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From the Monongahela valley
To the Mesabi iron range
To the coal mines of Appalacchia
The story's always the same
Seven-hundred tons of metal a day
Now sir you tell me the world’s changed
Once I made you rich enough
Rich enough to forget my name
In Youngstown
In Youngstown
My sweet Jenny, I'm sinkin' down
Here darlin' in Youngstown
When I was in my 20’s and I’d get out of work, I’d slide down my Brontosaurus and say Yabba Dabba Dooo! Then I would go out in the parking lot moving my neck back and forth like Merton Hanks.
Speaking of dinosaurs, the Titans used to go sport fishing in dino bars, but all we found were fossils. We drank so much ale that the oil we refined could have been used as fossil fuels and then we ended up depositing something that looked like lignite, which is the lowest ranking coal. Lignite contains up to 45% moisture and has heating values that generally range between 12 million and 14 million BTU per ton. Lignite is sometimes referred to as “brown coal” and is formed when increased pressure and heat from overlying strata cause buried peat to harden and dry. Hmmm..that sounds extremely familiar.
Today I bought ARLP (Alliance Resource Partners, LP) at 70.30. I will sell it in 4 to 6 weeks at 81.16. Here’s why I like ARLP:
Alliance Resource Partners, L.P. (ARLP) is a diversified coal producer and marketer with significant operations in the eastern United States. The company is the coal-producing industry's only publicly traded master limited partnership. The Partnership completed its initial public offering as a publicly-traded master limited partnership (MLP) on August 20, 1999.
What is a master limited partnership?
MLPs are businesses that are taxed at the unitholder level and generally are not subject to federal or state income tax. Annual income, gains, losses, deductions or credits of the MLP pass through to its unitholders. Unitholders report their allocated shares of these amounts on their individual tax returns, as though the unitholder had incurred these items directly. Currently, income from MLP’s is considered “non-qualifying”. There is language in the pending energy bill that would change this to “qualifying income”, which would enable mutual funds to buy MLP’s. This would certainly expand the PE multiples of these MLPs.
Strategically located operations, abundant long-lived reserves and appropriate acquisitions consistently have provided solid growth opportunities since they began operations in 1971 as MAPCO Coal Inc MAPCO , a Fortune 500 diversified energy company at that time, entered the coal production business and acquired the Dotiki mine. This underground operation in Webster County, Kentucky, soon became one of the most productive coal mines in the country.
By the time the company reached its silver anniversary, MAPCO Coal owned five mining complexes in three states — Kentucky, Illinois and Maryland. It also had a rail-to-barge loading terminal on the Ohio River. Located in Indiana, the transloading facility is capable of handling 8 million tons of coal per year.
In 1996 management formed Alliance Coal Corporation and led a buyout of MAPCO Inc.'s coal operations. Within two years, Alliance acquired Hopkins County Coal, a surface/underground operation in Hopkins County , Kentucky and opened MC Mining, an underground mine in East Kentucky. By the end of 1998, Alliance sold 15.1 million tons of coal and was recognized as the eighth largest coal producer in the eastern United States. They currently operate seven underground mining complexes in four states -- Illinois, Indiana, Kentucky and Maryland.
During 1999, Alliance Resource Partners, L.P. was formed and completed its initial public offering as a publicly-traded master limited partnership. ARLP's operations company, Alliance Coal, soon broke ground for a new underground mining complex, Gibson County Coal, in Gibson County, Indiana. Production began there the following year.
ARLP's customer base includes major utilities and industrial users. Coal is the energy source used by utilities to fuel more than 50 percent of the electricity generated in the United States of America each year. More than 70 percent of ARLP's sales tonnage is dedicated to electric utilities that have long-term contractual relationships with the company. For 2003, ARLP’s three largest customers were Seminole Electric Cooperative Inc., Synfuel Solutions Operating L.L.C., and Virginia Electric and Power Company. Sales to these customers in the aggregate, accounted for approximately 46% of 2003 total revenues.
ARLP can satisfy the broad range of specifications required by their customers. Of the coal produced in 2003, 31.2 percent was low-sulfur coal, 17.2 percent was medium-sulfur coal and 51.6 percent was high-sulfur coal. Their mines are located in favorable geographic locations that minimize transportation costs for our customers.
