Alliance Resource Partners is the Best Coal Play
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Coal miners have started to rebound as natural gas prices slowly tick upwards. It has been stated before that this growth in natural gas is based on fundamental strength. As natural gas returns to more sustainable levels coal prices will come out of their glut and coal miners will finally see the light of day. There are many different coal miners with operations throughout the world, but the numbers show that Alliance Resource Partners (NASDAQ: ARLP) is one of the safest and most profitable ways to gain a piece of the coal market.
The Coal Miners
Alliance is a master limited partnership with assets throughout the United States. It is one of the most expensive miners on the market, with a PE ratio of 17.79. This is not an automatic cause for concern as the fundamental show that it is also one of the strongest players. The company's 6.9% yield, coupled with the 12.14% dividend growth over the past 5 years shows that the dividend is here to stay and will help to maintain investor demand. As the charts below show, the company's debt to equity ratio of 1.072 is not outrageous considering its return on invested capital is among the best of its competition at 20.88%. Also, its earnings yield is healthy at 12.16%.
Pension obligations appear to be manageable, as the latest 10-K states that the pension fund as of December 2011 was underfunded by only $27.5 million. A revision of a long term rate of return for the pension to a more reasonable 7.35% would have resulted in a relatively small $500,000 increase in pension expenses during 2010. Considering the company has a market cap around $2.3 billion these expenses are not outrageous.
Peabody Energy (NYSE: BTU) is large miner with assets one both sides of the Pacific. Australia's introduction of a carbon tax for the foreseeable future, coupled with China's downturn, will drag down earnings. The company's return on invested capital of 8.34% is healthy but not spectacular. The free cash flow yield of 11.81% is high and its debt to equity ratio is close to that of Alliance. This company is a strong coal miner with a range of diversified assets but its 1.5% yield makes it less attractive than Alliance.
CONSOL Energy (NYSE: CNX) is not a strict coal play, as it also hold natural gas assets. Its return on invested capital is a solid 9.07% though nowhere near the 20.88% of Alliance. Its earnings yield of 8.24% is not spectacular though the healthy debt to equity ratio of .83 helps to compensate. The rising natural gas prices are a double benefit for this company as it will boost its income from natural gas assets and coal assets over the long run. The Marcus and Utica Shale assets could pose issues in the long run as it becomes more evident that shale wells do not provide the amount of natural gas as previously projected. This company is a strong energy player, but I believe that its exposure to gas reduces its attractiveness relative to Alliance.
BTU Debt to Equity Ratio data by YCharts
BTU Free Cash Flow Yield data by YCharts
BTU Return on Invested Capital data by YCharts
Metallurgical Coal Miners
Metallurgical coal is not in the same situation as thermal coal. There are continued difficulties in China and Europe that put a damper on steel demand. SunCoke Energy (NYSE: SXC) and Alpha Natural Resources (NYSE: ANR) are two metallurgical miners, and their respective returns on invested capital of 5.95% and -28.91% are the lowest among this mining group.
SunCoke's debt to equity ratio of 1.35 and low free cash flow yield of 3.53% shows underlying weakness. Alpha Natural Resources' negative free cash flow yield of -4.35% makes the company relatively risky, given that SunCoke has been able to maintain positive free cash flow in the same environment. Alpha Natural Resource's book value of .299 compared to SunCoke's 2.158 makes it clear that the market sees underlying weakness as well. Neither of these companies appears very attractive given the value and opportunities available elsewhere.
BTU Earnings Yield data by YCharts
Conclusion
Over the coming year’s natural gas will continue to increase in price and continue to drive thermal coal prices. Alliance Resource Partners is a strong coal miner with a solid return on invested capital of 20.88%, a debt to equity ratio close to 1, and an acceptable free cash flow yield of 6.7%. Its master limited partnership structure can offer great tax benefits over the long run. The 6.9% yield is a very attractive to investors in the current low yield environment. There are number of thermal coal miners, but I believe Alliance Resource Partners offers a strong underlying business with a strong yield to entice investors and keep the stock rising.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Alliance Resource Partners, L.P.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
