Executive Summary / Key Takeaways

• Deleveraging Nears Completion: Natural Resource Partners (NYSE:NRP) is on the cusp of achieving a "fortress balance sheet," having paid off over $1.3 billion in financial obligations over the last decade. With only $142 million of debt remaining as of year-end 2024, the company expects to be substantially debt-free by mid-2026.
• Imminent Distribution Upside: The successful deleveraging is set to unlock significant capital for common unitholders, with management guiding towards a substantial increase in distributions starting August 2026, as competing claims on free cash flow are eliminated.
• Resilient Royalty Model: Despite a challenging commodity price environment across metallurgical coal, thermal coal, and soda ash, NRP's passive royalty-based business model and strategic investment in a low-cost soda ash producer (Sisecam Wyoming) have enabled robust free cash flow generation.
• Commodity Headwinds Persist: Near-term market conditions for coal and soda ash remain weak due to oversupply and soft demand, leading to declines in Q2 2025 revenues and cash flows. Management anticipates muted pricing for coal and historically low distributions from soda ash for the foreseeable future.
• Strategic Optionality: NRP's vast mineral rights portfolio, including 3.5 million acres for carbon sequestration, offers long-term optionality in carbon-neutral initiatives (CNI) with minimal capital investment, despite current market uncertainties in this nascent sector.

Introduction: The Royalty Model and Strategic Resilience

Natural Resource Partners L.P. (NRP), established in 2002, operates a distinctive business model centered on owning, managing, and leasing a diversified portfolio of mineral properties across the United States. Unlike traditional producers, NRP generates revenue primarily through royalties and fees from its lessees, who bear the operational risks and capital costs of extraction. This passive, asset-light approach forms the bedrock of NRP's financial resilience, complemented by a 49% non-controlling equity interest in Sisecam Wyoming LLC, a key player in trona ore mining and soda ash production.

The company's strategic journey over the past decade has been defined by a relentless focus on deleveraging and derisking its capital structure. This disciplined strategy, initiated around 2015, aimed to cultivate a "fortress balance sheet" capable of generating substantial cash flow and competitive profits through various commodity cycles. This foundational strength is particularly pertinent today, as NRP navigates a period of significant headwinds across its core commodity markets.

In the competitive landscape, NRP's royalty model offers a distinct advantage over direct producers like Alliance Resource Partners L.P. (ARLP), Peabody Energy Corporation (BTU), and Arch Resources, Inc. (ARCH). While these competitors engage in active mining, incurring higher operational costs and capital expenditures, NRP benefits from a lower-risk, lower-cost structure. Its diversified portfolio, encompassing coal, industrial minerals, and a stake in a low-cost soda ash producer, provides a broader base of revenue streams compared to more coal-centric rivals. For instance, NRP's operating expenses, capital costs, and other liabilities arising from production are entirely borne by its lessees, a tangible benefit that enhances its margin profile, especially in inflationary environments where operator breakeven costs rise.

NRP's "technological differentiation" is not found in proprietary hardware but in its strategic asset management and business model innovation. Its extensive land holdings, spanning approximately 13 million acres, include 3.5 million acres of underground pore space for carbon dioxide sequestration. This vast footprint provides long-term optionality for carbon-neutral initiatives (CNI) with minimal capital investment from NRP, offering a unique avenue for future value creation. Furthermore, its 49% equity stake in Sisecam Wyoming, recognized as one of the world's lowest-cost producers of soda ash, provides a durable competitive moat in that segment. This low-cost position is a critical operational advantage, allowing Sisecam Wyoming to weather market downturns more effectively than higher-cost competitors, thereby stabilizing NRP's equity earnings and distributions. The "so what" for investors is a business designed for resilience, capable of generating consistent cash flow even when commodity markets are challenging, all while maintaining a lean operational footprint.

A Decade of Discipline: The Deleveraging Journey

NRP's current financial strength is a direct outcome of a decade-long, meticulously executed deleveraging strategy. Since 2015, the partnership has systematically reduced its financial obligations, paying off over $1.3 billion. This commitment culminated in significant milestones in 2024, including the redemption of all remaining Class A Convertible Preferred Units and the settlement of all outstanding warrants. These actions effectively eliminated all preferred equity and warrant liabilities, dramatically simplifying NRP's capital structure and removing substantial annual cash outflows, such as the $30 million previously allocated to preferred unit distributions.

Further solidifying its financial position, NRP extended its Opco Credit Facility's maturity date by two years to October 2029 in October 2024 and increased its capacity by $45 million to $200 million. This move enhanced liquidity and provided greater financial flexibility. As of June 30, 2025, NRP reported total liquidity of $157.5 million, comprising $30.3 million in cash and cash equivalents and $127.1 million in available borrowing capacity. The company's leverage ratio stood at a conservative 0.50x, well within its covenant of not exceeding 3.0x, and its interest coverage ratio was a robust 14.2x against a minimum of 3.5 to 1.0. This robust financial health underscores the success of management's long-term vision to derisk the partnership.

Q2 2025 Performance: Resilience Amidst Headwinds

Despite the strategic achievements in deleveraging, NRP's recent financial performance reflects the challenging commodity market environment. For the second quarter of 2025, NRP reported net income of $34.2 million and generated $46.3 million in free cash flow. While these figures demonstrate continued cash generation, they represent declines from the prior year.

