Last year was a tough one for coal miners, with low prices and slack demand taking a toll across the industry. And now Natural Resource Partners (NYSE:NRP) has added its name to the list of companies forced to trim their dividends because of coal's malaise. But that may make this a good time to buy.
Not your average coal miner
Arch Coal (NASDAQOTH:ACIIQ) trimmed its dividend from $0.11 a share quarterly to $0.03 in mid 2012. At the time, Arch CEO John Eaves noted that "...increasing the company's liquidity by $68 million annually at this point in the cycle is in the best long-term interests of our company and shareholders."
The problem Arch faced, and is still dealing with, is that it took on a large debt load to buy into metallurgical coal at the market peak. With more debt and less revenue because of falling coal prices, it had little choice but to circle the wagons.
However, Arch is something of a typical domestic coal miner, owning and running coal mines. That's not the same thing that recent dividend cutter Natural Resource Partners does. This limited partnership owns mines, but leases them out to others, taking a cut of sales. And, perhaps more importantly, Natural Resource has been working to diversify its business.
Over the past year or so, Natural Resource has bought non-working interests in the natural gas space and added soda ash to its portfolio of non-coal businesses. So far, these have helped to offset the problems in coal. But, as Nick Carter, the partnership's chief operating officer notes, the company "...did not see the recovery in the coal markets that we thought might occur over the course of 2013..."
Further, "As we approached the end of the fourth quarter, we gained more clarity on our lessees' operating plans for 2014. Based on the information received from our lessees, we determined that our forecast for 2014 coal-related revenues, and as a result, distributable cash flow, will be significantly lower than our previous estimates."
The company went on to highlight that it "does not have any debt maturing until 2016, and NRP expects no covenant compliance issues over the next year." So, unlike Arch, debt doesn't seem to be the driving force. CEO Corbin Robertson summed the dividend cut up nicely: "The resulting financial flexibility will enable NRP to continue to pursue its diversification efforts..."
And that's the important story at Natural Resource Partners. You need to watch coal, but you also need to keep a close eye on the partnership's other businesses, too. A similar story is unfolding at much smaller Rhino Resource Partners (NASDAQOTH:RHNO). This partnership, which operates most of its mines, is also pushing into natural gas.
Rhino was among the first in the industry to trim its payout, cutting the quarterly distribution from $0.48 a unit to $0.445 at about the same time as Arch. At the time, the partnership's sponsor agreed to halt distributions on the subordinated units it owns. With the continued weakening of the coal market, it wouldn't be surprising to see another cut at Rhino. That said, like Natural Resource Partners, growth in non-coal operations is an increasingly important aspect of the company's future. But, Rhino is one of the least leveraged coal players in the industry.
Time to buy? A rough comparison
Amusement park operator Cedar Fair (NYSE:FUN) cut its dividend to the bone in 2009 after a transformational merger doubled the company's size. Although the impetus for the cut was paying down debt, the real issue was a changing business. That's roughly similar to Natural Resource and Rhino.
While Arch is pulling in its horns and has to wait for coal to rebound, Natural Resource Partners and Rhino are investing in growth. Just like Cedar Fair did. Today, Cedar Fair's dividend is higher than it was before its cut and the shares are up over 300%. Natural Resource Partners' distribution cut could make now a good time to buy. And keep an eye on Rhino while you're at it.
Don't let 2014 get off to a rocky start