Nacco Industries Inc Q1 FY2024 Earnings Call

Welcome to the NACCO Industries First Quarter 2024 Earnings Conference Call. Our host for today is Christina Kmetko from Investor Relations. I will now hand the call over to Christina Kmetko. You may begin.

Good morning, everyone, and welcome to our first quarter 2024 earnings call. Thank you for joining us this morning. I'm Christina Kmetko, I'm responsible for Investor Relations at Nano. Joining me today are J.C. Butler, President and Chief Executive Officer; and Elizabeth Loveman, Senior Vice President and Controller. Yesterday, we published our 2024 first quarter results and filed our 10-Q. This information is available on our website. Today's call is also being webcast. The webcast will be on our website later this afternoon and available for approximately 12 months. Our remarks that follow, including answers to your questions, contain forward-looking statements. These statements are subject to several risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements made here today. These risks include, among others, matters that we've described in our earnings release, 10-Q, and other SEC filings. We may not update these forward-looking statements until our next quarterly earnings conference call. We will also be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures can be found in our earnings release and on our website. With the formalities out of the way, I'll turn the call over to J.C. for some opening remarks. J.C.?

Thank you, Christy, and good morning, everyone. I'm glad to be on the call this morning since we have a lot of good news to report. I mentioned during our year-end call that I'm optimistic about our 2024 outlook as we move past a tough 2023. We expected unfavorable 2023 comparisons would turn favorable in 2024. So, I'm pleased to report that our first quarter operating results were in line with those expectations. Our consolidated operating profit increased 162% over the prior year, driven by significantly improved earnings at our Minerals Management and North American Mining segments. Christy will go into more detail about our first quarter earnings and provide an overview of our outlook in a minute. But first, let me give you an update on our operations. I'll start with some positive operational news about our Coal Mining segment. I'm pleased to report the repairs to the damaged boiler at the Red Hills power plant are expected to be completed during the second half of 2024. As you can see from our financials, the Coal Mining segment's revenues decreased primarily due to fewer coal deliveries as a result of this issue. While the Red Hills power plant is still only operating on one boiler, it is helpful to have greater visibility on our customers' timeline for resolution. As we've discussed for several quarters, Mississippi Lignite Mining Company's Red Hills mine completed the move to a new mine area in 2023. This move sets us up nicely for the future, and we expect production costs at MLMC to decline significantly in 2024 to 2023 levels. These costs, however, are expected to remain above historical levels through 2024 until the boiler issue at the power plant is resolved. Deliveries return to normal, and a pit extension is completed later this year. Before I move to our other segment, I want to comment on the Environmental Protection Agency's recent announcement of new rules for coal-fired power plants. On April 25, the EPA issued a prepublication version of the final rules for Mercury Air Toxics Standards and greenhouse gas emissions, which require compliance as early as 2027 and 2030. These rules are ultimately enforced as drafted and will be applicable to the power plants that we serve. While we are still in the process of analyzing these new rules, I'd like to note that similar previous efforts by the EPA were met with extensive litigation, and we're anticipating a similar response to these rules. As you can imagine, this is a very high priority for us. It's worth noting that the United States is experiencing strong overall growth in the demand for electricity. MLMC supplies coal to the Red Hills power plant, which supplies electricity to TVA. TVA just announced in their 10-Q filing earlier this week that they experienced an all-time record high peak power demand during Q1. If these EPA rules go into effect as written, it's hard to see how the country will adequately replace the energy generated by these power plants. Shifting to our other segments, I mentioned earlier that our Minerals Management and North American Mining segments generated improved operating results in the first quarter. At Minerals Management, the higher first quarter income was the result of higher production volumes and included earnings from the large acquisition of mineral interest that closed in December. The Catapult Mineral Partners team, which oversees this segment, has done a great job of growing and diversifying our portfolio of mineral interest over the last few years. We now own a larger portfolio of mineral interest. We are more diversified in terms of operations, geographic footprint, and stages of mineral development, ranging from producing wells to undeveloped mineral interest. The Catapult team has again targeted mineral interest of up to $20 million in 2024. Our North American Mining segment also delivered strong year-over-year earnings improvement. North American Mining's operating profit improved 184%, and segment adjusted EBITDA increased 70% compared with 2023. I'm proud of the significant progress the North American Mining team has made on operational and strategic projects that contributed to the improved results for the first quarter of 2024. Our sawtooth mining operation is the exclusive miner for the PaccarPass Lithium project owned by Lithium Americas Corporation. Satuit Mining is contributing moderate income to the North American Mining segment during the current construction phase of that contract and is expected to continue to do so until we enter the production phase, which is projected to occur in the 2027-2028 timeframe. More information about this project is available on the Lithium Americas website. The North American Mining team continues to evaluate and pursue new business opportunities, including diversification into additional minerals as we did in 2023 with a new contract to mine phosphate for a customer in Florida. Overall, I believe we are making meaningful progress towards building this segment into a very successful business platform. Finally, moving to our mitigation resources of North America business. This team continues to advance existing mitigation projects and build on a substantial foundation it has established over the past several years. Mitigation resources added a new project in the first quarter by acquiring an attractive piece of land near a high-growth area in Central Florida. We anticipate that mitigation resources will further expand its business model in 2024 with a focus on generating a modest operating profit in 2025 and achieving sustainable profitability in future years. Overall, I continue to be very optimistic about our outlook in 2024 and beyond. I have a lot of confidence in our team, and I'm pleased with the way all of these businesses continue to advance their strategies, including efforts to protect our coal mining business. With that, I'll turn the call back over to Christy to cover our results for the quarter and our outlook in more detail. Christy?

