Natural Resource Partners: High Uncertainty, Low Risk
A royalty on the growth of others, a 20%+ free cash flow yield, and a big dividend increase on the horizon.
Natural Resource Partners (NRP) has several of our favorite investment characteristics. Chiefly:
A low valuation due to non-economic factors (e.g. ESG, spinoffs, index exclusion, low float, etc);
A royalty business model; and
A change in capital allocation as a catalyst.
It is also consistently free cash flow generative and has clear, accretive capital allocation. Exactly what you would expect when management and directors own 28.9% of the company. That’s $330 million of skin in the game. Corbin "Corby" Robertson Jr., the Chairman and CEO, owns 19.8% and takes no salary.
NRP is a master limited partnership (MLP) that owns 13 million acres of mineral interests and other subsurface rights across the United States. That’s about the size of the entire state of West Virginia, which covers 15 million acres. NRP owns virtually all of its property in fee (fee simple). It is the highest level of property ownership.
NRP’s properties mainly produce coal from the Appalachian Basis, Illinois Basin, and Northern Powder River Basin. NRP’s primary earnings are royalties on their lessee’s production.
NRP also owns a 49% interest in Sisecam Wyoming LLC (formerly NYSE: SIRE), which produces soda ash.
Last, NRP has a burgeoning carbon neutral business. Though small, it is already profitable and may move the needle down the road. This is also a royalty business, so it’s all upside and no downside for NRP.
NRP’s earnings are highly dependent on factors outside of its control, namely coal prices. That’s why I consider it “high uncertainty.” There’s no telling what they’ll earn in any given year.
I normally put businesses like this in the “too hard” pile. NRP avoids this fate because of its extraordinarily low valuation (20%+ FCF yield) and royalty business model. It is virtually impossible for NRP to lose money. Free cash flow (FCF) ranged from $7 to $22 per share over the past decade, but was never negative.
Even in the depths of 2020’s coal bear market, NRP produced $7/sh of FCF. The stock only trades for 12x that today. That’s why I consider it “low risk.”