April 15, 2019 - 4:19pm EST by
2019 2020
Price: 41.00 EPS 5.15 5.30
Shares Out. (in M): 7 P/E 8 7.7
Market Cap (in $M): 287 P/FCF 8 7.7
Net Debt (in $M): -76 EBIT 43 45
TEV (in $M): 211 TEV/EBIT 4.9 0

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Nacco Industries (NC) has been written-up a number of time between 2001 and today. Although "Nacco" stands for "North American Coal Company", VIC interest was generally in the operations and spin-offs of NC's non-coal subsidiaries Hyster-Yale and Hamilton Beach. However, in 2001, there was interest in NC's coal operations as natural gas was trading at $7.00. (Oh, for the good old days!) The stock is extremely illiquid so this idea is only appropriate for PA's.

NC conducts mining operations at nine surface mines. All but one of these mines is operated pusuant to a "management fee" agreement under which NC operates the mines but the customer pays for the capital and operating costs. NC gets a fee on the coal delivered to the customers power plant. These power plants are adjacent to the mine which allows for cheap, efficient fuel delivery. The results of these "mine mouth" facilities are accounted for as "earnings of unconsolidated mines". In 2018 these mines delivered 38.5 million tons of coal versus 37.2 million tons in 2017. This is not a growth business, but it is a highly profitable business with revenues of $65 million in 2018 against $61.4 million in 2017. The company's single consolidated mine is the Red Hills Mine operated by the Mississippi Lignite Mining Company subsidiary. It delivered 3 million tons of coal in 2018 versus 2.4 million tons in 2017. NC generates a royalty fees from gas and oil wells drilled on their properties. Royalties brought in $17.5 million in 2018 versus $12.8 million in 2017. In addition to its coal operations, NC operates draglines for the aggregates industry. It is a small and slow growth business with 8 customers at 18 quarries utililizing 24 draglines. Last, NC is attempting to grow its "Mitigation Resources" business which remediates closed mining sites.

None of this is terribly exciting, but the results are quite good. In 2018 NC generated $54.6 million of gross operating cash. Capital expenditures were $18.4 million, leaving net after-tax cash flow of $36.2 million or $5.17 per share. Management expects 2019 results to improve.

Shares outstanding       -        7,000,000

Market cap @ $41/share - $287,000,000

Cash -                               $85,000,000

Debt -                               $10,000,000

Net enterprise value -       $212,000,000

Earnings yield to stockholders - 17.1%

NC pays an annual dividend of $0.66, 1.6% on a $41 a share market price.

NC was incorporated in 1913. There are two classes of stock outstanding - A & B shares. There are 5,417,633 A shares outstanding which are entitled to one vote per share. There are 1,568,810 B shares outstanding. The B shares are entitled to 10 votes per share. The Taplin and Rankin families, whose forebears founded NC, own the B shares and have the class pretty well tied up legally. There will not be any corporate changes without their approval. The former president of NC was Alfred Rankin who still sits on the BOD at 77 years of age. He was an intelligent and capable leader who diversified the coal business into Hyster-Yale and Hamilton Beach and then oversaw their divestitures. At the present time a professional manager, Alfred Butler, leads the company. With equity values high, it seems unlikely to me that NC will diversify. As a consequence, NC will pay off its $10 million of debt, accumulate cash and slowly repurchase shares if they can be had at a reasonable price. In February, 2018 a $25 million stock repurchse program was authorized. As of 12/31/2018, the company had repurchased 28,680 shares at an average price of $33.28. 

There are two risks here that I see.

1) Coal is dying business and no matter how clever this structure is, it is still a dying business.

2) The family does something foolish.



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.


NC is a simple cash generating business that should be worth more every year.

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