We are maintaining our Buy recommendation on Natural Resource Partners L.P. (NRP). The strong global coal markets should boost NRP's operating in margins and distributable cash flow as its per ton royalty increases will be realized through '09. The partnership is levered to the premium priced central Appalachian Basin consisting of a sizeable metallurgical reserve base, representing 26% of '08 production.
The company released second quarter 2008 earnings of $40.4 MM, a 79% increase over Q2'07 and a 20% sequentially. Earnings attributable to limited partners, which is essentially an MLP equivalent to common stock for a non-master limited partnership, was $30.6 MM or $0.47 per unit, an increase of 68% over Q2'07. Limited partner earnings came in above our expectations due to higher-than-expected average royalties per ton production volumes.
NRP has no direct involvement with the operations of its assets. It collects royalties from the coal properties and infrastructure assets, which it owns based on a fixed price or a percentage of sales, whichever is higher. This allows the partnership to avoid large expenses and liabilities involved in the capital intensive coal mining business. By not having to set aside great deals of capital for capital expenditures or legacy liabilities, which all underground mining operators face, NRP can generate large amounts of distributable cash flow.
NRP will continue to reap the benefits of higher royalties without the operational or price risks associated with operating the mines. We are increasing our target price from $39 to $40 per unit and increasing our 08/ 09 earnings estimates from $1.75 to $1.78 per unit and from $1.77 to $1.85 per unit, respectively.
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