Natural Resource Partners LP (NRP) Q1 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to Natural Resource Partners first quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Tiffany Samus, Investor Relations. Tiffany, please go ahead.

Thank you. Good morning and welcome to the Natural Resource Partners first quarter 2026 conference call. Today's call is being webcast and a replay will be available on our website. Joining me today are Craig Nunez, President and Chief Operating Officer, Chris Azoulas, Chief Financial Officer, and Kevin Craig, Executive Vice President. Some of our comments today may include forward-looking statements reflecting NRP's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in NRP's Form 10K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today also include non-GAAP financial measures. Additional details and reconciliations of the most directly comparable gap measures are included in our first 10 to discuss the operations or outlook for any particular coalesce or detailed market fundamentals. Now, I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

Thank you, Tiffany, and good morning, everyone. I would like to start off by apologizing in advance for my voice. I'm a little under the weather today, and I will do my best to speak clearly so you'll be able to understand me. NRP generated $34 million of free cash flow in the first quarter of 2026 and $167 million of free cash flow over the last 12 months, before accounting for the $39 million capital investment we made into our soda ash business during the quarter. Metallurgical and thermal coal producers continue to operate in challenging conditions, while soda ash producers are struggling amid what is arguably the most significant global supply glut in a generation. To date, we have not experienced any material impact on our mineral rights segment from the war in Iran. However, the closure of the Strait of Hormuz has caused some European countries to look at delaying coal plant phase-outs to ensure power security, similar to ongoing discussions in the United States. U.S. metallurgical coal prices are realizing a modest benefit from increased demand for safe-haven domestically produced steel. At the same time, sharply higher diesel and shipping costs are compressing producer margins, and any slowdown in global industrial activity resulting from elevated energy prices could put downward pressure on steel demand and metallurgical coal pricing. There is another second-order effect worth noting. Higher oil prices may also lead to increased U.S. oil production and greater volumes of associated natural gas. Given the limits of LNG export capacity, a portion of this gas may become stranded domestically, placing downward pressure on North American natural gas prices and, in turn, on thermal coal demand and pricing. Commodity markets have a way of solving one problem by creating another. In the SODASH market, higher energy and transportation costs, combined with war-related slowdowns in construction activity, particularly across Asia, have worsened condition for an industry already burdened by oversupply. While lower-cost U.S. producers may ultimately gain market share as higher-cost competitors struggle, we have not yet seen clear evidence of this shift. In short, the war in Iran has taken an already difficult outlook for SODASH and made it worse. Despite these headwinds, NRP continues to generate substantial cash flow and remains on track with our deleveraging strategy. Although outstanding debt increased to $73 million during the quarter as we funded the $39 million investment in Shishajam, Wyoming, We subsequently reduced debt to $60 million by quarter end and have paid it down to $45 million as of today. Our objective is straightforward, pay off debt so that more cash can ultimately flow to unit holders. Before the conflict in Iran, both metallurgical and thermal coal markets were showing early signs of stabilization. While we cannot say with confidence that coal prices have reached a cyclical bottom, there are indications that the worst may be behind us. Looking ahead, my primary concern remains our soda ash business. Despite being one of the lowest cost producers globally, Shishijam, Wyoming, is currently struggling to generate positive free cash flow. While we were early to call for a soda ash downturn, I underestimated both its severity and duration. Our prior stress testing did not envision the decline of this magnitude. Had you asked me a year ago whether we would be making a capital infusion earlier this year, I would have said no. We are re-evaluating our assumptions regarding global soda ash markets in general, and Shishijam, Wyoming in particular. Recent events have demonstrated that even low-cost producers, like us, are not immune to prolonged adverse conditions. Since acquiring our interest in Chicago Wyoming 13 years ago, NRP has received half of a billion dollars in distributions so far. Annual distributions have ranged widely from a low of negative 39 million to a high of 81 million, averaging roughly $38 million per year. As of today, those distributions already received, have already delivered to NRP an 11% compound annualized return and a 1.6 to 1 multiple on our investment. Those calculations assign zero residual value for our interest in Shishijem, Wyoming. In reality, the reserve information filed with our Form 10-K indicates that at current production levels, Shishijem, Wyoming has approximately 50 years of remaining reserves. Simply extrapolating historical average distributions over the 50-year remaining reserve life, would equate to roughly $1.9 billion of potential future distributions to NRP, an unusually long runway for a natural resource asset and an important component of NRP's intrinsic value. While our internal evaluation of our interest in CCGM Wyoming is more detailed than that, incorporating projected pricing, costs, capital expenditures, and the time value of money through discounted cash flow and internal rate of return calculations, these high-level numbers give you an idea of our view of the economic characteristics of that investment. Before turning it over to Chris to cover the financial results, I'd like to leave you with three key takeaways. Number one, NRP's financial health is not dependent on the success of Shishijiam, Wyoming. Our balance sheet is strong, liquidity is ample, and free cash flow generation is exceptionally robust at this stage in the commodity price cycle. Preserving this hard-earned financial strength is our top priority. Number two, we remain on track to increase NRP unit holder distributions this year, but continue to caution that challenging environments for all three of our key commodities, particularly SODASH, increase the likelihood that some event or combination of events could push that timing back. I expect we will increase distributions in November, but will not be surprised if something happens to cause that to be delayed. We will continue to update you each quarter with our latest thinking. And number three, decisions to invest additional capital in Shishajam, Wyoming, will be evaluated through the same lens we would apply to all investments, maximizing NRPs intrinsic value per unit while maintaining a conservative bias and an appropriate margin of safety. Put simply, every dollar invested is a dollar that cannot be distributed to NRP unit holders today, and that tradeoff must be justified by compelling returns on capital and the expectation of higher unit holder distributions in the future. For those of you who are new to NRP, I refer you to the unit holder letters in our annual reports for more information on our investment philosophy and approach to capital allocation. With that, I'll turn it over to Chris now to cover the financials.