Thank you, J.C. Let me begin with high-level comments about our consolidated first quarter financial results, then I'll provide some detail on our individual segments. We reported consolidated income before taxes of $5.6 million compared with $4.4 million last year, a 28% increase. A shift in our mix of earnings led to an effective income tax rate of 18% this quarter versus a negative rate of 30% in first quarter 2023, which resulted in a $2.3 million year-over-year increase in income tax excess. Due to the higher income tax expense, our first quarter 2024 consolidated net income decreased to $4.6 million or $0.61 per share compared with $5.7 million or $0.76 per share last year. We generated EBITDA of $11.2 million, modestly higher than the prior year EBITDA of $10.8 million. The operating profit and EBITDA growth was primarily due to significant improvements in earnings at our Minerals Management and North American Mining segments. Minerals Management generated operating profit of $7.9 million and segment adjusted EBITDA of $8.9 million, over a 30% increase in both metrics compared with the prior year quarter. The improved earnings were due to higher production volumes, including contributions from a large acquisition of mineral interest near the end of last year. North American Mining operated profit of $2.4 million and EBITDA of $4.6 million increased significantly compared with last year. The first quarter improvements were primarily due to favorable pricing and delivery mix. Improved margins at the limestone quarries as a result of recent contract amendments also contributed to North American Mining's favorable results. The improvement in operating profit at both Minerals Management and North American Mining were partly offset by lower coal mining results. Our Coal Mining segment reported an operating loss of $417,000 and generated segment adjusted EBITDA of $1.8 million. This compares to an operating profit of $313,000 and segment adjusted EBITDA of $4.6 million in 2023. J.C. noted that the Coal Mining segment's revenues decreased primarily due to the boiler issue at Mississippi Lignite Mining Company. However, the revenue decrease was offset by a reduction in cost of sales, resulting in comparable quarter-over-quarter results. Lower earnings at our unconsolidated operations primarily due to reduced customer requirements at Coteau contributed to the decrease in the Coal Mining segment's results. Looking forward at our Coal Mining segment, we expect strong 2024 operating profit compared with the significant 2023 loss, which included a $60.8 million impairment charge. Higher segment adjusted EBITDA, which excludes the impairment charge, is also projected. These anticipated increases are primarily due to an improvement in the results of Mississippi Lignite Mining Company and higher earnings at Falkirk and Coteau in the second half of 2024. While MMC is expected to incur a loss in 2024, largely attributable to reduced coal deliveries while the power plant is operating with only one boiler, the loss is projected to be significantly less than 2023, excluding the impairment charge. This is primarily because production costs are expected to decrease compared with last year. In addition, the effect of the impairment charge taken last year will result in lower depreciation and amortization expense and contribute to lower production costs in 2024 and beyond. The projected increase in full year 2024 earnings at the unconsolidated mining operations is driven primarily by an expectation for increased customer requirements at Coteau and Falkirk along with a higher per ton management fee at Falkirk beginning in June 2024 when temporary price concessions end. Turning to North American Mining, we expect substantial quarterly growth in operating profit and segment adjusted EBITDA in each remaining 2024 quarter, leading to significantly improved full year results over 2023. Improvements at existing operations, as well as contributions from new and modified contracts, will all contribute to the improvement in results. Finally, at Minerals Management, we expect 2024 operating profit and segment adjusted EBITDA to decrease moderately compared with the prior year, excluding the 2023 impairment charge. The forecasted reduction in profitability is primarily driven by current market expectations for natural gas and oil prices, as well as development and production assumptions on currently owned reserves. Overall, at a consolidated level, we expect to generate net income in 2024 compared with the substantial 2023 net loss. Adjusted EBITDA, which excludes any impact from the prior year impairment, is also projected to increase significantly over 2023. These improvements are mainly due to increased profitability at the coal-mining segment. Growth in North American Mining is also expected to contribute to the higher 2024 net income. Before I turn the call over to questions, let me close with some information about our balance sheet and cash flow. We ended the quarter with consolidated cash of approximately $62 million and debt of $50 million. We had availability of $100 million under our revolving credit facility. During the first quarter, we repurchased approximately 128,000 shares for $4.3 million under an existing share repurchase program. In 2024, we expect cash flow before financing activities to be a moderate use of cash. We will now turn to any questions you may have.

