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Natural Resource Partners prepared for market decline, says company president

Three of Natural Resource Partners LP's lessees filed for bankruptcy protection in the second quarter, but the company said it was in a much stronger position to weather the market downturn than it was a few years ago.

The low pricing environment coupled with transportation hurdles and limited access to capital hurt the company's lessees, and falling coal prices will likely pressure lessees in the coming months, President and COO Craig Nunez said on an August 8 earnings call.

Blackjewel LLC, Blackhawk Mining LLC and Cambrian Coal Corp., all lessees of Natural Resource Partners', or NRP's, filed for bankruptcy protection in recent months. While Blackhawk appears poised to reorganize and emerge, Blackjewel has auctioned off its assets, and Cambrian plans to sell off its operations in the near future.

Most of NRP's lessees have been selling coal at higher prices they locked in during the fourth quarter of 2018, Nunez said, so the decline has not impacted the company's financials yet. But it expects sales contracts renewed in the second half of the year will likely be reset at lower levels. NRP anticipates the negative impact of those adjustments to be "somewhat muted" given the minimum payment provisions contained in the leases that provide some protection from declining prices.

"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 five years will work to minimize the negative impact to NRP from these proceedings," he said, "and we do not expect material changes to the long-term earning power of our assets involved."

The company has spent the last four years rightsizing its business and recapitalizing its balance sheet and is in a better position to weather a market decline, Nunez said, given conservative financial planning, $86 million in cash and a four-year bank facility with $100 million of available borrowing capacity, among other factors.

It does expect a relatively modest reduction in cash flow as a result of the three bankruptcies, though not resulting in a hit to those assets' long-term earning power. NRP thinks they will keep generating at the same run rate as previously.

In prior coal bankruptcies, the debtors' lease with NRP was either accepted or rejected as they proceed through the bankruptcy process, and usually accepted leases are not modified, the company president said. The decision on whether a lease will continue to operate usually depends on the economic viability of the operation of the lease. If the bankrupt operator or another operator can make money off the lease, then it usually continues to operate and NRP continues to make money off it. If the operation is losing money, regardless of the lessee's capital structure, the operation usually shuts down and the lease is rejected.

CFO Christopher Zolas said NRP saw "solid pricing" on metallurgical coal driven by global steel demand during the period. Coking coal accounted for about half of NRP's total coal royalty sales volumes and roughly 70% of coal royalty revenue. The company's coal royalty segment had a net income of $53.7 million, about a 36% increase year over year, and coal sales volumes totaled nearly 7 million tons.

NRP reported a net income from continuing operations of $19.1 million, or 85 cents per diluted unit, during the three-month period, compared with $35.1 million, or $1.57 per diluted unit a year prior.