May 5, 2022 - NACCO Industries® (NYSE: NC) has announced consolidated operating profit of $14.9 million and net income of $12.6 million, or $1.72 per diluted share, for the first quarter of 2022 compared with consolidated operating profit of $8.3 million and net income of $9.0 million, or $1.25 per diluted share, for the first quarter of 2021.
Improvements in the Company's consolidated operating profit, Consolidated EBITDA and net income were due to significantly higher earnings in the Minerals Management segment. Improvements in the North American Mining segment were offset by lower earnings in the Coal Mining segment and an increase in unallocated business development and employee-related expenses. Non-GAAP financial measures are defined and reconciled on pages 9 and 10.
Effective January 1, 2022, the Company changed the composition of its reportable segments. As a result, the Company retrospectively changed its computation of segment operating profit to reclassify the results of Caddo Creek Resources Company and Demery Resources Company from the Coal Mining segment into the North American Mining segment as these operations provide mining solutions for producers of industrial minerals, rather than for power generation. The Coal Mining segment now includes only mines that deliver coal for power generation. This segment reporting change has no impact on consolidated operating results. All prior period segment information in this release has been reclassified to conform to the new presentation. The reclassified segment financial information for the 2021 four quarters and full year has also been provided on pages 10 to 12 of this release.
At March 31, 2022, the Company had consolidated cash of $81.6 million and debt of $25.5 million with availability of $113.9 million under its $150.0 million revolving credit facility. The Company believes that maintaining a conservative capital structure and adequate liquidity are important given evolving trends in energy markets and the Company's strategic initiatives to grow and diversify, which are discussed further in the Growth and Diversification section of this release.
Detailed Discussion of Results
Coal Mining Results
Coal Mining revenues decreased in the first quarter of 2022 from the first quarter of 2021 primarily due to fewer tons delivered as a result of lower customer demand at Mississippi Lignite Mining Company.
First-quarter 2022 Coal Mining operating profit and Segment EBITDA decreased from the prior year quarter mainly due to a decrease in earnings of unconsolidated operations and higher operating expenses.
The decrease in earnings of unconsolidated operations was primarily attributable to the termination of the Bisti Fuels contract on September 30, 2021, a reduction in fees earned at Liberty as the scope of final mine reclamation activities continues to decline and lower customer requirements at Sabine. The decrease was partly offset by an increase in earnings at Coteau resulting from contractual price escalation. The increase in operating expenses was mainly due to an increase in professional fees partially offset by lower employee-related costs.
Coal Mining Outlook - 2022
On May 2, 2022, Great River Energy ("GRE") completed the sale of the Coal Creek Station power plant and the adjacent high-voltage direct current transmission line to Rainbow Energy Center, LLC and its affiliates. As a result of the sale, the existing agreements between GRE and Falkirk Mining Company terminated and GRE paid the Company $14.0 million, transferred ownership of an office building and conveyed membership units in Midwest AgEnergy to NACCO. The new Coal Sales Agreement ("CSA") between Falkirk and Rainbow Energy became effective on May 1, 2022. Falkirk will continue supplying all coal requirements of Coal Creek Station and will be paid a management fee per ton of coal delivered for operating the mine. Rainbow Energy is responsible for funding all mine operating costs and directly or indirectly providing all of the capital required to operate the mine. The CSA specifies that Falkirk will perform final mine reclamation, which will be funded in its entirety by Rainbow Energy. The initial production period is expected to run ten years from the effective date of the CSA, but the CSA may be extended or terminated early under certain circumstances.
Coal Mining operating profit in 2022 is expected to decrease significantly compared with 2021, both including and excluding the contract termination fees. The expected reduction in operating profit is primarily the result of reduced earnings at both consolidated and unconsolidated Coal Mining operations as well as an anticipated increase in operating expenses. The increase in operating expenses is primarily due to expected higher outside services and professional fees.
Results at the consolidated mining operations are expected to decrease significantly in 2022 from 2021 primarily due to expected substantially lower earnings at Mississippi Lignite Mining Company driven by an anticipated reduction in customer demand, predominantly in the second half of 2022, from higher than average levels in 2021. Lower customer demand, expected cost inflation in 2022 on diesel fuel, repairs and supplies, and higher depreciation expense related to recent capital expenditures to develop a new mine area are expected to contribute to an increase in the cost per ton in 2022. In general, cost per ton delivered is lowest when the power plant requires a consistently high level of coal deliveries, primarily because costs are spread over more tons.
