Description

Ciner Resources LP (“CINR”) is a little known raw materials MLP operating in an oligopolistic industry.  It’s the world’s lowest cost producer of soda ash, generates predictable free cash flow, and is currently subject to several positive catalysts.  The company has had an uneven last year and a half due to worries about oversupply in the soda ash market, various production issues, and a resulting pause in distribution increases that are so important for MLPs.  The 9% yield is high given the stability of the business and the pending resolution of these issues. We believe CINR is worth $36, including distributions, with additional upside potential.

Business description

CINR mines for a natural-occurring raw material called trona which it processes into soda ash.  Soda ash is used to make glass, detergent, chemicals, paper and other GDP-growth type of products.  There are 60M tons of soda ash used globally per year growing by roughly 1-2M tons per annum. Contracts for most the world market are set annually in the 4Q for both volume and price.  It is a predictable business, with visibility on more than 90% of annual volumes, revenue and profit on January 1.

CINR’s mine is based in Wyoming, where most of the world’s trona is located.  Natural trona is the lowest cost raw material for soda ash production. Around 15M tons of global soda ash volume are made from natural trona while the remaining 45M tons come from expensive synthetic manufacturing processes.  Trona-based soda ash costs roughly $70-80/ton to make vs. synthetic soda ash which costs around $130-180/ton to make, so the Wyoming-based mines have a significant cost advantage vs. other competitors worldwide. Notably, the US-based mines charge prices in-line with prices set globally (around ~$220/ton today).  The US soda ash market (~6M tons) is an oligopoly with rational pricing – only three other companies, all in Wyoming, compete (Tata, Solvay, Genesis). Each of the three aforementioned companies sells domestically and then CINR, Tata, and Genesis partner together via a co-op called Ansac to sell soda ash internationally.  Solvay sells its international volumes independently. Ansac was formed solely to export ~4M tons of low-cost US soda ash, primarily to Latin America (~45% of volumes) and Asia (~35% of volumes).

CINR’s corporate structure is a bit confusing.  CINR is the publicly traded MLP that owns 51% of an operating company that owns the Wyoming mine.  49% of this operating company is owned by NRP. CINR manages the operating company, although NRP is on the board of the operating company and holds two of the five votes.

~75% of CINR’s shares are owned by Ciner Turkey and ~25% by public market investors.  Our understanding is that Ciner Turkey is closely involved with CINR, although CINR is run on a day-to-day basis by the US team.

Why it is mispriced

1)      Overreaction to Ciner Turkey new tons and 1Q18 results

2)      Unrecognized near-term positive catalysts

3)      Unknown name  

Overreaction to Ciner Turkey new tons and 1Q18 results

In 2013, Ciner Turkey announced that they were building a mine with 2.5M tons of natural trona-based soda ash capacity.  The mine faced a variety of issues during construction, casting doubt on its viability. During 2017, Ciner Turkey confirmed that the new 2.5m tons would be online by the end of 2017, rattling the normally sleepy soda ash market and introducing questions around 2018 pricing.  At one point during 2017, IHS was forecasting a double-digit price decline internationally and a mid-single digit decline to pricing domestically because of these incremental tons. The average annual change in pricing has been a low single digit change in either direction over the last ten years.   

Price changes generate headlines in this industry because they are the only major profit variable that fluctuates each year for most producers.  As the low-cost provider, the Wyoming mines run at 100% utilization, so volumes are relatively fixed, and costs do not vary much either. Thus, pricing provides significant positive and negative profit leverage each year, depending on the direction and size of the annual pricing changes.

