Executive Summary / Key Takeaways

• Strategic Diversification Fuels Long-Term Growth: NACCO Industries is executing a "compounding growth" strategy, leveraging a century of operational expertise to build a diversified portfolio across Utility Coal Mining, Contract Mining, and Minerals and Royalties. This approach aims for "annuity-like returns" through long-term contracts and strategic investments, positioning 2025 as a "pivotal transition year."
• Specialized Technology and Operational Moats: The company possesses unique competitive advantages, particularly in specialized dragline operations, including underwater mining, and its exclusive partnership with MTech Cranes for advanced electric draglines. These technological differentiators enhance efficiency, uptime, and offer a distinct edge in complex mining environments.
• Short-Term Headwinds Mask Underlying Momentum: Despite a 30% year-over-year revenue increase to $68.2 million in Q2 2025, consolidated net income declined to $3.3 million due to temporary operational challenges at Mississippi Lignite Mining Company (MLMC) and Contract Mining, alongside higher unallocated costs. Management anticipates a substantial increase in operating profit in H2 2025, with momentum building into 2026.
• Robust Capital Allocation for Growth: NACCO maintains a "bulletproof balance sheet" to mitigate political and entrepreneurial risks, supporting strategic capital expenditures of up to $86 million in 2025, primarily for new business development. This disciplined reinvestment is expected to drive a steady increase in annual cash flow generation starting in 2026.
• Favorable Macro Trends and Expanding Opportunities: The company benefits from increasing demand for electricity, on-shoring initiatives, and supportive federal policies for natural resources. Growth vectors like the Thacker Pass lithium project, strategic mineral acquisitions, and the scaling of Mitigation Resources and ReGen Resources (solar) underscore a promising long-term outlook.

The Bedrock of Resilience: NACCO's Century-Long Evolution and Strategic Imperative

NACCO Industries, Inc. ($NC), founded in 1913, has meticulously evolved from its foundational roots in coal mining into a diversified natural resources company. Headquartered in Cleveland, Ohio, NACCO's journey reflects a strategic imperative to build long-term value through a portfolio of essential services. Its core operations now span three distinct, yet complementary, segments: Utility Coal Mining, Contract Mining, and Minerals and Royalties, a structure recently rebranded in Q2 2025 to enhance stakeholder clarity. This strategic evolution, particularly since a pivotal shift towards substantial growth and diversification around 2015, underpins the company's ambition to generate "annuity-like returns" from a "compounding effect" of long-term contracts and strategic investments.

The company operates within a dynamic industry landscape, benefiting from broad macroeconomic tailwinds. Increasing demand for electricity, driven by factors like data centers and AI, coupled with on-shoring trends and supportive federal policies for natural resources, creates a favorable environment. For instance, recent executive orders in April 2025 aimed at boosting the U.S. coal industry and deregulatory plans by the EPA in June 2025 signal a more accommodating regulatory climate for fossil fuels. This backdrop allows NACCO to leverage its specialized expertise and integrated business model to capture a wide range of growth opportunities.

NACCO's competitive positioning is distinct. Unlike more concentrated peers such as Peabody Energy (BTU) or Arch Resources (ARCH), which are heavily focused on coal, NACCO's diversification across multiple resource types provides a buffer against commodity-specific downturns. While its TTM gross profit margin of 12.02% and EBITDA margin of 19.29% are generally lower than the higher-margin, more specialized operations of BTU (Gross: 19%, EBITDA: 27.2%) or ARCH (Gross: 21%, EBITDA: 20.3%), NACCO's long-term contract structure and fee-for-service models offer greater revenue stability. In the aggregates sector, where it competes with giants like Vulcan Materials (VMC) and Martin Marietta Materials (MLM), NACCO differentiates itself not by scale (VMC and MLM boast significantly higher margins, e.g., MLM's TTM Gross: 29%, EBITDA: 44.5%), but by specialized contract mining services and technological advantages.

Technological Edge: The Power of Specialized Mining

A cornerstone of NACCO's competitive moat lies in its highly specialized mining technology and operational expertise. The company's Contract Mining segment, in particular, showcases this differentiation. NACCO is recognized as one of the largest operators of draglines globally, a critical piece of equipment for efficient surface mining. This expertise is further specialized in Florida, where NACCO is a leading entity in mining aggregates from submerged quarries, a complex operation few can execute at scale.