The reduction in earnings at the unconsolidated Coal Mining operations is expected to be driven by the termination of the Bisti Fuels contract as of September 30, 2021 and lower earnings at Falkirk, primarily in the second half of 2022 compared with the second half of 2021. Falkirk has agreed to a reduction in the current per ton management fee from May 1, 2022 through May 31, 2024. After May 31, 2024, Falkirk's per ton management fee increases to a higher base in line with current fee levels, and thereafter adjusts annually according to an index which tracks a broad measure of U.S. inflation.
Segment EBITDA, which excludes the termination payments of $10.3 million from Bisti Fuels' customer in 2021 and the $14 million contract termination fee from GRE in 2022, is expected to decrease significantly in 2022 from 2021 primarily as a result of the forecasted reduction in operating profit partially offset by an increase in depreciation, depletion and amortization expense. The increase in depreciation, depletion and amortization expense is primarily due to higher capital expenditures at Mississippi Lignite Mining Company as a result of the development of a new mine area.
Capital expenditures are expected to be approximately $21 million in 2022. The elevated levels of capital expenditures from 2019 through 2022 relate to the necessary development of a new mine area at Mississippi Lignite Mining Company, which will allow continued coal deliveries through the end of the contract. The increase in capital expenditures associated with mine development will result in higher depreciation expense in future periods that will unfavorably affect future operating profit. Capital expenditures for Mississippi Lignite Mining Company are expected to decline significantly beginning in 2023.
The Company's contract structure at each of its coal mining operations eliminates exposure to spot coal market price fluctuations. However, fluctuations in natural gas prices and the availability of renewable power generation, particularly wind, can contribute to changes in power plant dispatch and customer demand for coal. Sustained higher natural gas prices could continue to result in increased demand for coal. Changes to expectations for customer power plant dispatch could affect the Company's outlook for 2022 and over the longer term.
The owner of the power plant served by the Company's Sabine Mine in Texas intends to retire the power plant in the first quarter of 2023, at which time Sabine expects to begin final reclamation. Funding for mine reclamation is the responsibility of the customer. Coteau operates the Freedom Mine in North Dakota. All coal production from the Freedom Mine is delivered to Basin Electric Power Cooperative. Basin Electric utilizes the coal at the Great Plains Synfuels Plant, Antelope Valley Station and Leland Olds Station. The Synfuels Plant is a coal gasification plant owned by Dakota Gas that manufactures synthetic natural gas and produces fertilizers, solvents, phenol, carbon dioxide and other chemical products for sale. In August 2021, Basin Electric announced that it signed a non-binding term sheet which contemplates the sale of the assets of Dakota Gas. The closing is subject to the satisfaction of specified conditions. As part of the announcement, Basin Electric indicated that the Synfuels Plant will continue existing operations through 2026. Basin Electric is also considering other options for the Synfuels Plant if the transaction with the potential buyer does not close.
North American Mining Results
Revenues at North American Mining increased in the first quarter of 2022 over the prior year primarily as a result of an increase in tons delivered driven by increased customer requirements. Higher revenue related to reclamation at Caddo Creek also contributed to the increase in revenues.
The improvement in operating profit was due to higher reclamation income at Caddo Creek partly offset by a reduction in earnings at the active operations primarily as a result of higher employee-related costs.
North American Mining Segment EBITDA increased significantly as a result of the increase in operating profit and substantially higher depreciation expense resulting from equipment acquired to support newer contracts that are expected to contribute to increased income in future periods.
North American Mining Outlook
In 2022, North American Mining expects full-year operating profit to increase over 2021, primarily in the fourth quarter of 2022, due to an expected increase in customer requirements and contributions from contracts executed during 2021. Segment EBITDA for 2022 is expected to increase significantly compared with the prior year as a result of the improvement in operating profit and an increase in depreciation expense.
