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Natural Resource Partners LP Message Board

  • mikotian mikotian May 15, 2009 6:31 PM Flag

    NRP distribution is not sustainable

    NRP is going to cut its distribution either late this year or in 2010.

    The coverage ratio is already pretty thin, and Central Appalachian production levels are falling off a cliff. If you read the conference calls by major coal companies (take your pick, they all say roughly the same thing), the consensus is that coal demand will fall by 70 to 100 million tons (7-10%), with Central Appalachia taking the biggest hit by far due to its exposure to metallurgical coal and high mining costs. It's possible for 1/3 of Central Appalachian production to be shut down in the next year to balance the market. (according to several CEOs)

    Also, NRP is heavily exposed to metallurgical coal. And US steel mills have been producing at 43% of capacity through the first quarter. Metallurgical volumes and pricing have both fallen off a cliff, and I don't see any signs of recovery this year. Unfortunately, NRP's tonnage isn't locked in with last year's wonderful prices. Expect pricing to weaken through the year.

    Add this mix extremely high stockpiles of coal at US utilities. Utilities account for 90% of coal consumption in the U.S. Also, export demand, is down huge as well. The Appalachias is the primary export basin in the U.S., due to its high quality and expensive coals.

    Lastly, NRP's other revenue streams: Aggregates, oil and gas, etc, are all falling off a cliff. The coal transportation/processing businesses are either price or volume dependent, so they are correlated to the primary coal business.

    The guidance the company has will be pulled down later in the year. And depending on inventory levels and the economy following the summer burn period, 2010 may shape up to be another very weak year. Multiple major coal producers have said that 2010 volumes will be even weaker than 2009.

    This does not paint a pretty picture for this company.

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    • Doesn't sustainability of the distribution depend in part on the price of met coal and natural gas? As I understand it, both have strengthened in price recently.

    • In my opinion you are overly negative and not taking into account that the limited partners are pretty much insolated from the downside. The special shares issued for acquisitions will bear the brunt of any downside.

      Even if the dividend is cut in half, the current price would be justified.

      So I think the downside is limited.

      I suspect we will be trading above $20 fairly soon. The analists are usually very late with their downgrades and upgrades.

    • >Nobody knows what's going to happen in 12 to 18 months!

      Correct, but it takes lead time for a coal mining operation to be fired up and the company is basically saying there's nothing in the pipeline that can begin within that timeframe. Also, it's a lot easier to stop a coal mining operation than it is to begin one, so the risks to the downside are far greater than the upside.

    • ((I think you're missing that NRP itself says they do not expect revenues to lift any sooner than 12 months and possibly 18 months. That's far enough into the future that a share price of 10-15 is reasonable.))

      Nobody knows what's going to happen in 12 to 18 months! Things could improve a lot in that long a time.

    • I think you're missing that NRP itself says they do not expect revenues to lift any sooner than 12 months and possibly 18 months. That's far enough into the future that a share price of 10-15 is reasonable.

    • If you know anything about the coal business, reserve numbers are notoriously unreliable. In fact, no one has done any serious coal exploration in Central App for half a century or more--for the simple reason that it was unprofitable to do so. Unlike oil and gas, the rules regarding booking coal "resources" as "reserves" or even characterizing/quantifying these are very murky. For example, in O&G a reserve has to be "economically extractable using today's technology". No such requirement exists in coal. Or, what portion of these "reserves" are actually recoverable? Well, that depends on geology and on mining technique. You basically have no idea what the company is assuming, and the SEC does not really care (unlike in Oil and Gas). This is simply an accepted fact in the industry and people work around that.

      Most mines in the region have a reserve life of about 10-20 years when the mine is developed. That means, to "refresh" your production, you need to sink a very large amount of capital into a new mine site once the old one is exhausted. The problem with CAPP is that given today's pricing and legislative environment, very few people want to sink in the capital to develop these reserves. Not to mention, the geology in the basin is getting tougher all the time. Furthermore, a good portion of the basin's existing production has been shut. These include NRP customers. Many of these mines will NEVER start up again--they require too much capital to upgrade to comply with safety or environmental legislation.

      How do they plan to replace this lost production? I have no idea.

      If I had to guess, a very large portion of the stuff they book as "reserves" are never going to get commercialized.

    • I agree, and also used today's dip to add

    • The current coal reserves are 2.1 billion tons.

      They are mining these at the rate of about 60 million tons per year, giving us about 34 years of current reserves.

      That means revenue streams will continue for decades as opposed to the three or four years of cash distributions that some posters show.

      Reserves have been increasing from 1.8 billion tons 5 years ago to 2.1 billion today. They also have agreements with the Cline group that will allow them the right to purchase another 23 billion tons of coal, enough for the rest of the century and then some.

      You don't have to worry about future distributions.

      This doesn't sound like a Ponzi scheme to me.

      The coal price is not so much a factor as they sign contracts well ahead of the year's production for a stated royalty per ton. The spot price of coal has little bearing on royalties.

      Royalties have increased by over 100% in five years, from $106mm to $226mm.

      What will royalties be twenty years from now is anyone's guess?

      In 2008, production was up 6%, royalties were up 25% per ton. the year 2009 has been soft, but how long will we be in as weak an enviroment as we are today?

      The company has added a new revenue stream in Texas as they continue to diversify away from being almost totally coal.

      I added to existing positions today.

      Coal continues to generate 50% of all power in this country and will continue to do so for many years to come.

    • Thanks, found article very insightful, I've been considering selling, but find the dividend seductive, Thanks!

    • Interestingly, not a word in this thread mentioned what is happening in the natural gas market or the political environment.

      In my estimation, the political negativity is already priced into coal stocks, including NRP. My hunch is that between economic issues and health care, Congress will not do much except pay lip service to limiting CO2 until at least next year. It is even possible that eventually the global warming certainty will go the way the global cooling certainty did in the 1970's.

      The larger concern for coal lies with natural gas below $4mcf. My calculations indicate that with shipping costs, the cost of gas is on a par with $65 thermal coal. There is a lot of newly developable shale gas in the USA and lots that can be shipped in. Gas is a higher grade fuel. If utilities continue switching to natural gas, coal volumes could decrease.

      We hold a significant portion of our portfolio in NRP, but are becoming concerned.

      • 2 Replies to armandchar
      • Coal at $65/ton in appalachia (about 12,500 btu/pound) is about $2.60/million BTUs. Assuming a 25% cost for shipping and processing (low sulfur coal has to have a scrubber), I would say coal at $65/ton is equivalent to gas at about $3.25/mcf.

        However, having said that, coal is not currently being priced at $65/ton. Longterm contracts are currently around $50/ton. Also, is natural gas going to stay under $4?

        Interesting questions, but I don't have the answer. So, right now, I would say that natural gas puts a ceiling on coal of about $65 to $70/ton. But, that is all it does.

      • I think the real market is the behind-the-scenes posturing to gather green credits in case cap & trade limits are imposed. Once the cap & trade issue is resolved, both coal and natural gas will do well because of continuing immigration pressures on the US. There are not enough electrical generation plants in the US and growth in solar/wind is inadequate to meet future demands.

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