We have downgraded our recommendation on Natural Resource Partners L.P. (NRP) to Neutral due to continued threats of depletion of reserves and the partnership’s dependence on the capital markets to finance growth projects.
Natural Resource Partners’ does not indulge in extraction of minerals at any of the mines it owns. It, thus, eliminates the major risks of operating a mine. The partnership earns a major part of its revenues by leasing its assets to mine operators and charging a royalty or fee for the lease.
This allows the partnership to avoid large expenses and liabilities involved in the capital intensive coal mining business, enabling it to generate large amounts of distributable cash flow.
Natural Resource Partners’ first quarter 2011 results impressed, by surpassing the Zacks numbers. Positive contributions from both coal royalty revenue and revenues apart from coal royalty revenues led to the partnership’s outperformance in the quarter.
Going forward, we expect the partnership to benefit from the improvement in coal market fundamentals, recent acquisitions, its strong liquidity position and solid quarterly results. We note that the partnership’s strategy of growth through acquisition offers long-term upside to unitholders.
Further, we believe the partnership will continue to grow its distributions, driven by increased cash flows from its coal royalties business and the cancellation of the incentive distribution rights.
Despite these positives, which are already embedded in the stock’s valuation, we believe the Natural Resource Partners is prone to changes in coal prices and the continued depletion of reserves at its properties. Coal royalty revenue, a major component of the partnership’s revenue, could be significantly impacted by a decline in coal prices or the increasing attractiveness of alternative fuels.
Also, long periods of depressed coal prices could result in lessees curbing production, ultimately impacting Natural Resource’s royalty revenue and distributable cash flow.
Another major concern for Natural Resource is the continued depletion of reserves due to mining. This ties the partnership’s future growth largely to its ability to acquire and integrate additional reserves. Its ability to grow by acquiring companies or assets is integral to retaining its competitive edge and profitability. The inability to successfully acquire new assets may cut down profitability in the future.
Though we like Natural Resource Partners for the above mentioned positives, we prefer to move to the sidelines on the stock guided by the threats facing Natural Resource Partners.
Natural Resource Partners presently also has a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. At the current rank, Natural Resource Partners remains at par with its closest peers Peabody Energy Corp. (BTU) and CONSOL Energy Inc. (CNX), who also hold a Zacks #3 Rank.
Houston, Texas-based Natural Resource Partners L.P. is a master limited partnership principally engaged in the business of owning and managing mineral reserve properties. The company owns coal reserves and coal handling and transportation infrastructure in the three major coal producing regions of the United States – Appalachian, the Illinois Basin, and the Powder River Basin.
PEABODY ENERGY (BTU): Free Stock Analysis Report
CONSOL ENERGY (CNX): Free Stock Analysis Report
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