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Edited Transcript of ARLP earnings conference call or presentation 29-Oct-18 2:00pm GMT

Q3 2018 Alliance Resource Partners LP and Alliance Holdings GP LP Earnings Call

Tulsa Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Alliance Resource Partners LP earnings conference call or presentation Monday, October 29, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian L. Cantrell

Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC

* Joseph W. Craft

Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC

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Conference Call Participants

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* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Mark Andrew Levin

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Nicholas Jarmoszuk

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Walter Francis Sosnowski

SRC Capital Management, LLC - Founder

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Presentation

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Operator [1]

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Good morning, and welcome to the Alliance Resource Partners Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

And with that, let's turn the conference over to Mr. Brian Cantrell, Senior Vice President and Chief Financial Officer. Please go ahead.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [2]

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Thank you, Brian, and good morning, everyone. Alliance Resource Partners released its 2018 third quarter earnings earlier today, and we'll now discuss these results as well as our outlook for the balance of the year. Following our prepared remarks, we'll open the call to your questions.

Before beginning, a quick reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions that are contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, the partnership has no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, unless required by law to do so.

Finally, we'll also be discussing certain non-GAAP financial measures. We have provided definitions and reconciliations of the differences between these non-GAAP measures and the most directly comparable GAAP financial measures at the end of our press release, which has been posted on ARLP's website and furnished to the SEC on Form 8-K.

With the required preliminaries out of the way, I'll begin with a review of our financial results and then turn the call over to Joe Craft, our President and Chief Executive Officer, for his perspectives on the coal markets and ARLP's outlook for the remainder of 2018.

As mentioned in our release this morning, ARLP reported strong results for the 2018 quarter and period, posting increases to all of our key operating and financial metrics. Led by increases at our Gibson North and South, Hamilton and River View mines in the Illinois Basin and at Tunnel Ridge in Appalachia, coal production jumped 1.4 million tons over the 2017 quarter to 9.9 million tons. Continued strength in the international coal markets drove coal sales volumes higher in the 2018 quarter by 4.4% at 10.1 million tons, while coal sales prices rose 1.3% to $45.71 per ton sold. Higher coal sales volumes and prices drove total revenues up 9.8% to $497.8 million compared to $453.2 million in the 2017 quarter. Although increased volumes also pushed operating expenses up by 4.7% in the 2018 quarter, segment adjusted EBITDA expense per ton of $30.70 remain comparable to the 2017 quarter, reflecting higher revenues as well as increased contributions from our investments in oil and gas minerals and gas compression services. Net income attributable to ARLP and EBITDA also increased in the 2018 quarter, climbing 20.3% and 8.3%, respectively, both compared to the 2017 quarter.

Building on ARLP's strong performance during the first half of the year, our results for the 2018 quarter contributed to across-the-board increases to coal sales and production volumes, revenues, net income and adjusted EBITDA for the first 9 months of 2018 compared to the 2017 period.

In reviewing our results for the 2018 quarter and period, I want to remind everyone that ARLP's IDR Exchange and Simplification Transactions impacted total units outstanding and the allocation of net income to our general partners, creating a lack of comparability of earnings per unit between periods. As a result, we have again included at the end of this morning's press release a comparison of ARLP's actual EPU and pro forma EPU as if the Exchange and Simplification Transactions had occurred on January 1, 2017. On this pro forma basis, EPU for the 2018 quarter increased 22.2% to $0.55 per unit compared to $0.45 per unit for the 2017 quarter, and by 37.6% to $2.34 for the 2018 period compared to $1.70 for the 2017 period. We'll also provide investors with a detailed pro forma presentation of ARLP's EPU in our upcoming Form 10-Q filing with the SEC.

Before turning to the balance sheet, a few comments regarding our results for the 2018 third quarter compared to the 2018 second quarter. You may recall that ARLP reported exceptionally strong coal sales for the sequential quarter, primarily due to the shipment of 1.4 million tons deferred from the first quarter of 2018 due to weather-related issues earlier this year. As a result, we anticipated a sequential decline in coal sales volumes and revenues. In addition to the impact of this expected decline, our Hamilton Mine encountered unanticipated geological conditions following a longwall move during the 2018 quarter. These difficult conditions negatively impacted Hamilton's coal volumes, revenues, operating expenses, net income and EBITDA during the 2018 quarter and were the major contributor to the Illinois Basin experiencing a 6.7% sequential increase to segment adjusted EBITDA expense per ton and a 17.2% decrease to segment adjusted EBITDA. We believe the Hamilton geology issue is now largely behind us as productivity at Hamilton has recently improved.

