Should U.S. Lime & Minerals Consider An MLP Conversion?
|July 11, 2013||Posted by Nat Stewart under Cash Flow Stocks, Compounding Machines||
Note – For background information on U.S. Lime And Minerals, see my previous article here.
Timm Fenn, of the law firm Latham & Watkins, LLP, states in his outstanding MLP primer (PDF) that (emphasis added by me),
“For purposes of the qualifying income rule set forth in the tax code, with respect to natural resource-related activities, the term “mineral or natural resource” means fertilizer,geothermal energy and timber, as well as any product from which a deduction is allowable,which includes oil, gas, and oil-and-gas related products. Typically, anything that is dug or pumped out of the ground qualifies, which includes coal, lignite, potash, salt, aggregates, limestone, sand and many other hard rock minerals. Moreover, Congress made it clear in the legislative reports accompanying these qualifying income rules that, for purposes of determining the limits of what constitutes oil, gas, or products thereof, such term includes gasoline, kerosene, number-2 fuel oil, refined lubricating oils, diesel fuel, methane, butane, propane and similar products that are recovered from petroleum refineries or field facilities.”
Let’s step back for a moment: Productive finance has two primary purposes:
- Provide capital to productive business and enterprise
- Create securities which meet investor needs for income and/or capital appreciation
I believe that in the case of U.S. Lime & Minerals, both of the above objectives would be enhanced through a conversion to an MLP structure.
Right now, with millions of individuals at or near retirement age, there is a tremendous need for securities which create strong, relatively stable “cash flow” returns that will maintain their purchasing power (and even grow purchasing power) over time.
In many ways, a well-run, investor focused MLP is an ideal structure to meet this objective. Profits are not taxed at the company level, and in many cases cash flows count as return of capital, which can work to defer taxes for a significant period of time. As it stands, U.S. Lime and Minerals has used its excess cash generation to repurchase shares, and to routinely build a substantial cash reserve on the balance sheet. I believe that the MLP structure will allow for a higher use of this “hard-asset” derived cash flow.
Benefits for U.S. Lime & Minerals, the productive enterprise include:
- I believe that an MLP conversion would immediately and significantly boost U.S. Lime & Minerals market capitalization
- L.P. units create a stable source of financing which can be used for accretive, productivity enhancing acquisitions
The bottom line is that when the right structure is combined with the right assets, real values can be enhanced. This is because the productivity for both parties (the investor and the operating business) is increased.
I strongly urge CEO Timothy Byrne, the majority shareholder, and the full Board of Directors to explore the feasibility of an MLP conversion.