, coal usage in the United States for electricity production has flat-lined, with many older plants in the process of being shut down. Coal-fired plants are disfavored, and their use is being discouraged through heightened environmental regulation. These aspects combine to make a tough operating environment for Natural Resource Partners.
The company has worked to decrease its reliance on coal-related revenues through acquisitions. Indeed, the company has made several purchases over the past three years to increase non-coal related production. Its Sundance and Abraxas operations will allow for increased oil and gas production in North Dakota and Montana over the next few years. The sizable OCI Wyoming acquisition, along with its investments in trona ore-mining and soda ash refinery in Wyoming serve to diversify the company further. The company also has a joint venture with International Paper (IP), which will generate money from mining leases and cell tower leases. Over the longer term, we expect that the company will be looking at further sources for diversification, especially to aid cash flow growth.
Natural Resource Partners fiscal position is highly leveraged, largely using new debt to pay for new mineral rights. Indeed, the debt load has increased over the past few years as acquisitions were made, increasing interest costs along the way. The cash flow remains solid, and is generally used to pay the sizable dividend. Even though the company slashed its per-share dividend from $2.20 to $1.40 in December, 2013, it has remained one of the top-yielding stocks in The Value Line Investment Survey. Future cash flow will likely be used on further acquisitions and payouts to shareholders. This issue has historically appealed to income-seeking investors.
Natural Resource Partners is adapting its strategy for the future. By diversifying income away from coal, the company should be better prepared for whatever the future may hold. Too, this should allow for solid income prospects for longer-term investors. For more information, please review our full-page review in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.