Ladies and gentlemen, thank you for standing by and welcome to the Natural Resource Partners L.P. second quarter 2020 earnings. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. I will now like to hand the conference over to Ms. Tiffany Sammis, Manager of Investor Relations. Ma'am, you may begin.

Good morning and welcome to the Natural Resource Partners second quarter 2020 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 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 detailed market fundamentals. In addition, I refer you to general 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.

Thank you Tiffany. Good morning all. I hope you and your loved ones are safe and healthy. NRP continues to operate under CDC guidelines, government imposed rules and company remote work protocols. Our employees are safe and the partnership is conducting business as usual. Our management's succession plans and delegations of authorities are in place, should we need them. The COVID-19 pandemic has had a significant negative impact on demand for steel, electricity and glass, which translates to lower demand for the coal and soda ash we produce. Year-to-date, coal production in the United States is down 27% compared to 2019 and global soda ash production is down approximately 15% year-over-year. The outlook for coal and soda ash market remains uncertain as COVID-19 numbers continue to rise across the U.S. However, we believe that our liquidity, free cash flow generation and the fact that our parent company bonds do not mature until 2025, provide us with the financial flexibility to manage through a prolonged downturn. At beginning of the pandemic and in order to best prepare for extreme adverse economic conditions, our Board preserved cash by suspending our first quarter common distribution and electing to paying in-kind one half of our preferred unit distribution. Based on the performance of our businesses since those decisions, we announced today that our Board has decided to pay a common distribution and pay in cash, the full distribution on our preferred units for the second quarter. In addition, in June we redeemed in cash, the preferred distribution that was paid in kind for the first quarter. Despite the negative economic backdrop, NRP continues to generate cash and pay down debt. We generated $112 million of free cash flow over the last 12 months, paid off $48 million of debt and added $40 million to…

Thank you Craig and good morning everyone. I would like to start out summarizing some significant items that are impacting comparisons between the second quarter of 2020 and 2019. First, we recognized $132 million of asset impairment expense in the second quarter of 2020, primarily related to weakened coal market compounded by the COVID-19 pandemic and resulted in the termination of certain coal leases. As a reminder, asset impairment is a non-cash expense and does not have an impact on our debt covenant compliance. And second, we recognized a $29 million loss on early extinguishment of debt in connection with the refinancings of our bonds and revolving credit facility in last year's second quarter. These refinancings reduced our ongoing interest cost, extended the maturity of our parent company bonds out to 2025 and significantly improved our liquidity and financial flexibility. I would now turn to our overall and segment specific results. During the second quarter of 2020, we generated $20 million of operating cash flow and $7 million of net income from continuing operations, excluding the impact of asset impairments. Our coal royalty and other segments generated $34 million of revenue and $32 million of operating cash flow during the second quarter of 2020. These results were lower as compared to the prior quarter, primarily due to a weakened market for metallurgical coal because of decline in global steel demand. Both sales volumes and prices for our metallurgical coal sold were lower in the second quarter of 2020 compared to the prior year quarter. In terms of our coal royalty sales mix, metallurgical coal made up approximately 70% of our total coal royalty sales volumes and approximately 80% of coal royalty revenue during the second quarter of 2020. In addition, weaker domestic and export thermal coal markets resulted in lower…

[Operator Instructions]. Your first question comes from the line of Mark Levin with Benchmark.

Great. Thanks very much. Congratulations on the quarter. Just some questions, let me start off, if I can, with the distribution and the decision to resume the quarterly payment. I guess it reflects several factors but I guess what caught me off guard was just given how weak the underlying coal markets are and your decision of the Board's decision to resume it, maybe you can give some color around what went into that decision and why you decided to do it now?

Mark, this is Craig. I would say that we considered, the Board considered a variety of factors. The performance of the business since the COVID crisis hit and the near and intermediate term outlook that we have, our liquidity, our cash generation that we currently have and when weighing all those, it appeared that it was a prudent move to make the distribution. It doesn't mean that there could be some significant event in the future that causes our results to the come in considerably worse than the run rates we are currently generating could cause us to change your mind. But at this point, it appeared like a good move to pay the distribution.

Got it. And, yes, just it was something that sort of caught me a little off guard, I guess, even in reference to Ciner Wyoming suspending that $7 million distribution, but that's fantastic. I assume the Board wouldn't have done it if they weren't confident that they could keep it going in this type of market conditions. The other question I was going to ask is, I think you referenced last quarter maybe free cash flow cushion or free cash flow in general just turning negative. Do you feel that way today? It sounds like it's coming down. But do you still echo the same sentiments in terms of what you see today?

