Thank you for standing by, and welcome to the Natural Resource Partners L.P. Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Tiffany Sammis, Manager of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to the Natural Resource Partners third 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 third 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 commentary 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, and good morning all. 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 succession plans and delegations of authorities are in place, should we need them. Demand for steel, electricity and glass began to rebound in the third quarter, and the outlook for our coal and soda ash businesses has improved. However, we expect markets to remain volatile as a result of ongoing uncertainties with the COVID-19 pandemic. We continue to generate free cash flow and maintain strong liquidity, which provides us with significant financial flexibility to continue paying down debt and managing through these challenging times. We generated $95 million of free cash flow over the last 12 months and paid-off $46 million of debt. Our cash flow cushion, which is the free cash flow remaining after paying our private placement debt amortizations and distributions on our common and preferred units, was $1.5 million. We ended the quarter with $216 million of liquidity, consisting of $116 million of cash and $100 million of unused borrowing capacity. Metallurgical and thermal coal markets have shown improvement from their second quarter lows, and we expect this will benefit our lessees going forward. As mentioned last quarter, we worked with Foresight to help them develop a plan to emerge from bankruptcy. And we entered into lease amendments pursuant to which Foresight, which represents over 70% of our thermal coal revenues, agreed to make fixed payments to us totaling $49 million this year and $42 million next year. We began to see the benefits of those amendments in the third quarter. The fixed payments provide cash flow certainty for NRP at a level greater than had been anticipated as the coal industry…

Thank you, Craig, and good morning, everyone. During the third quarter, we generated $24 million of operating cash flow and $7 million of net income from continuing operations. Our coal royalty and other segment generated $19 million of net income and $29 million of operating cash flow in the third quarter of 2020. Similar to last quarter, this segment's results were lower as compared to the prior year quarter, primarily due to a weakened market for metallurgical coal as the COVID-19 pandemic continued its disruptive impact on U.S. and global economies. Both sales volumes and prices for metallurgical coal sold were lower in the third quarter of 2020 compared to the prior year quarter. In terms of our coal royalty sales mix, metallurgical coal made up approximately 65% of our total coal royalty sales volumes and approximately 70% of our coal royalty revenue during the third quarter of 2020. In addition, weaker domestic and export thermal coal markets compared to the prior year quarter resulted in lower revenue from our thermal coal properties. Domestic and export thermal coal markets remain challenged by lower utility demand, due primarily to continued low natural gas prices, the secular shift to renewable energy and the COVID-19 pandemic. Moving to our second business segment, soda ash. Our soda ash segment revenues and other income in the third quarter of 2020 were lower by $12 million as compared to the previous year quarter due to lower soda ash demand and weakened market pricing driven by the COVID-19 pandemic. And our soda ash distribution in the third quarter of 2020 was lower by $6 million as compared to the previous year quarter due to the suspension of distributions by Ciner Wyoming. As we discussed on our earnings call last quarter and as Craig mentioned earlier, while Ciner…

Thank you. [Operator Instructions] Our first question comes from Mark Levin, The Benchmark Company. Please go ahead. Your line is open.

Great. Thanks very much and congratulations on continuing to navigate through some pretty tough markets. My question is to Craig. Craig, so I remember and I can't remember this last quarter, it might have been the quarter before, you had talked about the potential for free cash flow cushion to turn negative. I think it was $1.5 million on a trailing 12-month basis. Just curious if you have any thoughts about the free cash flow cushion? And as you kind of look at your crystal ball in the markets and what's going on? How to think about that over the successive quarters.

Good morning, Mark. It's good to get your question. Good to talk to you. Yes, I did make that comment in a previous call. I still think that the prospect for free cash flow cushion to turn negative is still there. I think as the second quarter and the weak third quarter, although we're seeing rebounds, clearly, I think that those two quarters have to roll through. And we always think of cash flow cushion on a 12-month basis is how we think about things, most of our numbers here. And I think there's still a very significant risk that that cushion turns negative. The way I think about that is that, for instance, if the cash flow cushion turns negative by, let's just pull out the number, $5 million, $10 million, I compare that to the liquidity that we have, in particular, the cash we have. And let's say, on an annual basis, we have $10 million of negative free cash flow cushion. The $116 million of cash, we got a fairly – many years' worth of liquidity for that cash flow cushion to turn back to positive again and to continue to make payments on our debt and all the obligations that we have. So I'm not trying to minimize the fact that I think it's likely that our cash flow cushion could turn negative here in succeeding quarters, but that's how we think about it. We look at it in relation to our liquidity that we currently have. We certainly don't – our crystal ball certainly doesn't give me any reason to believe that it would turn cash flow negative for any considerable period of time.

