What Are Natural Resource Partners’ Key Risks?
Commodity price risk
Natural Resource Partners’ (NRP) revenues are dependent on the selling price of coal and aggregates mined by the company’s lessees as well as oil and natural gas prices. Also, the revenue contribution from NRP’s soda ash business is dependent on soda ash market prices.
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NRP’s lessees sell coal under long-term contracts, short-term contracts, and spot prices. If the company’s lessees fail to secure long-term supply contracts, then NRP’s coal (KOL) royalty revenues may become more volatile due to fluctuations in the spot coal prices. Also, NRP’s aggregate product prices can fluctuate depending on construction activity, which in turn is dependent on the economic conditions in the local markets. The continued downturn in the coal industry has resulted in lower coal royalty revenues since 2011.
Interest rate risk
As of September 30, 2016, Natural Resource Partners had about $260 million in the form of variable interest rate debt. According to company filings, this debt is subject to variable interest rates based on LIBOR (London inter-bank offered rate). Assuming the principal amount of variable debt outstanding to be constant, a 1% increase in interest rate will increase the company’s interest expenses by $2.6 million for that particular year.
Regulations restricting the emission of greenhouse gasses and other harmful air pollutants could reduce the demand for coal (KOL), oil, and natural gas. In August 2015, the EPA (US Environmental Protection Agency) published its final Clean Power Plan regulations to reduce carbon pollution from existing power plants including coal-fired power plants. However, the final fate of the plan is in the hands of the new president-elect.
Changes in fuel consumption patterns by utilities and the strong US dollar could also pose a significant risk to NRP’s business.
Next, let’s look at NRP’s long-term business plan.