And we will take our first question from Douglas Weiss with DSW Investments. Douglas...

A question on the mining business. Once you've started a project, how much is the ongoing capital expense on those projects on an annual basis? Are you talking about a coal mine, or are you talking about a North American mining project?

North American mining. Yes. It entirely depends on the project. In some instances, we own the equipment and will maintain that equipment over the life of the contract, and that's all included in the fee structure that we receive. In other instances, the customer is responsible for funding those things. So, it's really very contract-specific. I guess I would add that for most of the operations that we do inside North American Mining, I'll just use an example, right? We might acquire a dragline that will operate at a quarry or a phosphate mine or somewhere else for somebody. The upfront capital is the most significant piece typically of that project. Over time, you're going to have repairs to the drag line, you're going to have planned outages where you need to do periodic upgrades and improvements. But for the most part, I think you could think of the North American mining project as having a majority of its CapEx upfront, although there will be some over time.

Okay. So to the extent you're not bringing on new projects, is it fair to say that a fairly high proportion of the EBITDA in that division will convert to cash flow? It just sounds like the yes.

I believe that's a reasonable assumption. Unlike a manufacturing business where you frequently replace components on the production line, the mining sector typically operates differently. However, as we experienced at our Red Hills mine, there are times when reinvestment is necessary. Overall, you can view EBITDA as actual cash flow.

Okay. Can you share what kind of returns you expect from that upfront investment? For instance, if you invest $20 million in a new project, like for the drag line, what sort of EBITDA do you anticipate earning in the years that follow?

Well, I mean I think given the fact that these are multiyear projects with investment upfront, I'd point you to like an IRR calculation, and we target things that are in the mid-to-high teens in general.

Okay. Great. And when you guide to quarterly growth for that business, do you mean sequential growth like the second quarter will be better than the first quarter and so on?

Generally... Yes.

Yes. Okay.

But like any business, you can't draw a straight line to all those points and have it look like a nice neat graph.

