Good afternoon, and thank you all for joining us. My name is William Shelmire. I'm an Account Manager here at Three Part Advisors, and I have the pleasure of introducing our next presenting company at this year's Midwest Ideas Conference. Up next, we have NACCO Industries, which trades on the New York Stock Exchange under the ticker symbol NC. Representing the company today is their President and Chief Executive Officer, J.C. Butler. J.C.
Thank you. Good afternoon, everybody. It's after lunch, right? I know that's always a tough time slot. Like they said, I'm J.C. Butler. I'm President and Chief Executive Officer, here to tell you a story about NACCO Industries.
Big picture overview, NACCO Industries is a diversified natural resources platform that's built off of the strength of a 112-year-old coal mining business. It has a very unique business structure. We've got a model that really makes us an integrated part of our customers' operations, and in many ways, we've expanded that into other parts of our business. Our legacy business gives us very strong recurring cash flows, as represented here by EBITDA, and we've been using that cash flow, as well as the skills that we've established in this legacy business, in order to grow into these other businesses. 112 years old. Far left, you see when the company was founded in 1913 by Frank Taplin as an underground coal mining business in Southern Ohio.
We continued in that business until the 1980s, when we got out of underground mining and moved into a really center part of the country, mining in a way where we're providing our coal as the exclusive fuel for our customers' power plants. The current iteration of the company really came to play about 10 years ago, in 2015, when the prior leadership team retired in normal course, and the current leadership team came in and said, "We've got a great business model. We love our business model, and we've got a lot of confidence in going forward, but why aren't we doing other things?
We've got a lot of skills, we've got a lot of opportunities to expand, so why don't we use those skills in order to grow?" We also noted that it was about 100 years since our founding, and we very much wanted to create a company that could survive in a really great way for the next 100 years, looking at the second 100 years. We did this, I'm going to back up one slide. We did this in 2015, really focusing on Jim Collins' teaching in Good to Great. Who's read Good to Great? Anybody? Love that. It's a great book. Everybody should read Good to Great. We really stepped back and used the teachings in Good to Great to say, "What are the things that we're better than anybody else at?
What really drives our economic engine, and how do we think about our business model?" Kind of our flywheel concept. Some key aspects of that are we're really good at long-term relationships and investments. Our longest relationship that we have right now is with our second largest coal mining operation in North Dakota, where we've been serving the same power plant for 46 years. Not far from that is another one that's over 40 years. Multi-decade relationships to us are a very normal thing. It's a normal part of our business model. We also think it's a valuable thing because if you have these long-term relationships with very strong, stable customers, it generates a very steady level of income that you can really count on from year after year.
Another feature of our business model that we like is we look for places where either we're earning income from a service base, where we're paid a fee for the services that we do, typically mining services, or if we invest, it's a project where we're going to invest upfront, but then we've got very low CapEx requirements going forward, very low maintenance CapEx. If you think about that, it's really driving a model that is long-term relationships with strong, stable customers, with contract structures that give us very long horizon, a lot of visibility onto our earnings stream and our cash flow stream going forward. We use that mindset and the cash flows that come out of our legacy coal mining business in order to create this portfolio of businesses that you see here. I'll start on the left with North American Coal, which is the legacy business.
It says stable cash generation because the primary business model in this segment is one where we operate coal mines that are directly adjacent to the power plants that they serve. Both were constructed at the same time so that the fuel we provide is the fuel that the power plant needs in order to generate electricity. In one instance, we've been doing this for 46 years. We're an integrated part of their operation. If we stop delivering coal, they stop their ability to take power. We're very integrated side by side into that operation, and we work together to see that it's successful. We took the very same business model in the next segment, which is our contract mining segment, which we call North American Mining. This is really the same kind of thing.
We're providing integrated contract mining services on behalf of our customers, but in this instance, our customers aren't utilities that are generating electricity. These are companies that use industrial minerals. The business started many years ago as a business where we were integrated into aggregate producer operations in Southern Florida. If you think about a standard aggregates facility, you've got a mine directly adjacent to the facility where they crush and size the aggregates, and then they sell them. It's just like in the coal mining business, except here we do the mining on behalf of these folks. They crush it, they process it, they sell it, and we're an integrated part of their business. We sign long-term contracts with these folks, and in many instances, we're doing business with some of the largest aggregates producers in the United States, people like Martin Marietta and Cemex.