I'll wrap up with a quick look at ARLP's balance sheet. We ended the 2018 quarter with ample liquidity of $713.8 million, and our strong year-to-date performance further improved ARLP's leverage to 0.72x total debt to trailing 12 months adjusted EBITDA. We believe our consistently strong, conservative balance sheet is a competitive advantage for ARLP, providing the financial flexibility and capably -- capacity to execute our plans and take advantage of future opportunities.

With that, I'll turn the call over to Joe for his views on the markets and ARLP's outlook. Joe?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [3]

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Thank you, Brian, and good morning, everyone. As Brian just reviewed, ARLP delivered strong results during the 2018 quarter, and I'm extremely pleased with our year-to-date performance and I'm equally optimistic about our prospects for near-term growth. In delivering these results, our teams have effectively responded to improve fundamentals in both the domestic coal markets and growing international markets.

On the strength of increased coal demand, ARLP secured new commitments during the 2018 quarter for approximately 11.1 million tons to be delivered through 2021, including an additional 4.9 million tons of export shipments through 2019. We now have volume and price commitments for approximately 32.9 million tons in 2019 or approximately 75% of what we currently plan to produce next year. As part of these 2019 planned shipments, ARLP has already secured commitments to export 7.7 million tons of thermal coal and 100,000 tons of metallurgical coal as we continue to increase our presence in the growing international coal markets. Responding to strong demand in our markets and in keeping with our goal of investing in ARLP's core Coal business, during the 2018 quarter, we brought the second continuous mining unit into production at our Gibson North mine and added the 10th continuous mining unit at our River View mines. With a focus on improving productivity and controlling costs, we also began making investments in various infrastructure projects at several operations. With these additions and our solid performance so far this year, we now expect to increase full year 2018 production by approximately 8% over 2017 levels.

As we assess the future, we continue to see significant opportunities for ARLP in both the international and domestic coal markets. Globally, increased coal-fired power generation, strong power demand, high natural gas prices and a lack of meaningful supply response continue to favor U.S. producers in the seaborne thermal coal markets. Fundamentals in the -- excuse me, fundamentals in the international metallurgical coal markets also remain positive and should provide continued opportunities for U.S. producers for the foreseeable future.

Domestically, as we enter the heating season, utility stockpiles in our markets have fallen significantly. Faced with depleted inventories, higher natural gas prices and expectations for weather-related load increases, domestic utilities in our markets are actively pursuing tonnage to build their open positions for 2019 and beyond.

Our efforts this year to return Gibson North to production, increase mining units at River View and improve overall productivity will allow ARLP to take advantage of anticipated strong global coal market dynamics in 2019. Benefiting from the full year impact of our 2018 capital projects, ARLP is now positioned to increase production in 2019 by 6% to 10% over our anticipated volumes in 2018. Longer term, with supported market conditions, we have the ability to further increase production by fully utilizing installed infrastructure at our Western Kentucky and Gibson County, Indiana mines.

In anticipation of the increased production I just discussed, ARLP has begun hiring and training the personnel required to support this growth. Reflecting these additional costs and higher year-to-date expenses, we currently expect full year 2018 segment adjusted EBITDA expenses to increase approximately 4.5% compared to 2017. As a result, ARLP is adjusting 2018 guidance ranges for net income to $415 million to $425 million and EBITDA to $730 million to $740 million. We remain upbeat about our investments in oil and gas minerals and gas compression services as the contribution to ARLP's year-to-date results from these investments has increased $12.9 million to $26.1 million compared to the 2017 period. Development activity by operators in our primary areas of investment is ongoing and we continue to anticipate these investments will contribute approximately $35 million to $40 million to ARLP's net income and EBITDA this year.

