Natural Resource Partners LP (NYSE:NRP) is a diversified natural resource company engaged principally in the business of owning, managing and leasing a diversified portfolio of mineral properties in the United States, including interests in coal and other natural resources. The company also owns a non-controlling 49% interest in Sisecam Wyoming, a trona ore mining and soda ash production business.

Business Overview

NRP's business is organized into two operating segments: Mineral Rights and Soda Ash. The Mineral Rights segment consists of approximately 13 million acres of mineral interests and other subsurface rights across the United States, providing critical inputs for the manufacturing of steel, electricity and basic building materials, as well as opportunities for carbon sequestration and renewable energy. The Soda Ash segment consists of the company's 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.

In 2023, NRP generated annual revenue of $293.7 million and net income of $196.8 million. The company's annual operating cash flow was $311.0 million, and it generated $311.0 million in annual free cash flow. These strong financial results were driven by the company's diversified mineral rights portfolio and its stake in the profitable Sisecam Wyoming soda ash operation.

Mineral Rights Segment Performance

NRP's Mineral Rights segment generated $70.8 million in revenues and $60.6 million in net income during the first quarter of 2024. This represents a decrease of 11% and 12% respectively compared to the prior year period, primarily due to lower metallurgical coal prices. Approximately 75% of the segment's coal royalty revenues and 50% of its sales volumes were derived from metallurgical coal during the quarter.

Despite the decline, the Mineral Rights segment continued to generate robust cash flow, providing $69.7 million in operating cash flow and $70.4 million in free cash flow during the first quarter of 2024. Management noted that while metallurgical and thermal coal prices have declined from record highs seen in 2022, they remain above historical norms. Limitations on operators' ability to increase production due to limited access to capital, labor shortages, and inflationary pressures are expected to provide price support for both metallurgical and thermal coal going forward.

Soda Ash Segment Performance

NRP's Soda Ash segment, represented by its 49% stake in Sisecam Wyoming, generated $5.5 million in net income during the first quarter of 2024, a decrease of 72% compared to the prior year period. This was primarily due to lower soda ash sales prices and volumes driven by new supply from China.

However, the Soda Ash segment provided $14.1 million in operating cash flow and free cash flow during the quarter, an increase of 33% compared to the prior year period. This was due to a higher distribution received from Sisecam Wyoming related to its stronger fourth quarter 2023 performance, when soda ash prices were much higher.

Management remains optimistic about the long-term outlook for the Soda Ash segment, noting that Sisecam Wyoming is one of the world's lowest-cost producers of soda ash, a product with favorable long-term fundamentals driven by urbanization, renewable energy, and the electrification of the global auto fleet.

Balance Sheet and Liquidity

As of March 31, 2024, NRP had total liquidity of $64.8 million, consisting of $11.0 million in cash and $53.8 million in available borrowing capacity under its Opco Credit Facility. The company's leverage ratio, as measured by outstanding debt divided by the last twelve months' Adjusted EBITDA, was 0.6x as of the end of the first quarter.

During the first quarter of 2024, NRP utilized the accordion feature of its Opco Credit Facility to increase its total borrowing capacity by $45 million to $200 million. The company has been using its strong free cash flow, along with the credit facility, to permanently retire preferred equity and warrants. As of April 2024, NRP has eliminated all of its outstanding warrants and reduced its preferred equity balance to $72 million, down from the original $250 million issued in 2017.

Management remains laser-focused on continuing to strengthen the company's balance sheet and eliminate its remaining financial obligations. This derisking strategy has significantly reduced the potentially dilutive effect of the preferred equity and warrants, as evidenced by the 20% decrease in diluted weighted average common units outstanding in the first quarter of 2024 compared to the prior year period.

Outlook and Conclusion

While NRP expects its free cash flow to decline from the record levels seen in 2023 due to weaker commodity prices, the company's capital structure is solid and improving. Management anticipates the business will continue to generate robust levels of free cash flow for the foreseeable future, allowing it to pay off all remaining debt and preferred stock while also providing common unit distributions to help cover unitholder tax liabilities.

Overall, NRP's diversified mineral rights portfolio and strategic investment in the Sisecam Wyoming soda ash operation have positioned the company to generate substantial and sustainable cash flows. The company's focus on strengthening its balance sheet and eliminating financial obligations should further enhance long-term unitholder value. With its strong liquidity, low leverage, and positive long-term outlook, NRP remains well-positioned to navigate the current commodity price environment and continue delivering for its shareholders.