Coal focused Natural Resource Partners LP (NYSE:NRP) recently announced plans to sell $300 million worth of bonds to permanently finance its purchase of a stake in a soda ash producer. With interest rates still near historic lows, locking in current rates through 2021 is a good call. But, debt is getting a little high at around 80% of the capital structure, particularly in light of the weak coal markets which still account for around 70% of revenues.
Natural Resource Partners LP (NYSE:NRP) isn’t exactly a coal miner, instead owning coal lands that it leases out to miners. Thus, it earns royalties and almost completely avoids the costs and risks of running coal mines. So, with few expenses, Natural Resource Partners LP (NYSE:NRP) can afford to take on more debt than competitors that do their own grunt work.
For example, Rhino Resource Partners, L.P. (NYSE:RNO) has long been debt averse. Its general partner chose to stop receiving distributions on its subordinated units and trimmed the limited partner distribution slightly so it could continue to fund expansion within and beyond coal. Debt at Rhino Resource Partners, L.P. (NYSE:RNO) is just about a third of the capital structure. The partnership, meanwhile, is pushing into natural gas and oil drilling and has an expansion project in the relatively low cost Illinois coal basin.
The decision to cut distributions is, on the surface, concerning. However, continued expansion and the maintenance of a low debt profile give Rhino Resource Partners, L.P. (NYSE:RNO) a great deal of flexibility during a very rough period for coal miners. Rhino Resource Partners, L.P. (NYSE:RNO)’s diversification efforts are only just beginning compared to Natural Resource Partners LP (NYSE:NRP), which generates around 30% of its top line from non-coal-royalty businesses. But of the two, Rhino Resource Partners, L.P. (NYSE:RNO)’s capital structure looks more capable of handling additional diversification efforts.
Rhino Resource Partners, L.P. (NYSE:RNO) yields around 14% and Natural Resource Partners LP (NYSE:NRP) 11%. Neither is a low risk investment, but investors need to ask how much further Natural Resource Partners can push its debt load without overburdening itself. To be fair, the soda ash purchase was large and opportunistic, but any more big purchases could put distributions at risk if coal markets continue to struggle.
What debt can do
Walter Energy, Inc. (NYSE:WLT) is a good example of how damaging debt can be. Long-term debt accounted for about 75% of the metallurgical-coal-focused miner’s capital structure. It recently had to trim its dividend to a token penny a share and amend a credit facility to improve liquidity. While those were clearly the right moves in a difficult market, debt is a burden that doesn’t easily go away.
For example, Walter Energy, Inc. (NYSE:WLT) was able to cut its capital spending essentially in half in 2013 to reduce costs but it’s debt expense of $53 million per quarter won’t go away without repaying or refinancing. With sales under pressure, debt ate up 10% of sales in the first quarter and 12% in the second quarter. It’s little surprise that the dividend had to be cut.