Company Notes Series: Natural Resource Partners

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Start of notes for Natural Resource Partners

Data as of 9 January 2024

Background on company

  • Company name: Natural Resource Partners LP
  • Ticker: NYSE: NRP
  • Structure: Publicly traded Delaware limited partnership formed in 2002
  • Natural Resource Partners LP’s operations are conducted through Opco and its operating assets are owned by its subsidiaries, where Opco refers to NRP (Operating) LLC, a wholly owned subsidiary of Natural Resource Partners LP.  NRP (GP) LP is the general partner and has sole responsibility for conducting Natural Resource Partners LP’s business and for managing its operations. Because NRP (GP) LP is a limited partnership, its general partner, GP Natural Resource Partners LLC, conducts its business and operations; the Board of Directors and officers of GP Natural Resource Partners LLC also makes the decisions for Natural Resource Partners LP. Robertson Coal Management LLC, a company wholly owned by Corbin Robertson, Jr., owns all of the membership interests in GP Natural Resource Partners LLC. 
  • The senior executives who manage Natural Resource Partners LP are employees of Western Pocahontas Properties Limited Partnership or Quintana Minerals Corporation, which are both controlled by Corbin Robertson Jr.
  • Neither GP Natural Resource Partners LLC nor any of its affiliates receive any management fee or other compensation in connection with the management of Natural Resource Partners LP apart from reimbursement for all direct and indirect expenses incurred on the behalf of Natural Resource Partners LP. 

Business

  • Natural Resource Partners LP has two segments: Mineral Rights, and Soda Ash
  • In 9M 2023, Natural Resource Partners LP’s total revenue was US$275.9 million and 79% was from Mineral Rights (US$217.3 million) and 22% was from Soda Ash (US$58.6 million). In 2022, Natural Resource Partners LP’s total revenue was US$389.0 million and 85% was from Mineral Rights (US$329.2 million) and 15% was from Soda Ash (US$59.8 million)

Business – Mineral Rights segment

  • The Mineral Rights segment consists of 13 million acres of mineral interests and other subsurface rights – including coal and other natural resources – across the US; if combined in a single tract, the ownership would cover roughly 20,000 square miles. The ownership provides critical inputs for the manufacturing of steel, electricity, and basic building materials, as well as opportunities for carbon sequestration and renewable energy. Natural Resource Partners is working to strategically redefine its business as a key player in the transitional energy economy in the years to come. Figure 1 below shows Natural Resource Partners LP’s geographic distribution of its ownership. 
Figure 1
  • Under the Mineral Rights segment, Natural Resource Partners LP does not mine, drill, or produce minerals. Instead, the limited partnership leases its acreage to companies engaged in the extraction of minerals in exchange for royalties and various other fees. The royalties are generally a percentage of the gross revenue received by lessees (the companies that extract the minerals), and are typically supported by a floor price and minimum payment obligation that protects Natural Resource Partners LP during significant price or demand declines. The majority of revenue from the Mineral Rights segment revenues come from royalties related to the sale of coal. Of the Mineral Rights segment’s US$217.3 million in revenue in 9M 2023, US$170.8 million came from Coal Royalty revenue, so Coal Royalty Revenue was 62% of Natural Resource Partners LP’s total revenue in 9M 2023; of the Mineral Rights segment’s US$329.2 million in revenue, in 2022, US$227.0 million came from Coal Royalty revenue, so Coal Royalty Revenue was 58% of Natural Resource Partners LP’s total revenue in 2022.  Natural Resource Partners LP’s coal is primarily located in the Appalachia Basin, the Illinois Basin, and the Northern Powder River Basin. Natural Resource Partners LP’s coal-related leases are typically long-term in nature – at end-2022, two-thirds of royalty-based leases have initial terms of 5 to 40 years, with substantially all lessees having the option to extend the lease for additional terms. Leases include the right to renegotiate royalties and minimum payments for the additional terms. 
  • Figure 2 below shows all the other revenue sources for the Mineral Rights segment in 9M 2023 and 9M 2022:
Figure 2
  • There are two kinds of coal, and Natural Resource Partners LP participates in both in its Mineral Rights segment:
    • Metallurgical coal, or met coal, is used to fuel blast furnaces that forge steel and is the primary driver of Natural Resource Partners LP’s long-term cash flows. Met coal is a high-quality, cleaner coal that generates exceptionally high temperatures when burned and is an essential element in the steel manufacturing process. Natural Resource Partners LP’s met coal is located in the Northern, Central and Southern Appalachian regions of the United States.
    • Thermal coal, sometimes referred to as steam coal, is used in the production of electricity. The amount of thermal coal produced in the US has been falling over the last decade as energy providers shift to natural gas and to a lesser extent, alternative energy sources such as geothermal, wind, and solar. Management believes thermal coal’s long-term secular decline will continue. This, together with the long-term strength of the met coal business and Natural Resource Partners LP’s carbon neutral initiatives mean that thermal coal will be a diminishing contributor to Natural Resource Partners LP’s business in the future. The vast majority of the limited partnership’s thermal coal sales are located in Illinois and its operations are some of the most cost-efficient mines east of the Mississippi River. The remainder of Natural Resource Partners LP’s thermal coal is located in Montana, the Gulf Coast and Appalachia.
    • Met coal tends to be priced higher than thermal coal.
    • In 2022, 70% of Natural Resource Partners LP’s Coal Royalty revenues and approximately 45% of coal royalty sales volumes were derived from metallurgical coal.
    • Figure 3 shows the types of coal production of Natural Resource Partners LP from various properties in 2022, and Figure 4 shows the limited partnership’s significant coal royalty properties in 2022.
Figure 3

