I know, I know, I know - coal mining is evil, coal mining is finished, yada yada yada. But people thought the same about tobacco companies and those businesses are still very strong. So my question is - are there any good coal mining businesses out there and are they good investments.
Covid-19 has certainly disrupted the coal mining business. Basically the government closed the economy, killing demand for electricity and since coal is a major input for electricity, killing the demand for coal.
Alliance Resource Partners, L.P. (NASDAQ: ARLP)
Alliance generates income from coal production, oil & gas mineral interests, and terminal services:
Alliance claims to be the second largest coal producer in the eastern United States with seven underground mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia as well as a coal-loading terminal in Indiana. Alliance market their coal production to major domestic and international utilities and industrial users.
Oil & Gas Mineral Interests
Alliance own both mineral and royalty interests in approximately 1.4 million gross acres in premier oil & gas producing regions in the United States, primarily the Permian, Anadarko and Williston Basins.
Alliance market their mineral interests for lease to operators in those regions and generate royalty income from the leasing and development of those mineral interests. Reserve additions and the associated cash flows are expected to increase from the development of our existing mineral interests and through acquisitions of additional mineral interests.
Alliance provides terminal services for loading coal, as well as develop and market industrial and mining technology products and services such as miner and equipment tracking systems, and proximity detection systems.
Alliance is a Master Limited Partnership which, as I understand it, generally means the income flows through the Master Partnership un-taxed. So it is only taxed once in the investors hands instead of twice in company structures.
States that rely more heavily on coal typically provide their citizens with a lower retail price for electricity. There are currently 22 states that generate less than 8% of their electricity from coal; these states pay over 24% more than the national average per kilowatt-hour (kWh) of electricity. States that generate 70% of their electricity from coal pay 13% less than the national average per kWh. I would love to see similar data based on electricity generated from gas.
So is the business any good?
As you know - I firmly believe life will return to normal after Covid-19 passes - so I am ignoring the short term impact provided the company appears to have enough cash to survive the disruption.
Love the 10 year median Return on Equity (ROE) of 41.5%. Even in recent years when the world has been less kind to the coal industry they have maintained an ROE of around 30%.
Recently its profitability has taken some big hits with non-cash items like write downs, but it has remained free cash flow positive. We think this company will return to its former glory as the economy recovers from Corona Virus, so we added it to our portfolio.
Our portfolio already has exposure to Coal, Oil & Gas through our investments in BHP Group (NYSE: BHP) and NACCO (NYSE: NC). Uranium is also a player in the electricity generation business which we have exposure to through Cameco (TSX: CCO; NYSE: CCJ) and BHP.
Not Investment Advice
As usual, this is not investment advice. Do your own research. Consult your professional advisors.