Alliance’s coal reserve base is significant enough to preserve the Partnership's continuity over the long term. The coal reserves reported by ARLP are ones that they believe can be economically and legally extracted or produced. As of December 31, 2003, ARLP had approximately 418.4 million tons of proven and probable reserves.
Our reserve estimates are based on geological data that is analyzed by ARLP's staff of geologists and engineers. The data that they use is gathered through extensive, ongoing exploration drilling and in-mine channel sampling programs. Additionally, our criteria adhere to standards as defined by the U.S. Geological Survey.
ARLP’s stock is up 116% in the last 52 weeks yet its PE is only 16. If you look at its chart it has stayed well above its 50 day and 200 day moving average, indicating strong upward price momentum. Its 12 month chart has a correlation coefficient of 0.93. Its 6 month chart has a correlation coefficient of 0.92. :
What’s so sexy about coal? Coal is cool.
Coal is formed from the fossilized remains of vegetation that died millions of years ago and is composed mostly of carbon, hydrogen, oxygen, nitrogen, and sulfur. Coal is not a mineral. Like natural gas and oil, coal is a fossil fuel that gives off heat energy when burned.
Coal is the most abundant natural resource in America, and it also is the nation's lowest cost fuel source for electricity generation. Because of this, coal has continued to maintain its historical dominance as the primary fuel for electricity generation. With decades of reserves, there is little need for most coal companies to invest heavily in exploration. This is an important distinction between coal mining companies and other resource producers. ARLP will generate significant free cash flow in future years with the potential for robust dividends. Remember, in questionable securities markets, dividends are most certainly your friend.
• Coal makes up about 95 percent of America's fossil energy reserves.
• Total U.S. coal resources are estimated at nearly four trillion tons.
• Reserves recoverable using current technology totals more than 296 billion tons.
• Coal deposits can be found in 38 of the 50 states.
Odds are better than 2-to-1 that when you turn on your TV to watch “The Apprentice”, the electricity comes from burning coal. Coal kicks the crap out of all other fuels that make electricity. Nuclear power, at 20%, is a distant second. Natural gas comes in third, with 16%.
Coal is the major fossil fuel because it is cheap. But the times they are a changing. Americans continue to be thirsty for power. We must have more power. "Scotty, can you give me more power from the Warp Drive Engines?" "Captain, I'm giving you all I can get. She's going to blow, Captain!!" I think the next scene is when Captain Kirk is shown putting his boots on.
With nuclear and hydro power operating near capacity and natural gas prices likely to stay above $3.50 per mmBTU, coal demand will stay strong. Coal supply will remain restrained due to regulatory challenges and a shortage of labor. Coal prices are near record highs. Coal inventories continue to be at very low levels. Disciplined production cuts by the coal mining industry and strong demand have been successful in reducing the industry overhang.
So now demand is outpacing supply, and U.S. coal producers are spanking. In fact the cheap price of coal over the past 20 years is what caused producers to operate with their flaps down. So now, coal production is just barely keeping up with demand, so prices have risen. They should go up. We are energy hogs. Prices should keep rising til we know better. Following the boom in technology investment in the late 1990’s, 2000 was a very good year for electricity demand – up 3.4% from 1999. Along with the strong economy at that time, the technology boom of the late 1990’s made America more power hungry. Because nuclear and hydro were operating near full capacity, most of this incremental baseload power demand went to coal.
With normal-to-below normal power sector inventory levels, nuclear and hydro power operating at or near maximum capacity, a strengthening domestic ecomomy, continued supply side discipline, and expectations of relatively normal weather patterns going forward, coal fundamentals are poised to continue to improve.
A sure bet is that power demand will continue to climb. The Energy Dept. projects U.S. energy consumption will grow about 30% by 2020. That's one of the reasons most experts believe in the wisdom of having a diverse mixture of energy fuels rather than relying too much on natural gas. So, one way or another, coal probably has a bright future. With coal-fired plants operating at just 71% of capacity, coal will benefit from a strengthening economy and growth in base load power demand. The cost of electricity in states with a high percentage of coal-based power generation, such as Kentucky, is often substantially less than the electricity cost in states with little or no coal-based generation capacity, such as Rhode Island and New York.