To fund our coal production growth, ARLP is increasing its full year 2018 guidance for capital expenditures or its Coal business to a range of $245 million to $260 million. Repeating what I said earlier, I'm extremely pleased with ARLP's performance through the first 9 months of 2018 and remain optimistic about our future. We are on track this year to achieve the most tons sold in our history. And with the projected increase in production next year, we accept -- we expect to set a new record for tons produced and sold in 2019. Our expectations for increased cash flows in 2019 should keep ARLP's distribution coverage ratio above 1.5x. This optimism and our ability to generate long-term cash flow growth gives us the confidence to deliver on our priority of returning cash to ARLP's unitholders. For the 2018 quarter, we continue to execute on this priority by, once again, increasing quarterly cash distributions and buying more of our units. We continue to believe ARLP's strategy of focusing on sustainable, long-term cash flow growth and returning cash to unitholders while maintaining strong distribution coverage and a conservative balance sheet will serve us well, creating value for our unitholders in the future.

Thanks to everyone for your time and attention this morning. This concludes our prepared comments. And now with the operator's assistance, we'll open the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question will be from Mark Levin with Seaport Global.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

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A couple of quick questions. The first, just -- it sounds like next year, you will -- you'll increase your production 6% to 10%. How did you -- Joe, how did you weigh that decision versus -- or the returns from that decision versus the returns of maybe buying back your stock or your units more aggressively?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [3]

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As we look at supply/demand for the markets where we are participating, we see that these are very attractive investments. I mean, we're -- the market pricing that we see is strong. I mean, it continues to provide very strong margins. We believe our margins next year will be comparable to this year, maybe a little bit better, depending on where prices actually end up for the year. So we're committed to maintaining and growing our market share and the market's giving us that opportunity. So we feel like we're in this for a long-term investment. Just because we're investing in those coal markets doesn't mean that we won't still continue to buy our units, though. So we're looking at all 3 prongs. We'll looking at investing in coal. We'll looking at investing in investments outside of coal. And we'll continue to buy back our units.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

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Got it. And then thinking about -- to 2019 and you just kind of alluded to margins that were maybe comparable to '18, if not a little better. From a CapEx perspective in '19, I realize it's early. We're not even at Thanksgiving yet. But is this sort of the new baseline for CapEx? Or are you accelerating some spending this year and it would tail off next year? How should we think about capital in '19?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [5]

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Now when you look at that capital, it includes growth capital. So as you think about maintenance CapEx, we're right in the middle of our planning process. So as we talked to you before, we're continuing to evaluate, looking at our East Kentucky mine and continuing production there. We would look at that as maintenance capital if we make that investment. So if that investment is made, then that would drive our maintenance cost -- maintenance capital number up a little bit in 2019. Absent that, it would not be that different than what we're looking at right now. So the capital number -- the increase this quarter was all growth capital and it's going to add to our EBITDA and add to our production. And we believe all that's sustainable.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [6]

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And Mark, as you alluded and as Joe mentioned, we're in the middle of our process right now. On the January call, as we always do, we'll provide an updated view on our longer-term maintenance capital on a per ton basis. So you can anticipate that coming next time we chat.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [7]

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Got it. And then 1 last question, then I'll let someone else jump in here. Pricing in the Illinois Basin for 2019, obviously, you guys were active layering on some new business, which is fantastic. What are you guys pricing coal for calendar '19? I think we see on DTC and maybe some of the other coal publications a $44, $45 number. Does that look right? Does the physical number look close to that? And then the second question would be, how does that price compare to the export netbacks you're getting right now? What does that price look like?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [8]

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Well, that's a -- you've got to look at customer by customer. So it's hard to answer that question on an average basis right now, especially since we're right in the middle of bidding on several solicitations. So I'm going to take a pass on trying to give you that number for competitive reasons. But as I mentioned, I think our overall average sales price will be equal to, if not higher, in 2019. That's overall consolidated. And I think one correction on the margins, really, for the increased production we're bringing on, those margins will actually be higher because they're incremental tons and they're at our lowest-cost operations. So we're going to be adding some lower-cost, higher-margin business in 2019. So overall, we think 2019 is shaping up to be an outstanding year for us.