The company's partnership with MTech Cranes from the Netherlands exemplifies its commitment to technological innovation. NACCO is the exclusive dealer for MTech draglines in 48 of 50 U.S. states and the sole operator of these advanced electric draglines in the country. These MTech machines offer significant advantages over traditional diesel-driven draglines, including enhanced operating efficiencies, reduced maintenance requirements, and superior uptime. This translates directly into lower operational costs and increased productivity for customers, strengthening NACCO's value proposition. Furthermore, NACCO employs large surface miners for limestone extraction, which eliminates the need for blasting and reduces subsequent crushing requirements, offering a cost-effective and environmentally friendlier solution, especially for quarries near growing urban areas. These technological differentiators are not merely operational details; they are fundamental to NACCO's ability to secure and retain long-term contracts, drive operational efficiencies, and ultimately enhance its financial performance through better margins and a stronger market position in niche, high-value mining services.

Recent Performance: Navigating Short-Term Bumps on a Growth Trajectory

NACCO's second quarter of 2025 demonstrated robust top-line growth, with consolidated revenues increasing 30% year-over-year to $68.2 million. This was primarily driven by the Utility Coal Mining segment, where Mississippi Lignite Mining Company (MLMC) saw increased customer requirements as its power plant customer returned to more normal operations after a boiler issue in 2024. However, operational challenges and specific financial dynamics impacted profitability. Consolidated net income for Q2 2025 decreased to $3.3 million from $6.0 million in Q2 2024, with diluted EPS falling to $0.44 from $0.81, and EBITDA reaching $9.3 million compared to $13.5 million in the prior year.

The Utility Coal Mining segment's operating profit declined by $1.5 million in Q2 2025. This was largely due to MLMC facing lower contractual sales prices—an "aberration" stemming from a complex, historical formula influenced by unusual five-year look-back index movements (e.g., COVID-era price fluctuations)—and ongoing customer power plant inefficiencies. These factors led to an unfavorable gross loss, despite improved cost per ton delivered. Recurring inventory impairment charges, totaling $1.3 million in Q2 2025, reflect these challenges. Earnings from unconsolidated operations also decreased, although higher per-ton management fees at Falkirk (following the end of temporary price concessions in June 2024) provided some offset.

The Contract Mining segment also experienced headwinds, with operating profit decreasing by $2.1 million in Q2 2025. Temporary mechanical issues at certain quarries led to fewer tons delivered and higher operating costs, including unexpected repairs. Nevertheless, an increase in parts sales partially mitigated this decline. The Minerals and Royalties segment, however, saw a positive trend, with revenues rising 30% in Q2 2025, largely due to higher natural gas prices. Its operating profit, while down $2.4 million year-over-year, was primarily impacted by the absence of a $4.5 million gain on land sale recognized in Q2 2024. Unallocated items saw an increased operating loss due to higher employee-related and outside service costs associated with developing businesses.

Financial Health and Capital Allocation

NACCO maintains a conservative financial posture, characterized by management's commitment to a "bulletproof balance sheet." As of June 30, 2025, the company reported total debt of $95.5 million and cash and cash equivalents of $49.4 million, resulting in a net debt position. Total liquidity stood at $139.9 million, including $90.5 million available under its $200 million revolving credit facility, which matures in September 2028. NACCO Natural Resources, the primary borrower, was in compliance with all financial covenants, including a maximum net debt to EBITDA ratio of 2.75:1.00 and an interest coverage ratio of not less than 4.00:1.00. This strong liquidity position is crucial for mitigating political and entrepreneurial risks, and for assuring long-term partners of NACCO's stability.

Capital expenditures for the first six months of 2025 totaled $12 million, predominantly for Contract Mining equipment. For the full year 2025, planned capital expenditures are projected to reach $86 million, with the majority earmarked for new business development and growth initiatives across all segments. This reflects a strategic shift from maintenance CapEx to investments that generate long-term value, aligning with the company's compounding growth strategy. The company also paid $1.9 million in dividends in Q2 2025 and repurchased 22,198 shares for $0.7 million in H1 2025, with $7.8 million remaining under its $20 million share repurchase program expiring at year-end 2025.