Sure. Regarding your royalty businesses, I noticed that while you provide disclosures in the K about your reserves, other royalty companies often do not effectively communicate the actual reserve life of those assets. Could you share your thoughts on the economic life of your gas assets, particularly in Appalachia, which I believe is your largest?

The Appalachia assets are part of our legacy, acquired over many decades, possibly dating back to the early 1900s when we started our underground coal mining operations. Throughout history, we obtained our natural gas reserves along with all minerals. In many cases, we either mined the coal ourselves or others did, and we sold the surface rights if we owned them. Our ownership of these natural gas assets goes back a very long time, likely around ten years or so, when horizontal fracking emerged as the main method for extracting minerals in Appalachia. Pipelines began appearing around 2017 to 2018, prompting us to enhance our operations by hiring experts and developing our Catapult Minerals partners business, which manages these assets. While much development has occurred, there are still many wells that remain unexplored. Typically, wells show a decline over time but can last for decades. Initially, horizontal fracking wells produce significant amounts of gas, but their output decreases quickly before they can continue to produce for a prolonged period. Some companies focus solely on purchasing the remaining production rights from these wells. Our approach to natural gas assets in Appalachia also extends to our broader purchasing strategy, which includes acquiring mineral interests that feature producing wells, drilled but non-operational wells, and allowed permits that have not yet been developed. A significant portion of what we pay for these assets centers around the production from existing wells, as that's what investors are most interested in for immediate cash flow. While we acknowledge this aspect, we are also acquiring many reserve interests that will be developed over the coming years. This strategy positions us to accumulate more assets and extend our profitability potential in this sector significantly. I hope this answers your question.

Yes, I think so. As you look at opportunities to acquire, are you seeing better value on the oil side or on the gas side?

It varies. In many cases, it depends on specific factors related to the transaction, such as the reasons behind someone's decision to sell. For instance, is someone liquidating a fund after 20 years? Or is a company losing funding from a private equity firm and therefore needs to sell some wells to raise capital? Understanding their motivation is likely the biggest factor influencing the fluctuations in value based on my experience.

Okay.

I mean, the prices affect the value of mineral interest. They do on the margin, but it doesn't swing as much as you would think it might, based on monthly quarterly changes in oil and gas prices.

Right. Okay. That makes sense. Regarding MLMC, once you finish with the move-in locations and so on, what would be a good normalized cost of goods sold there?

We don't disclose that. Regarding the move, we are almost finished. In our disclosures, we mention a pit extension. We have established the new pit, and operations there are going very well, which we are pleased about. Part of our plan was to make the initial pit longer, as a longer pit is a more efficient means of mining. We're still extending that pit this year, and it will be completed later this year, at which point costs should decrease to align more closely with historical levels. Currently, we are dealing with some self-inflicted issues due to the expansion, which adds to our costs. Additionally, the power plant is operating on just one of the two boilers, limiting our production to about half of normal levels and resulting in inefficiencies that increase operational costs. However, we anticipate returning to historical levels, and we feel optimistic about that as we move forward. We just need a couple more quarters to get through.

Right. Okay. And then just touching on North American Mining, again, you had a really nice step up in your EBITDA margin this quarter. Is that sustainable? Or are those margins going to move around quarter-to-quarter?

Everybody's margins fluctuate from quarter to quarter. However, I believe there have been some fundamental shifts in the business, both strategic and tactical. We have been working on various initiatives over the past few years. As previously disclosed, we paused new business development last year to address some operational issues, and we feel positive about the progress we've made. Additionally, we have signed new contracts and are continuously refining our contract structure to best serve our customers while considering our business's economics. We have a combination of new contracts, amended contracts, and operational and strategic improvements that are yielding positive results. I believe we are moving towards stronger performance in that business going forward due to these factors. Consistency every quarter may not be guaranteed, but I feel optimistic about our direction.

Okay, that makes sense. Can you clarify what the unconsolidated income line in that division refers to? Which asset or mine is it related to?

It's just some smaller historical mines or locations that we account for as a variable interest entity and thus under the equity method.

