NRP - Natural Resource Partners: Well-Diversified With A Well-Supported Dividend Yield

2023-11-09 02:54:07 ET

Summary

• Natural Resource Partners has seen a 60% increase in shares and offers a dividend yield of over 4%.
• NRP focuses on generating revenue through its mineral portfolio, with the majority of its income coming from royalty and mineral rights.
• The company has made significant improvements in its financial performance, with a low P/E ratio and strong free cash flow supporting its dividend.

Investment Rundown

Investors that were in Natural Resource Partners L.P. (NRP) 12 months before will have managed to get a very good return on their investments as the shares are up over 60% and the company has a dividend yield of over 4%. NRP is a pretty well-diversified business that focuses on generating revenues and earnings through its mineral portfolio consisting of various assets across the US. The largest source of revenues by far is from the royalty and mineral rights they have in various assets. Last quarter it was $68 million in total, down from $81 million a year prior. The price of various commodities tumbled as they reached new highs when the war in Ukraine broke out and the markets got spooked.

NRP is invested in various asses across the US as mentioned and has made significant moves in the last few years to focus on well-performing assets. In 2015 the company sold significant amounts of assets and cut the total amount by almost 50% or $800 million. This seems to have been the right move and the bottom line has climbed steadily ever since and is now at $272 million TTM, as compared to $110 million before the sale of several assets. I think that the strong improvements the company has made over the last several years, nearly a decade now, have made it an appealing and compelling investment. The p/e is very low at under 6 and the dividend is well supported by solid FCF thanks to the business model.

Company Segments

NRP focuses on the ownership, management, and leasing of a diverse portfolio of mineral properties situated across the United States. Operating across two main segments, Mineral Rights and Soda Ash, the company possesses interests in an array of valuable natural resources, including coal, soda ash, trona, and more. The majority of its coal reserves are strategically located in key regions, encompassing the Appalachia Basin, the Illinois Basin, and the Northern Powder River Basin within the United States.

NRP generates its revenue primarily through leasing a portion of its valuable mineral reserves, a business model that yields royalty payments in exchange. The company goes beyond mere mineral ownership, also taking a strategic role in the ownership and leasing of essential transportation and processing infrastructure closely linked to its coal properties. Notably, NRP serves as the general partner, orchestrating the management and operations within the company's diverse mineral portfolio.

This multi-faceted approach to generating revenue underscores NRP's commitment to ensuring a steady stream of income through its diverse assets while maintaining a strong presence in the mineral resources industry. It allows the company to effectively balance the ownership and utilization of mineral reserves while optimizing the value created from its mineral and infrastructure holdings.

Earnings Highlights

As I have mentioned in earlier parts of the article the revenues have dropped somewhat on a YoY basis to $86 million for the quarter. One of the key reasons behind my buy rating for the company is the strong dividend yield it offers and the discounted valuation as well. NRP has made strong improvements in dividend payout and in the last 12 months, it has amounted to $69 million in total. With TTM's net income of $272 million, there is little chance the dividend will be cut. There is too much of a threshold for the company to reach that point.

Robust FCF growth in the last years has enabled the company to support the dividend this way while also growing the asset base and portfolio efficiently. Proactive management of NRP's extensive mineral reserves stands as a pivotal pillar of its comprehensive asset management strategy. Within its vast portfolio, NRP holds ownership of a diverse range of mineral assets, including coal, aggregates, and various commercial minerals. This multifaceted approach to managing mineral reserves plays a significant role in optimizing resource utilization and long-term sustainability. So far the mineral rights are still the largest source of FCF for the company, $276 million as of June 30, 2023.

The coal royalty map reveals assets across the US with the largest source being from Central Appalachia generated 65% of royalty revenues in 2022. The largest leaser in the area is Alpha Metallurgical (AMR) which is a pretty significant company in the industry at a market cap of $2.9 billion in total. Following the sale of several assets in 2015 the ROA has improved immensely and is now at 32.58% TTM. Back in 2015, it was a negative 24% but quickly rose to 26% in 2018. From that point, NRP has been able to further grow their returns and I think this underscores why perhaps the valuation should reflect that as well, meaning a higher one. Historically the p/e has been 5 for the company but given the clear improvements it has made perhaps something along the lines of 6 - 7 is justified here. If NRP achieved similar EPS numbers as the last report then we land at an annualized EPS of $13.6 and with a premium of 6.5 we get a price target of $88.6, a usage of roughly 28% from today's levels. With the strong dividend yield, the company also adds I think the value shareholders can extract here is very good and results in the buy I have NRP as right now.

Risks

NRP's financial performance is inherently tied to the pricing dynamics of vital natural resources, which encompass a spectrum of minerals such as coal, soda ash , and more. These commodities are the lifeblood of NRP's revenue streams, making their market prices a critical determinant of the company's financial well-being. As prices fluctuate, so too do NRP's earnings and overall financial health.

The dynamic nature of environmental governance means that changes in environmental laws, permit requirements, or compliance costs can exert significant influence on the company's operations and profitability. As such, any shifts in the regulatory landscape, whether in the form of stricter environmental standards or evolving compliance obligations, may necessitate adjustments to NRP's operations. Heavy investments into renewable energy are posting a challenge to some of the assets the company has. Still, as a side note, some of the assets the company has is producing vital resources in the production of both solar panels and electric vehicles so I do think the operations are somewhat shielded nonetheless.

Final Words

NRP has made solid improvements following its sale of underperforming assets in 2015. The ROA has improved to over 30% in the last 12 months and with a growing dividend that is supported by robust cash flows the actual value here seems to be greater than the current price. I see a short-term upside of 28% least given the quality of the business and the fact a higher premium can be justified. For investors seeking a stable dividend payer with diversified assets then NRP is one to look at.

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