The coal industry is benefiting from higher natural-gas prices. Natural-gas futures have recently skyrocketed and since come down to earth a bit to trade in the $5 range, but the price is still well above the usual $2 to $3 range. The bubble has burst. Cheap nat gas is history.
Another sometimes overlooked aspect is the fact that very strong raw materials demand in China has significantly tightened the ocean shipping markets. Shipping rates will remain relatively high for the next few years. Relatively high ocean freight makes U.S. coal at current prices more competitive than it has been in recent years. The weak US dollar and high bulk shipping rates will likely increase the competitiveness of US coal exports over the next few years.
For example, half of all European coal imports come from South Africa, Columbia, Venezuala and Australia. The shipping distance from Baltimore (US export point) to Rotterdam is 3,570 nautical miles. South Africa to Rotterdam is 7,160 nautical miles. Colombia to Rotterdam is 5,180 miles. Queensland, Australia to Rotterdam is 11,085 nautical miles. As a result, at current exchange and shipping rates, expect US coal producers to eventually increase their market share in the European market.
Wall Street ANAL-ysts are confident coal prices will continue to show strength and, its longer-term prospects depend on several variables, including the weather and environmental concerns that could prevent operation of certain mountaintop mines. The price of coal lives under an umbrella provided by the rising price of oil: As oil prices go up, the use and price of coal goes up. And because the U.S. has huge domestic supplies of coal, this part of the energy sector doesn't face the threat of supply disruption from terrorist activities that oil does. Finally, because coal is produced domestically and costs are denominated in dollars, a weaker dollar won't drive up domestic prices for coal, and it will make U.S.-mined coal even more competitive in international energy markets.
Because natural gas supplies are currently low, and because demand for natural gas is high, natural-gas-fired plants usually demand the highest prices. Suppliers using coal-fired plants fill out the lower price range, because electricity produced from coal is cheaper per unit to produce than electricity produced from natural gas. Result: Coal-fired plants get paid the same price for their low-cost energy as natural-gas-fired plants get paid for their high-cost energy. That means that coal-fired plants are making better profits than natural-gas-fired plants -- and coal-fired plants have limitless fuel supplies to boot. (The U.S. is home to 25% of the world's coal reserves.) As a further result, most new electric power plants being built these days are coal-fired plants. Hence, the increasing demand for natural gas, which has caused the price of natural gas to increase, is destined to produce an increase first in the demand (for example, to fuel the new coal-fired electric plants), then in the price, of coal.
In releasing the administration’s energy study, VP Dick Cheney said “coal will remain the dominant source of power generation in the United States. To suggest otherwise is to deny blunt reality”. He sure is subtle isn’t he? In 2003, Democratic Senator Joe Lieberman, referring to coal, said that “we are literally sitting on the resources we need to be energy independent.”
So what does all of this wonderful news about coal have to do with ARLP? Remember the mantra…earnings earnings earnings. Last quarter ARLP reported quarterly net income of $25.3 million, or $1.37 per basic limited partner unit, for the third quarter ended September 30, 2004, an increase of approximately 134% over net income of $10.8 million, or $0.59 per basic limited partner unit, reported for the same quarter of 2003. The third quarter 2004 results represent the fourth consecutive quarter the Partnership has reported record quarterly net income. The Partnership also announced that the Board of Directors of its managing general partner declared a quarterly cash distribution of $0.65 per unit (an annualized rate of $2.60) for the third quarter ended September 30, 2004, payable on November 12, 2004, to all unitholders of record as of November 1, 2004.
For the nine months ended September 30, 2004, Partnership net
income rose by $33.9 million, an increase of approximately 105%, to
$66.4 million, or $3.58 per basic limited partner unit, compared to
net income of $32.5 million, or $1.86 per basic limited partner unit,
for the same period of 2003. Revenues increased approximately 19.6% to
$478.6 million and tons of coal sold rose approximately 7.2% to 15.4
million tons for the first nine months of 2004, compared to $400.2
million and 14.4 million tons for the same period of 2003,
respectively.
