Text for 5 minute "NRP stock pitch"
I would like to thank Edwin for inviting me to participate in his “Rapid Fire: 10 Stock Pitches From Emerging Managers event, found here.
Natural Resource Partners (NRP) - for Edwin’s Twitter Spaces 9/8/2023
Natural Resource Partners (or NRP) is one of the worlds most unique publicly traded natural resource assets
The company is nearing the end of a long deleveraging process that has reached a point where the mathematics are extremely compelling.
I estimate that something over 18 months from now, NRP will have paid off all debt and dilutive securities and will have the capacity to pay $15 to $20 per unit in distributions, vs. $3/unit today.
This is the clear catalyst that will get the market’s attention.
As to the business, NRP owns two core assets:
They own 13 million acres of mineral interests, including 3.5 million acres of pour space that could be used to sequester carbon dioxide.
Most of NRP’s revenue currently comes from coal royalties, 70% of which is met coal.
NRP also owns 49% of Sisecam Wyoming, one of the largest and lowest cost producers of natural soda ash. Soda Ash is used to make glass and various chemicals, with a large amount of demand expected for use in solar panels
NRP received about $64m in distributions from Sisecam over past 12 months, and
I estimate that this investment alone is worth over $600 million
NRP’s cash flow operating margin is around 80%, and Free Cash flow was $308 million over the last 12 months.
It is important to note that given NRP’s royalty-based business model, Free cash flow is robust to different coal price environments.
For example, in 2016 (which was a very tough year for coal) a “debt free” NRP would have generated over $166 million of free cash flow to equity - or over $12 per unit in potential distributions.
In other words - this not really a bet on short-term coal prices - there are much better stocks for that purpose.
Unlike other commodity related businesses, NRP will have little else to do with their free cash flow beyond distributing it to unitholders
Operating costs, expenses, capital costs and liabilities (including environmental liabilities) are borne entirely by the lessees
And management makes it very clear that this is is the go-forward business model
As such, I think we can be confident that NRP’s massive cash flow will be distributed to unitholders
Unlike the vast majority of public L.P. securities,
I think there is solid alignment of interests here. This not just based on words, but on actions taken over the past 8 years - management has created a solid track record.
My final comment will be on NRP’s Carbon neutral initiatives,
This an emerging business that management calls “our call option on greatness”
NRP has the legal right to sequester carbon on 3.5 million acres, almost all of which is near major industrial facilities in the southeastern US.
These are large blocks of land - and NRP owns rights that extend from the surface, all the way to the core of the earth, which gives NRP a unique advantage in terms of striking deals.
To-date they have signed two sequestration agreements- one with Oxy, the other Denbury-Exxon.
If these projects come to fruition, NRP will earn a per-ton fee based upon the amount of carbon sequestered.
Looking at just the Oxy deal (65,000 acres and 1.3 billion of carbon sequestration potential) I *very roughly* estimate that this project could generate $20 - $40 million in annual cost-free revenue
Keep in mind, this is just 65,000 acres, a teeny portion of the total
All told, I think NRP’s present value is well over 100% above the current share price.
Massive distribution increases will be the catalyst that wakes the market up
beyond this, it is a great collection of assets operated by a proven management team - I view the stock as a compelling long-term holding.
I/we own NRP
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