Another factor to consider is that thermal coal is mostly used domestically whereas met coal is mostly exported. So for thermal we really need to think about domestic coal power plants. The bear case is that natural gas E&Ps keep producing gas at below break even cost and there’s an acceleration in renewables installation. The bull case is that power demand increases more than was forecast until recently (ie AI) and, due to regulations, few gas power plants are built, thereby forcing grids to rely on existing infrastructure. As for tobacco and Big Tech, government regulation can be good for incumbents.
Thanks for a good update on NRP and the broader coal environment. I always have to chuckle at the IEA reports on coal. If you go back and look at the last 5 or 6 annual reports you will see that the Exec summaries are always the same - last year was a record in terms of use of coal globally and next year will likely break that record... but after that there will be a decline. As you noted, the authors definitely have an agenda. I continue to believe that we will see growth globally in thermal coal use for many years to come. With that said, this write up was helpful to think through the broader story and drivers for NRP. Thanks as always for good work.
It’s a royalty. The Coal Trader once told me “it’s like a royalty on AMR bc 60ish% of Alpha volume is NRP land.. At least half of Ramaco is as well. They also own about half of the rest of CAPP, some NAPP, Oak Grove in SAPP, and most of Foresight in ILB, among others. At least half of Ramaco is as well. They also own about half of the rest of CAPP, some NAPP, Oak Grove in SAPP, and most of Foresight in ILB, among others. NRP will be debt & preferred's clear in a year or so and will probably pay chunky divs thereafter, on the order of magnitude of $200-250 million per year. Either the div yield will increase dramatically or the stock price will reset higher to match their historical div yield.”
Thanks for pointing that out. I had forgotten NRP is a royalty - and that I get the K-1 reports. I just wondered about comparing, because Arch Coal is also concentrating on reducing debt as quickly as possible.
Thanks, admiration is mutual. Been long NRP since the 50s. Once the capital stack clears up, either the stock re-rates or we clip a +mid-teens yield (I'm inclined to think most of the returns from here come from distributions, but we'll see). Love the set-up.
I looked at the IEA projections and coal replacement when I looked at the coal industry as well. Figured I'd share a few things.
On using hydrogen to reduce iron - we don't have a good way to make industrial quantities of hydrogen. That's why electric cars are being pushed instead of hydrogen fuel cells. You can make hydrogen from natural gas, which makes a lot of emissions. Or you can make hydrogen through the electrolysis of water, which requires a lot of energy (a chemical engineer who works in oil and gas told me that you put more energy in than you'll get out of the hydrogen) and it's very expensive.
On the IEA report and met coal specifically. They predict a 10% reduction of total production in blast furnaces by 2030. But that number is misleading.
Global steel production is expected to rise by 2% a year from now until 2030. That means 16% more steel will be produced in 2030. If 10% less of the total is made in blast furnaces, but we make 16% more steel, then between now and 2030 MORE steel will actually be made in blast furnaces, not less.
Nice write up. I like to see people willing to try to kill their best ideas.
Land can be owned outright, also called fee simple, in which case the owner controls the surface, water, and mineral rights or the ownership can be split. In some cases the surface, mineral, oil and gas, and water rights are all split and controlled by separate owners. Split ownership can complicate approval for some activities because more than one owner must approve the activity and disapproval by any single owner can end the projet. Where NRP owns large fee simple tracts of land they can more easily approve certain activates like carbon sequestration.
Yes, they do have some water rights. It's difficult to parse out exactly what each property consists of in terms of surface, mineral, water or oil and gas but they do have some.
Great analysis btw, I would attribute the largest value portion of NRP to the met coal deposit over the lifetime of the company.
Considering most of the consumption for Met Coal is outside the SS and inevitably adds shipping cost also.
I look at 2 additional risk not captured here.
1. Assuming there is some price limit of steel how do that the price divide between iron-ore, coal and cost of shipping that coal(Gas?).
2. A bigger risk, while the dropping excitement around coal is prohibiting new exploration of coal, how do you see discovery of new met coal mines near to the consumption location as a risk. Are we as earth maxed out in discovery or even if we discover some new mines we may end up using all of it in due time ?
Razor, thanks for the thought-provoking questions. We would generally agree that met coal’s future is more important for NRP than that of thermal. Largely because met makes up a majority of NRP’s revenues. We didn’t quite follow the thrust of your first additional risk. As for the second one, we don’t believe any future discoveries of met coal mines lessens our thesis on NRP in the slightest. NRP will be debt free in about one year. That is not long enough for any new mines to be impactful. In a year or so we will reevaluate NRP’s investment merits.
It's a shame many brokers outside the US (including my country) no longer offer trading of PTP companies in US/Canada (including LP's such as NRP) due to the new IRS rule from January 2023 ... Alas, there's still plenty of other fish in the sea.
Good writeup SB!
Another factor to consider is that thermal coal is mostly used domestically whereas met coal is mostly exported. So for thermal we really need to think about domestic coal power plants. The bear case is that natural gas E&Ps keep producing gas at below break even cost and there’s an acceleration in renewables installation. The bull case is that power demand increases more than was forecast until recently (ie AI) and, due to regulations, few gas power plants are built, thereby forcing grids to rely on existing infrastructure. As for tobacco and Big Tech, government regulation can be good for incumbents.
A few typos:
- “primary revenue sou is coal”
- “lower the its return prospects”
Corrected thank you.