Increased production and sales volumes, particularly at the
Partnership's Warrior, Pattiki, Gibson County, and MC Mining
operations, have positively impacted financial results through the
first nine months of 2004. Reflecting the improved coal markets,
higher average coal sales prices realized by the Partnership have further benefited year-to-date financial results.
Look at these trailing 12 month numbers:
ARLP’s stock is also a great bargain compared to its brethren in the coal industry.
ARLP Coal Industry
PE 16 28
Price/Sales 2.2 2.3
Price/Bool 3.8 4.6
Price/Cash Flow 10.2 12.2
Dividend Yield 3.6% 1.4%
Gross Margin 26.3% 17.4%
ROA% 22.2% 4.2%
ROI% 29.1% 5.0%
ROE% 24.2% 10.9%
Management’s strategy is to operate its existing mines efficiently and as near to full capacity as possible to take advantage of strong coal prices. Management also aims to grow organically or by acquisition. This is key to the success strategy of any MLP.
ARLP bought out some of their coal sales agreements in the 2nd half of 2004, which will allow ARLP to take advantage of the anticipated higher spot coal prices in 2005. Last fall, ARLP also entered into two separate coal leases, which cumulatively will increase the Company’s coal reserve holdings by 25% above its current reserve position. If coal prices continue to increase, this could be the deal of the century.
With steady and highly predictable cash flows, ARLP’s current debt level is quite manageable. For the first nine months of 2004, EBITDA of $119.6 million covers interest expense of $11.4 million by a healthy 10.5 times. The cash provided by operating activities for the first nine months of 2004 is $125.9 million, more than doubled the $62.5 million for the nine months of 2003. The increase in cash was principally provided by strong revenue growth of almost $80 million for the first 9 months, depreciation expense of $40 million and a growth of current liabilities of $46 million.
Total coal production was up 3.3% to 4.9 million tons in the 3rd quarter of 2004 compared to 4.7 million in the 3rd quarter of 2003. Coal prices were up 11.6% as compared to 3rd quarter 2003.
The partnership has achieved record levels of revenue, net income, tons sold and tons produced. The partnership has optimized operating capacity and improved efficiencies at existing operations.
This stock is such a layup. $$$MR. MARKET$$$ doesn’t even need to make an earnings prediction. ANAL - ysts say revenues will be 718 MM in 2005 with EPS of $5.09. At today’s PE of 16.6, that takes the share price to $84.49, which is past my sell target. Even they got it right this time! In the meantime, I might get lucky and scoop up a dividend on the way.
Since this is my Super Bowl pick, what better person to hear from then the CEO of ARLP, whose name is Joe Craft. That’s right, the owner of the New England Patriots is Robert Kraft. Both of these guys have crafted a winner. Here’s what the coal guy said:
"Alliance again delivered solid results this quarter," said Joseph
W. Craft III, President and Chief Executive Officer. "We continue to
benefit from the robust coal markets and remain committed to
maximizing our operating efficiency in the face of cost pressures
resulting from higher fuel, power and steel prices."
"Reflecting positive industry fundamentals for the coal industry
this year, the Partnership has delivered exceptional results through
the first nine months of 2004," Mr. Craft stated. "During this period,
we have achieved record levels of revenues, net income, tons sold and
tons produced. Our continuous efforts to optimize operating capacity
and improve efficiencies at existing operations have allowed us to
take advantage of the opportunities presented by the current coal
markets. Recent investments at our Gibson County, Pattiki and Mettiki
mines also have allowed Alliance to rapidly respond to current market
demand."
Looking ahead, Mr. Craft added, "Continued growth in the U.S.
economy, increasing demand for electricity, low coal stockpiles, high
prices and supply constraints for competing fuels, and global market
dynamics all point to sustainability of the current strong coal market
fundamentals. Our Elk Creek and Tunnel Ridge projects announced
yesterday should further strengthen the Partnership's ability to
capture the future benefits of this improved environment and achieve
our goal of sustaining growth in earnings and cash flow."
Sounds good to me. Put some more marshmallows on that coal furnace. Prediction for the weekend Patriots over the Steelers 27-10.