Mark, I think it's very possible that our cash flow cushion could, as it trends lower, could go below zero at some point. It could go negative, absent some turnaround and dramatic improvement in the global economy in the near term. But I would always balance the negative cash flow cushion with the amount of liquidity that we actually have and look at those two things together. But yes, I think there is always a chance that these existing conditions extend out for a prolonged or extended period, that you could see the cash flow cushion go negative.

And related to that point, is there a minimum liquidity number that you guys would like to keep or have on hand?

We don't have a target that we are sharing, Mark, as far as liquidity. It depends on the facts and circumstances. And the more optimistic we are about the outlook going forward, the lower that number can be and vice versa. Right now, we are comfortable where we are with our liquidity number now. We think over $200 million of liquidity with over 4100 million of cash, we think that's a good number in light of the market and our view of the market today.

Got it. And then my last question. Just maybe some color around the Illinois basin royalty rate. I noticed that it stepped below $2 a ton. I wasn't sure if there was something funky from an accounting perspective going on or if that's sort of the new run rate to think about because it was so obviously materially different from a royalty revenue per ton perspective in the Illinois basin than it's been historically.

Well, there's a couple of factors at play at that. Chris, you want to talk about that? Or Kevin?

I would be happy to, Craig and Mark, yes. So we tried to mention it few times in our remarks earlier. But this is driven by the agreements that we entered into with Foresight where we are now receiving a fixed amount over time. That's the primary driver for the result here.

That's not a payment in the royalty rate per se. It's just when you do the calculations, it appears that the royalty rates changed. And it's just not --

Got it. That just makes sense.

Just for this intermediate time of 2020 and 2021 when we have fixed payment.

That just makes perfect sense. Is there any sense, I know you mentioned the distribution being suspended as it relates to the soda ash business. Any reason to believe that they would resume in the fourth quarter? Or do you have any color or thoughts on how to think about, I mean I assume that will be a zero going forward until notified otherwise, but is there any color maybe you can give on that?

I can't. We can't give you any color other than what Ciner has announced and just generally speaking, they have announced the that they are suspending it until the market improves. I will take this. I think you need to be prepared for some extended period, multiple quarters for sure, of continued tough sledding in the soda ash business. I will say that there are definitely green shoots coming out. If you look globally, especially global demand is starting to pick up. Flat glass and container glass is strong here in the U.S. But I think it's going to take a little while for that market to come back. And so I think for the foreseeable future, I think that business is still trying to get its legs back underneath it. But that's all I can share and I would suggest directing questions about distributions to Ciner.

That makes perfect sense. One final one, just one for me and I think I have asked this in previous calls. Can you talk a little bit about the minimum structure and maybe how to think about that as a floor from a revenue perspective for the business, at least as you look across your portfolio for people who might be concerned about negative met pricing sentiment, all that kind of stuff? Maybe just talk a little about the revenue, the floor revenue composition?

Well, Mark, as we have talked before, explained to you that the real key with the minimums is the extent to which we have deficiency payments. So if we have an obligation under a minimum obligation from a lessee to us under lease and they do not generate sufficient royalty income to cover that minimum, then whatever the difference is between the minimum and the amount that they actually paid us in royalty income is the deficiency. And so it's the deficiency payment. We have typically, if you look back over the last year or couple years, we have been seeing $15 million to $20 million roughly of deficiency payments that we receive across all of our portfolio combined. Some of those, of course, have been associated with Foresight, a lot of that is with Foresight because which in this environment, now that we have a fixed payment structure with Foresight for this year and next year, we won't be receiving deficiency payments per se from them. So I think the right way to think about it is that as you look forward, say over the next year or so, I think that assuming that it gets really bad, maybe it stays, met pricing gets even worse than we are now, I think it's fair to think of it in terms of maybe something between 10 million and $20 million of deficiency payments that we would receive. Chris, do you have anything you want to add to that?

The only thing I would like to add, Craig, I think that you summarized that well. And Mark, we do include in a footnote in our 10-Q a disclosure of the total amount of contractual minimums we have. So if you want to get a perspective of what is that over the minimum amount, we do have that in the footnote in the 10-Q. But really the key thing, as Craig pointed out, is how much of those deficiency payments would we receive. That $15 million to $20 million is really the important number to talk about.

Got it. Very helpful. Thank you gentlemen very much and congratulations on the Foresight agreement.

Thank you very much, Mark. I appreciate that.

[Operator Instructions]. At this time, there are no further questions. I would like to turn the call back over to Mr. Craig Nunez.

Well, thank you everyone. I appreciate you taking time to join our call and appreciate your interest in NRP and I hope that you and your family stay safe and healthy. And until next month, take care.

Ladies and gentleman, this concludes today's conference call. Thank you for participating. You may now disconnect.