Will This Contrarian Coal Stock Finally Crack?

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Investing in coal stocks has not exactly been the most lucrative investment over the past few years. Unless, of course, you have been a shareholder in Alliance Resource Partners (NASDAQ: ARLP  ) . But the company just announced it was closing one of its mines because of a lack in demand. Is this the sign that Alliance is about to fall in line with the rest of its peers in the coal industry? Let's take a look at this recent news and how it should impact Alliance going forward. 

Sneaking in the news
Alliance can hang its hat on being the only coal company to generate a positive total return over the past 5 years. Considering the overall market for coal in the past couple of years, this is actually a pretty astounding accomplishment.

ARLP Total Return Price Chart

ARLP Total Return Price data by YCharts

Over the weekend, though, Alliance made an announcement that sounds more like something you would expect from one of its peers. The company will close its Pontiki mine in Central Appalachia once it has fulfilled all of its outstanding sales contracts. It anticipates all of these commitments will be met by December and will then look begin the process of shutting down operations there. 

At first glance, this news could be interpreted as the first crack for a company that has bucked industry trends. If you dig deeper into the overall strategy of Alliance, though, this actually could be a smart move that will not only not have much of an impact on the company's bottom line, but it also is a sign of forward thinking on managements part.

Trimming the fat
The Pontiki mine is one of the few mines for Alliance that is located in the Central Appalachian region -- also known as CAPP-- which is very similar to having a scarlet letter in today's coal market. This region that was once the powerhouse of American coal production is dying a slow death. There are several reasons CAPP coal is losing its competitiveness, but the two largest ones are from cheap natural gas and improved emission technology at power generation plants. At today's coal prices, natural gas would need to be higher than $4.65 for CAPP coal to compete. Compare that to Illinois Basin coal that can remain competitive at natural gas prices above $2.90. For many years, CAPP coal had the advantage of being a lower sulfur coal, which meant fewer emissions. Today, though, tighter regulations has forced almost all coal plants to implement emission regulation technologies, such as scrubbers. This means that the type of coal being burned has less of an impact on emissions and utilities can make more decisions solely on price. 

Southern (NYSE: SO  ) , one of the largest coal consumers in the U.S., has said CAPP coal will only represent 1% of all coal the company receives by 2016. This is a major shift from 2007 when the company bought equal shares of Central Appalachian, Powder River Basin, and Illinois Basin coal. Southern estimates shifting away from CAPP coal saves the company hundreds of millions of dollars a year. 

Alliance is not the only one shutting down operations in the Central Appalachian region, either. Alpha Natural Resources (NASDAQOTH: ANRZQ  ) will idle its Laurel Mountain mine in Virgina, and James River Coal (NASDAQOTH: JRCCQ  ) recently announced it would be idling three of its mines in the region as well. What separates Alliance from this group, though, is losing Central Appalachian production is not as much of a detriment to the company as a whole. The Pontiki mine only represented 1.7% of Alliance's total output in 2012, where the three mines James River looks to idle represent 24% of 2012 production and Alpha estimates that its entire CAPP coal operations -- which represent 17% of total production -- will decline by more than 10% over the next 5 years.  

What a Fool believes
Alliance shutting down this mine is not an act of desperation like many other companies in the space. On the contrary, it may actually put the company in a better position in the future. By getting out of the CAPP coal business and focusing its efforts in the Illinois Basin, it is setting itself up to have a better chance to succeed. The long-term outlook for the coal industry does not appear to be the most promising, but if one company is going to be successful in this gloomy market, Alliance is proving to be it. 

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Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2013, at 4:22 PM, dy2 wrote:

    Nicely thought out article and very much on point.

    ARLP is increasing its ILB coal dramatically in its

    Gibson South mine under construction and in its

    massive investment in White Oak, both going online

    in the next 2 years.

    With Tunnel Ridge now fully operational (6 million/tons /year-10 times Pontiki and much

    more profitable) ARLP is a long way from its

    maturation. It is beginning to eat everyone else's

    lunch, particularly CAPP miners.

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