I am HUGE!!
$$$MR. MARKET$$$
To the Mesabi iron range
To the coal mines of Appalacchia
The story's always the same
Seven-hundred tons of metal a day
Now sir you tell me the world’s changed
Once I made you rich enough
Rich enough to forget my name
In Youngstown
In Youngstown
My sweet Jenny, I'm sinkin' down
Here darlin' in Youngstown
When I was in my 20’s and I’d get out of work, I’d slide down my Brontosaurus and say Yabba Dabba Dooo! Then I would go out in the parking lot moving my neck back and forth like Merton Hanks.
Speaking of dinosaurs, the Titans used to go sport fishing in dino bars, but all we found were fossils. We drank so much ale that the oil we refined could have been used as fossil fuels and then we ended up depositing something that looked like lignite, which is the lowest ranking coal. Lignite contains up to 45% moisture and has heating values that generally range between 12 million and 14 million BTU per ton. Lignite is sometimes referred to as “brown coal” and is formed when increased pressure and heat from overlying strata cause buried peat to harden and dry. Hmmm..that sounds extremely familiar.
Today I bought ARLP (Alliance Resource Partners, LP) at 70.30. I will sell it in 4 to 6 weeks at 81.16. Here’s why I like ARLP:
Alliance Resource Partners, L.P. (ARLP) is a diversified coal producer and marketer with significant operations in the eastern United States. The company is the coal-producing industry's only publicly traded master limited partnership. The Partnership completed its initial public offering as a publicly-traded master limited partnership (MLP) on August 20, 1999.
What is a master limited partnership?
MLPs are businesses that are taxed at the unitholder level and generally are not subject to federal or state income tax. Annual income, gains, losses, deductions or credits of the MLP pass through to its unitholders. Unitholders report their allocated shares of these amounts on their individual tax returns, as though the unitholder had incurred these items directly. Currently, income from MLP’s is considered “non-qualifying”. There is language in the pending energy bill that would change this to “qualifying income”, which would enable mutual funds to buy MLP’s. This would certainly expand the PE multiples of these MLPs.
Strategically located operations, abundant long-lived reserves and appropriate acquisitions consistently have provided solid growth opportunities since they began operations in 1971 as MAPCO Coal Inc MAPCO , a Fortune 500 diversified energy company at that time, entered the coal production business and acquired the Dotiki mine. This underground operation in Webster County, Kentucky, soon became one of the most productive coal mines in the country.
By the time the company reached its silver anniversary, MAPCO Coal owned five mining complexes in three states — Kentucky, Illinois and Maryland. It also had a rail-to-barge loading terminal on the Ohio River. Located in Indiana, the transloading facility is capable of handling 8 million tons of coal per year.
In 1996 management formed Alliance Coal Corporation and led a buyout of MAPCO Inc.'s coal operations. Within two years, Alliance acquired Hopkins County Coal, a surface/underground operation in Hopkins County , Kentucky and opened MC Mining, an underground mine in East Kentucky. By the end of 1998, Alliance sold 15.1 million tons of coal and was recognized as the eighth largest coal producer in the eastern United States. They currently operate seven underground mining complexes in four states -- Illinois, Indiana, Kentucky and Maryland.
During 1999, Alliance Resource Partners, L.P. was formed and completed its initial public offering as a publicly-traded master limited partnership. ARLP's operations company, Alliance Coal, soon broke ground for a new underground mining complex, Gibson County Coal, in Gibson County, Indiana. Production began there the following year.
ARLP's customer base includes major utilities and industrial users. Coal is the energy source used by utilities to fuel more than 50 percent of the electricity generated in the United States of America each year. More than 70 percent of ARLP's sales tonnage is dedicated to electric utilities that have long-term contractual relationships with the company. For 2003, ARLP’s three largest customers were Seminole Electric Cooperative Inc., Synfuel Solutions Operating L.L.C., and Virginia Electric and Power Company. Sales to these customers in the aggregate, accounted for approximately 46% of 2003 total revenues.
ARLP can satisfy the broad range of specifications required by their customers. Of the coal produced in 2003, 31.2 percent was low-sulfur coal, 17.2 percent was medium-sulfur coal and 51.6 percent was high-sulfur coal. Their mines are located in favorable geographic locations that minimize transportation costs for our customers.