Thank you, Craig. In the first quarter of 2026, NRP generated $20 million of net income and $33 million of operating cash flow. NRP's free cash flow in the first quarter of 2026 was negative $5 million, which takes into account the $39 million capital investment into Sisijam, Wyoming. Of these consolidated amounts, our mineral rights segment generated $34 million of net income, $42 million of operating cash flow, and $43 million of free cash flow in the first quarter. When compared to the prior year first quarter, mineral rights segment net income decreased $12 million, and operating cash flow and free cash flow each decreased $1 million. The decrease in net income was primarily due to lower metallurgical and thermal coal sales volumes as compared to the prior year period and increased depletion rates at certain thermal properties. The declines in operating and free cash flow were also primarily due to lower metallurgical and thermal coal sales volumes, partially offset by higher recoupments of prior period minimum payments in the first quarter of 2025 compared to the first quarter of this year. regarding our met thermal coal royalty mix metallurgical coal made up approximately 65 percent of our coal royalty revenues and 45 percent of coal royalty sales volumes in the first quarter of 2026 for our soda ash segment net income for the first quarter decreased 12 million compared to the prior quarter this decrease was driven by lower sales prices and volumes due to the oversupplied international soda ash market and weakened demand for flat glass Operating cash flow decreased $3 million and free cash flow decreased $42 million when compared to the prior year period. These decreases were due to not receiving a distribution in the first quarter of 2026 as compared to receiving $3 million of distributions in the first quarter of 2025. In addition, free cash flow was further impacted by the $39 million capital investment made in CISGEM Wyoming in the first quarter of 2026. In March of this year, NRP and CISGEM Wyoming's managing partner made a capital investment into CISGEM Wyoming, and NRP's per rate of share was just $39 million. NRP does not expect distributions from CISGEM Wyoming to resume until SODASH market demand rebounds or there is a significant supply response to this weakened market. moving to our corporate and financing segment q1 2026 net income operating cash flow and free cash flow each improved three million as compared to the prior year period these improvements to the corporate and financing segment were due to less debt outstanding resulting in lower interest costs and less cash paid for interest regarding our quarterly distributions in february this year we paid the fourth quarter distribution of 75 cents per common unit. In March, we paid a special cash distribution of 12 cents per common unit to help cover unit holder tax liabilities associated with owning NRP's units in 2025. And today, we announced our first quarter distribution of 75 cents per common unit to be paid later this month. And with that, I'll turn the call over to our operator for questions.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device and please stand by while we compile the Q&A roster. Our first question comes from the line of Stephen Balsam with Yellowgate Investment Management. Stephen, your line is now open.

Hi, good morning, everyone. Can you discuss the minus 7.8 million loss on the equity and earnings in the SODASH that include interest? Maybe if you could just give a little bit more detail on that.

Sure. No, that was our proportionate share of their net income during the first quarter. So that was their operating results. That includes all cash and non-cash amounts. That's the U.S. GAAP number.

Right. I understand. So that means that total loss would have been double that. But I guess I'm trying to get a sense of whether that included any impairments or whether that was sort of represented by, you know, I guess maybe if you have an idea, I know it comes from the financial statements, what the gross loss.

Yeah, we have a footnote in our 10Q that you'll see later here today that will disclose anything significant. But there was no significant one-time items that were in the net income amount.

