February 08, 2015 - 11:50pm EST by
2015 2016
Price: 36.44 EPS 4.05 4.21
Shares Out. (in M): 74 P/E 9.0 8.6
Market Cap (in $M): 2,697 P/FCF 7 6.6
Net Debt (in $M): 628 EBIT 515 545
TEV (in $M): 3,325 TEV/EBIT 6.5 6.0

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  • Coal
  • Great management
  • Dividend yield
  • Secular headwinds


I am probably slightly mad for writing up a coal company, particularly amidst a worldwide glut of cheap,
clean(er) energy. Not to mention the current administration’s efforts to “kill the coal industry”. But
Alliance Resource Partners’ stock has dropped over 30% in the past 3 months. At 36 and change, ARLP
trades at a 14% FCF yield, a 7.1% dividend yield, 4x EBITDA, and boasts very smart management in the
form of Joe Craft (whom I consider the Rich Kinder of the coal industry). Interestingly, IL Basin coal
prices are only down 3-4% since the peak last summer (Uh, oil is down 50%+ people).
What separates ARLP from the rest of the coal universe is that they produce thermal coal from the
Illinois Basin, a low cost region, and also coal with high heat content that utilities prefer. While overall
coal demand will continue to decline over the next decade, IL Basin coal demand is expected to grow at
a 3.9% CAGR between now and 2025. The losers are the coal companies in the high cost Central and
Northern Appalachian regions, where demand is expected to decline by 12%/year. There have been a
couple good write ups on the GP, Alliance Holdings (AHGP), by Thistle933 that can provide some decent
background here.
Since 2005 ARLP generally has traded between a 4% and a 7% distribution yield. Today’s 7.1% is the
highest since 2009. At a 5.5% yield on 2015 estimated distributions, ARLP could easily trade to $50 in
the next year, or to $55 by 2016, upside of 40-60% including dividends.
Alliance Resources annually produces roughly 40mm tons of thermal coal today and owns rights to a
total of 1.6BB tons of coal reserves. 90% of these reserves are in the Illinois Basin, and almost all of
ARLP’s coal is sold to utilities under long term contracts, with 93% of 2015 production already sold out.
Pricing fears are overblown too, as management has indicated that overall pricing in 2015 will only be
about 2-3% lower than 2015.
Given that coal is used to provide baseload power, its demand is much more consistent than demand for
natural gas, which is more expensive on an energy equivalent basis, and often used in “peakers” to fuel
gas-fired power plants in particularly hot or cold weather.
There are 3 primary coal producing regions in the US: Powder River Basin (PRB) in Wyoming, Appalachia
(CAPP) along the East Coast, and the IL Basin (ILB). Appalachian coal has been produced for decades,
and is depleted to the point where costs/ton are in the $50-60 range. With Big Sandy coal prices at $53,
only the lowest cost producers can continue to profitably produce coal there.
The PRB is mostly cheap to mine surface variety coal, but transportation costs and low heat content
(8400 BTU vs 12,000 BTU in other regions), make it far less attractive than Eastern coal.
The chart above illustrates that IL Coal is highest in sulfur content, but has high heat content which
utilities prefer.
The regulatory history of coal and its future appear difficult in the aggregate. In 1990, the EPA passed
the Clean Air Act, which limited sulfur content in coal-fired power production, and demand for ILB coal
dropped dramatically. At the time, aggregate ILB coal production was 141mm tons, and fell to 88mm by
the year 2000.