Alliance Resource Partners, L.P. (NASDAQ:ARLP)

ARLP is one of the greatest sleeper stocks ever because this is really an incredibly misunderstood opportunity. At $27, this stock is trading at less than 4 times next years earnings. In addition, ARLP could actually pay a $5 to $6 dividend in 2009. ARLP, a coal mining company, now has 92% of its 2009 sales and 80% of its 2010 coal sales “under contract” with U.S. power companies.





People who have not done their homework, seem to believe that Pres. Obama will quickly put these coal power companies out of business. In reality, 29 new coal powered plants are currently permitted and under construction in the US. Most will start generating electricity in 2009 and 2010. Coal now provides the US with over 40% of its electricity. Supply, because of environmental challenges, is extremely tight since no new coal mining permits have been issued in over a year. There is no way to quickly reduce the amount of electricity produced in the US with either wind or solar. And, Nat Gas still produces CO2 and it costs 3-4 times more per BTU than does coal. In fact, the DOE sees the use of coal in the US to continue to grow through 2030. But, regardless of your beliefs about this the reality is that most of the coal sales for ALRP for 2009 and 2010 are already under contract and over half of 2011 is under contract.





As a single product company it is very easy to estimate 2009 and 2010 earnings. The guidance provided by management is that 2009 avg. coal prices will be between $64.90 and $66.92 depending on how the last 9% of the available coal prices. Remember, 92% of that is already locked-in via contracts to dozens of power companies. The estimate of tons to be sold in 2009 which is consistent with 2008 is 26 to 28 M tons. In 2008, the average cost of sales per ton - everything included but taxes - was $34.73. This may actually decrease significantly in 2009 since the cost of diesel, explosives and steel have all declined dramatically. But I'll be conservative and assume that the cost actually increases by 4% in 2009 to $36.37/ton. Total pre-tax earnings in 2009 will, on the low side, would be ($64.90 - $36.37)X26M tons = $741.8M. Assuming a 30% tax rate, this is a net earnings of $519.3M.





About 40% of that will be distributed to the managing partner, AGHP. Note: AHGP shares are also publicly traded so both are available for investors. After distributions to AGHP, the EPS for ARLP will be about $8.00 per share. A large portion of that - the managing partner AGHP decides how much - will be distributed as a dividend. However, and it is important to understand this, all of the managing partners share of the earnings are defined in terms of net distributions to ARLP shareholders. So, the larger the “dividend distribution” to ARLP shareholders, the larger will be the earnings distribution to the managing partner. In the past, a very high portion of earnings have been distributed as dividends to the ARLP shareholders.