Alliance’s coal reserve base is significant enough to preserve the Partnership's continuity over the long term. The coal reserves reported by ARLP are ones that they believe can be economically and legally extracted or produced. As of December 31, 2003, ARLP had approximately 418.4 million tons of proven and probable reserves.
Our reserve estimates are based on geological data that is analyzed by ARLP's staff of geologists and engineers. The data that they use is gathered through extensive, ongoing exploration drilling and in-mine channel sampling programs. Additionally, our criteria adhere to standards as defined by the U.S. Geological Survey.
ARLP’s stock is up 116% in the last 52 weeks yet its PE is only 16. If you look at its chart it has stayed well above its 50 day and 200 day moving average, indicating strong upward price momentum. Its 12 month chart has a correlation coefficient of 0.93. Its 6 month chart has a correlation coefficient of 0.92. :
What’s so sexy about coal? Coal is cool.
Coal is formed from the fossilized remains of vegetation that died millions of years ago and is composed mostly of carbon, hydrogen, oxygen, nitrogen, and sulfur. Coal is not a mineral. Like natural gas and oil, coal is a fossil fuel that gives off heat energy when burned.
Coal is the most abundant natural resource in America, and it also is the nation's lowest cost fuel source for electricity generation. Because of this, coal has continued to maintain its historical dominance as the primary fuel for electricity generation. With decades of reserves, there is little need for most coal companies to invest heavily in exploration. This is an important distinction between coal mining companies and other resource producers. ARLP will generate significant free cash flow in future years with the potential for robust dividends. Remember, in questionable securities markets, dividends are most certainly your friend.
• Coal makes up about 95 percent of America's fossil energy reserves.
• Total U.S. coal resources are estimated at nearly four trillion tons.
• Reserves recoverable using current technology totals more than 296 billion tons.
• Coal deposits can be found in 38 of the 50 states.
Odds are better than 2-to-1 that when you turn on your TV to watch “The Apprentice”, the electricity comes from burning coal. Coal kicks the crap out of all other fuels that make electricity. Nuclear power, at 20%, is a distant second. Natural gas comes in third, with 16%.
Coal is the major fossil fuel because it is cheap. But the times they are a changing. Americans continue to be thirsty for power. We must have more power. "Scotty, can you give me more power from the Warp Drive Engines?" "Captain, I'm giving you all I can get. She's going to blow, Captain!!" I think the next scene is when Captain Kirk is shown putting his boots on.
With nuclear and hydro power operating near capacity and natural gas prices likely to stay above $3.50 per mmBTU, coal demand will stay strong. Coal supply will remain restrained due to regulatory challenges and a shortage of labor. Coal prices are near record highs. Coal inventories continue to be at very low levels. Disciplined production cuts by the coal mining industry and strong demand have been successful in reducing the industry overhang.
So now demand is outpacing supply, and U.S. coal producers are spanking. In fact the cheap price of coal over the past 20 years is what caused producers to operate with their flaps down. So now, coal production is just barely keeping up with demand, so prices have risen. They should go up. We are energy hogs. Prices should keep rising til we know better. Following the boom in technology investment in the late 1990’s, 2000 was a very good year for electricity demand – up 3.4% from 1999. Along with the strong economy at that time, the technology boom of the late 1990’s made America more power hungry. Because nuclear and hydro were operating near full capacity, most of this incremental baseload power demand went to coal.
With normal-to-below normal power sector inventory levels, nuclear and hydro power operating at or near maximum capacity, a strengthening domestic ecomomy, continued supply side discipline, and expectations of relatively normal weather patterns going forward, coal fundamentals are poised to continue to improve.
A sure bet is that power demand will continue to climb. The Energy Dept. projects U.S. energy consumption will grow about 30% by 2020. That's one of the reasons most experts believe in the wisdom of having a diverse mixture of energy fuels rather than relying too much on natural gas. So, one way or another, coal probably has a bright future. With coal-fired plants operating at just 71% of capacity, coal will benefit from a strengthening economy and growth in base load power demand. The cost of electricity in states with a high percentage of coal-based power generation, such as Kentucky, is often substantially less than the electricity cost in states with little or no coal-based generation capacity, such as Rhode Island and New York.
