Welcome to the Natural Resource Partners L.P. Third Quarter 2018 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kathy Roberts, Natural Resource Partners' Vice President of Investor Relations. Ms. Roberts, you may begin.

Thank you, Nicolas. Good morning, and welcome to the Natural Resource Partners' third quarter 2018 conference call. Today's call is being webcast and a replay will be available on our Web site. Joining me today are Craig Nunez, our President and Chief Operating Officer and Chris Zolas, our Chief Financial Officer. Some of our comments today may include forward-looking statements reflecting NRP's views about future events. These matters involve risk 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 reasons. Our comments today also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP measures are included in our third quarter 2018 press release, which can be found on our Web site. I would like to remind everyone that we do not intend to discuss operations or outlook for any particular coal lessee or get into detail market fundamentals, nor do we discuss pricing or sales with respect to our construction aggregate operations for competitive reasons. In addition, I'll refer you to general resources, public disclosures and commentary for specific questions regarding our soda ash business segment. Now, I would like to return the call over to Craig Nunez, our President and Chief Operating Officer.

Thank you, Kathy. And welcome everyone to our quarterly call. Good to have you with us today. NRP continues to generate significant amounts of cash on the back of solid demand for metallurgical and thermal coal, a trend we have seen for some time now. Over the last 12 months, we recorded $230 million of EBITDA, $148 million of free cash flow and $89 million of net income attributable to common unit holders. This strong performance allowed us to pay out $22 million of distributions to common unit holders, while still retaining $67 million of earnings, resulting in 37% increase in common equity, before the beneficial impact of a new accounting standard. As we've said previously, we are becoming more confident with each passing quarter that our past performance maybe indicative of a sustainable run rate that we can plan on for future. In addition, we are pleased to announce that early in the fourth quarter, which means it is not reflected in our third quarter results, that we received initial payment of $25 million from Foresight Energy regarding the previously announced litigation settlement surrounding the Hillsboro and Macoupin mines. This is the first of a total of $190 million of non-recoupable payments Foresight has agreed to make to us over the next 15 years. We believe this mutually beneficial resolution to our legal disputes represents an important step and marks a new era of cooperation between our two companies, and we look forward to working together in the years ahead. With this litigation behind us, we can now focus all our energy on positioning our company for the future. A future that I’m pleased to say is looking brighter with each passing day. We intend to use the proceeds from this settlement, along with the strong cash generation of…

Thank you, Craig and good morning, everyone. Our third quarter results continue to demonstrate the benefits of NRP's portfolio of net and thermal coal properties, along with our soda ash and construction aggregate assets. During the third quarter, we generated $33 million of cash from operations and $29 million of net income, driven by the steady performance and strong cash collections from our coal royalty segment. Free cash flow was up $3 million over the prior year quarter, primarily due to having lower debt and paying less cash for interest, and also due to the timing of cash payments and receipts from our construction aggregates business. Basic and diluted earnings per common unit for the third quarter were $1.71 and $1.30 respectively. Moving to our segment results. Our coal royalty segment continues to perform well, generating $49 million of revenue, $42 million of cash from operations and $43 million of free cash flow during the third quarter. These results were driven by continued strong export markets for both met and thermal coal that all tightened the domestic markets. Our lessees produced 6 million tons of coal on our properties in the third quarter. Global demand for steel remain strong and met coal from our properties in Appalachia made up 61% of our coal production and 67% of our coal royalty revenue during the third quarter. In addition, continued strength in thermal coal demand and pricing resulted in steady Q3 performance from our coal properties in Appalachia, the Illinois Basin and the Northern Powder River Basin. In regards to our soda ash segment, operating results were consistent with the prior quarter. We received $12 million of cash distributions from General Wyoming in the third quarter, an amount consistent with what we received in the prior quarter and in the third quarter…

[Operator Instructions] Your first question comes from the line of Nick Gertsema with Stifel.

I was hoping if you talk about the $25 million that's coming in from Foresight, and talk about strengthening the balance sheet. But how should we think about that paying down debt, open market purchases? You're just going add it to liquidity. How do you think about that coming in?

It initially added to liquidity and then it'll be used to pay down debt.

And are there any portions of the capital structure that we should think about, whether it's opco bonds or holdcos?

Well, the easy thing to payoff initially is the revolver and opco.

Your next question comes from the line of Mark Levin with Seaport global.

Couple of quick questions, one does the receipt of cash from Foresight and obviously almost the long-term like annuity stream from that settlement changed your thought process with regard to what distribution increase -- how do you feel about distribution increases maybe versus the last quarter? It felt like the last quarter that just because maybe you get to three times in 2019, but that didn’t necessarily mean that we should all expect distribution increases. Does this legal settlement change that calculus at all?

No, it doesn’t Mark. It is certainly a benefit. And once we achieve our target, our goal that we've set three years ago of 3 times, we will at point asses the landscape and decide what we think is appropriate for distribution policy, going forward. And then we will give you some additional communication at that time. But right now, this doesn’t move the needle in a direction that causes us to make a decision before we reach our target.

And maybe you can remind -- remind me some of the needs for cash over the next year or so, some of the refinancing and the timing around certain refinancings and why it would make sense to keep a lot of cash on the balance sheet?