Okay. Please let me know if anyone else has questions because I don't want to prevent anyone from asking.

You have great questions. We're more than happy to add. Yes. I appreciate your interest. We're happy to answer your question.

I'm interested in the coal segment, particularly with the Sabine mine as an example. After the mine closed, you received several years of closure payments. Can you discuss how favorable these closure payments are compared to the previous operating earnings of the mines?

I'll speak generally. During production in our management fee contracts for the Coal Mining segment, which include Coteau, Fallkirk, Coyote Creek, and Sabine, a lot of work occurs. We have many people involved and activities taking place, resulting in a higher fee. In the first few years after entering the final mine reclamation phase, there is still significant work to be done, including moving dirt and addressing regulatory and land matters related to ramping up the mine. Consequently, the fee remains quite substantial, although typically lower than during production. After a few years, we enter the latter part of final mine reclamation, where most of the dirt work is completed, and we focus on monitoring water, checking for erosion, and ensuring that planned vegetation is growing as expected. Thus, the fee generally decreases in the later years of a contract. Each contract is unique regarding responsibilities for us and the customer, but the customer continues to cover 100% of the costs related to the fee we receive. This reflects a step-down structure as the workload diminishes.

Okay. And then I guess just a couple quickly on your new projects. So, on the remediation business, how big a business do you think that could be looking out 3 to 5 years?

We haven't disclosed how big we believe the remediation business can become. However, the business we launched 5 or 6 years ago is growing faster than we originally anticipated. We're pleased with our ability to utilize our North American coal environmental reputation to enhance our credibility, despite being a startup. Many people involved in this business came from our coal mining operations, which has been beneficial as we got started. We also have a strong relationship with the Army Corps of Engineers in our operational areas, which has proved helpful. Additionally, the mitigation aspect of the business is expanding more quickly than we expected. We've also started engaging in abandoned mine land reclamation, and our recent disclosures highlight that we're the preferred provider of these services in Texas, which is significant. We are also undertaking various remediation projects beyond just mitigation banking and abandoned mine land reclamation. We're experiencing growth opportunities across several areas, which have developed organically. The ongoing question is when this business will be recognized as a formal segment. While I can't provide a definitive timeline, I hope it’s sooner rather than later, as being a defined segment tends to attract more attention. Nevertheless, this business is growing rapidly. We believe it will achieve profitability at an operating profit level in 2025, with sustainability expected in subsequent years. One reason for this projection is that, particularly in mitigation banking, we acquire properties and it takes about a year to obtain our banking instrument from the Army Corps of Engineers. Credit sales can extend over a long period, even up to 10 years. Therefore, the initial phase involved initiating numerous projects, and we are now entering a phase where we expect to see significant income from credit sales stemming from those banks. While this may not directly answer your question, I hope it provides some helpful insight.

That's great. I have one last question regarding the additional details provided about your solar project. Can you discuss the size of the investment you are considering? Do you still believe it will yield a very high return on investment?

Yes, the returns on the projects we are considering are quite attractive. Our main approach is to act as developers. We have unique knowledge regarding properties suitable for solar farms, including reclaimed mine land, whether it's ours or from other sources. Many people shy away from these properties, but we understand the associated risks and opportunities. Our investments will focus on the development phase, which involves acquiring or leasing land, conducting interconnect studies, and finding EPC contractors to assemble everything into a complete package. It's likely that we will finish the project in a well-prepared state, ready to sell to a company that will own and operate these solar farms long-term, including overseeing construction. We might retain some ownership interest, possibly in the solar farm itself or through retaining the land and receiving lease payments. There are various possibilities to consider. I am aware that large solar farms require significant capital, and since we prioritize protecting our balance sheet, we will avoid taking on projects that exceed our comfort level.

That makes a lot of sense. One last quick question is just about the boiler. I think you mentioned in your filing that you expect it to be repaired in the second half. Do you have good visibility on that, or are you just monitoring it like everyone else?