In fact, today, as this business grows, we find that often it's organic through our existing customer relationships where they will come to us and say, "Look, we know that we're experts in crushing, sizing, and selling. You're our expert miner. So we want you to come look at another operation with us that they've either started or acquired, and they ask us to take over their mining operation." In some instances, we'll do that on a fee-for-service basis, mining as a service. In other instances, we might invest capital upfront in order to do that, but in that instance, we're going to have the contract structured in a way that we know before we invest the money in the equipment upfront, and it's really just an upfront investment, that the contract structure and the term is going to give us a very attractive return on that capital.
Again, all of these work in a way where there's capital upfront. If we do put in capital, it's capital upfront. It's low maintenance CapEx as you go over time, and it's really this nice annuity-like cash flow stream that comes out of these great long-term customer relationships. That business has continued to expand from what started a bunch of years ago. Ten years ago, we were really just doing this in South Florida for lime rock producers using a piece of excavating equipment called a drag line. We said, "This doesn't have to be in South Florida. We know how to mine lots of things. It doesn't have to be in South Florida. It doesn't have to be aggregates.
It doesn't have to be a drag line." We've expanded that into other states and other regions and other minerals, and kind of the far extreme of that is we're in the process right now of developing a lithium mine in Northern Nevada. Our customer is Lithium Americas, traded on the New York Stock Exchange as LAC. We're going to be operating a lithium mine on what is the largest proven lithium reserve in the world. We're going to mine the Lithium. We're directly adjacent to their processing facility. They will process the lithium, and they're in a joint venture with General Motors . GM will take the Lithium. It's the same integrated mining business that started in our coal business, went through aggregates, and we've now taken all the way into lithium. The opportunity for expansion here is tremendous. Again, go back to our North American Coal business.
In the early part of the company's history, we were underground mining coal in Southern Ohio. We don't do that anymore. Haven't done it for almost 40 years. What we did, however, in Southern Ohio is we owned a lot of mineral reserves, including coal, which we mine, but also including natural gas. We looked at our portfolio in the middle 2010s and saw that we had a tremendous amount of natural gas assets in Southern Ohio, and we were making a couple million dollars a year off of royalties that we'd receive. We saw fracking come into that part of the country, and we saw pipelines come in, which increased offtake, and we knew this was about to get supersized.
We hired a group of people, formed a business called Catapult Mineral Partners, and they manage the legacy assets in Southern Ohio, but they also have been investing in high-quality mineral reserves in premier basins around the country, like the Permian Basin in West Texas. Today, what started as, even just five years ago, started as very natural gas heavy in Ohio is much more balanced. We've got natural gas and significant oil reserves. Importantly for us, because we take this long-term view, we're buying assets that not a lot of other people are bidding on. There's much less competition for the things that we look for because we're happy to buy not only producing wells, minerals that have producing wells on them today, but we'll buy minerals that probably won't get developed for five years or seven years or ten years.
These have lots of upside once you get into the future. The beauty of it is you pay very little money for those future development opportunities upfront, but once you get five or six or seven years into this process, you become really glad that you bought them because you get new development on those low-cost reserves. We've put about $94 million in this business, buying reserves over the last several years, and this business has got a budget of about $20 million a year. If they spend the $20 million, that's great because they've found worthy projects, but if they don't spend the money, that's okay too. They're not compensated based on whether they put this money to work or not. Honestly, if they find some great projects that exceed the $20 million, that's okay too.
It's really been a great additional platform for us that has grown out of our North American Coal business. These first three that I've described are all segments in our financial statements at this point. The fourth business over at the right, Mitigation Resources of North America, is born out of the fact that we have a truly industry-leading environmental record at our coal mines. We do mine reclamation better than anybody else in the country. We use those skills to develop a mitigation business, and if you don't know how this works, that's okay because not a lot of people do. If you think about a high-growth area like someplace in Texas or Florida where it's just exploding with growth, people are building schools, they're building shopping centers, they're building apartments, they're building all sorts of things, and the state transportation department is expanding the roadways.
Every one of these people, not everyone, but many of these people will somehow disturb an existing stream or wetland. In order to get a permit for their development, they have to get approval from the Army Corps of Engineers, a U.S. agency. The Army Corps of Engineers says if they're going to disturb, for example, 100 ft of stream with their project, they have to replace that with protected stream somewhere else. That's the business we're in, and the same thing happens with wetlands. We will find high-growth areas, think about states like Texas, Florida, Tennessee, and we'll identify areas in those states that are growing rapidly.
