Units of Alliance Holdings GP L.P. (NASDAQ: AHGP) rose 20% in July. Alliance Holdings is the general partner of coal mining partnership Alliance Resource Partners L.P. (NASDAQ:ARLP), which is one of the best performing coal miners in the United States. That price gain came in just a couple of days at the end of the month, as the partnership rocketed higher on two pieces of news.
The first bit of news was the announcement of a distribution increase of nearly 33%. That's a huge bump, and came after Alliance Resource Partners suggested a distribution increase was likely when it reported first-quarter results. Alliance Resource Partners increased its distribution by roughly 14%. Because of the relationship between general partners and limited partnerships, Alliance Holdings' distribution is leveraged to that of Alliance Resource Partners. But interestingly, Alliance Resource Partners units were only up 7% in July and barely moved on the distribution news.
That's where the second part of the news release comes into play. Alliance Holdings eliminated its economic general partner interest in Alliance Resource Partners in return for additional limited partner units. This is big news because it will make it easier for Alliance Resource Partners to acquire Alliance Holdings at a future date, which management explicitly stated as a possibility. The price jump in Alliance Holdings suggests investors are already pricing in that possibility.
Thermal coal is an important part of the domestic utility industry. The importance of the relatively dirty and polluting fuel, however, is slowly declining, meaning that coal has material headwinds to deal with. That said, Alliance Resource Partners is well positioned in the coal mining industry. Acquiring its general partner, Alliance Holdings, will help to reduce its costs and position it even better for the future. So the elimination of Alliance Holdings' general partner interest is good news for Alliance Resource Partners. It's even better news for Alliance Holdings because it suggests that it will soon be acquired. With a big gain already seen in Alliance Holdings, however, the uptick from a potential acquisition is probably largely priced into the units. If you are looking to invest in a coal miner, Alliance Resource Partners is probably the better option.