Well, I mean, we're next door, right? The mine is next door to the power plant. So, we have great relationship with the folks over the power plant because of the nature of the operation, 100% of their fuel comes from our mine; they're our only customer. So, it makes it very important to have a close, transparent relationship. So, our folks on the scene stay in close touch with the people over the power plant, and I think everybody feels good about the progress that's being made. It's really our customers' project, so I don't want to say that much about it because it's their disclosure, not ours. But it's progressing nicely, and we feel good about them. I think they feel good about it.

Great. Okay. Well, thanks again for the insight, and talk to you next quarter.

Yes. Once again, we appreciate your interest.

Thanks, Doug. And your next question comes from Nachy Kanfer with Viacom.

Okay. Great quarter. Thanks.

Thank you.

Picking up from that last question left off. Just a few questions on Mississippi. Can you provide an update on the financial health of your customer over there? Have they emerged from whatever restructuring they were in? What extent their balance sheet?

And from what I understand from the disclosures, that's all been settled. What you're talking about is a restructuring with the bondholders.

Right, correct.

Yes. And that's been resolved. I think Southern disclosed that a couple of quarters ago, maybe three quarters, four quarters ago.

Yes. I mean what I've seen other than the disclosures is that they're not putting any additional capital into it, and there was certainly no cash reserve in the business prior to restructuring. So, what I'm trying to understand is how strong is your counterparty in its ability to maintain a position of buying the amount of lignite you guys want them and project them to buy for the next several years.

I believe the key question is whether TVA requires the electricity. Looking at TVA's latest quarterly report, which was recently submitted, they have experienced record demand for electricity, which ultimately drives the situation. TVA has a significant need, as evidenced by the operation of the power plant. If TVA needs electricity, they will purchase it from the plant, indicating that the plant will require coal to generate that power.

So... Someone is going to have to put in capital, right? I mean, are you saying that TVA might actually put in capital for repairs or for ongoing CapEx?

I mean... I should think about... I'm not privy to the details, but my understanding is there's a provision in the waterfall with respect to the mechanics of the bonds that provides for capital that's needed for maintenance and repairs. Gold bonds.

I'm trying to understand what the new bond structure is, which I am not trying to understand...

Yes. We don't have access to the terms of that agreement.

I appreciate your comments about the Mercury standard. My understanding from the technical documents released by the EPA is that they were predicting a relatively low additional operational expenditure requirement at Red Hills, which was under $1 million a year. However, your comments imply a rather pessimistic outlook on compliance. Can you help reconcile these two perspectives? Is the truth somewhere in between, or how should I interpret this?

I believe the entire situation is likely to lead to significant legal challenges. Firstly, the regulations are not finalized yet. Secondly, I anticipate that this will be litigated similarly to previous EPA rules. I came across an interesting article in the Journal yesterday, or at least I read it online last night, discussing the obstacles that these regulations are facing.

There's no question of litigation. I agree with you, but the mercury standards that are in effect for power plants are in effect. I mean they have survived that was a decade ago.

Correct?

So, I guess what I'm trying to understand is what is tons of uncertainty regarding how the courts will view this, and future administrations might have a different perspective as well. I'm trying to grasp what the actual cost of compliance might be for your customer, even just in general terms. Is it tens of thousands, tens of millions, or somewhere in between?

I think it's not appropriate for me to publicly speculate on information that I don't have. I'm not involved in the operation of power plants, so I don't have access to that kind of information.

Sure. Makes sense. Last question. There was a $60 million impairment charge in the last quarter. Can you help me understand the impact on the Mississippi business and the core asset, which is the long-term sales agreement? How much of the book value of that asset was lost with the $60 million impairment charge? Does that make sense? How is the asset now half the size I previously thought? Should I consider it to be 90% of its original size?

I think we've never disclosed the asset value related to a specific...

In our risk factor in the 10-K previously, we set our assets at risk were around $130 million. And we took $5 million a...

Yes, that's really helpful. When you were evaluating the financials and deciding how much to write off, was the primary factor the relatively short-term decrease in sales that contributed to the overall $60.8 million figure, or did you also consider the life of that agreement?