We'll buy a piece of property that's got a badly damaged stream on it because somebody 50 years ago, you know, straightened out a stream or moved the stream over to the side of the property so it could be used for timber or other things. The stream's badly damaged, it's not functioning as a healthy stream. We'll buy the property. Think again, we make a capital investment upfront. We then will spend time working with the Army Corps of Engineers to agree on the scope of work that we'll do to restore that stream to a natural state. We agree with the Army Corps of Engineers, we enter into an agreement, a contract with them that allows us to do this, and then we do the work, creating stream credits and wetland credits that can be sold to those developers for a profit.
It's a manufacturing business where we're selling a profit. Each one of these mitigation banks, you can think of it as having a 10 to 12-year development and harvest cycle. You buy the land upfront, you invest some work in getting the streams restored, and then it's a lot of watching, making sure the grass grows as it should, making sure the trees that we planted are developing as they should, and over that cycle, the Army Corps of Engineers will release credits to us that we can sell to developers. It's a long-term business model. You invest upfront, you harvest over the period of time that you're operating these mitigation banks. You remember the part where we're in there doing the work to fix the stream? That means we've got the equipment and the skills and the people to do that sort of work.
In addition to doing work for ourselves in-house, we do work for third parties who might be, you know, they're mining companies, they might be a municipality that's got a stream or wetland issue around its area, and probably our biggest win is we have been named as the go-to company when the state of Texas wants somebody to come in and fix abandoned mine land. That's mine land that was somebody else that mined years ago, and it was never properly reclaimed. Anytime the state of Texas has a project they want to tackle, they come to us first to go do that work for them. If we want to do it, we can. If we don't want to, we don't have to. The long-term horizon that I described about credit releases is supplemented with income that we get from these shorter-term reclamation projects.
Mitigation Resources of North America right now is in our unallocated segment. It's not actually a segment yet. The other three are. If you think about the investment criteria that we used earlier, we want long-term contracts, we want long-term relationships, we want steady cash flows, we want it to be predictable, and you think about the skills that we had in our company that allowed us to develop these businesses. If you've read Jim Collins' book, you know the flywheel, right? This is how we think about our business flywheel. We take our investment criteria and our internal cash flows. We grow organically. We don't want to grow through acquisitions because frankly, we think that it's too risky. We use the cash flows and our investment criteria, which allow us to sign up more long-term projects, as you see at the top.
Every time we do that, in some way, we're expanding our core competencies. Mining lithium in Nevada will be the first time we do that. Highly confident that we're going to be successful, but it provides additional credibility around our core competencies that we can then leverage into more opportunities in these business areas. You sign up another project with those criteria. It's going to be long-term. It's going to have steady cash flows. It's going to have rock-solid customers. You keep turning this flywheel, which creates a compounding effect. It's the compounding effect of that that lets us really feel quite good about saying we've got a target of $150 million of EBITDA. Another way to convey that graphically is what you see up on the chart.
At the bottom of the chart, you can see recurring EBITDA of $50 million roughly from our legacy businesses, which is really our utility coal mining and our legacy mineral assets in Southern Ohio. You think about that base of income that really just gets generated every year. I'm not saying it doesn't have some fluctuation, but it's generally very predictable, especially as a trend over time. Every year, we sign up more long-term projects, essentially creating a layer cake on top of all of the prior long-term contracts. You think about a lot of the businesses that you guys have talked to today. They're always out there looking for a customer to sell their product to.
Our sales cycle is we're going to find a customer and we're going to develop a relationship with them and do a project with them that's going to deliver cash flows for possibly decades to come. People ask me what I think of as long-term, and I'm like, more than 30 years is long-term to me. Below that, you know, it's more intermediate term. You create this layer cake of these projects. Now, the way we judge projects is we look at their IRR. We're going to invest some capital upfront and then have a harvest cycle. We look at IRR and we look at NPV. NPV we measure as net present value of after-tax cash flows compared to a 10% discount rate, which is what we consider our weighted average cost of capital to be.
On that measurement, over the last five years, 2019 to 2024, we've added $150 million of NPV to what we already had in place. One of the projects that's in there is the lithium project that we signed in 2019. That isn't really going to start delivering meaningful EBITDA in 2027 because there's a lengthy development cycle with our customer. Their processing plant is under construction and we're about to start building the mine. You think about we've added the $150 million of NPV since 2019. Some of that has not yet been built into the base number that you see below. Thinking about this another way, trailing 12 months, we had $57 million of EBITDA, as you can see here on the left. We say we're targeting $150 million over the next five to seven years.
