NACCO Industries, Inc. (NC) is a diversified natural resources company that has been delivering critical inputs for electricity generation, construction, and industrial mineral production for over a century. With a robust portfolio of businesses, NACCO is poised to navigate the shifting energy landscape and capitalize on emerging opportunities in the years ahead.
Business Overview and History Incorporated in 1913 as the Northern American Coal Corporation, NACCO Industries has a long and storied history of innovation and adaptability. The company initially focused on coal mining operations, but over the decades, it has strategically expanded its operations, leveraging its core mining expertise to diversify into a range of natural resource-based businesses.
In the 1980s, NACCO made a significant strategic shift towards surface coal mining, operating under long-term contracts with power generation companies. This move established the service-based business model that remains a core part of the company’s operations today. The Coal Mining segment currently operates surface coal mines in North Dakota and Mississippi, fully integrated with its customers’ power plant operations.
The 2000s marked another important phase in NACCO’s diversification efforts with the establishment of the North American Mining (NAMining) segment. This division expanded the company’s reach beyond coal, providing value-added contract mining and other services for producers of industrial minerals such as aggregates, activated carbon, and lithium.
NACCO faced significant challenges in the early 2010s when several of its coal-fired power plant customers experienced financial difficulties or early plant retirements. The company successfully navigated these disruptions by adapting its operations and seeking new opportunities. In 2022, NACCO further diversified its portfolio by establishing the Minerals Management segment, which acquires and promotes the development of oil, gas, and coal mineral interests.
Today, NACCO operates through three primary segments: Coal Mining, North American Mining (NAMining), and Minerals Management. The Coal Mining segment oversees surface coal mines that supply lignite coal to power generation companies, primarily through long-term service-based contracts. The NAMining segment provides contract mining services for producers of industrial minerals, such as aggregates, activated carbon, and lithium. The Minerals Management segment generates income by leasing its royalty and mineral interests to third-party exploration and production companies.
Financial Snapshot Financials In its latest fiscal year (2023), NACCO reported annual revenue of $214.79 million and a net loss of $39.587 million, primarily due to a significant $65.9 million pre-tax impairment charge. The company’s operating cash flow (OCF) for 2023 was $54.49 million, with free cash flow (FCF) of $9.08 million.
For the most recent quarter (Q3 2024), NACCO reported revenue of $61.66 million, up 32.5% year-over-year. Net income for the quarter was $15.64 million, compared to a net loss of $3.83 million in Q3 2023. The improvement in net income was primarily due to $13.6 million in business interruption insurance recoveries at the company’s Mississippi Lignite Mining Company subsidiary, as well as improved operating results at the Coal Mining and Minerals Management segments. Operating cash flow for Q3 2024 was -$23.29 million, compared to $20.03 million in Q3 2023, while free cash flow was -$9.15 million, compared to $18.19 million in the same period last year.
Liquidity and Financial Ratios NACCO’s financial ratios paint a picture of a company with a solid foundation. The current ratio stands at 3.76, indicating a robust ability to meet short-term obligations. The quick ratio of 2.39 further supports the company’s strong liquidity position. The debt-to-equity ratio of 0.117 suggests a conservative capital structure, providing ample financial flexibility.
As of September 30, 2024, NACCO had $63.05 million in cash and cash equivalents. The company also maintains a $200 million credit facility, with $131 million available as of the same date, further enhancing its liquidity position.
Operational Highlights and Diversification Efforts One of NACCO’s key strengths is its diversified business model, which has allowed the company to weather challenges in the coal industry and capitalize on growth opportunities in other natural resource sectors.
In the Coal Mining segment, NACCO operates surface coal mines under long-term contracts with power generation companies. During the three and nine months ended September 30, 2024, the segment’s operating coal mines were The Coteau Properties Company, Coyote Creek Mining Company, The Falkirk Mining Company, and Mississippi Lignite Mining Company (MLMC). Each of these mines supplies lignite coal for power generation and delivers its coal production to an adjacent power plant or synfuels plant under a long-term supply contract. While MLMC’s coal supply contract contains a take-or-pay provision, the contract also has a force majeure provision that allows for the temporary suspension of the take-or-pay requirement during certain specified events beyond the control of either party. All other coal supply contracts are requirements contracts, meaning the customers are only obligated to purchase the amount of coal they require.
The Coal Mining segment’s revenues decreased by 5.1% in the third quarter of 2024 and 26.5% in the first nine months of 2024 compared to the respective 2023 periods. This was primarily due to a reduction in customer requirements at MLMC as a result of a mechanical issue that impacted one of two boilers at the Red Hills Power Plant. However, the segment’s operating profit increased by 24.6% in the third quarter and 31.3% in the first nine months of 2024 compared to the prior year periods. This was mainly attributable to MLMC’s business interruption insurance recoveries, a decrease in the gross loss, and an increase in earnings from the unconsolidated coal mining operations.
