Alliance Resource Partners: AI Winner or Value Trap?

#107: A deep dive into the coal patch.

Three weeks ago, we took a detailed look into the evolving energy landscape in Data Centers and Power Demand. After years of stagnant electricity demand, new investment in data centers — powering AI, big data, and bitcoin mining — is rapidly changing the outlook for power markets.

Initially skeptical, I was surprised by my findings. Nearly every grid operator and utility across the country is ringing alarm bells about growing demand and the implications for grid reliability, transmission investment, and generating resources. Resource adequacy over the coming decade is being recalculated, calling into question the ability to part with power plants slated for retirement.

Investors have been handsomely rewarding perceived beneficiaries of these trends, including independent power generators with coal, natural gas, and nuclear assets — companies like Vistra Corp (VST), Constellation Energy (CEG), and Talen Energy (TLNE). But while the three companies hold a combined 10 GW of coal fired generation, the market has yet to extend its blessing to coal producers. Long viewed as an un-investable if not ethically repugnant wasteland, could the outlook for the coal patch actually be improving?

In particular, I noted Alliance Resource Partners, L.P. (NYSE: ARLP), which is the largest thermal coal producer in the eastern U.S. and is tied to the fortunes of the U.S. power market and the fate of coal-fired power plants¹. Despite the dramatic decline of coal consumption in the U.S. over the past decade, ARLP posted record sales in 2023. Its current annual distribution of $2.80 per unit is the highest in its 20 year public history and represents a 12% yield. Further, the partnership has made lucrative investments in oil and gas royalties and quietly holds valuable mineral interests in the most productive acreage in the country. It even mines a bit of Bitcoin.

But is buying coal, a declining industry at the crosshairs of regulatory ire, a savvy contrarian play or a classic value trap? The road to ruin is paved with yield.

This week, I go beyond heuristics and take a deep look at this dinosaur, including;

• Overview and Financials

• Capital Structure and Dividend Coverage

• Sum-of-the-Parts Valuation

• Value vs. Value Trap

Let’s dig in.