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Natural Resource Partners L.P. (NRP - Analyst Report) reported fourth quarter 2012 adjusted earnings of 58 cents per unit, up 18.3% from the year-ago earnings of 49 cents per unit. This was driven by favorable returns from the metallurgical coal business and benefits accrued from increasing its presence in the Illinois Basin. The partnership’s quarterly earnings surpassed the Zacks Consensus Estimate by 34.9%.

GAAP earnings in the fourth quarter stood at 56 cents compared with a loss of 16 cents in the year-ago quarter. The difference between GAAP and pro forma earnings stemmed from a 2 cent non-cash impairment charge.

Natural Resource Partners’ 2012 adjusted earnings were $2.00 per unit compared with $1.99 per unit reported in 2011. The reported earnings beat the Zacks Consensus Estimate by 8.7%.

Revenue

Natural Resource Partners’ fourth quarter top line surged 9.9% year over year to $102.4 million due to increase in revenues other than coal royalty. The reported quarter revenue was higher than the Zacks Consensus Estimate of $88.0 million.

The partnership’s total revenue for 2012 was $379.1 million increasing marginally from $377.6 million in the prior year. The revenue was well above the Zacks Consensus Estimate of $362.0 million. In 2012, metallurgical coal accounted for 32% of the partnership’s total production and 44% of its coal royalty revenues compared with 34% of production and 45% of coal royalty revenues in the previous year.

Operational Highlights

Coal production in fourth quarter 2012 increased 41% from the year-ago quarter to 17.0 million tons. Healthy production growth in the Appalachian and Illinois Basin led to the sharp rise in output levels.

Natural Resource Partners’ fourth quarter coal royalty revenue was $67.7 million compared with $67.3 million in the year ago quarter. This was due to a 29.1% downswing in average coal royalty revenue per ton.

Revenues, other than coal royalty, increased 36% year over year to $34.8 million owing to a $6.5 million revenue supplement from minimums and an addition of $4.6 million gained from sales to West Virginia Department of Highways. This was partially offset by a shrinkage of $1.5 million in oil and gas revenues due to lower prices and production from BRP LLC’s gas properties in Louisiana.

Total operating costs and expenses during the quarter were $29.2 million, including an impairment charge of $2.6 million for the further write down of the Gatling West Virginia assets. Excluding the impairment charge, total operating costs and expenses were $26.7 million, up 5.1% over 2011, due to rise in depreciation, depletion and amortization expenses on account of rise in production partially offset by a $1.9 million drop in general and administrative expenses.

Operating income for the fourth quarter was $73.2 million compared with a loss of 2.6 million in the year-ago quarter. The combination of revenue upturn and plummeting costs led to the significant escalation in profit.

Financial Update

Cash provided by operating activities during the quarter was $77.5 million versus $87.2 million in the prior-year quarter.

In the fourth quarter, distributable cash flow was $74.5 million, down 6.2% from the year-ago period mainly due to a rise in reserves for future principal payments.

Cash and cash equivalents as of Dec 31, 2012 were $149.4 million versus $214.9 million as of Dec 31, 2011.

Long-term debt of the partnership as of Dec 31, 2012 was $897.0 million versus $836.2 million as of Dec 31, 2011.

In 2012, the partnership invested $240.2 million for acquisitions of which $46.1 million was spent in the fourth quarter related to the purchase of oil and gas interests in the Marcellus play and an overriding royalty on frac sand reserves in Wisconsin.

Cash Distribution

The partnership’s Board of Directors on Jan 22, 2013 announced a quarterly distribution of 55 cents per unit for the fourth quarter 2012.

Guidance

Natural Resource Partners L.P. lowered its production estimates for 2013 owing to challenges in thermal coal market in the U.S. and depressed prices. Also, the closure of some mines and production cutbacks by the lessees will affect revenue.

The partnership expects coal royalty revenue to further decline by $25 million year over year to $50 million. Output at the Central Appalachia will also continue to fall by 9 million tons.

The acquisition of Anadarko Petroleum Corporation’s (APC - Analyst Report) interest in the OCI Wyoming L.P. could provide some respite to dull coal revenues. Taking into account these factors, the partnership expects total revenue for 2013 in the range of $330 million to $375 million. The partnership expects to retain its distribution rate for 2013 at $2.20.

Other Coal Company Releases

Peabody Energy Corporation (BTU - Analyst Report) reported an operating loss of $1.12 per share in the fourth quarter, coming significantly below the Zacks Consensus Estimate of earnings of 26 cents. Alliance Resource Partners, L.P. (ARLP - Snapshot Report) reported earnings of $1.87 per unit in the fourth quarter, surpassing the Zacks Consensus Estimate of $1.32 per unit for the quarter.

Our View

Natural Resource Partners continued its winning streak, posting earnings surprises for the last eleven quarters.  We believe the partnership will continue to have a good run in the upcoming quarters given its recent high-return buyouts of unconventional assets like the acquisition of frac sand resources and the majority interest in the Marcellus which will boost growth.

The latest interest purchase in OCI Wyoming could be synergistic to the top line in the near term. Moreover, the rise in met coal demand from the emerging markets of India and China will contribute to the partnership’s profitability. Natural Resource Partners currently retains a Zacks Rank #2 (Buy).

Headquartered in Houston, TX, Natural Resource Partners L.P. engages in the business of owning and managing mineral reserve properties. It primarily owns coal, oil and gas reserves across the US, generating royalty income for the partnership.

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