During 2021, North American Mining expanded its footprint, including into new geographies, by entering into new contract mining services agreements at quarries in Florida, Indiana, Texas and Arkansas. During the first quarter of 2022, North American Mining agreed to commission a new dragline at an existing quarry in Florida to secure a contract extension through 2027. This dragline will supplement an existing dragline at this operation, resulting in an expected increase in deliveries and income over the next five years at the quarry. North American Mining continues to have a substantial pipeline of potential new projects and is pursuing a number of growth initiatives that, if successful, would be accretive to future earnings.
In 2019, North American Mining's subsidiary, Sawtooth Mining, LLC, entered into a mining services agreement to serve as the exclusive contract miner for the Thacker Pass lithium project in northern Nevada, owned by Lithium Nevada Corp., a subsidiary of Lithium Americas Corp. (TSX: LAC) (NYSE: LAC). Lithium Americas owns the lithium reserves at Thacker Pass and will be responsible for the processing and sale of the lithium produced. In April 2022, Lithium Americas provided an update on the Thacker Pass project, which noted that all key state-level permits had been issued for Thacker Pass and early-works construction, which includes site access and preparation, is expected to commence in 2022. At maturity, this management fee contract is expected to deliver fee income similar to a mid-sized management fee coal mine.
In 2022, capital expenditures are expected to be approximately $28 million primarily for the acquisition, relocation and refurbishment of draglines, as well as the acquisition of other mining equipment to support the continued expansion of contract-mining services, including the acquisition of equipment to support the Thacker Pass lithium project. The cost of mining equipment related to Thacker Pass will be reimbursed by the customer over a seven-year period from the equipment acquisition date.
Minerals Management Results
For the first quarter of 2022, Minerals Management revenue, operating profit and Segment EBITDA increased significantly over the first quarter of 2021 primarily due to higher royalty income driven by significantly higher natural gas and oil prices, as well as $2.1 million of settlement income recognized during the first quarter of 2022. The settlement income relates to the Company's ownership interest in certain mineral rights.
Minerals Management Outlook
The Minerals Management segment derives income from royalty-based leases under which lessees make payments to the Company based on their sale of natural gas, oil, natural gas liquids and coal, extracted primarily by third parties.
Operating profit and Segment EBITDA in 2022 are expected to increase significantly over 2021 primarily driven by current expectations for natural gas and oil prices for the remainder of 2022, partly offset by an anticipated reduction in production. As a result of substantially higher oil and natural gas prices in the first half of 2022 compared with the respective prior year period, the Company expects a significant increase in operating profit in the first half of 2022. This increase is anticipated to be partly offset by a modest decrease in the second half of 2022 as increases in oil and gas prices are expected to moderate and as a result of the absence of $3.3 million of settlement income recognized in the third quarter of 2021.
Commodity prices are inherently volatile and as an owner of royalty and mineral interests, the Company's access to information concerning activity and operations with respect to its interests is limited. The Company's expectations are based on the best information currently available and could vary positively or negatively as a result of adjustments made by operators and/or changes to commodity prices.
In the first quarter of 2022, Minerals Management completed a small acquisition of mineral interests in the New Mexico portion of the Permian basin for $0.7 million. Minerals Management is targeting additional investments in mineral and royalty interests of approximately $9 million in the remainder of 2022. These investments are expected to be accretive, but each investment's contribution to earnings is dependent on the details of that investment, including the size and type of interests acquired and the stage and timing of mineral development. The contribution of each investment could also vary due to commodity price changes. These acquired interests are expected to align with the Company's strategy of selectively acquiring mineral and royalty interests with a balance of near-term cash-flow yields and long-term growth potential, in high-quality reservoirs offering diversification from the Company's legacy mineral interests.
Consolidated 2022 Outlook
Overall for the 2022 full year, excluding the settlements associated with the GRE/Rainbow Energy transaction and the Bisti termination fee recognized in 2021, NACCO expects consolidated operating profit, net income and Consolidated EBITDA to decrease from 2021. Lower operating profit in the Coal Mining segment is expected to be partially offset by an anticipated significant increase in earnings at the Minerals Management segment and higher operating profit at North American Mining. In addition, the Company recognized $3.4 million of gains associated with equity securities in 2021 that are not expected to recur. The effective income tax rate, including the settlements associated with the GRE/Rainbow Energy transaction is expected to be between 14% and 16%.