The trigger was the issue at the power plant on December 15th. As we approached year-end, this significant event raised questions about the extent of the damage and the necessary repairs. It also created uncertainty about our near-term deliveries. They quickly determined that the plant could operate on one boiler, and there were no other factors from this incident that would prevent that. Given the potential for an extended period of reduced deliveries, which impacts our fixed-cost mining operation significantly, this situation had economic repercussions. The immediate concern was about the near-term value of the asset since short-term revenue is more impactful than future earnings. Additionally, we had to undergo the required GAAP exercise to assess impairment, but it was the short-term effects that primarily triggered this evaluation.

Okay. That makes sense. And I think the last question, how should I think about the macro with respect to your other unconsolidated operations. Is there a different way I should think about that compared to the Mississippi situation?

Let me clarify that the math rule doesn't apply to our minds. It applies to our customers' power plants, which are all lignite-powered. Each power plant has its own technologies related to their boilers and environmental controls, and I believe they will be evaluating these independently.

Appreciate your time with me this morning.

And your next question comes from John Huber with Saber Capital.

Thank you for the informative responses during this call. I found the historical insights on minerals management particularly engaging. I have a question regarding your business. I monitor several royalty companies, and I've noticed that the minerals market has become increasingly competitive in recent years. I would like to know if you share this perspective and, if so, what advantages you believe you possess in this competitive landscape. Specifically, what kind of networks do you have that enable you to achieve the returns you are generating? From what I see, you have invested about $68 million in capital over the last few years and have earned approximately $19 million in profit, which reflects a strong return. I'm curious about how you perceive your competitive advantage in the current market.

Yes, let's revisit the history. I would love to claim that we're seeing significant returns on the $68 million investment. However, if we examine how we acquired the Appalachian minerals, which are our main income sources, our cost basis for those is almost nothing as they were obtained on a go-forward basis. Consequently, much of that Appalachian inventory has negligible valuation on our balance sheet. Currently, our internal returns are exceptionally high. We believe that over time, as we invest further, we will achieve returns in the high teens, possibly even low 20s. At this moment, we are investing in a business with extremely high returns, which will eventually stabilize in the high teens as you've pointed out. What sets us apart? I believe our significant advantage lies in our skilled team, which is very meticulous in their analysis. They are aligned with a long-term investment mindset, which complements our values. If you've taken the time to understand our company, you'll see that we are committed to maintaining a multi-decade perspective on investments. When we acquire minerals, we are fully prepared to invest in those that may not be developed for 10 or 15 years, as we are establishing a foundation for long-term dividends. These acquisitions require minimal expenditure, and we are open to exploring those opportunities. In contrast, many of our competitors operate using funds from private equity or through borrowing, often driven by the necessity of a Yieldco model, which prioritizes immediate production. Their focus is on quickly developed wells, which they actively pursue and bid on. As a result, they tend to shy away from longer-term developments that may take 2, 5, 10, or 15 years, leading to a less competitive atmosphere for those types of assets. While there are exceptions in any market, this is generally the landscape we observe, and we believe our long-term approach gives us a distinct edge.

That's interesting. Yes, very helpful. I noticed you have some undeveloped acreage in the Williston Basin. How much do you think of the $68 million that you've spent since 2020 is related to undeveloped land or represents untapped potential for future production?

I don't know. I will give you a very honest answer and say I don't know. Liz is flipping into the K.

Yes. I mean we have provided some of that data in our 10-K. So I don't know if you'd look through that, but that would provide you some additional information.

Where is that? Start on Page 46 of the 10-K. I see the amount of acreage. I was trying to understand how you're strategically thinking about the capital you're investing in this. You provided a helpful background and mentioned high teens returns. You have legacy assets that have been part of the company for many years. When you evaluate a project, I'm sure you conduct some form of IRR calculation, but I'm curious about how you compare that to other capital uses within the business, such as perhaps buying back your own stock, which you've done before. I would like to understand the return hurdle rates you're considering for this Minerals business.

