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Alliance Sees Opportunities on the Horizon


Alliance Resource Partners, operator of steam mines in the Illinois Basin (ILB), Northern Appalachia (NAPP) and Central Appalachia (CAPP) and widely regarded as one of the healthiest companies in the coal space, believes it has been strengthened by the steady procession of U.S. coal industry bankruptcies in the past couple of years, including Peabody Energy Co.’s recent Chapter 11 reorganization filing in St. Louis. Unlike many of its industry counterparts, Tulsa, Oklahoma-based Alliance remains firmly in the black, even though its net income fell to $47.3 million in the first quarter of 2016, down from $106.4 million a year ago. Total first quarter revenue was $412.8 million, compared with $560.4 million in the first quarter of 2015.

Considered a well-run company not overly burdened with debt, Alliance looks to take advantage of contract and/or asset acquisition opportunities arising from the numerous bankruptcies. During an April 26 conference call with analysts to discuss earnings, Joe Craft, Alliance’s longtime president and CEO, acknowledged plenty of opportunities are available. “We continue to look at that,” he said when asked if bankruptcies by Peabody and others have changed the competitive dynamic in the industry. “It strengthened our position.” That said, financing a transaction or acquisition might be “a little more challenging” than if Alliance merely extended its own current debt level because “the investment market today is different,” he opined.

Creditors of bankrupt coal companies, he said, “are going to want to get these companies out of bankruptcy sooner than later and force the debtors to go ahead and rationalize their production at cost or above,” so they can extract the maximum benefit from the company. As a result, he added, “there will be an acceleration of supply going down as lenders evaluate the cost of existing operations and whether they should continue to produce with high-cost mines.”

More than 70% of Alliance’s sales and production are in the high-sulfur ILB, a basin that is experiencing its share of cutbacks as the industry tries to navigate through the toughest coal market in decades. Of the company’s total sales of 7.4 million tons in the January-March period, 5.5 million tons were in the ILB. Appalachia, both NAPP and CAPP, accounted for the remaining 1.9 million tons.

Largely by design, most of Alliance’s ILB underground mines produced less coal in the latest quarter, including its River View and Warrior operations in western Kentucky and Hamilton No. 1 (formerly White Oak No. 1) and Pattiki in southern Illinois. Alliance’s Tunnel Ridge and MC Mining deep operations in Pennsylvania/West Virginia and eastern Kentucky, respectively, also had lower output. Late last year, the company idled its Gibson North and Onton underground mines in southern Indiana and western Kentucky, respectively.

Still that, along with cutbacks by other coal producers, probably is not enough to coax a long-awaited rise in coal prices. “If you look at our market region, specifically Northern App and the Illinois Basin, we believe that with the customers’ current stockpiles there’s probably a 20-million-ton overhang,” Craft said. So that would be the tonnage that needs to come out of the market or demand needs to go up from first-quarter levels to eradicate that overhang.”

Nevertheless, Alliance is maintaining a full-year 2016 forecast of 33.7 million tons to 35.7 million tons of production and 34.6 million tons to 38.1 million tons of sales, albeit at prices about 6% below 2015 levels.

By late 2016, Craft expects coal markets to be more in balance. And that could set the stage for a rise in sales and production in 2017. “We believe we will have an opportunity to increase our production next year, because there are a couple of contracts expiring that we believe we will get,” he said. “Any increase is likely to be modest, though, probably a couple of million tons.”