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Edited Transcript of NRP earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Natural Resource Partners LP Earnings Call

HOUSTON Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Natural Resource Partners LP earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Zolas

Natural Resource Partners L.P. - CFO & Treasurer of GP Natural Resource Partners LLC

* Craig W. Nunez

Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC

* Kevin Joseph Craig

Natural Resource Partners L.P. - EVP of Coal - GP Natural Resource Partners LLC

* Tiffany Sammis

Natural Resource Partners L.P. - IR Executive

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Conference Call Participants

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* Mark Andrew Levin

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Natural Resource Partners quarterly earnings conference call. My name is Norah, and I'll be facilitating the audio portion of today's interactive broadcast. (Operator Instructions)

At this time, I'd like to turn the show over to your speaker Tiffany Sammis, Natural Resource Partners, Investor Relations. Ma'am, please go ahead.

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Tiffany Sammis, Natural Resource Partners L.P. - IR Executive [2]

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Thank you, good morning, and welcome to the Natural Resource Partners Second Quarter 2019 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 Zolas, Chief Financial Officer; and Kevin Craig, Executive Vice President of Coal.

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 10-K 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 to the most directly comparable GAAP measures are included in our second quarter 2019 press release, which can be found on our website.

I would like to remind everyone that we do not intend to discuss the operations or outlook for any particular coal lessee or get into detailed market fundamentals. In addition, I refer you to Ciner Resources' public disclosures and commentaries for specific questions regarding our soda ash business segment.

Now I would like to turn the call over to Craig Nunez, our President and Chief Operating Officer.

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [3]

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Thank you, Tiffany, and welcome, everyone, to our quarterly call. I'm pleased to announce that NRP continues to generate significant amounts of cash and earn attractive returns on capital. Excluding [disco] ops and onetime beneficial items, we recorded $161 million of free cash flow over the last 12 months and our consolidated return on capital employed over the same period was 16%, with the coal segment coming in at 16.7% and soda ash returning [to] 18.4%. These results have allowed us to add $70 million to common unitholders' equity and pay out nearly $33 million of common distributions over the last year. Our cash flow cushion, which is the free cash flow remaining after mandatory debt amortizations of our private placement notes, payments of preferred dividends and the current common unit distribution, was $26 million over the same period. Looking ahead, falling coal prices are likely to put pressure on our coal lessees in the coming months. While the impact of falling prices has not yet impacted our results, we believe it's because most of our lessees have been selling coal at higher prices locked in during the fourth quarter of last year. We also believe most of these sales contracts will be coming up for renewal between now and the end of the year, at which time, sales prices will likely be reset at lower levels. However, we expect the negative impact of these adjustments on us to be somewhat muted by the minimum payment provisions in our leases that provide us with some downside price protection. The current coal price environment, together with continuing transportation and logistical challenges as well as limited access to capital, are taking a toll on some of our lessees. Three of our lessees Blackjewel, Blackhawk and Cambrian have declared bankruptcies since our last earnings call. While we cannot predict the outcome of a bankruptcy with certainty, we believe that the quality of our asset base, the legal strength of our position as a coal lessor landlord and our experience with numerous lessee bankruptcies over the last 5 years will work to minimize the negative impact to NRP from these proceedings, and we do not expect material changes to the long-term earning power of our assets involved.

In our soda ash segment, the managing partner of our Ciner Wyoming joint venture has announced plans for a major capacity expansion and a multiyear reduction in cash distributions, with the cash retained at the joint venture used to fund a portion of the expansion capital cost. The cash distributions we received from Ciner Wyoming over the last 2 years have averaged $45 million annually. Starting this month, we expect annual distributions to us to drop to $25 million and remain in the range of $25 million to $28 million for the next 2 to 3 years. While this expansion is intended to provide significant increases in production capacity, free cash flow and cash distributions to us over the long-term, the near-term reduction in cash distributions has negative implications for our cash flow cushions. Despite these headwinds, NRP is in a much stronger position today than at the start of the last downturn in the coal markets. Our team has spent the last 4 years rightsizing our business and recapitalizing our balance sheet. It's times like these when that hard work and conservative financial planning will pay off. With $86 million of cash, a 4-year bank facility with $100 million of available borrowing capacity, no parent company bond maturities for 6 years and a leverage ratio that is roughly half the level of just 4 years ago, I'm confident we have the financial strength to weather storms that come our way.