The Company will recognize the value of the North Dakota office building and the membership units in Midwest AgEnergy received as part of the settlement with GRE as a component of other income.
Consolidated capital expenditures are expected to be approximately $67 million in 2022 and include approximately $8 million for expenditures at Mitigation Resources of North America®. In 2022, cash flow before financing activities is expected to be significantly lower than in 2021 as a result of the anticipated capital expenditures.
Growth and Diversification
The Company is pursuing growth and diversification by strategically leveraging its core mining and natural resources management skills to build a strong portfolio of affiliated businesses. Management continues to be optimistic about the long-term outlook for growth in the North American Mining and Minerals Management segments and in the Company's Mitigation Resources of North America business. Each of these businesses continues to expand its pipeline of potential new projects with opportunities for growth and diversification.
North American Mining is pursuing growth and diversification by expanding the scope of its business development activities to include potential customers who require a broad range of minerals and materials and by leveraging the Company's core mining skills to expand the range of contract mining services it provides. North American Mining continues to pursue additional opportunities to provide comprehensive mining services to operate entire mines, as it expects to do at the new lithium project in Nevada. The goal is to build North American Mining into a leading provider of contract mining services for customers that produce a wide variety of minerals and materials. The Company believes North American Mining can grow to be a substantial contributor to operating profit, delivering unlevered after-tax returns on invested capital in the mid-teens as this business model matures and achieves significant scale, but the pace of growth will be dependent on the mix and scale of new projects.
The Minerals Management segment continues to grow and diversify by pursuing acquisitions of mineral and royalty interests in the United States. The Minerals Management segment will benefit from the continued development of its mineral properties without additional capital investment, as all further development costs are borne entirely by third-party producers who lease the minerals. This business model can deliver higher average operating margins over the life of a reserve than traditional oil and gas companies that bear the cost of exploration, production and/or development. Catapult Mineral Partners, the Company's business unit focused on managing and expanding the Company's portfolio of oil and gas mineral and royalty interests, has developed a strong network to source and secure new acquisitions, and has several potential acquisitions under review. The goal is to construct a diversified portfolio of high-quality oil and gas mineral and royalty interests in the United States that deliver near-term cash flow yields and long-term projected growth. The Company believes this business will provide unlevered after-tax returns on invested capital in the low-to-mid-teens as the portfolio of reserves and mineral interests grows and this business model matures.
Mitigation Resources of North America continues to expand its business, which creates and sells stream and wetland mitigation credits and provides services to those engaged in permittee-responsible mitigation. This business offers an opportunity for growth and diversification in an industry where the Company has substantial knowledge and expertise and a strong reputation. The Mitigation Resources business has achieved several early successes and is positioned for additional growth. The Company's goal is to grow Mitigation Resources into one of the ten largest U.S. providers of mitigation solutions, largely focused on streams and wetlands, initially in the southeast United States. While this business is in the early stages of development, it is currently focused on expanding and has established mitigation projects in Alabama, Mississippi, Texas and Tennessee. The Company believes that Mitigation Resources can provide solid rates of return as this business matures.
The Company also continues to pursue activities which can strengthen the resiliency of its existing coal mining operations. The Company remains focused on managing coal production costs and maximizing efficiencies and operating capacity at mine locations to help customers with management fee contracts be more competitive. These activities benefit both customers and the Company's Coal Mining segment, as fuel cost is a significant driver for power plant dispatch. Increased power plant dispatch results in increased demand for coal by the Coal Mining segment's customers. Fluctuating natural gas prices and availability of renewable energy sources, such as wind and solar, could affect the amount of electricity dispatched from coal-fired power plants.
The Company continues to look for opportunities to expand its coal mining business where it can apply its management fee business model to assume operation of existing surface coal mining operations in the United States. However, opportunities are very limited in the current environment. In addition, the political and regulatory environment is not receptive to development of new coal-fired power generation projects which would create opportunities to build and operate new coal mines.
The Company is committed to maintaining a conservative capital structure as it continues to grow and diversify, while avoiding unnecessary risk. Strategic diversification will generate cash that can be re-invested to strengthen and expand the businesses. The Company also continues to maintain the highest levels of customer service and operational excellence with an unwavering focus on safety and environmental stewardship.