Okay. That's very helpful. And that kind of dovetails into my next question, which I know I've asked before, and I certainly respect the fact that you don't want to give anything specific, but maybe you can kind of speak generally. You do, obviously, and you just referenced it have a lot of liquidity, I think, $216 million of liquidity. How do you counterbalance the fact that, I guess, most coal companies right now have limited, if not, any access to the capital markets? How much liquidity makes sense versus accelerating debt pay down? How do you balance the two? And is there any kind of appropriate liquidity position that you think of or is right for NRP in the environment where you're in?

Well, I think there's two points I'd like to emphasize in answering that question. I think it's a great question. The first point is, I don't know exactly what the right number is for liquidity. But in light of the uncertainties, we still see going forward with COVID, don't know how it's going to play out, second wave in Europe, second wave here, how are things going to play out. Where we are now and somewhere in the range of where we are now, it just feels right – I don't want to use the word comfortable, but it feels appropriate. We feel good about it. I don't have a threshold to give you that if we fall below the threshold, we're going to be panicking about it or we won't feel comfortable. But right now, it feels good. We feel like we're on track with how we – where we should be with our capital structure and where we should be with our liquidity to manage through the situation in the future months in a couple of years. Secondly, with respect to paying debt early, the real option there for us are our Parentco bonds that we have, the $300 million of Parentco bonds mature out in 2025. And there's a technical issue associated with acquiring those bonds, if we were to want to acquire those bonds. Of course, we always look at that market of those bonds. But the vast majority of those bonds, I can't remember the percentage, but it's 80% plus – almost 90% of those bonds are owned by literally a handful of owners. And those owners are not really sellers. So it's somewhat difficult to make inroads to buy those bonds back at what would be beneficial prices as a result of the fact that there are some pretty sophisticated large-cap institutional investors that are pretty keen on owning those bonds.

Makes total sense. And again, I know you guys don't give guidance, so I have to be sort of – I want to kind of make sure I frame my question correctly. But we're sitting here in, call it, the beginning of November, the first month, your met prices have obviously been up and down. It looks like production has seemingly come back from the lows of the pandemic. As you kind of think about the pace of production on your reserves or on your land, as you look out over the last three months of the year, does it feel like it's likely to get better, stay the same, get worse? Any kind of color you can provide on what you've seen from a production perspective from your reserve holders?

I'll make a general comment, and then I'll defer it to Kevin Craig, who is the Head of our Coal Division to – if he wants to add some. I will say that generally, our outlook from production and pricing on our coal assets, and that's met and thermal, is looking better for next year than it is now. And so, we are expecting some general improvement. Kevin, do you – would you like to add to that?

Yes, Craig and good morning, Mark. I would agree with that, certainly off the lows of the second quarter here in 2020, we've seen improvement. There has been some volatility during the third quarter. But generally, if there's a bias for 2021, it would be more to the positive off the lows of the second quarter and some of the volatility in the third quarter. As we move in and you see the natural price - natural gas going up, which would into a little better thermal market and then it's tougher on the overall economic picture, given the pandemic what met prices will look like. But generally, certainly, off the second quarter lows, we believe they'll be higher than those debts.

Got it. So from – and again, without trying to get too much guidance, but from a fourth quarter versus third quarter perspective, should we anticipate at least from a royalty production perspective, a lot of change or sort of similar to what we've been seeing?

So for the fourth quarter compared to third, I would not predict a significant change quarter-over-quarter.

Okay. Fair enough.

Mark, keep in mind, as I know you're aware that there's a lag time before we start to see movement. It hits our lessees first, they produce it, they sell it. They locking - they contract for volumes, they then produce it, sell it and then they pay us a royalty. So there's always a bit of a lag time.

Yes. That makes sense. Final question just has to do with sort of a broader industry issue, which is the increasing relevance, I suppose, of third-party surety bond providers and their – they seem to be looking for more and more cash collateral from their – from those that they're underwriting. I'm just curious how you guys risk assessed your lessees as it relates to that particular issue, do you feel like there's vulnerability? I mean how do you kind of assess that issue and it could or may or may not ultimately mean for your customers or your lessees?

Let me start off with addressing this, and Kevin wants to add in, he can add in. This issue really became most relevant to us, in my opinion, back in the 2015 to 2016 time frame. It was at that point that we had the most number of lessees that were in financial difficulty, and there were numerous lessees that went bankrupt that there were concerns as to whether they would be able to – they had self-bonded and whether they'd be able to handle their reclamation liabilities and that type of thing. And they were not in the financial condition to obtain surety bonds from third parties. We have not had with our lessees, with our material lessees, we have not had that – those same types of issues that we have seen here over the last year, like we saw during that 2015 to 2016 time frame. So first of all, I don't think it is that significant of an issue now as it has been in the past. And it's not something that keeps us awake at night. I would also say that we are very confident also in the way that the law works in the United States, in all the jurisdictions in which we operate, where as a lessor that is not actively involved in the operations of our lessees, we're just – we don't see the legal line of potential liability for those types of reclamation liabilities, pollution, et cetera, coming to us in the historical jurisprudence. So I'm not trying to say it's an important issue. We are very sensitive to our operators' creditworthiness. It's one of the factors that we consider when we enter into business with them. We want to make sure they have the ability to comply with the permits and to bond, et cetera. But right now, I don't – while it's a pressing issue with certain companies out there, we don't see it high on our – on the list of risks right now. Kevin, do you want to add to that?