Figure 4

  • Under the Mineral Rights segment, Natural Resource Partners LP also participates in the sequestration of carbon dioxide underground. Similar to its Coal Royalty business, Natural Resource Partners LP only plans to lease acreage to companies that will conduct carbon dioxide sequestration. Natural Resource Partners LP owns approximately 3.5 million acres of specifically reserved subsurface rights in the southern US with the potential for permanent sequestration of greenhouse gases. The carbon capture utilization and storage industry is in its infancy but a few facts are clear. A sequestration project requires acreage possessing unique geologic characteristics, close proximity to sources of industrial-scale greenhouse gas emissions, and the appropriate form of legal title that grants the acreage owner the right to sequester emissions in the subsurface. Although carbon sequestration rights and ownership continue to evolve, management believes that Natural Resource Partners LP owns one of the largest acreages in the USA with potential for carbon sequestration activities. In 2022 Q1, Natural Resource Partners LP leased its first acreages (75,000 acres) for subsurface carbon dioxide sequestration in underground pore space in southwest Alabama, with the potential to store over 300 million metric tons of carbon dioxide; in October of 2022, the second subsurface carbon dioxide sequestration lease was signed, this time for 65,000 acres of pore space near southeast Texas, with an estimated storage capacity of at least 500 million metric tons of carbon dioxide. At end-2022, Natural Resource Partners LP had 140,000 acres of pore space under lease for carbon dioxide sequestration, with estimated carbon dioxide storage capacity of 800 million metric tons.

Business – Soda Ash segment

  • The Soda Ash segment consists of 49% non-controlling equity interest in Sisecam Wyoming, a trona ore mining and soda ash production business located in the Green River Basin of Wyoming. Sisecam Wyoming mines trona and processes it into soda ash that is sold both in the USA and internationally into the glass and chemicals industries.
  • Sisecam Resources LP runs Sisecam Wyoming and owns the other 51%. Natural Resource Partners LP is not involved in the day-to-day operation of Sisecam Wyoming, although Natural Resource Partners LP is able to appoint – and has appointed – 3 of the 7 members of Sisecam Wyoming’s Board of Managers.
    • In December 2021, Sisecam Resources LP changed majority-owners. Before this, Sisecam Wyoming was named Ciner Wyoming, and Sisecam Resources LP was named Ciner Resources LP. Under the terms of the transaction, Ciner Enterprises Inc, which controls 74% of Ciner Resources LP, effectively sold 60% of its interests in Ciner Resources LP to Sisecam Chemicals USA Inc, an indirect subsidiary of Turkish conglomerate Türkiye Şişe ve Cam Fabrikalari A.Ş. Ciner Resources LP subsequently changed its name to Sisecam Resources LP. 
    • In February 2023, Sisecam Resources LP announced that it would be fully acquired by Sisecam Chemicals Resources LLC. Sisecam Chemicals Resources LLC is in turn, 60% owned by Sisecam Chemicals USA Inc. The acquisition price of Sisecam Resources LP is US$25 per unit for all the units of Sisecam Resources LP that were not controlled by Sisecam Chemicals USA Inc (from the above, Sisecam Chemicals USA Inc already controlled 60% of Sisecam Resources LP – see Appendix for more). Sisecam Resources LP’s total unit count as of 31 March 2023 was 19.8 million, so Sisecam Resources LP was valued by Sisecam Chemicals USA Inc at US$495 million. Sisecam Resources LP’s only business interest is its 51% stake in Sisecam Wyoming; so if Sisecam Resources LP was valued at US$495 million, the entire Sisecam Wyoming is worth US$971 million, and Natural Resources LP’s 49% stake in Sisecam Wyoming is worth US$476 million.
  • Sisecam Wyoming is one of the largest and lowest cost producers of soda ash in the world, serving a global market from its facility located in the Green River Basin of Wyoming. The Green River Basin geological formation holds the largest, and one of the highest purity, known deposits of trona ore in the world, in fact the vast majority of the world’s accessible trona is located in the Green River Basin. Trona is a naturally occurring soft mineral and is also known as sodium sesquicarbonate. Trona consists primarily of sodium carbonate (or soda ash), sodium bicarbonate, and water. Sisecam Wyoming processes trona ore into soda ash, which is an essential raw material in flat glass, container glass, detergents, chemicals, paper and other consumer and industrial products.
  • Around 30% of global soda ash is produced by processing trona, with the remainder being produced synthetically through chemical processes. Synthetic production of soda ash is more expensive than the costs for mining trona for trona-based production. In addition, trona-based production consumes less energy and produces fewer undesirable by-products than synthetic production.
  • Sisecam Wyoming’s Green River Basin surface operations are situated on approximately 2,360 acres in Wyoming (of which, 880 acres are owned by Sisecam Wyoming), and its mining operations consist of approximately 24,000 acres of leased and licensed subsurface mining area. 