I'll take a look for that. Also, the coal sales volumes this quarter were down about 20%, 21% versus the prior year. Also down versus the fourth quarter. Illinois Basin was down a lot. Northern Powder River and Gulf. Was that anything there that you see going forward? Obviously, you guys don't have the production forecast, but do you have a sense of anything in particular going on there or what you think things should look like for the year ahead?

Well, as you know, we don't talk about any lessees particularly, and when we talk about the Illinois Basin, we only have one lessee, but But we didn't see – there was not a systemic problem in Illinois Basin that resulted in lower production. It was really an issue of mining on adjacent land that was not owned – had minerals that were not owned by us during the period. And you'll see that happen sometimes. You'll see our production volumes drop and increase rather dramatically from period to period as the operator moves from adjacent property onto us and back off of us again. Got it. So nothing systematic.

Correct. Great. Just one, another financial statement question, a quick one, is in the cash flow statements, for cash flows from financing, there was $8.6 million spent during the quarter, just on other items net. Can you talk about what that was?

Sure. The biggest item there is taxes associated with equity awards. So when we settle equity awards, they get net settled, and those taxes get paid by NRP.

That happens every first quarter.

I guess that's also just the payables or probably also just catching up with bonuses or other payments from the prior. One last quick question is just notice that there's non-cash, but there's a major increase in depreciation. I think you mentioned that there was increased depletion rates in certain thermal coal. Anything else? The number went from $4 million to $7.6 million this quarter.

Yeah, you picked up on it. I mean, that's exactly right. We continually do evaluations of our economic tons estimates that drive that depletion calculation. And as we get information from our operators and our lessees about their future mine plans, it can cause some adjustments to those estimates of economic tons. And that's what happened last year. But there wasn't, I just want to add, you noticed there wasn't any associated impairment that was recorded as a result of those adjustments.

So, again, that's something that fluctuates time to time. your estimated reserve quantities will go up they'll go down and as they do it affects your depletion rate each and on your financial statements and on your tax returns got it right thanks for clarifying that go back to the queue in case there are other questions thank you our next question comes from the line of david spear with nitor capital management david your line is now open hi um regarding the soda ash jv as following the contribution um how much debt

now remains at the um at the jv 60 million 60 million in total not not to nrp share got it and then earlier when you mentioned you're you know potentially re-evaluating the soda ash business. Is it possible to further elaborate on, you know, potential options?

Well, let me tell you what I mean by reevaluating. So, you know, those of you who follow us for a long time, you know that we are very focused on scenario testing, stress testing our business, trying to evaluate every possible thing or combination of that could undermine our results. We do the same thing on Sodash. And, you know, quite frankly, the environment that we find ourselves in now is one that is worse than we had envisioned in our stress testing. So we have gone back to the drawing board and said, OK, let's let's start from scratch, because since this scenario, this market situation has fallen outside of what we had envisioned was realistically possible. possible, we may need to correct our thinking. So we're just reevaluating everything along those lines. As far as what are the possible scenarios going forward with respect to Shishijam, Wyoming, two reasons I don't have a lot of meat to give you on that. First is that we don't yet know what the operator of the venture is going to do. They are working, they're evaluating, they're making up their decisions of what they would like to propose as a plan going forward. And the second thing is, you know, this is a very competitive market that we're in in the global SODASH business right now, even more competitive now than during normal times. So I don't want to elaborate too much on the possible avenues that the operator may be considering because it could give competitors information that would not be helpful for us, for them to have. and i'd still imagine even in the current depressed environment and it's the you know the partnership's view that this you know the jv is still a large component of the you know of the company's value right now um it it is our view that um this is a world-class asset that has a very long life to it with very significant cash generating potential in the future that's going through a very difficult time right now. And so, yeah, I mean, look, the concern that we have that you should have, I think that everyone should have, is are there signals here that this asset has lost the investment characteristics that attracted us to it in the first place? Is the future going to be materially worse than the past? This asset's been operating for over 60 years. And is the next 50 going to be materially worse than the last 60? And are we unrealistically clinging to bright memories of the past, allowing ourselves to be misled into making more investments into the future that shouldn't be made? And we're trying to be very careful that we don't fall into that trap.

Got it. I appreciate it. Thank you.

You bet.

We have reached the end of the Q&A session. I will now turn the call back to Craig Nunez for closing remarks.

Thank you very much, Operator, and thank you, everyone, for your participation on the call and the questions. And I wish you a very good day and look forward to speaking to you on our next call.

This concludes today's call. Thank you for attending. You may now disconnect.