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Why This Coal Stock Is up 30% in 2014

http://www.fool.com/investing/general/2014/08/01/why-this-coal-stock-is-up-30-in-2014.aspx

Bob Ciura
August 1, 2014

It seems like everywhere you turn, no one has anything positive to say about the outlook for coal companies. Under the threat of increasing regulatory and public scrutiny of coal plants, it's natural to assume the entire coal industry should be avoided altogether.

But if you took that view, you would be missing a true canary in the coal mine. While most coal companies are indeed struggling, coal master limited partnership Alliance Resource Partners LP (NASDAQ: ARLP) is on an incredible run.

Shares of Alliance Resource are up an astounding 30% just since the beginning of this year, and that doesn't even include the hefty distributions investors have collected. The rally extended on July 28, after the company released a great quarterly earnings report.

Alliance Resource Partners continues to blow Peabody Energy Corp. (NYSE: BTU) and CONSOL Energy (NYSE: CNX) away, and its investors are reaping huge rewards.

The secret of Alliance Resource Partners' success
Other coal companies, like Peabody and CONSOL, are grappling with sluggish production and cost pressures. But Alliance Resource Partners is racking up record results. Last quarter, its coal sales volumes, revenue, and net income each hit company records. In all, revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 8% and 19%, respectively.

In comparison, Peabody Energy lost $72 million in the same quarter.

Alliance Resource Partners holds a unique advantage that separates it from the competition. Its mines are strategically positioned geographically. The company's assets are located close to its customers, primarily utilities and industrial users. This results in low operating expenses per ton, which helps keep margins and profitability robust.

For example, Alliance Resource Partners' Appalachia mines had its lowest costs per ton ever last quarter. Across the entire company, expense per ton fell 4% last quarter.

Alliance Resource's powerful assets
Alliance Resource Partners' success is due mostly to the Illinois Basin. This region is hugely important to Alliance Resource Partners, since it comprises more than 75% of its total tons sold. Based on this statistic, you might be concerned that the company is too dependent on one geographic region. But that would be misguided, because Alliance Resource Partners is highly diversified, even within the Illinois Basin.

All told, Alliance Resource Partners has 10 mines in the Illinois Basin, including the new Gibson South mine which recently started up production. This effectively insulates the company from depletion of any individual mine.

Plus, Alliance Resource Partners' Appalachia mines will likely play an increasing role going forward. That's because these three mines are outperforming those in the Illinois Basin. Adjusted EBITDA in the Appalachia mines nearly doubled last quarter, versus the same quarter one year ago.

Great news for investors
Here's how Alliance Resource Partners stacks up against its competitors in terms of cash returns.