The coal industry is benefiting from higher natural-gas prices. Natural-gas futures have recently skyrocketed and since come down to earth a bit to trade in the $5 range, but the price is still well above the usual $2 to $3 range. The bubble has burst. Cheap nat gas is history.
Another sometimes overlooked aspect is the fact that very strong raw materials demand in China has significantly tightened the ocean shipping markets. Shipping rates will remain relatively high for the next few years. Relatively high ocean freight makes U.S. coal at current prices more competitive than it has been in recent years. The weak US dollar and high bulk shipping rates will likely increase the competitiveness of US coal exports over the next few years.
For example, half of all European coal imports come from South Africa, Columbia, Venezuala and Australia. The shipping distance from Baltimore (US export point) to Rotterdam is 3,570 nautical miles. South Africa to Rotterdam is 7,160 nautical miles. Colombia to Rotterdam is 5,180 miles. Queensland, Australia to Rotterdam is 11,085 nautical miles. As a result, at current exchange and shipping rates, expect US coal producers to eventually increase their market share in the European market.
Wall Street ANAL-ysts are confident coal prices will continue to show strength and, its longer-term prospects depend on several variables, including the weather and environmental concerns that could prevent operation of certain mountaintop mines. The price of coal lives under an umbrella provided by the rising price of oil: As oil prices go up, the use and price of coal goes up. And because the U.S. has huge domestic supplies of coal, this part of the energy sector doesn't face the threat of supply disruption from terrorist activities that oil does. Finally, because coal is produced domestically and costs are denominated in dollars, a weaker dollar won't drive up domestic prices for coal, and it will make U.S.-mined coal even more competitive in international energy markets.
Because natural gas supplies are currently low, and because demand for natural gas is high, natural-gas-fired plants usually demand the highest prices. Suppliers using coal-fired plants fill out the lower price range, because electricity produced from coal is cheaper per unit to produce than electricity produced from natural gas. Result: Coal-fired plants get paid the same price for their low-cost energy as natural-gas-fired plants get paid for their high-cost energy. That means that coal-fired plants are making better profits than natural-gas-fired plants -- and coal-fired plants have limitless fuel supplies to boot. (The U.S. is home to 25% of the world's coal reserves.) As a further result, most new electric power plants being built these days are coal-fired plants. Hence, the increasing demand for natural gas, which has caused the price of natural gas to increase, is destined to produce an increase first in the demand (for example, to fuel the new coal-fired electric plants), then in the price, of coal.
In releasing the administration’s energy study, VP Dick Cheney said “coal will remain the dominant source of power generation in the United States. To suggest otherwise is to deny blunt reality”. He sure is subtle isn’t he? In 2003, Democratic Senator Joe Lieberman, referring to coal, said that “we are literally sitting on the resources we need to be energy independent.”
So what does all of this wonderful news about coal have to do with ARLP? Remember the mantra…earnings earnings earnings. Last quarter ARLP reported quarterly net income of $25.3 million, or $1.37 per basic limited partner unit, for the third quarter ended September 30, 2004, an increase of approximately 134% over net income of $10.8 million, or $0.59 per basic limited partner unit, reported for the same quarter of 2003. The third quarter 2004 results represent the fourth consecutive quarter the Partnership has reported record quarterly net income. The Partnership also announced that the Board of Directors of its managing general partner declared a quarterly cash distribution of $0.65 per unit (an annualized rate of $2.60) for the third quarter ended September 30, 2004, payable on November 12, 2004, to all unitholders of record as of November 1, 2004.
For the nine months ended September 30, 2004, Partnership net
income rose by $33.9 million, an increase of approximately 105%, to
$66.4 million, or $3.58 per basic limited partner unit, compared to
net income of $32.5 million, or $1.86 per basic limited partner unit,
for the same period of 2003. Revenues increased approximately 19.6% to
$478.6 million and tons of coal sold rose approximately 7.2% to 15.4
million tons for the first nine months of 2004, compared to $400.2
million and 14.4 million tons for the same period of 2003,
respectively.
