Ciner Resources is a low-cost U.S. based producer of Soda Ash (used in the production of glass, soaps/detergents, etc.). CINR’s unit price is depressed following a recent distribution cut, irrespective of the company’s pro forma free cash flow generation.
As proof that idea quality and results don't always correspond, see the excellent writeup on CINR from last summer at $27 for background. This writeup will be less thorough, but at current prices, CINR is extremely attractive. The opportunity exists because the management team is taking the long view (reducing the distribution in the short term to invest in capacity at acceptable rates of return), and the market is taking the short view ("dude, where did a bunch of my dividend go?")
CINR is an MLP - the holder base is predominately there for the income - so the sell-off is not surprising. However, we believe the distribution will be back (and then some), and if you can wait a few years, a very attractive IRR (perhaps 20%+) may be yours. And with a current yield > 7% and the security of 2.3x distribution coverage, you won't starve waiting around, either.
[As an aside, NRP is currently an excellent value, and creates significant virtual exposure to CINR at a further discount through NRP's 49% stake in the same soda ash assets.]
CINR’s unit price has declined to a multi-year low following the announcement last month that the company was reducing its distribution by 40%
On May 10th, CINR announced that it was temporarily reducing its distribution by 40% (quarterly distribution per unit was reduced from $0.57 to $0.34) in order to preserve cash to fund a major capacity expansion project.
The distribution cut was not driven by weakening fundamentals; both production volumes and pricing are anticipated to improve in 2019. CINR’s distribution coverage increased sequentially from 1.2x to 2.3x following the distribution reduction.
CINR’s unit price has declined by over 16% following the announcement as selling by yield-seeking investors put pressure on the stock.
CINR operates in a stable industry with a favorable demand outlook
Soda ash is a raw material used in the production of glass, chemicals and detergents. The Soda Ash industry has been a stable, low-growth market with world Soda Ash demand (excl. China*) having grown at a ~1.5% CAGR in the past 8 years, and at a ~2% CAGR in the past 4 years. Global utilization rates (excl. China) have remained between 87% and 92% during that period as net capacity additions have been modest.
Our conversations with CINR customers have corroborated that a growing use of glass in the construction, automobile, and consumer product packaging industries is expected to contribute to continued global demand growth.
Demand growth is expected to be primarily driven by international markets as per capita soda ash consumption in the Middle East, Latin America, Africa and Asia (excl. China) is still 50%-90% below that of the U.S.
* Excluding Soda ash demand growth in China as demand is met by domestic producers
Source: IHS Markit
As CINR is a producer of natural soda ash from trona, the company has a significant and structural cost advantage over synthetic soda ash producers (the majority of global competitors produce synthetic soda ash)
The world’s largest deposit of trona is in the Green River Basin of Wyoming where CINR is located. Trona-based producers consume less energy and are less burdened by additional costs associated with the storage/disposal of undesirable by-products.
As a result, CINR’s soda ash production costs are close to 50% lower than those of many international competitors.
Their advantaged cost positions have allowed CINR and other U.S. producers of natural soda ash to expand their international market share when higher-cost synthetic soda ash plants have been closed or idled.
CINR’s substantial trona assets are expected to provide the company with approximately 60 years of mining reserve life.
CINR’s cost position is materially lower than that of international competitors:
Soda Ash production process comparison:
CINR is pursuing growth projects that will enable the company to increase production volume by 30%, allowing for meaningful distribution growth post-completion
CINR’s advantaged cost position has enabled the company to operate at close to 100% utilization and its soda ash prices have been relatively stable over time.
CINR is pursuing an expansion project that will increase its soda ash production capacity from 2.7mm to 3.5mm tons per year.
Based on our estimates, the ROIC for the expansion project will potentially only be ~9%-12%. We believe these fairly mediocre returns help explain why the Soda Ash industry has not attracted a lot of new capital or been characterized by large capacity-driven boom/bust cycles.
Management has communicated that they plan to maintain the reduced distribution for the next 10-12 quarters, after which increased production levels will materially improve the distributable cash flow (DCF) and allow the company to raise the distribution again.
We believe CINR’s expanded capacity would imply a distributable cash flow per unit of ~$3.50 and allow for a distribution per unit of ~$2.60, representing a ~90% increase over CINR’s current distribution.
Valuing CINR at a 8% - 9% dividend yield would imply a value per unit of $28.90-$32.50 (upside of ~50%-70% from today’s price).
In the meantime, we will be paid to wait as CINR is paying out a ~7% distribution yield that is now over 2x covered.
The risk-reward seems attractive here with fairly limited potential downside. Even if soda ash prices were to decline by ~13% on a blended basis, that would still enable the company to pay a dividend over ~$1.00 per unit (implying a ~5%-6% dividend yield). As a point of reference, collective sales by the natural soda ash producers in the U.S. only declined by ~12% in 2009.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
When they ramp up the distirbution again in a few years.
Or, maybe if they somehow collapse the convoluted ownership structure (buy out NRP's stake, for example).