No, Craig. I think you covered it, unless Mark has a follow-up question, I think you covered it very well.

And last question for me. As the potential exists for a change in the White House, like, we'll just have to wait and see what happens over the next few days. But I'm just curious, from your perspective, as a coal reserve owner, how a change in the White House might affect you? I mean, obviously, we can debate what the impact will be on U.S. thermal coal and the like and what types of regulations could occur. But I'm just thinking from NRP – from an NRP company-specific situation, is there anything directly that you'd be watching for, if there is a change?

Again, I'll take the first stab at this here and let others add in. A change in the executive branch in Washington is not something that is of high-level of concern to me for our business. We are not directly a significant emitter of any types of pollution, CO2, et cetera. Our lessees are direct emitters and they're mining operations. So indirectly, there could be a factor impact to us, if there's more stringent regulation. Also, the thermal coal that is consumed is, as we know, in long-term secular decline. And so, as it continues to decline, that will impact the part of our business that is thermal coal, which is getting smaller and smaller by the day. But I truly believe that we are – the impact on our business is primarily economic. On the thermal side, it's natural gas prices. And it's the fact that, just for all types of reasons, including regulatory reasons, they just are not new coal-fired power plants being built in the United States. On the metallurgical side, I believe that we are driven by demand for steel and global GDP. And on soda ash, I believe, we're driven by the demand for principally glass and associated type products, which is heavily influenced by the global automobile, construction and packaging industries, which again are tied to GDP. And many of the demand pull mechanisms that are putting demands for steel that uses met coal and that are putting demands on soda ash, glass, which uses soda ash to make it. Many of those are green type demands. They're green. They're not brown. So I really – I don't see that the change in the administration or even if the whole Congress flipped, I don't see that it's a direct impact on us in a significant way. And that's – I'm judging that based on not just our opinion, but also we saw a change in administration that took place four years ago. And there was much talk about how the regulatory burden was improving in the coal business, et cetera. And when we tried to trace that through to the positive impact on our business, it was tough.

Interesting. Yes, that's very helpful. I appreciate that. And then one more, and I'm going to get off the phone here because I've hogged it.

Mark, just one thing about that. It’s a little bit off topic, and it's not something that we're very prepared to talk about at this point. But we do look forward here at NRP to the future. And we are looking two, three, four, five, 10, 15, 20 years down the road. And we are very much pursuing a number of initiatives that are unrelated to coal production. But yet – that use our asset base that we have, these tremendous tens of millions of acres of subsurface poor space to do things such as sequester Co2 and the like. These are all, at the moment, their dreams, but they're activities that we have been pursuing for some time. And our hope is that as thermal coal goes away due to the secular downturn in thermal coal that we will actually be transforming our business into – I know it sounds strange to be a big coal owner and talk about becoming green, but we're hoping that combined with our soda ash business that we've actually become a pretty green company in the not-too-distant future.

And that is through organic means, Craig, or through acquisition or combination of both. I mean how?

Well, as you know, our capital structure is such that we're not in – we're not able to be in a mode at this point in time that we would have large acquisitions or capital-intensive projects. So yes, it would be organic. I mean we've got some really great assets, what we own subsurface and around the country. And so, we think there's a lot of potential there. I can't put anything to it, any numbers to it or any time line to it, but I can just tell you that it's something that we're working on.

That is interesting. I was actually going to ask about the potential for asset sales, if there's anything – if there's any – if you see anything in the portfolio right now that is of any size and scale that we should anticipate raising some cash in that regard or is that – you're pretty comfortable with the way the asset base looks right now?

We will always be willing to entertain discussions, if we feel that there is someone else that has – an asset is worth more to someone else than it is to us. But at the moment, we don't feel that we have that in any situation.

Okay. Fair enough. Very helpful. Much appreciated. Thank you for all the time this morning.

You bet. Thank you.

[Operator Instructions] And at this point, I will turn the call back to Craig Nunez for closing remarks.

Thank you very much. And thank all of you for joining the call. I appreciate your continued support of the partnership. We appreciate it, and we look forward to talking to you again soon. Stay safe and healthy. Everyone be well. Have a great day. Bye.

Thank you very much for joining us today. This concludes our call. And you may now disconnect.