Rhino Resource Partners and Natural Resource Partners are both struggling in the coal market despite trying to shift their exposure to a hot coal region. Alliance Resource Partners, meanwhile, continues to excel as most of its operations come out of the hot Illinois Basin (ILB).
Where the action is
Although natural gas prices are still low by historical standards, ILB coal remains price competitive. That's a big plus for miners in the region. However, there's another trend going on, too. Utilities are increasingly using ILB coal over other eastern basins, like Northern Appalachia.
That's why miners like Rhino Resource Partners and Natural Resource Partners have been shifting their focus to the Illinois Basin. For example, in 2005 Natural Resource Partners got about 3% of its revenues from the ILB. In the first quarter, that number was up to 16%. Rhino Resource Partners, meanwhile, just opened a new ILB mine in the first half.
Both Rhino Resource Partners and Natural Resource Partners have material exposure to other areas, however, which has kept their results weak since coal is in the doldrums. Alliance Resource Partners, on the other hand, pretty much gets all of its coal out of the ILB. This is good since even though coal prices are soft, volume growth has more than made up for it.
Alliance Resource Partners CEO Joseph Craft noted in the first quarter that the partnership is "on track to achieve our fourteenth consecutive year of record results." The coal miner has increased its distribution for 24 consecutive quarters and solid second quarter results are likely to increase that to 25. Watch for an update on the newly opened Gibson South mine when the miner reports, but expect good news overall.
Other factors at play
Natural Resource Partners, which is trying to get in on some of the ILB demand, still has a broader coal footprint. That includes getting nearly a quarter of its top line from metallurgical coal. Although the domestic thermal market is showing signs of life, the global met market remains weak. That plus notable exposure to Appalachian coal (15%) is going to be a drag on coal results.
However, Natural Resource Partners has also been working to increase its exposure to non-coal businesses. That segment now accounts for over 30% of the partnership's revenues; this is up from just 6% in 2005. It's been putting money to work in oil and gas drilling, as well as aggregates like frack sand and soda ash.
Although a coal turnaround on the thermal and met sides of the business is vital, the future for Natural Resource Partners is in these other areas. While a distribution cut at the start of the year was a notable negative, insiders own around a third of the units. This means that they felt the pain, too. It also means they have a vested interest in doing what's best for the long-term health of the business.
Rhino Resource Partners' new ILB mine is the update to monitor at this miner when it reports second quarter results because its going to drive growth. It's not the real reason to like the partnership, though. Rhino just sold off natural gas assets that left it largely debt free. While some coal peers like Natural Resource Partners have debt at nosebleed levels, Rhino Resource Partners should be able to easily keep its head above water until coal rebounds and pay a handsome distribution along the way.
The dividend payers
This trio of coal players are all partnerships and thus pay out notable distributions. Alliance Resource Partners has been the industry's top performer, and its shares have been bid up accordingly. The yield is a solid 5.4% or so. Struggling Natural Resource Partners and Rhino Resource Partners are far more risky, but yield around 8.9% and 13%, respectively. There are good reasons to like each despite currently weak coal results.
The ILB will be a key story to watch for all three miners when they report their respective second quarter results. However, Natural Resource Partners and Rhino both have more going on that you'll want to keep in mind. The "more" might even be a good reason to buy despite their inherent risks.
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