Can Rhino Resource Partners LP Buck the Coal Trend?

Rhino Resource Partners (NYSE: RNO  ) is a relatively small coal miner with a diversified asset base. It's on the verge of opening a new mine in the Illinois coal basin (ILB), its first in the region. That should have a big impact on this virtually debt-free coal miner. For proof, look no further than Alliance Resource Partners (NASDAQ: ARLP  ) .

Not much to look at...for now
Around $375 million market cap Rhino is a small player in the coal market. However, the recent sale of an oil and gas asset has changed the company's prospects. Essentially, the $185 million sale has left the miner debt-free at exactly the same time that it has its new Pennyrile mine coming online in the ILB. And, better yet, the mine is located on the Green River, which gives Rhino river access to several potential customers.

(Source: Michaelstone428, via Wikimedia Commons)

In fact, Rhino already has one customer locked in for 800,000 tons per year between 2015 and 2020. And it has test burns scheduled with additional customers that could lead to further production at the site, which Rhino believes can produce over 2 million tons per year. If it hits that mark, costs are expected to fall and increase the profit per ton from around $9 to $15.

This is a big deal for Rhino
In a weak coal market, how likely is it that Rhino will be able to nearly triple production from this new mine? A quick look at Alliance Resource Partners' results provides a compelling picture. Alliance, with a $3 billion market cap, mines predominantly out of the ILB.

In 2009, Alliance produced around 26 million tons of coal, selling 25 million. The partnership expects to produce around 40 million tons this year, selling virtually all it mines. Even in 2012, when historically low natural gas prices led utilities to favor gas over coal, Alliance was able to increase production by nearly 13% and sales by 10%.

It's no wonder that Alliance's shares have been on a fairly steady upward climb in recent years while competitors have struggled. And that includes Rhino Resource Partners. Alliance has been able to achieve this success because demand for ILB coal has been robust now that more and more utilities have installed scrubbers to comply with government mandates. The ILB has been gaining market share at the expense of other coal regions.

ARLP Chart

ARLP data by YCharts

Rhino is getting in on the action
So Rhino is, essentially, getting in on the ILB action with this mine. And it should be transformational. For example, Rhino has committed coal sales of 3.2 million tons in 2014. If the company can get contracts to expand the mine to 2 million tons a year, it will increase its sales by over 60%. It won't happen overnight, obviously, but it will be a huge boost to the top line. Moreover, as the cost of running the mine declines with increased scale, more money will flow to the bottom line.

It costs a lot of money and takes a lot of time to build a new coal mine. That's why the best part of this mine is probably the natural gas sale. The large expenses have already been paid and the gas sale means that Rhino has basically wiped out the debt associated with the construction of the mine. And since the wait for opening day is basically over, Rhino is ready to embark on a new leg of growth. That remains true even though the coal market is still relatively weak.

As a small miner, Rhino isn't for the faint of heart. However, with an impressive 13% yield, a virtually debt-free balance sheet, and a new ILB mine opening its doors, this could be a good time for more aggressive investors to climb aboard. Alliance's solid growth shows just how much this one mine could mean to tiny Rhino.

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