A notable financial event is the planned termination of NACCO's defined benefit pension plan in Q4 2025. While this will result in a significant non-cash settlement charge, impacting reported net income and EBITDA, the plan is overfunded. Excess funds, such as the $14.5 million transferred to the NACCO 401k plan in Q1 2025, will be utilized to offset future profit-sharing contributions, effectively freeing up general funds and simplifying the company's financial structure by eliminating future pension-related earnings volatility.

Strategic Growth Vectors and Outlook

NACCO's future growth is underpinned by several strategic initiatives designed to expand its diversified portfolio:

• Thacker Pass Lithium Project: Sawtooth Mining, a subsidiary of Contract Mining, is the exclusive mining services provider for the Thacker Pass lithium project in Nevada, a joint venture between Lithium Americas Corp. (LAC) and General Motors (GM). Construction commenced in 2023, with Phase 1 lithium production targeted for late 2027. Sawtooth currently provides stable income during construction and will earn a production fee, with its scope of work expanded in Q4 2024 to include clay tailings transportation. This project represents a significant long-term cash flow opportunity in the critical minerals space.
• Minerals and Royalties Expansion: The Catapult Mineral Partners team continues to expand its high-quality, diversified portfolio. In July 2025, it completed a $4.2 million acquisition of mineral interests in the Midland Basin, adding 10,500 gross acres and approximately 400 net royalty acres, including producing wells and future development upside. This, along with its equity investment in Eiger, LLC (Hugoton Basin), is expected to drive significant operating profit improvements in H2 2025 and into 2026.
• Mitigation Resources of North America: This business, providing stream and wetland mitigation solutions, is scaling up. While temporary federal permitting delays pushed its full-year profitability expectation from 2025 to 2026, management anticipates more consistent results as new projects are layered on, offering solid rates of return on capital employed.
• ReGen Resources: Pursuing new power generation opportunities, including solar projects, particularly on reclaimed mine land. This segment is exploring "behind the meter solutions" for the rapidly growing data center and AI industries, leveraging NACCO's land assets and energy sector expertise.

Management remains confident in delivering improving results in the second half of 2025, with momentum building into 2026. Consolidated operating profit is expected to increase substantially in H2 2025 compared to H1, though full-year 2025 results will be lower than 2024 due to the absence of the $13.6 million business interruption insurance income. Net income and EBITDA will also see a substantial year-over-year decrease due to the non-cash pension settlement charge. However, a steady increase in annual cash flow generation is projected to begin in 2026, as prior investments mature and new projects contribute.

Risks and Considerations

Despite a compelling growth narrative, investors should consider several risks. Operational challenges, such as the ongoing inefficiencies at MLMC's customer power plant and temporary mechanical issues in Contract Mining, can impact short-term results. The contractual pricing formula at MLMC, influenced by historical index movements, introduces an element of revenue volatility. Regulatory delays, as experienced by Mitigation Resources, can push out profitability timelines. Furthermore, the company's coal business remains exposed to political and environmental policy shifts, although current federal policies are supportive. While NACCO's diversification strategy aims to mitigate these, a significant reliance on any single commodity or customer could pose a risk. The company's "bulletproof balance sheet" strategy is a direct response to these inherent risks, providing financial flexibility and stability.

Conclusion

NACCO Industries stands at a pivotal juncture, transforming its century-old legacy into a diversified natural resources powerhouse. The core investment thesis rests on its ability to leverage specialized mining expertise, including advanced MTech dragline technology and unique underwater mining capabilities, to secure long-term, high-value contracts. This, combined with strategic investments in critical minerals and environmental solutions, creates a powerful "compounding effect" that promises durable, annuity-like returns.

While Q2 2025 presented temporary operational headwinds, the underlying strategic momentum is undeniable. Management's clear guidance for improving profitability in the second half of 2025 and a steady increase in cash flow from 2026 underscores confidence in its growth trajectory. NACCO's disciplined capital allocation, robust balance sheet, and proactive pursuit of opportunities in a favorable macroeconomic environment position it as a compelling long-term investment. The company's strategic evolution, underpinned by technological leadership and a diversified portfolio, is set to unlock significant value for shareholders as its new ventures gain traction and its foundational businesses stabilize.