Yes, our original thoughts regarding coal were that its a setup similar to tobacco years ago.
Thanks for the detailed write up and the projections.
Thanks for commenting, Patrick!
Thanks for a good update on NRP and the broader coal environment. I always have to chuckle at the IEA reports on coal. If you go back and look at the last 5 or 6 annual reports you will see that the Exec summaries are always the same - last year was a record in terms of use of coal globally and next year will likely break that record... but after that there will be a decline. As you noted, the authors definitely have an agenda. I continue to believe that we will see growth globally in thermal coal use for many years to come. With that said, this write up was helpful to think through the broader story and drivers for NRP. Thanks as always for good work.
Yes. Agreed. The case laid out in the piece is much more a worse case than a base case.
Superb,thoughtful and balanced analysis
Thank you, Joel.
Great work.
No, thank you, JP.
Great study of NRP - thanks. How does NRP compare with Arch Coal and Consol?
It’s a royalty. The Coal Trader once told me “it’s like a royalty on AMR bc 60ish% of Alpha volume is NRP land.. At least half of Ramaco is as well. They also own about half of the rest of CAPP, some NAPP, Oak Grove in SAPP, and most of Foresight in ILB, among others. At least half of Ramaco is as well. They also own about half of the rest of CAPP, some NAPP, Oak Grove in SAPP, and most of Foresight in ILB, among others. NRP will be debt & preferred's clear in a year or so and will probably pay chunky divs thereafter, on the order of magnitude of $200-250 million per year. Either the div yield will increase dramatically or the stock price will reset higher to match their historical div yield.”
JP, a few months ago Dyer seemed a lot less enthusiastic about NRP all of a sudden. Do you know why?
No, I don’t.
Amen.
Good question, Al. As JP highlighted, NRP really doesn’t compare to any of the miners because of its royalty business model.
Thanks for pointing that out. I had forgotten NRP is a royalty - and that I get the K-1 reports. I just wondered about comparing, because Arch Coal is also concentrating on reducing debt as quickly as possible.
Great article, thank you!
Thank you, Simon.
Nice article/podcast. Do you have an estimate of how UBTI will change once the debt is paid down? TIA
At this time we don’t. Sorry.
Nice work
Jake, thank you. Also, we highly enjoy your write-ups.
Thanks, admiration is mutual. Been long NRP since the 50s. Once the capital stack clears up, either the stock re-rates or we clip a +mid-teens yield (I'm inclined to think most of the returns from here come from distributions, but we'll see). Love the set-up.
We agree.
I looked at the IEA projections and coal replacement when I looked at the coal industry as well. Figured I'd share a few things.
On using hydrogen to reduce iron - we don't have a good way to make industrial quantities of hydrogen. That's why electric cars are being pushed instead of hydrogen fuel cells. You can make hydrogen from natural gas, which makes a lot of emissions. Or you can make hydrogen through the electrolysis of water, which requires a lot of energy (a chemical engineer who works in oil and gas told me that you put more energy in than you'll get out of the hydrogen) and it's very expensive.
On the IEA report and met coal specifically. They predict a 10% reduction of total production in blast furnaces by 2030. But that number is misleading.
Global steel production is expected to rise by 2% a year from now until 2030. That means 16% more steel will be produced in 2030. If 10% less of the total is made in blast furnaces, but we make 16% more steel, then between now and 2030 MORE steel will actually be made in blast furnaces, not less.
Nice write up. I like to see people willing to try to kill their best ideas.
Thank you, TJ.
You state that there is not a split water interest.What does that mean?
Land can be owned outright, also called fee simple, in which case the owner controls the surface, water, and mineral rights or the ownership can be split. In some cases the surface, mineral, oil and gas, and water rights are all split and controlled by separate owners. Split ownership can complicate approval for some activities because more than one owner must approve the activity and disapproval by any single owner can end the projet. Where NRP owns large fee simple tracts of land they can more easily approve certain activates like carbon sequestration.
Do they own water rights?
Yes, they do have some water rights. It's difficult to parse out exactly what each property consists of in terms of surface, mineral, water or oil and gas but they do have some.
Great analysis btw, I would attribute the largest value portion of NRP to the met coal deposit over the lifetime of the company.
Considering most of the consumption for Met Coal is outside the SS and inevitably adds shipping cost also.
I look at 2 additional risk not captured here.
1. Assuming there is some price limit of steel how do that the price divide between iron-ore, coal and cost of shipping that coal(Gas?).
2. A bigger risk, while the dropping excitement around coal is prohibiting new exploration of coal, how do you see discovery of new met coal mines near to the consumption location as a risk. Are we as earth maxed out in discovery or even if we discover some new mines we may end up using all of it in due time ?
Razor, thanks for the thought-provoking questions. We would generally agree that met coal’s future is more important for NRP than that of thermal. Largely because met makes up a majority of NRP’s revenues. We didn’t quite follow the thrust of your first additional risk. As for the second one, we don’t believe any future discoveries of met coal mines lessens our thesis on NRP in the slightest. NRP will be debt free in about one year. That is not long enough for any new mines to be impactful. In a year or so we will reevaluate NRP’s investment merits.
It's a shame many brokers outside the US (including my country) no longer offer trading of PTP companies in US/Canada (including LP's such as NRP) due to the new IRS rule from January 2023 ... Alas, there's still plenty of other fish in the sea.
We agree. We are sorry NRP isn't a better option for investors outside the US.