Ciner Turkey volume over-supply concerns and worry about price declines are overblown.  Between 60-80% of the Ciner Turkey tons are now online with no sign of dramatic pricing dislocations and, in fact, the market globally is tight.  There were five lines scheduled to go online, each with about 500K tons of capacity. We believe that volume from three of the Ciner Turkey lines was contracted during the 2018 contracting season and some volume on the fourth line may be getting sold in the spot market.  Because the market is growing at an annual 2-3% rate, or 1-2M tons, and because China has taken some volume offline for environmental reasons, these new 1.5-2M incremental tons were absorbed by the market with no pricing disruptions during the 2018 contracting season. For 2018, international pricing is forecasted to be up 2% on a consolidated basis.

We believe that most of the new Ciner Turkey volume was sold to European buyers, with some volume also going to Latin America and Asia.  Like CINR, cost of production of soda ash at the new Ciner Turkey mine is also around $70-80/ton vs. the production cost for European synthetic soda ash suppliers of $140-160/ton, so there is a large opportunity here for Ciner Turkey to win market share.  Note that Ansac is prohibited from selling in Europe (regulators deem it a cartel), so the European market has traditionally been dependent on this much higher-cost synthetic soda ash to meet its needs. This dependence changes dramatically with Ciner Turkey’s presence.  Our recent checks indicate that the remaining Ciner Turkey capacity is unlikely to fully come online before the end of 2018, with some specific problems plaguing the fifth line.

For the 2019 contracting season, we believe that the remaining 0.5-1M Ciner Turkey tons will come online and be absorbed by demand associated with global GDP growth, again primarily in the European market.  This market is approximately 8M tons in size. There are possible second-order effects of this disruption in the European market. We anticipate that high cost European synthetic producers displaced by Ciner Turkey will ship product at cost to Latin America to breakeven on sale of this soda ash instead of losing money by selling it into the Asian market which is more competitive.  Asian market strength is expected to continue, counterbalancing potential pricing pressure in the Latin American market for CINR. This is essentially a repeat of market dynamics in 2018 where 1-1.5M tons (net of China tons offline) are to be absorbed (versus 0.5-1M in 2019) implying price increases in 2019 at a greater level than in 2018. By 2020, market dynamics look very favorable.  Our contacts expect mid-single digit price increases in 2020.

Aside from concerns about volume oversupply and price declines, the Company reported a new operational issue on their 1Q18 conference call that was unexpected.  This is the second year in a row with an unexpected operational issue. The issue last year was related to an equipment outage and this year is due to a heating dome structural weakness caught during routine maintenance.  CINR is well-regarded and their maintenance capex and care of facilities is considered top-notch. Direct competitors who operate nearby and have a read on each other’s facilities indicate that CINR has among the best maintained assets in the industry.  These recent production issues seem to be a bit of bad luck and as one competitor put it, “you just hope it doesn’t happen to you.” Both last and this year’s equipment outages are of a similar magnitude (~$3-4M reduction to EBITDA, including lost tons and repair expenses).  This is ~2% of EBITDA this year, so while it’s a negative development, it is of a relatively small scale.

Unrecognized near-term positive catalysts

There are several unrecognized positive catalysts on the horizon for CINR.

1.  Large one-time benefit to EBITDA in the 2Q with positive implications for near-term distribution increases.  On June 28, CINR’s operating company signed a legal settlement for $27.5M.  The settlement with Anadarko relates to their use of a higher royalty rate than permitted under the original 1961 contract granting CINR its mining rights.  Under the terms of the settlement, CINR will continue to pay the royalty rate that it has been paying to Andarko (neutral ongoing impact to CINR’s financials) and Andarko agreed to pay $27.5M to CINR’s operating company.  This payment will be accounted for in the CINR 2Q financials as EBITDA, nearly doubling 2Q EBITDA versus consensus estimates. Additionally, this may prompt a distribution increase in the near-term. The Company has indicated they are comfortable raising distributions once their coverage ratio ranges from 1.1-1.2x consistently.  Using conservative assumptions, coverage ratios are at or above 1.1x beginning in the 2H of 2018. We are modelling distributions to be raised in the 3Q18.