When evaluating investments in this business, we certainly consider IRR along with other metrics, but IRR is a primary focus. We also take into account related calculations like NPV and ROTCE. For each project, we assess them as individual entities, considering the cost to integrate them into our portfolio, including overhead costs. Our goal is to acquire projects that can yield IRRs in the high teens, while being aware that any undeveloped assets or those not currently producing carry uncertainty about their future value. We are confident in their development potential, but the timeline and future oil and gas prices remain unknown. We aim for high teens based on what we believe is achievable, with the potential for additional value beyond that. By acquiring diverse packages of mineral interests, we gain exposure to a wide range of areas and resources, and we are transitioning to a portfolio that is more oil-oriented after being predominantly gas-focused. Over time, much of the Appalachian natural gas has been developed, and we anticipate being beneath the decline curve eventually, which will lessen its significance to the portfolio.

It seems that you might be more interested in acquiring oil assets. I understand that a lot of the legacy assets are in Appalachia, and much of the Gulf Coast is oriented towards gas, but some areas in the Permian Rockies are more focused on oil. Is that the direction you would like to take?

Yes. Back in 2018, our focus was solely on natural gas in Appalachia. We want to diversify by exploring other basins, increasing our oil presence, and working with more operators. We believe in this asset category and want to expand our position into different areas within the United States.

Yes, it's great. I had a question about the Cantab team and the $20 million. Can you share how they're incentivized? What happens if you can't find assets that meet your hurdle rate? Is it acceptable if we don't reach the $20 million?

Without getting into the integrity details of our incentive plans, we take a one-team approach to incentive for everybody that participates in seton plans all operate so that we're all incentivized to help each other, make it a team sport watch sports. You're going to always know that wins. So, if they invest, that's great; if they don't invest, that's okay too because everybody participates in the same incentive programs that are tied to total company performance.

Yes, that's great.

We believe that if individuals are separated into distinct groups, they will naturally start to focus only on their own interests. This applies to me, and to everyone. People will become preoccupied with what they personally find interesting, and that approach does not contribute to building a company that can thrive for a century.

No, well said. I completely agree, and that's great to hear. You want to avoid situations with incentive structures that commit to spending a set amount, such as $20 million, regardless of the circumstances. That approach may not be the best use of capital if other opportunities for returns exist within the business. I appreciate the insights on minerals; they were very helpful. I have a quick question regarding the CapEx in North American Mining. I read the filings this morning and may have missed or misunderstood something. I believe the $23 million spent on the Nevada project is reimbursed by the mine owners. Is that correct?

Yes. From a cash standpoint, we'll be reimbursed over 5 years. From a GAAP standpoint, it...

The revenue is recognized over the useful life of assets. That was a GAAP and cash...

You will receive reimbursement over a period of 5 years in cash. Regarding the $33 million you've mentioned for that business, what portion of it, if any, is eligible for reimbursement?

It's a small amount. The majority of that is for the remaining North American Mining business, not for.

Right. Got you.

And I'm sorry but Christy is telling me that we've got like 1 minute left on this call before we get cut off. You're the first third caller we've ever had. We're super excited...

No problem. My questions have been answered. I appreciate the thoughtful replies and I can follow up later with a couple of quick questions. But overall, great call. Thank you for the answers.

Well, thank you so much, everyone. At this time, I'll turn it back over to Christina Kmetko for closing remarks.

Okay. Well, with that, we will conclude our very robust Q&A session, as J.C. said, that was very informative for everybody. Before we conclude, I would like to provide a few reminders. A replay of the call will be available later this morning. We'll also post a transcript on the website when it becomes available. And if you do have any follow-up questions, please reach out to me. My phone number is on the release. So, I hope everyone has a great day, and I'll turn it back over to Bailey to conclude the call.

This concludes today's conference call. A replay of the conference will be available for 7 days ending May 9, 2024. To access the replay, please dial 1(800) 645-7964 or 1-757-849-6722 then enter the playback ID-9435, followed by the pound key. Thank you for attending.