With that, I'll turn the call over to Chris to cover our financial performance.

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Christopher J. Zolas, Natural Resource Partners L.P. - CFO & Treasurer of GP Natural Resource Partners LLC [4]

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Thank you, Craig, and good morning, everyone. I'd like to start with a recap of the refinancing transactions we completed in the second quarter that provide us with significant additional time to execute further deleveraging and manage our business through commodity price volatility.

First, we extended all $100 million of our bank facilities committed borrowing capacity from 2020 to 2023. Second, we issued $300 million of new 9.125% parent company bonds due 2025 and used the net proceeds along with cash on hand to redeem all $346 million of our 10.50% parent company bonds due 2022. In addition to the benefit of extended maturities, lowering both the principal and interest rate on a parent company bonds will decrease our annual interest expense by $9 million. In terms of the impact that these refinancings had on our second quarter results, we recorded a $29 million loss on extinguishment of debt, of which $18 million related to cash we paid to call the 10.50% bonds and $11 million related to noncash write-offs of unamortized debt issuance and debt discount costs.

With that being said, I'll move to our second quarter financial results. During the second quarter, we generated $53 million of operating cash flow and $54 million of free cash flow driven by strong royalty cash collections and steady overall performance from our coal royalty segment. Second quarter net income was $19 million, which includes the $29 million loss on extinguishment of debt related to our Q2 refinancings.

Basic and diluted earnings per common unit for the second quarter were $0.95 and $0.87, respectively.

I'll next move on to our segment results. Our coal royalty segment continued to perform well. Our lessee sold a total of 7 million tons of coal from our properties and our coal sales prices were stable. Our coal royalty segment generated $56 million of operating and free cash flow during the second quarter of 2019, an 8% increase compared to prior year quarter driven by the collection of lease amendment fees and the Hillsboro minimum payment that we began to recognize in 2019 after the litigation settlement with Foresight.

We continued to see solid pricing from our metallurgical coal driven by sustained global steel demand. In terms of our coal mix, metallurgical coal made up approximately 50% of our total coal royalty sales volumes and approximately 70% of our coal royalty revenue during the second quarter. Additionally, during the second quarter, we continue to see stable sales pricing for our thermal coal as a result of our lessees locking in favorable pricing in the fourth quarter of last year. With this matchup of stable overall pricing for our coal in the second quarter, our coal royalty segment's net income was $54 million, an increase of 36% compared to the prior year quarter. This increase was driven by $14 million of increased lessee forfeitures of recoupable balances from minimums paid in prior periods, $4 million of increased lease amendment fees and $3 million of increased straight-line minimum revenue primarily from our Hillsboro property. These increases in our coal royalty segment's Q2 net income compared to prior quarter were partially offset by a $4 million decrease in coal royalty revenue driven by lower coal sales volumes from idling of the Pinnacle mine in the fourth quarter of 2018, logistical issues in the Illinois Basin caused by flooding and high water throughout the river systems, and the timing of mining on our Northern Powder River basin property.

Moving to our second business segment. Our soda ash business generated $11 million of net income and $9 million of free cash flow during the second quarter of 2019. Net income decreased $5 million compared to the prior year quarter due to Ciner Wyoming's prior year litigation settlement of a royalty dispute that resulted in $13 million of income in the second quarter of 2018. Excluding the impact of this litigation settlement, Q2 2019 net income increased $8 million compared to the prior year quarter driven by increased production and sales volumes and increased domestic and international sales prices.

