On Apr 18, 2013, we downgraded our recommendation on Natural Resource Partners L.P. (NRP) to Neutral from Outperform. The owner of mineral reserve properties currently holds a Zacks Rank #3 (Hold).
Why the Downgrade?
The primary reason behind the downgrade is the effect of drab coal industry performance in 2012 which will continue to act as a deterrent in the first quarter of 2013.
Over the past two months the Zacks Consensus Estimate of the partnership declined 0.5% to $1.72 per unit for 2013. Moreover, the Zacks Consensus Estimate for 2013 reflects a projected fall of 14.25% from the year-ago earnings of $2.00 per unit.
Cause of Concern
Natural Resource Partners will be affected by lower thermal coal prices in the U.S. energy market. Moving forward, the expiration of a lease agreement with an associate of the partnership’s major client Cline, Gatling LLC would impact operations.
Transporation cost is an important factor which impacts price of coal. An increase in transportation costs owing to greater distance between the properties and the end markets would also impact competiveness of coal produced by lessees as oppose to ones produced from other sources.
On a positive note, an improving steel market in the developing nations will reinvigorate the demand for metallurgical coal. This will to some extent counter the strong aforementioned negatives.
Other Stocks to Consider
While we hold a modest outlook for Natural Resource Partners in the upcoming quarters, the expected rise in natural gas prices would reduce coal-to-gas substitution thereby enhancing coal market dynamics.
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