We came across a bullish thesis on Natural Resource Partners L.P. (NRP) on from Waterboy’s Substack by Waterboy Investing. In this article we will summarize the bulls’ thesis on NRP. Natural Resource Partners L.P. (NRP) share was trading at $92.30 as of Sept 18th.

A coal miner at their place of work, with the coal reserves in the backdrop.

Natural Resource Partners (NRP) stands as one of the largest mineral rights owners in the U.S., earning royalties primarily from metallurgical coal, which constitutes 70% of its revenue. Despite its association with commodities, NRP boasts an impressively consistent profitability with free cash flow (FCF) margins of 50%. The company's high-return-on-invested-capital (ROIC) model allows it to earn royalties from coal producers without assuming the risks of production, a strategy that has yielded decades of stable profits. Currently, NRP offers an attractive 24.7% FCF yield, supported by a market cap of $1.15 billion. Management, with a 29% ownership stake, has focused on paying down debt and reducing financial risk over the past several years.

NRP has a notable history of overcoming financial challenges. In 2015, the company faced significant pressure due to falling commodity prices and high debt levels, nearly pushing its financial capacity to the brink. At the time, NRP had $1.5 billion in debt, with bonds trading at 65 cents on the dollar, and negative free cash flow. The company’s response was a deliberate strategy to deleverage and de-risk its operations, successfully positioning it for long-term financial stability. This plan continues to be a cornerstone of NRP’s strategy, with no quarterly guidance provided, allowing management to focus on returning capital to shareholders. The company’s status as a Master Limited Partnership (MLP) means it distributes dividends, yielding over 20% at the current price.

Key assets include the Carter Roag mine, operated by Affinity Coal, known for producing high-quality metallurgical coal for decades, and the Kepler Coal Plant Property, operated by Alpha Metallurgical Resources, which is undergoing an expansion to boost production by 160,000 tons annually. Additionally, Elk Creek, operated by Ramaco Royalty Company, has the lowest cash cost per ton in the nation.

NRP’s portfolio extends beyond coal. It holds a 49% stake in a Wyoming soda ash mine, recently valued at $500 million, half of NRP’s market cap. Other monetizable resources include timber rights, carbon offset credits, and potential leasing opportunities for renewable energy projects. The company is also exploring carbon capture and storage, backed by government incentives and large companies like Occidental Petroleum, offering significant growth potential. NRP’s strong free cash flow and diversified assets provide a compelling investment case with substantial upside potential.

Natural Resource Partners L.P. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 6 hedge fund portfolios held NRP at the end of the second quarter which was 5 in the previous quarter. While we acknowledge the risk and potential of NRP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NRP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.