Well, generally speaking, Mark, if you think of it this way. If you look over the last 12 months as a good example, we generated $148 million of free cash flow. That’s cash from operations minus cash used in investment activities; $30 million of that had to go to pay the distributions on the preferred securities that we have; $22 million went to pay our current common distribution; and we had $81 million of mandatory principal amortization on opco private placement notes, which gave us a cushion of excess free cash flow of about $15 million, which could be used to pay down debt. That’s nice to have $15 million cushion over here what we view as our mandatory commitments, but it's not a big cushion. And as those opco private placement notes get paid down that cushion gets bigger, as long as our free cash flow generation remains somewhat consistent, which the outlook now is it appears it will for some time. And so we'd like to see that cushion grow a bit before we start becoming more aggressive on the distribution.

Your next question comes from the line of George Wang with Citigroup.

Most of questions were already answered, just a couple of real quick questions. Just in terms of potential deal overflow, different incremental asset that you guys might be possibly looking at. I mean with excess free cash and the additional cash inflow with this Foresight resolution. You guys briefly talked about the pay down debt and also try to have additional liquidity on the balance sheet. Any possibility like we may see some deal flow on the horizon?

You mean deal flows in terms of acquisitions of new assets or businesses...

Right…

I'll tell you what, at this point in time, our focus is on de-levering the balance sheet. And as we explained to Mark's question previously, we don't have a lot of cushion in excess of what we -- the cash that we need to de-lever that we'll require -- mandatory payments we're required to make and then stay consistent with our equity distributions that we're currently making. We don't have much cushion right now. So any deal flow that we would use or any acquisitions we would make with excess cash flow, it would have to be quite small. I’m not sure that unless we were to borrow money, and we're not interested in increasing leverage at this point and time. And the small size of deals that it would take for us to use only our access free cash flow, I’m not sure that it'd be worth our time. So I wouldn’t put the acquisitions high on the agenda at this point until we improve our liquidity position and our capital structure little bit more.

And just -- the current yield that mid-single digit, any thoughts on the possibility on tapping on capital markets for any additional liquidity, or do you think it's off the table right now?

Well, I don’t want to take a position on this call as to whether we think our equity is cheap or whether we think its rich, or anything on those lines. But suffice to say, right now, we don’t have much appetite to issue equity at these levels.

Your next question comes from the line of Bill Hyler with WDH Capital.

I appreciate you guys having these calls, by the way, they're very helpful. I was hoping you could remind us how the conversion features of the preferred units and warrants with Blackstone work. I believed NRP has the option to redeem these for cash under certain circumstances. Maybe what the key dates are we should be looking at over the next three, four, five years with these securities?

So our preferred units can be redeemed at any time for cash. However, the unitholders are unable to convert until five years. So in 2022, they will have the option, the ability convert up to a third of the units beginning in 2022 if we meet standard threshold for unit price. So that conversion process can begin and upon issuing that notice then we will have the ability to issue common units or to redeem those units in cash. And I think a key thing to remember on preferred units is that the value that they’re going to convert into is fixed. So there is $250 million of preferred units out there and when there is a conversion, they will be converted into -- we'll be either providing cash or issuing units that have a value for $250 million.

And that is -- and what is as Chris points out. That is uniquely different than the traditional preferred, which gives the preferred holder common equity upside, the higher the equity per common equity price at the time conversion, the more money in the money preferred is. These preferred do not have a fixed strike price, or conversion price, or a conversion ratio set it them. It's simply, as Chris explained that we deliver the number of units or cash that have a value equal to the value of the preferred at the time of the conversion. So, there's no value dilution for current unit holders per se in that regard.

And what about the warrants, those they can exercise at anytime, I believe and there are 22.50 a share and 30 a share. Is that the two tranches?

Yes, that's exactly right. You've got the ballparks there on the strike prices. And we have the ability to convert to settle those in other common unit or in cash. And I think that second tranche is $34 strike price.

And if you convert in cash, how does that work? You would just pay them a current stock price -- I mean or the strike or the exercise -- how would that work?

We would pay the difference. So we pay the net difference between whatever the exercise prices on the date of exercise and the strike price in the warrant. So if they exercise when it's $40 and the strike price is $34 on the warrants then we pay $6 difference per unit.

Well, I guess that’s another reason you need to focus on de-leveraging over the next several years -- it will just give you more flexibility to potentially limit the dilution here.

Yes, agreed.

Your next question comes from the line of Amer Tiwana with Cowen and Company.

My question is, your results have been pretty stable. And from what I hear, you guys think that cash flow is going to be relatively stable in the near future as well. Just trying to understand your sensitivity to your met coal portfolio, to met coal prices. Can you shed some light on how the contracts are structured and what sensitivity should we expect?

So it's a little bit tricky for us. We're not straight -- exactly straightforward in terms of sensitivity, because of the way our coal leases are structured in terms of minimum payments and our royalty rates. But generally speaking -- and this is guidance that we provided in the past. As you have 10% increase in the met index price, we have about $2.5 million impact to our revenue.

On an annual basis…

And at this time, there are no further questions. Are there any closing remarks?

Thank you everyone for joining us today. I appreciate you following NRP, appreciate your interest with us. Also appreciate your question. And we look forward to talking to you again soon, and for good times ahead. Everyone have a great. Take care.

Thank you. That does conclude today's conference. You may now disconnect.