While the facility's operating performance was stronger than the prior year quarter, we received $9 million of free cash flow from Ciner Wyoming in Q2 2019, which represents a $2.9 million decrease compared to the prior year quarter. As Craig mentioned earlier, this decrease is a result of the decision by Ciner Wyoming to reduce distributions to fund its capital expansion project. We expect the annual distributions from Ciner Wyoming to drop to $25 million or $6.25 million per quarter and remain in that range of $25 million to $28 million annually for the next 2 to 3 years.

Our coal -- our corporate and financing segment costs in the second quarter were $46 million, which include the $29 million loss on extinguishment of debt resulting from our Q2 debt refinancings. Excluding this $29 million of loss, our Q2 corporate and financing costs were down $4 million or 21% compared to the prior year quarter, primarily due to the lower interest expense resulting from the $262 million of debt we've repaid over the last 12 months.

Regarding distributions, we paid a quarterly $0.45 per unit distribution to our common unitholders and a quarterly cash distribution of $7.5 million to our preferred unitholders in May. In addition, we also paid an $0.85 per unit special distribution made to our common unitholders to cover their tax liability resulting from the sale of our construction aggregates business.

In July, we declared another quarterly cash distribution of $0.45 per common unit and $7.5 million cash to our preferred unitholders.

With that, I'll turn the call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Mark Levin of Seaport Global.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

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Just a couple of questions. First more modeling related. I think you referenced in your remarks production lease minimums seem like where we missed relative to estimates or relative to what you guys reported was a big, big difference in the other revenue and particularly the production lease minimum revenue line item, which jumped significantly quarter-over-quarter. Maybe you can provide some more color around that jump and then how to think about modeling that line item going forward?

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Christopher J. Zolas, Natural Resource Partners L.P. - CFO & Treasurer of GP Natural Resource Partners LLC [3]

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Sure. Mark, this is Chris. You're absolutely right. There was a big jump in production lease minimum revenues. And as I said on the call, that was driven by lessee forfeitures of their recoupable balances that occurred in the second quarter, primarily driven by lease terminations and that's really the big driver for that amount. That's not something that I think [is] really you can forecast on a regular basis. And if you looked at our prior quarter amount, that's something that's probably more of a sustained normal rate for that line item.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

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Got it. That's very helpful. In terms of leverage, looks like you guys were 2.6x. Again many kudos for driving that down as you have over the last several years. Really, really a great job. But I'm just curious where do you stop if you stop? So if you're 2.6x is one turn the right number? Is 1.5 turns? Is no lever? I mean how do you guys ultimately see what the capital structure should look like over the next few years?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [5]

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Mark, this is Craig. We don't have a long-term target for debt capital structure just yet, but it is well below the 2.6 level where we are now. We have a couple of outstanding items out there that we want to get through. We still have some litigation that's outstanding that we want to get that behind us and we also want to see what happens after we -- with the volatility in the coal price market -- coal markets these days and what happens after recontracting in the back half of this year, and as we get into 2020 to see what the environment's like.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [6]

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No. That makes sense. And related to the point you made about some of your lessees that filed for bankruptcy. One of them will be out soon and producing but I guess several of the others are a little bit more squishy. Can you maybe remind us a, what the contribution was production-wise from those companies that are in bankruptcy and then secondly, maybe a quick history course because as you referenced, you had a number of lessees over the years going through the bankruptcy process, can you maybe talk about how the courts have dealt with those companies' contracts with you as they went through those bankruptcies?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [7]

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Sure. First of all, we aren't going to comment as we've said before, Mark, on specific lessees and the contribution that we receive from specific lessees. I will tell you though that while all the bankruptcies combined that we referred to, there's a relatively modest reduction in our cash flows that we anticipate. It's not a material impact to us. We also don't believe that there is any hit to the long-term earning power of those assets. We think they're going to continue to generate the same run rate they did before. So I don't think there's really any adjustment that needs to be made for that.