2.  China’s environmental program.  China creates synthetic soda ash to meet its internal needs as well as to ship around Asia.  In 2016, in response to rising soda ash pricing in 2015, China increased its higher-cost capacity.  This higher-cost synthetic soda ash production process is particularly bad for the environment and, in the wake of Xi Jinping’s environmental control mandate, roughly 500K tons of Chinese soda ash volume has since gone back offline.  This has facilitated absorption of CINR Turkey’s new supply. This Chinese soda ash was being sold to other Asian countries and its absence is an incremental opportunity for Ansac and Ciner Turkey. The dynamic has increased pricing for Asian soda ash which was 10% higher in Q1 2018 (~$250/ton) versus last year (~$225/ton).  The Asian soda ash market continued to see similar yoy pricing increases in the 2Q, as well.

3.  After Ciner Turkey tons come online, there are no other low-cost supply options left in the world.  There are no other low-cost supply options anywhere in the world after Ciner Turkey brings its Kazan mine fully online (other than debottlenecking – see #4 below).  Additionally, it takes around two to three years to build-out new supply. This bodes well for 2019 and, especially, for 2020.

4.  CINR debottlenecking to get to 3M tons by 2021.  Management announced an annual 3M ton production goal during their 4Q call and indicated this is doable “within the next few years.”  This implies 70-100K incremental tons in 2019-2021, representing ~$7M of incremental EBITDA each year from the sale of these incremental tons at today’s margins, driven by capex costs of ~$15-$20M annually.    

5.  Energy EBITDA contribution.  CINR announced a new energy cost saving initiative on the 1Q conference call.  The cost of this program is expected to be $45M of capex to install a turbine to supply 1/3 of CINR’s electricity needs resulting in ~$7M of incremental EBITDA each year.  The machinery will also ultimately allow CINR to sell electricity to third parties, although the permitting to sell to third parties will take 12-18 months. Once permitting is finalized, CINR will generate $12M of EBITDA annually from this turbine.  The turbine is expected to begin contributing at the $7M level by 3Q19.

6.  Ansac changes.  Ansac may transform or unwind altogether, if CINR + Ciner Turkey recreate Ansac in a format more beneficial for them – a possibility given their now-dominant market status and ability to ship to Europe, which is ~13% of the world’s soda ash demand.  Ansac originally formed to create scale and associated shipping and marketing synergies. CINR needs to give two years notice to Ansac by January 1 to formally separate, which did not happen this year. However, Ciner Turkey is actively investigating this option in some format and, in fact, appears to have recently outbid Ansac for port exclusivity in Longview, WA. Ciner Turkey will potentially invest $125M into this port which is a sign of their seriousness and commitment to their US shipping business.  The volumes that this port can support are greater than the entirety of existing Ansac tons shipped. (https://tdn.com/news/local/port-in-talks-with-ciner-enterprises-for-berth-lease/article_5ec279c1-b302-5dac-a91f-bf49c09162dc.html).

7.  NRP stake acquisition.  CINR may acquire the CINR stake owned by NRP.  Acquiring the NRP stake is CINR's #1 M&A priority and we believe NRP would consider this divestiture for the right price.  NRP apparently ran a process to sell a piece of the CINR stake before doing the Blackstone financing, but that process fell apart because CINR has a right of first refusal.  Ciner Turkey likely passed on the purchase at that time because they had just purchased their current CINR MLP stake from OCI and their soda ash business unit plans were not yet clear.  For CINR, there are some strategic advantages to acquiring the NRP stake. If CINR were to pursue growth through acquisition, it would need to borrow at the operating company level where the collateralizable assets are held.  NRP though holds two board seats/votes here so their approval would be necessary. Furthermore, NRP would receive the benefit of any CINR acquisition making it perhaps more difficult to acquire the NRP stake; a bit of a catch-22 for CINR.  Similarly, there are some strategic advantages to NRP, which are discussed in Nha855’s recent write-up on NRP. A sale would generate the capital needed to paydown debt, paving the way for much coveted distribution increases at NRP. It would also unlock value not currently represented in its share price which NRP management alluded to on their 4Q17 conference call when they said, “the implied value of our soda ash investment equates to almost half of NRP's current enterprise value, even though it accounts for only 20% of our EBITDA. I encourage you to look at the data and run the numbers yourself.”  NRP purchased the CINR stake for $296M in 2013 (~4x TTM EBITDA, ~6x forward EBITDA) and has received ~$50M of distributions annually so the investment has been excellent.  Multiples have expanded since that time, so it may be an opportune time to sell.