The Mineral Rights segment, NRP's largest contributor, saw revenues and other income decrease by 23.1% year-over-year to $47.6 million in Q2 2025, with net income falling to $39.7 million. This was primarily driven by lower metallurgical coal sales prices and volumes, exacerbated by a non-recurring carbon neutral transaction in Q2 2024 and a coal property condemnation. For the first six months of 2025, Mineral Rights revenues were $103.5 million, down 22.1% from the prior year period. Management noted that metallurgical and thermal coal markets remain under pressure due to soft global steel demand, cheap natural gas, and high coal inventories. However, NRP's royalty model provides a buffer, as it benefits from higher breakeven coal sales prices for operators (due to cost inflation) without bearing the increased production costs.

The Soda Ash segment also faced significant headwinds. Equity in earnings from Sisecam Wyoming decreased by 30.7% year-over-year to $2.5 million in Q2 2025, with net income at $2.5 million. Cash distributions from Sisecam Wyoming were notably lower, contributing to a $3 million decrease in operating and free cash flow for the segment compared to Q2 2024. The decline is attributed to lower sales prices resulting from a significantly oversupplied global market and weakened demand for flat glass used in construction and automobiles, further compounded by new natural soda ash supply from China.

In contrast, the Corporate and Financing segment showed improved performance, with net income, operating cash flow, and free cash flow all improving by $2 million in Q2 2025 compared to the prior year. This positive trend is a direct result of lower interest costs stemming from the substantial reduction in outstanding debt.

Outlook: The Path to Unitholder Value

NRP's management maintains a clear and compelling outlook, centered on the impending shift from aggressive deleveraging to enhanced unitholder returns. The company is "on track to pay off substantially all debt by the middle of next year" (mid-2026). This pivotal achievement is expected to pave the way for a "substantially increase[d] unitholder distributions starting next August" (August 2026). This guidance underscores the culmination of a decade-long strategy, promising a significant inflection point for common unitholders.

Despite this bright future for capital returns, management remains realistic about near-term commodity markets. Muted pricing for both metallurgical and thermal coal is anticipated for the remainder of 2025. The soda ash market is expected to remain "significantly oversupplied," with distributions from Sisecam Wyoming projected to stay at "historically low levels, potentially [0] for the foreseeable future," until demand rebounds or high-cost supply is forced out. NRP's conservative planning for soda ash reflects a preference to "plan conservatively and be pleasantly surprised."

Longer-term, the outlook is more nuanced. For metallurgical coal, limited investment in new supply, rising production costs, labor shortages, and secular demand trends for steel are expected to support prices at higher levels compared to historical norms. Thermal coal, while benefiting from input cost inflation and labor shortages, faces a continued long-term secular decline in North American demand. The long-term view for NRP's soda ash investment remains positive, as Sisecam Wyoming's status as one of the world's lowest-cost producers, coupled with favorable fundamentals tied to renewable energy, urbanization, and EV growth, provides a durable competitive moat.

NRP's Carbon Neutral Initiatives (CNI) represent a strategic optionality for future growth. While leasing interest for underground CO2 sequestration has been lackluster due to political, regulatory, and market uncertainties (as evidenced by Exxon (XOM)'s non-renewal of a lease in Baldwin County, Alabama), there is increased activity in geothermal, solar, and lithium development. Since 2019, CNI has generated $42 million in revenues, and NRP believes its vast ownership footprint provides opportunities for value creation with "minimal capital investment."

Once the debt reduction target is met, NRP's capital allocation priorities are clear: first, maintaining liquidity and balance sheet strength; second, maximizing unitholder distributions; third, opportunistic unit repurchases at material discounts to intrinsic value; and fourth, opportunistic acquisitions. The recent amendment to the Opco Credit Facility, which loosened covenants, provides greater flexibility for these future capital return strategies.

Risks and Challenges

While NRP's strategic execution has been commendable, the investment thesis is not without risks, primarily stemming from the inherent volatility of commodity markets and the nascent stage of its carbon-neutral initiatives.

The company's financial performance remains substantially dependent on prevailing commodity prices for coal and soda ash. Historically, these markets have been volatile, and current conditions reflect significant oversupply and soft demand. Sustained depressed prices could materially reduce revenues, potentially impacting future cash flow generation and, in extreme scenarios, triggering asset impairments or debt covenant concerns. NRP's reliance on its lessees for effective coal marketing also poses a risk; a failure by lessees to secure long-term contracts could lead to more volatile royalty revenues from increased spot market sales.

The soda ash market, in particular, faces a prolonged period of oversupply, with prices currently below production costs for many operators. While Sisecam Wyoming is a low-cost producer, the market rebalancing is expected to take "multiple years," which could continue to suppress distributions from this segment.

Furthermore, the promising Carbon Neutral Initiatives face significant uncertainties. The "stagnant" market for CO2 sequestration, driven by political, regulatory, and market hurdles, means that the timing and likelihood of material cash flows from these ventures remain speculative. While NRP's vast land holdings offer long-term potential, the near-term realization of value from CNI is not guaranteed.

Conclusion

Natural Resource Partners stands at a pivotal juncture, poised to transition from a decade of disciplined deleveraging to a new era of enhanced unitholder returns. The company's unique royalty-based business model, coupled with its strategic investment in a low-cost soda ash producer, has proven remarkably resilient, generating robust free cash flow even amidst the most challenging commodity market conditions in recent memory. This operational fortitude, underpinned by a "fortress balance sheet" nearing completion, positions NRP for a significant increase in distributions starting in August 2026.

Despite persistent headwinds in coal and soda ash markets, NRP's strategic focus on asset management, low operational risk, and long-term optionality in carbon-neutral initiatives provides a compelling investment narrative. The company's competitive advantages, rooted in its cost-efficient model and diversified asset base, offer a degree of stability that many direct producers lack. As NRP approaches the apex of its deleveraging journey, the stage is set for a new dawn of capital returns, making it a noteworthy consideration for discerning investors seeking a combination of financial discipline and future income potential.