As far as the process of going through bankruptcies, what has tended to happen in the past is that our leases are either accepted or rejected as they go through the bankruptcy process. If they're accepted, they tend to -- they're accepted as is. So there's no modifications, reductions to those leases, et cetera. And what has actually happened is that -- and I would say the majority and that's roughly the majority of bankruptcies where our leases are assumed, we actually are able to receive improved terms in one form or fashion even if it's just assignment fees, that type of thing, onetime hit, onetime benefits for us. We've -- the times when the leases would not be assumed is when the -- typically when the operation on that lease is not profitable for that operator. And -- so from our view the decision of -- the assessment of whether a lease is going to continue to operate, whether it's going to be assumed or not assumed typically falls on the economic viability of that operation on that lease. If an operator, be it the bankrupt operator that may be emerging from reorganization or another operator can actually make money by operating that lease, it typically continues to operate and we continue to get paid. If it's not a viable operation, if it's losing money at the operating level regardless of the capital structure of the lessee then that operation normally shuts down and goes away and that lease is rejected.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [8]

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That makes sense. That's a good explanation. One more from me. So -- I am sorry?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [9]

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Mark, let me add something to that also. I would say that over the last 5 years, we've been through a quite a number of lessee bankruptcies here. I mean it's a substantial number of lessee bankruptcies here. And that -- through that time, I would suggest that never say never, but I think it's unlikely that there are many operations that we have currently operating on NRP properties that are unprofitable for the lessees at the present time because most of those were shaken out during the carnage of the last down cycle.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [10]

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That makes perfect sense. Two last quick ones from me. One is a major Eastern rail has or seems to be putting up for sale some of its properties. I won't ask you to comment specifically on that situation, but is there a point at which you guys would consider actually getting bigger in terms of your coal reserve position? Or are we thinking more along the lines of just continuing to shrink the debt balances and improve the cash cushion?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [11]

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Well, Mark, our primary focus is to continue to improve the capital structure because we think that's the least risky, best risk-adjusted way to [add].

(technical difficulty)

value over time. Now that being said, as a coal -- mineral owner, we are in a somewhat unique position. And there could be -- if an opportunity came along to acquire a coal mineral right that was synergistic with what we had and we were in a unique position to add value, and, perhaps, accelerate our deleveraging process by an attractive asset, I think we would consider everything and anything. However, the primary focus continues to be what it's been for the last 3 years and that is -- 4 years and that is to improve the financial profile of the business.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [12]

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No. That makes sense. And then final, final, final question, which is, any color you can provide in terms of -- a frequent question sometimes is around minimum royalty payments and any way to quantify in a given year what a good minimum base is to think about? I mean just worst, worst, worst-case scenario, which hopefully will never come into play. But if it did, is there any sort of financial color you can provide around -- the floors at which minimums provide you guys from a cash flow perspective?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [13]

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Well, generally -- I'll give you some guidance here -- or not guidance per se, but generally, we don't receive any minimums of -- to speak of on the met side because met pricing is above the minimum threshold at our leases, so we're receiving market prices so to speak on those. So that -- we're really talking about the thermal side of the business right now. And we do receive -- we do have a number of minimums there that are in place that are, what I'll call, in the money. And so what I think you're really asking is, of those minimums, how much are actually in the money and kicking in? What's the amount of deficiency payments that we're actually receiving because we have that minimum provision in our contracts? And that number is roughly in today's price environment, today's thermal price environment, $20 million, $25 million.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [14]

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Got it. That's annual -- that's like on an annualized basis?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [15]

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Correct.

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Christopher J. Zolas, Natural Resource Partners L.P. - CFO & Treasurer of GP Natural Resource Partners LLC [16]

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And, Mark, just to add a little color to that. We do have a footnote in our 10-Q. We have a revenue footnote and it's footnote 2 in our 10-Q and we actually disclose there the total amount of minimums we have for all of our lease contracts and kind of break it out in buckets of 5-year increments. So the total amount there is just about $74 million of total annual minimums we have with all of our lessees.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [17]

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Okay, that's perfect. That's exactly what I was looking for. And are there any -- there are a lot of new met projects that are being talked about or discussed. Are any of -- are there any new met projects that are on NRP land that could conceivably add to your met volume over the next few years?