Business – Customers

  • There is customer concentration for the whole of Natural Resource Partners LP, and also for the Soda Ash segment.
  • Natural Resource Partners LP’s revenue from (1) Alpha Metallurgical Resources was US$102.4 million in 2022, which accounted for 37% of the year’s total revenue and (2) Foresight Energy Resources was US$65.6 million, which accounted for 24% of the year’s total revenue.
  • For the Soda Ash segment, the two largest customers of Sisecam Wyoming are distributors in its export network that collectively made up 26% of its total gross revenue.

Business – Commodity prices

  • Even though Natural Resource Partners LP’s royalty fees are typically supported by a floor price and minimum payment obligation that protects Natural Resource Partners LP during significant price or demand declines, the limited partnership is still affected by price swings in commodity prices.
  • In 2022, met coal and thermal coal prices both reached record highs in 2022; met coal prices was the primary driver of Natural Resource Partners LP’s strong Mineral Rights segment performance in 2022. See Table 1 below for Mineral Rights segment performance in 2022.
  • In 9M 2023, met coal and thermal coal prices were both below record highs seen in 2022 – the Mineral Rights segment saw a dip in performance in 9M 2023, as shown in Table 1.
Table 1

Management

  • Corbin Robertson, Jr, 75, has served as CEO and Chairman of the Board of Directors of GP Natural Resource Partners LLC since 2002; GP Natural Resources LLC has managed Natural Resource Partners LP since its formation and listing in 2002.
  • 2015 was a tough year for Natural Resource Partners LP as commodity prices crashed and it had too much debt. Since then, Natural Resource Partners LP has dramatically improved its financial health. See Figures 5, 6, and 7.
Figure 5
Figure 6
Figure 7

Valuation

  • Unit price of Natural Resource Partners LP: US$96.93
  • Market cap of Natural Resource Partners LP: US$1.225 billion
  • Enterprise value of Natural Resource Partners LP: US$1.41 billion
  • Value of Natural Resource Partners LP’s stake in Sisecam Wyoming is US$476 million, so the market is assigning a value of US$938 million for the Mineral Rights segment
  • Trailing free cash flow as of 30 Sep 2023 is US$304 million (lion’s share comes from the Mineral Rights segment since most of net income is from the segment), so the Mineral Rights segment is valued at just 3x FCF. Worth noting that Natural Resource Partners LP’s FCF has been relatively stable since 2015 – see Figure 8
  • In Figure 6 above, it is worth noting that Natural Resource Partners LP’s aim is to “retire all permanent debt, redeem all the 12% preferred equity, and eliminate all outstanding warrants, all of which will require approximately US$325 million.” 
  • On the 12% preferred equity, Natural Resource Partners LP issued US$250 million of the preferred equity units in March 2017 at a price of US$1,000 per preferred equity unit. The preferred equity is convertible to common units, but Natural Resource Partners LP can choose to redeem the preferred equity for cash. The outstanding balance of the preferred equity as of 30 September 2023 is US$72 million. Once all the preferred equity is cleared, Natural Resource Partners LP can save US$30 million in annual coupon payments (based on US$250 million issue), and this adds directly to free cash flow; if the US$72 million outstanding balance is fully cleared, Natural Resource Partners LP can save US$8.6 million in annual coupon payments.
Figure 8

 

Appendix

Chart showing Sisecam Wyoming and Sisecam Resources LP’s ownership structure before and after the February 2023 announcement of the acquisition by Sisecam Chemicals USA

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