A lot of this is already related to investments that we've made, contracts that we have signed, projects that are underway. We feel very good about the portfolio that exists today. As another data point for you, in 2024 alone, just last year, we signed new projects, again, long-term projects that will add $11 million of annual EBITDA to our results beginning in 2026. Think about this. Signed it in 2024, not yet reflected in our performance, going to start dropping $11 million of annual EBITDA in 2026. Those are going to run for a very long time. The nature of a lot of the contracts we sign is they've got an inflation factor in them that will increase our income streams and our cash flow streams over time. They have built-in inflation protection. I know I'm highly biased, but I think it's a great business model. Why now?
I don't know if you know this, but this is the first, I've been at the company 30 years, this is the first time we've come to an investment conference. We're here now because we're really sort of at an inflection point in our development. You think about 10 years ago, we started these Jim Collins strategies, which, you know, the first five years was a lot of refining strategy and a lot of thinking about how to execute. The last five years, 2020 to 2025, has been a lot of execution as we further refine those strategies. Why here today? When you think about our contract mining business, which is the business that, you know, it's limestone, it's sand and gravel, it's aggregates, some of the largest producers in the country, the pace of expansion has really accelerated in recent years.
We're signing bigger contracts, we're signing more meaningful contracts with these big customers. Like I said, they come to us and ask us if we will grow with them, which is a great place to be if you're an integrated service provider. In our minerals and royalties business, we've invested $94 million thus far from really 2020 so far. Some of those minerals that we bought were producing, but there's a lot of stuff that we bought that was not producing when we bought it, but is starting to come into development now. You're getting the time lag on that from earlier investments. Of course, we're continuing to invest in that business because we think it's a great model that fits our profile really well. The mitigation business, Ecological Solutions, we've been scaling that business for about five years. I described to you the development horizon of a mitigation bank.
We started planting those seeds five years ago. We're now reaching a point where we've got 14 projects. Some of those projects are going to start delivering profits that are going to allow this business to achieve profitability in 2026. My favorite metric is EBITDA. Just because they're going to achieve profitability, you do the math and EBITDA is going to be a bigger number than profitability. Even though it's not a lot of profit starting in 2026, EBITDA is more meaningful, and it is a business with, again, low maintenance CapEx. You really can think of EBITDA as cash flow.
If you tie all of this together over at the right-hand side, as all these things come together and our EBITDA grows from $50 million to $60 million to $70 million to $80 million, it creates even more capital that we can put to work, accelerating our pace of growth with these new great long-term projects over time. We think as all these things converge, really at a point in time when we're ready to start harvesting from earlier investments, and we've refined our business models so that we've got a really, we're very confident about our ability to continue this investment and development cycle, we feel really good about where we're headed with this. Why should we be part of your investment portfolio? We're not like anything that you've got, probably. We're probably not like anything you've got in your portfolio.
Certainly, if you're looking at tech-heavy S&P 500, that is not us. We're 100% domestic. We're not driven by trends. We're not driven by cycles. We're really doing a lot of natural resource businesses. We talk about being a diversified natural resource business. The things we are doing are really kind of the fundamental building blocks of American industry. If you're going to have growth in roads, data centers, population growth in growing states where we primarily focus, you're going to see a lot of great trends that are backing this up. Things that are going to jerk around other companies because it's trendy really don't affect us in any meaningful way. The other thing that I think really differentiates us is a lot of the other companies, that I look at anyway, are talking about one-year horizon and three-year horizon.
What we have built and what we're building here is a very long-term compounder. As we continue that, you know, turn the flywheel, use very disciplined investment criteria, use the cash that we have, that we generate so that we're not becoming over-leveraged or, you know, creating risks through that. It really creates a compounding kind of cycle that will, I mean, if you build the spreadsheet and say you keep reinvesting in high-return businesses with long track records, this whole thing escalates as you go into the future. That's why we're excited to be here today to tell our story. With that, we'll take questions. Yes, sir.
I noticed you have two classes of stock. Did you just [audio distorted].
Yep, we have two. The question is, we have two classes of stock in our company. Can I explain that? We have had two classes of stock since the public company was formed, I think originally in 1961, but certainly in 1986 when NACCO Industries was created. We have dual class stock. We have A shares, which are the publicly traded shares. They have one vote per share. We have Class B shares, which are 10 votes per share, and they are not freely tradable. In all other respects, they're completely identical. Dividends are the same. B shares can be converted into A shares. The mix, Christy or Liz, do you know the mix of A's versus B's? We're about, while they're thinking, I'll buy time, we're about 7.4 million shares outstanding. We're about 1.8 million Class B shares, and the rest are Class A shares.
