Alliance Resource Partners (ARLP -0.66%) has been posting record results at a time when the rest of the coal industry has been floundering. But is the recent announcement that it is closing its Illinois Basin (ILB) Pontiki mine the first sign that the partnership is headed for a slowdown?

A ray of light
In Alliance's second quarter earnings report, management proudly announced that: "Our performance to date and expectations for the remainder of 2013 allow us to increase full year guidance and give us confidence that ARLP will deliver its thirteenth consecutive year of record results." Strength in its ILB business, which represented nearly 77% of the company's coal volume in the quarter, was highlighted as key to the solid results and positive outlook.

Just weeks later, however, the partnership announced plans to shut down its ILB-based Pontiki mine. The mine has produced about 600,000 tons of coal this year, about 3% of the partnership's total ILB production. However, the reason for the closure was the inability to find a customer for the mine's coal in 2014. That's troublesome.

The big switch
The ILB has benefited from a shift in demand, with both CSX (CSX 0.03%) and competitor Norfolk Southern (NSC 0.31%) noting a major increase in ILB shipments over the last couple of years. ILB coal volume more than doubled at CSX and was up nearly 100% at Norfolk. Central Appalachian coal has been the big loser. CSX expects this trend to keep going.

That's the good news and one of the reasons to like Alliance and, frankly, the diversified portfolios of larger players like Peabody Energy (BTU) and Arch Coal (NYSE: ACI); both have notable exposure to the ILB and the Powder River Basin, the only coal basin in the United States that's cheaper than the ILB.

However, both Peabody and Arch have been struggling along with the broader coal industry. That's a fate that Alliance has so far avoided because of its relatively tight focus on the ILB. Still, coal volume at Peabody's Midwest division, which includes the ILB, was down slightly year over year. The same was true at Arch. So Alliance must be doing something right in addition to having well-situated mines.

To be fair, both Arch and Peabody are more focused on the PRB. That's an area to which Alliance has no exposure. And, longer term, it's an issue that could pose a problem for Alliance when coal markets pick up again.

Is this the end?
The fact that Alliance couldn't find a buyer for the coal from one of its ILB mines isn't the end of the world and management highlighted that fact: "ARLP does not currently expect the closure of the Pontiki mine to have a material impact on its 2013 financial results." Of course that doesn't say anything about 2014 and beyond.

Interestingly, coal volumes from the ILB were up 8% year over year but were down 2% from the first quarter. This trend and the closure of the Pontiki mine suggests that 2014 production will start at a disadvantage. That's true even though the mine only accounts for a small percentage of Alliance's ILB coal volumes.

But this isn't a reason to run out and sell Alliance. The company is a standout performer in an underperforming industry. And that's likely to continue since it is still working to increase production at other mines. The lost Pontiki coal volume, then, will probably be more than made up elsewhere in the partnership's portfolio, though maybe not right away.

Watch the ILB
If you own or are considering an investment in Alliance you need to keep close tabs on the ILB and the partnership's results out of that region. This one mine closure doesn't spell the end, but it's worth watching underlying results a little closer for a few quarters, just in case. Of course, if coal prices pick up, the loss of some production won't be as big an issue and the mine might get reopened pretty quickly.