The NAMining segment has been a growth driver for NACCO, as the company leverages its mining expertise to provide contract services for producers of industrial minerals. As of September 30, 2024, NAMining operates in Florida, Texas, Arkansas, Virginia, and Nebraska. The segment also has exclusive responsibility for mining and mine closure services for the Thacker Pass lithium project in Nevada through its Sawtooth Mining, LLC subsidiary.
NAMining’s total revenues increased by 48.8% in the third quarter of 2024 and 32.2% in the first nine months of 2024 compared to the respective 2023 periods. This was primarily due to an increase in reimbursable costs, which have an offsetting amount in cost of sales and do not impact gross profit. Revenues excluding reimbursable costs increased by 24.1% in the third quarter and 30.5% in the first nine months, mainly due to favorable pricing and delivery mix at the consolidated limestone quarries. Operating profit for the segment decreased by 1.3% in the third quarter but increased by 27.1% in the first nine months of 2024 compared to the prior year periods.
The Minerals Management segment, which generates royalty income from leasing mineral interests, has also been a consistent contributor to NACCO’s overall financial performance. The segment owns a variety of mineral interests, including royalty interests, mineral interests, non-participating royalty interests, and overriding royalty interests. Revenues and operating profit for the Minerals Management segment increased in the third quarter of 2024 and the first nine months of 2024 compared to the respective 2023 periods. This was primarily due to an increase in oil and natural gas revenue as a result of higher production volumes, partially offset by a reduction in other revenues, such as coal royalty income. Operating profit in the first nine months of 2024 also included a $4.5 million gain on the sale of land related to legacy operations.
Outlook and Risks NACCO’s management has outlined a strategic vision focused on continued diversification and growth across its business segments. The company is pursuing opportunities to expand its contract mining services, acquire additional mineral interests, and leverage its expertise in areas such as stream and wetland mitigation solutions.
For the fourth quarter and full year 2024, NACCO expects consolidated operating profit and adjusted EBITDA to increase significantly compared to 2023. This improvement is primarily driven by anticipated increases in profitability at the Coal Mining segment, growth and profit improvement initiatives in the NAMining segment, and the Minerals Management segment’s strong performance.
Specifically, the Coal Mining segment’s operating profit and segment adjusted EBITDA are expected to increase compared to the prior year periods, primarily due to higher earnings at the unconsolidated coal mining operations and an expected improvement in results at Mississippi Lignite Mining Company. North American Mining’s operating profit and segment adjusted EBITDA are also anticipated to increase year-over-year, mainly due to contract amendments and scope of work expansion with customers. However, the Minerals Management segment’s operating profit and segment adjusted EBITDA are expected to decrease in Q4 2024 and full year 2024 compared to the prior year periods, excluding certain one-time items, primarily driven by expectations for lower natural gas and oil prices.
Looking ahead to 2025, NACCO anticipates solid customer demand at its coal mining operations, benefiting from the absence of temporary price concessions at Falkirk. However, cost inflation is expected to affect Mississippi Lignite Mining Company’s 2025 results. North American Mining expects to build on its current 2024 momentum to deliver further improved results in 2025, driven by new and amended contracts and new business expansion opportunities. The Mineral Management segment’s diversified portfolio is expected to continue delivering solid financial results in 2025, although a moderate production decline is anticipated due to current trends in oil and natural gas prices and projected volumes.
NACCO is also taking actions to terminate its defined benefit pension plan, which will eliminate future volatility from changes in the pension obligation but will result in a non-cash settlement charge in 2025.
However, the company faces several risks that could impact its future performance. The ongoing regulatory and environmental challenges facing the coal industry pose a potential threat to NACCO’s Coal Mining segment. Fluctuations in commodity prices, particularly for oil, natural gas, and industrial minerals, could also affect the company’s royalty income and contract mining profitability.
Additionally, NACCO’s reliance on a limited number of large customers in its Coal Mining and NAMining segments introduces concentration risk. The loss of a major customer or a significant reduction in their demand could have a material adverse effect on the company’s financial results.
Conclusion NACCO Industries has demonstrated resilience and adaptability in navigating the evolving natural resources landscape. Through its diversified business model and strategic initiatives, the company is positioned to capitalize on emerging opportunities in the energy and industrial minerals sectors. While challenges remain, NACCO’s strong financial position, proven track record of innovation, and positive outlook for 2024 and 2025 suggest that it is well-equipped to weather industry headwinds and deliver long-term value for its shareholders. The company’s focus on growth across its three main segments, coupled with its efforts to optimize operations and explore new ventures, provides a solid foundation for future success in the dynamic natural resources market.
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