Class B shares are primarily held by the founding family, which is now in its fifth generation of ownership in the company. I was asked a question earlier today about how they feel about the company, and everybody's very locked in, big believers in what we're doing, and they're big believers in this as an investment platform. If I could just add, sorry, the ownership structure from my standpoint, right? I mean, I've been in this job for 10 years. It's what really has allowed us to create what we've created. If we were really driven in a business model that was about quarterly earnings, we couldn't make the long-term investments that we do to build a business like this. The markets just won't tolerate that. There are lots of views about ownership structure like this.
It's what really has allowed us to create what I think is a super business model that's got a great trajectory. Any other questions? Yep.
I'll take another one. On your mining now, coal plants, I mean, you don't own the plants, right?
What's the question?
Do we own the power plants?
We do not own the power plants. Our customers own the power plants. We have four coal mines in that segment. From an accounting standpoint, from your standpoint, we do not own the coal mines for three out of four. The one in Mississippi, we do. Now, legally, if you go look at real estate records, we own the coal mines and we own the equipment and we employ all the employees. The beauty of this business model that's been in place since the 1950s in another in Pennsylvania is that our customers, because they're utilities, have very low cost of capital. Our utility customers pay 100% of our capital costs and they pay 100% of our operating expenses, including labor, including everything. We collect a fee for every ton of coal that we deliver. It's really mining as a service.
Now, legally, we own them, but from a practical standpoint, our customer owns them, which is why since about 2002, those coal mines that operate under that business model are not consolidated in our financial statements. Those coal mines show up, those mining operations are a single line on our income statement that says earnings of unconsolidated operations. If you consolidated all together, if you brought all of that stuff into our financials, we'd be $800 million- $900 million of revenue and our balance sheet would be much, much, much bigger. Because of variable interest entity accounting post-Enron, we de-consolidate this because we do not have anything at risk, our customers do.
Thank you.
That's a geeky accounting explanation for complicated financial statements. Any other questions? Yes.
On the utility mining side, what would cause quarter-to-quarter variations? I would think just kind of a mining all day.
The question is, what would cause quarterly variations in the earnings of the utility mining segment? A couple of things. There are two different business models in there. A majority of the income comes out of the business model that I just described, and it shows up on one line, earnings of unconsolidated series. We've set that aside. That's really only going to be changed by volume, and volume is going to be changed by a couple of things. If during a quarter a customer's power plant does a significant maintenance, we call it an outage. If they take a power plant down because they need to do significant work, that will cause our deliveries to that customer to go down.
In other words, mining is a service, so our fees will be lower, just purely because of volume, because they have a maintenance issue. If it's an unplanned maintenance issue, something goes haywire and they have to take the plant down for a while, that could also affect volume. The other thing that can affect volume is what's going on with the weather and what's going on with other things like natural gas prices. If you get it in the shoulder seasons, let's say we have a really mild fall, so there's not a ton of heating or air conditioning demand and there happens to be a lot of wind, which wind doesn't always happen, and natural gas prices are low, you might see some of these coal-fired power plants dispatch, meaning the electrons go on the grid below the lights. That could reduce our volume.
Conversely, if you go from a hot summer to a cold winter, that typically means you're not going to have a lot of wind. Hot days, cold days, no wind. It probably also means your natural gas prices are higher. They're going to dispatch the daylights out of those plants. That's the mining as a service piece. If you go over to the Mississippi part, that mine, we actually own the mine. We pay the capital. We pay all the costs. Our revenue is determined based on a formula. We're not exposed to market prices at all. The formula is based off, it was written in the early 1990s, it's based off of a formula that uses inflation indices in a basket that kind of tracks inflation, but not really. You've got that piece of it. You once again have what happens with the volumes on the power plant.
If the volumes are low on the power plant, that makes our operations less efficient. We can get the period where we might have lower costs because of a revenue-specific formula. We've got higher costs because a plant was inefficient, which makes us inefficient. Those are the things that will cause income to vary. My favorite, I want to flash you red, my favorite metric is EBITDA. EBITDA generally is less volatile on a percentage basis than operating profit. Because we have low CapEx, maintenance CapEx, I think that's a better metric for that. Let's flash you red.
That'd be the falcon.
What happened?
28 seconds.
Reading one more.
Yes, sir.
You mentioned contract signing in 2024 and then EBITDA in 2026.
You've got what?
How much capital?
That's kind of where we've already spent.
Bear in mind that you're tryin g to figure out what's the relationship between capital.
I don't know the answer to that question. It's a good question. I promise you we'll know tomorrow. I will tell you, not every contract you sign requires capital.
Right. We're perfectly happy to sign up. One, mining is a service. Mitigation banking is a service. Anything is a service. We have no capital upfront.