Summary
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.
Background
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.
