Please ensure Javascript is enabled for purposes of website accessibility

Will 2016 Be Alliance Resource Partners LP's Best Year Yet?

By Reuben Gregg Brewer - Feb 7, 2016 at 4:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Alliance has outperforming the coal industry during a painful industry downturn, but its future is looking glum—time to rethink that view

Alliance Resource Partners LP (ARLP 2.05%) is one of the best performing coal miners, handily outdistancing peers in a tough coal market. But that trend looks like it's ending. Which, believe it or not, means that 2016 could be Alliance's best year yet.


A young one
Alliance is a fairly young partnership, having come to market in mid-1999. It's not even 20 years old yet. It's also had the benefit of operating in one of the most desirable coal regions in the United States, the Illinois Basin. Coal from this region has been displacing coal from other key regions around the country, even during the deep commodity downturn.

Mining and selling more while others pull back. Source: Alliance Resource Partners.

So it shouldn't come as too much of a surprise that Alliance operates with low cost mines. Moreover, as other miners have had to pull back on production, demand for Illinois Basin coal has kept Alliance's volumes growing. That's allowed the partnership to keep boosting its financial results while competitors have struggled. A win-win, for Alliance anyway.

But the company's third-quarter earnings release basically spells the end to this trend. CEO Joseph Craft explained:

Overall for the U.S. domestic thermal coal outlook, we expect future demand to be stable; however, the market continues to be oversupplied causing weak commodity prices. We see no near-term catalyst to improve pricing except a supply response by the industry. As we evaluate our own supply response to an uncertain coal market, ARLP is electing to maintain quarterly cash distributions per unit at current levels.

I think your first takeaway from this statement is that the dividend didn't get increased. That's the first quarter without an increase since 2008. Not good. But the longer-term takeaway here is that Alliance is likely to cut its production in 2016. That means the company's results will probably fall year over year.

The best year ever
If you're looking at the partnership from a pure numbers point of view, then 2016 is definitely not looking like it will be a good year. But step back for a second. Look at how young Alliance is. No company survives without going through a trial by fire -- that's how the business world works. And so far, Alliance has been able to ride high because of its coal region focus and youth. Next year it gets to test its mettle, to prove that Alliance Resource Partners isn't just lucky, but that it's a survivor.

Nucor, a steel icon. Source: Nucor

To really understand the depths of this point, take a look at Nucor Corporation (NUE -0.40%). Today it's one of the largest and most profitable steel companies in the United States. However, it started life as REO Motor Car Company in the early 1900's. After a couple of trips through bankruptcy and a name change to Nuclear Corporation of America, the company eventually refocused around its most profitable business, steel, in the 1960's, changing its name to Nucor.

One of the key pieces of this shift was its use of mini-mills, a cheaper alternative to blast furnaces. But the more important aspect of Nucor becoming one of the most successful U.S. steel companies was a change in the way it operates. For example, Nucor's pay system rewards employees when it's doing well and reduces compensation when times are tough. That provides a safety valve on the cost side that employees have embraced because of the rewards in the good years.

Equally important, Nucor, having experienced its own troubles, has managed itself conservatively since the steel shift. This has allowed it to expand via investment and acquisition during the lean years. The steel industry is cyclical, but Nucor has weathered through the downturns and remained strong and agile. In fact, through multiple cycles, the steel giant has lost money only once. And all the while it has continued to invest in growth and expansion so it comes out the other side of each downturn in a better position than it entered.  

Now reexamine Alliance. It doesn't have the same history behind it; it hasn't been around long enough. This is the company's first true test, and it's only starting to get serious now. And, thus, only now can this partnership prove that it has what it takes to be a lasting company. A company that can change and adjust to the markets around it, in good times and bad. If Alliance comes through this not just in one piece, but stronger than it went in, 2016 could turn out to be the best year ever for the miner.

It all depends on how you look at it
So if all you care about are numbers, then 2016 will be a bad year. I have little doubt about that. But a company's real value is in its ability to spit out a long-term stream of cash flows. And that requires living through both the good and the bad times. Alliance has sailed easily through the coal market's malaise so far, but 2016 is when the rubber hits the road. And now we'll find out what this miner is really made of. Not to sound too melodramatic, but that means 2016 might, indeed, be the best year ever for Alliance.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alliance Resource Partners, L.P. Stock Quote
Alliance Resource Partners, L.P.
$18.94 (2.05%) $0.38
Nucor Corporation Stock Quote
Nucor Corporation
$109.62 (-0.40%) $0.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.