8.  Stable performance through cycles.  Soda ash demand is closely tied to global GDP – so much so that the Federal Reserve Board uses it as an economic indicator.  In the recession, annual contracting agreements delayed pricing declines, offsetting some of the volume demand deterioration that emerged and would have otherwise led to profit weakening.  And as the economic crises waned, these delayed pricing declines were offset by volume demand increases. As a result, our understanding is that EBITDA was roughly flat during the financial crisis, followed by significant pricing strength in 2011/2012 once GDP growth resumed.  This is a stable, defensive business.

Unknown name

CINR is not on anyone’s radar screen.  It has a confusing ownership structure, it is small ($550M market cap with $140M float), has low liquidity (around $0.5M traded per day), distributions have been flat for the last year and a half, and the management team has not actively marketed the Company.  

Valuation

We conservatively value CINR at a $36 target price based on 2019 results, including distributions over our investment time horizon.  Key assumptions include:

• Growth of 135K domestic tons offset by a decline of 105K international tons in 2018
• Growth of 70K international tons in 2019 (flat domestically)
• Domestic pricing declines of 1.1% and international price increases of 2.2%, net of CIDT tons, for 2018.  Note that while the domestic industry overall saw flat pricing for 2018, CINR lowered pricing to win market share
• Domestic price increases of 1% and international price increases of 3% for 2019
• A COGS increase of $2m annually, driven by operating leverage on higher tons produced
• A slightly higher 2018 SG&A expense versus 2017 as SG&A savings in 2017 related to tons shipped to Ciner Turkey will not repeat in 2018
• Turbine EBITDA contributions of $3.5M in the 2H19
• A 1c distribution increase every two quarters starting in 3Q of 2018
• A re-rating to a 7.5% yield.  This was the average yield prior to the Ciner Turkey volume/pricing noise and the 2017 operational issues

Risks

Asian soda ash pricing. Ciner Turkey incremental supply coming online in 2018 may make its way to Asia (instead of Europe), as Asia is the only market that operates on a spot basis, and the 2018 contracting season has passed.  Further, China could loosen their environmental controls and restart production/exporting of volumes currently shutdown. Both of these dynamics could cause (potentially significant) Asian soda ash pricing declines.  These are the single biggest risks for 2019/2020.

Management reliability.  Although management has suggested that the legal settlement makes a distribution increase more attractive and has confirmed their eagerness to raise distributions once they are comfortably within that 1.1-1.2x range or above, that could change.

Production issues.  Last year’s production issues have been resolved, as evidenced in the 4Q results.  However, CINR ran into a different production issue in the 1Q. This latest production issue has been quantified, but there is a risk that the problem is worse than anticipated or that a different problem arises.    

Limited investor universe given low liquidity and MLP status.  Trading liquidity of $500K/day and MLP status make this stock difficult for many funds to buy in size.  

Catalyst

Legal settlement shows up in the 2Q results

CINR announces a dividend increase

Strong financial performance driven by favorable 2018 contracts continues

China soda ash pricing remains higher than last year

2019/2020 soda ash pricing becomes more visible in the 2H18

CINR fixes their operational issue in 2Q18

Energy project develops favorably over the next twelve months

CINR confirms the timeline for their 3M ton debottlenecking project
Ansac re-forms itself in a way that is clearly favorable to CINR
CINR announces the purchase of the NRP stake