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Kevin Joseph Craig, Natural Resource Partners L.P. - EVP of Coal - GP Natural Resource Partners LLC [18]

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Mark, this is Kevin Craig. No, not a brand-new met project. There are some expansions -- continuations of operations in -- one in particular coming off adverse coal back on dollars, but not what you would think of as a new greenfield line of sight.

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Operator [19]

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(Operator Instructions) We have a question from the line of [Steve Berman], an individual investor.

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Unidentified Participant, [20]

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The minimums, are they principally tied to the thermal side as opposed to the met coal? Or they are -- or are they on both segments?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [21]

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We have them on both segments, both met and thermal, but the current price environment in the met market means that the market prices are above where the minimums are set. So the minimums are not kicking in and we're not receiving deficiency payments on the met side right now.

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Unidentified Participant, [22]

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Okay, so when you said you would expect that the pricing of coal will be going down, you're implying it's going to be on the met side, right?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [23]

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We think -- well, both met and thermal benchmarks have fallen quite significantly here year-to-date. So we think there will be lower prices on met and thermal.

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Unidentified Participant, [24]

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I see. Okay. And I'm sure this is obvious to industry experts like the last person that spoke, but what are the key driving forces in the pricing of these various coal markets? Obviously, there's a lot of things but just simplistically, what are the -- what's causing the downward swing in prices?

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Kevin Joseph Craig, Natural Resource Partners L.P. - EVP of Coal - GP Natural Resource Partners LLC [25]

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So this is Kevin Craig. Number of factors going into it obviously. If you start at the macro level, economic growth, on the thermal side, electric generation both domestic and internationally. If you look at our export market, we compete around the world with coals such as Australian coals going into China, so you have currency exchange rates that play a role, demand from China, India, the international players. On met side in particular demand for steel worldwide, steel plant utilization rates. And I'm thinking particularly of both our domestic steel plant utilization rates, European market and then your Asian markets are really the key drivers to get back to your supply/demand dynamics.

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Unidentified Participant, [26]

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So the industrial slowdown that supposedly is taking place in China is -- do you feel that, that is directly impacting the pricing of your product?

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Kevin Joseph Craig, Natural Resource Partners L.P. - EVP of Coal - GP Natural Resource Partners LLC [27]

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My opinion is not to date. You've seen met coal being imported into China year-over-year at a very consistent rate. So -- and steel production out of China -- or in China has grown year-over-year. So there are certainly other factors that drive the macro market and you can't look at any one data point. It's really a number of points that drive the worldwide demand.

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Unidentified Participant, [28]

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Okay. So basically you seem to be implying that the current payout is sustainable even though you want to reduce your leverage further and have some things that still need to be done. Is that a fair assessment to current yield?

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [29]

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When you say current payout, you mean our current common distribution rates?

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Unidentified Participant, [30]

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Yes, yes.

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [31]

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We're not going to give specific guidance on that. However, we will be -- we'll tell you that even during the carnage of the last downturn in the coals markets, we were quite focused on maintaining the distribution at a current -- at the current level because we realize that our investors have to pay income tax on the -- their pro rata share of the income we earn. And unlike most MLPs, we actually do generate taxable income that flows through to our equity holders, so we are quite focused on maintaining the current common distribution.

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Operator [32]

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There are no further questions at this time. I would like to turn the call over back to speaker, Craig Nunez. Please go ahead, sir.

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Craig W. Nunez, Natural Resource Partners L.P. - President & COO of GP Natural Resource Partners LLC [33]

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Thank you very much and I'd like to thank everyone for participating in our call today, and thank you for your interest in NRP and continued support. We look forward to talking to you again soon. Have a great day.

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Operator [34]

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This concludes today's conference call. You may now all disconnect.