Increased production and sales volumes, particularly at the
Partnership's Warrior, Pattiki, Gibson County, and MC Mining
operations, have positively impacted financial results through the
first nine months of 2004. Reflecting the improved coal markets,
higher average coal sales prices realized by the Partnership have further benefited year-to-date financial results.
Look at these trailing 12 month numbers:
ARLP’s stock is also a great bargain compared to its brethren in the coal industry.
ARLP Coal Industry
PE 16 28
Price/Sales 2.2 2.3
Price/Bool 3.8 4.6
Price/Cash Flow 10.2 12.2
Dividend Yield 3.6% 1.4%
Gross Margin 26.3% 17.4%
ROA% 22.2% 4.2%
ROI% 29.1% 5.0%
ROE% 24.2% 10.9%
Management’s strategy is to operate its existing mines efficiently and as near to full capacity as possible to take advantage of strong coal prices. Management also aims to grow organically or by acquisition. This is key to the success strategy of any MLP.
ARLP bought out some of their coal sales agreements in the 2nd half of 2004, which will allow ARLP to take advantage of the anticipated higher spot coal prices in 2005. Last fall, ARLP also entered into two separate coal leases, which cumulatively will increase the Company’s coal reserve holdings by 25% above its current reserve position. If coal prices continue to increase, this could be the deal of the century.
With steady and highly predictable cash flows, ARLP’s current debt level is quite manageable. For the first nine months of 2004, EBITDA of $119.6 million covers interest expense of $11.4 million by a healthy 10.5 times. The cash provided by operating activities for the first nine months of 2004 is $125.9 million, more than doubled the $62.5 million for the nine months of 2003. The increase in cash was principally provided by strong revenue growth of almost $80 million for the first 9 months, depreciation expense of $40 million and a growth of current liabilities of $46 million.
Total coal production was up 3.3% to 4.9 million tons in the 3rd quarter of 2004 compared to 4.7 million in the 3rd quarter of 2003. Coal prices were up 11.6% as compared to 3rd quarter 2003.
The partnership has achieved record levels of revenue, net income, tons sold and tons produced. The partnership has optimized operating capacity and improved efficiencies at existing operations.
This stock is such a layup. $$$MR. MARKET$$$ doesn’t even need to make an earnings prediction. ANAL - ysts say revenues will be 718 MM in 2005 with EPS of $5.09. At today’s PE of 16.6, that takes the share price to $84.49, which is past my sell target. Even they got it right this time! In the meantime, I might get lucky and scoop up a dividend on the way.
Since this is my Super Bowl pick, what better person to hear from then the CEO of ARLP, whose name is Joe Craft. That’s right, the owner of the New England Patriots is Robert Kraft. Both of these guys have crafted a winner. Here’s what the coal guy said:
"Alliance again delivered solid results this quarter," said Joseph
W. Craft III, President and Chief Executive Officer. "We continue to
benefit from the robust coal markets and remain committed to
maximizing our operating efficiency in the face of cost pressures
resulting from higher fuel, power and steel prices."
"Reflecting positive industry fundamentals for the coal industry
this year, the Partnership has delivered exceptional results through
the first nine months of 2004," Mr. Craft stated. "During this period,
we have achieved record levels of revenues, net income, tons sold and
tons produced. Our continuous efforts to optimize operating capacity
and improve efficiencies at existing operations have allowed us to
take advantage of the opportunities presented by the current coal
markets. Recent investments at our Gibson County, Pattiki and Mettiki
mines also have allowed Alliance to rapidly respond to current market
demand."
Looking ahead, Mr. Craft added, "Continued growth in the U.S.
economy, increasing demand for electricity, low coal stockpiles, high
prices and supply constraints for competing fuels, and global market
dynamics all point to sustainability of the current strong coal market
fundamentals. Our Elk Creek and Tunnel Ridge projects announced
yesterday should further strengthen the Partnership's ability to
capture the future benefits of this improved environment and achieve
our goal of sustaining growth in earnings and cash flow."
Sounds good to me. Put some more marshmallows on that coal furnace. Prediction for the weekend Patriots over the Steelers 27-10.
I am HUGE!!
$$$MR. MARKET$$$
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