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Operator [9]

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Next question today will be from Lucas Pipes with B. Riley FBR.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [10]

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I wanted to follow up first on the 2019 production guidance. And I wanted to ask specifically to what extent you believe this is unique to Alliance. Or do you think we're going to see maybe growth across the industry in the Illinois Basin?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [11]

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I do think it is unique to Alliance. There's 1 other operation that's planning to come into the market that you all are aware of, so there could be some additional production. We still believe that the total production for Illinois Basin in 2019 will be below demand when you factor in both the thermal exports and domestic demand. What we believe, if you look at 2017, '18 and '19, we are seeing utilities draw down their stocks so the deliveries have been lower than their actual consumption. So we see that both 2018 is coming in quite a bit short. Production is coming in short of that demand and so we're trying to fill that gap both domestically as well as internationally. As we look at our competitors, most of our competitors are already operating at their full capacity. We just had the benefit of capital that we've spent over the last 5 years to have excess capacity at our existing operations that is really -- capital is very, very low on an annual ton basis. So we don't see anybody talking about putting in new coal mines and neither are we with the 1 exception in East Kentucky, which is necessary if we want to maintain a position in that BTU low-sulfur market in Eastern Kentucky.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [12]

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Got it. That's very helpful. I appreciate that color. Maybe looking towards the export market. Obviously, you find additional contracts, the way I understand it, for 2019. And kind of just big picture, what's the appetite out there in the market for term business in the export market? And could you be doing more if you wanted to? Or would you be facing higher discounts, either on a sulfur level or for trading margins, et cetera?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [13]

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Most of our contracts are 1 year or less because the curve is backward-dated. What we've seen over the last couple of years and we believe will continue as you get closer in time, that curve blends out and we can get higher realizations. Again, most of our growth in the export market is coming from our low-sulfur Gibson County mines, and so we think that there's high demand for that product. So we continue to try to fill that need based on the demand of the customer base. It keeps encouraging us to bring on that volume. So we do believe that there is adequate demand for the tonnage we're bringing on. And we do believe that when we look at 2019 versus 2018, thermal exports will grow another 10% or so overall. And most of that will come from the Illinois Basin.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [14]

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Very interesting. Maybe to follow up on your larger contract book. What percent do you anticipate to have -- of your 2019 volumes, what percent do you anticipate to have fully priced by the end of this year for 2019?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [15]

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We're at 75% today. I can't, again, because we are pricing into the export market on quarter-to-2-quarter basis, most of that will [bidder] in, but there's still some domestic bids that are outstanding that could increase another 5% or 10%. It all depends on our success in those solicitations.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [16]

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Got it. Now I have one more, if you don't mind, and that's kind of going back to the Export business. There's been a fair bit of press about widening quality spreads. I think it relates more to ash than to sulfur. But if you have maybe a few thoughts to share on the topic and to what extent it does or doesn't affect you, I would very much appreciate it. That's it.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [17]

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Yes. There are some production regions where their BTUs are dropping or declining. And so with the transportation of the export product, the customers are looking for high-BTU coal. So the coal we have to offer, our BTUs are stable for the foreseeable future so that does not impact us. In fact, it's an advantage because we got some extremely high-BTU coal in our West Kentucky mines that we're now looking to see if we can't place in that international market, which historically net coal's down all domestically.

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Operator [18]

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(Operator Instructions) Next question will come from Nick Jarmoszuk with Stifel.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [19]

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Wanted to talk about the RFP environment. Wanted to see if you could talk about how competitive you're seeing the environment. And I know you guys commented on looking to grow market share. Is that based on the quality of your products? Or are you looking to build share on being aggressive with price? Just any color you can provide on how the market's looking.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [20]

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Yes. I think that because, as I mentioned earlier, the utilities have been pulling from their inventories, there's only so far they can go. And I think from the customers that we are targeting, you look at the strength of our balance sheet, that's an advantage that we have. And if these utilities are actually going to go out for 3 years, which some of them are, they're wanting to find a counter-party that they believe will be there for the full 3 years and the strength of our balance sheet helps us in that regard. So there are contracts that are coming up with customers who are opening positions this year in 2019 that give us an opportunity to increase volumes into those customers, whereas in the past, they've been fully committed to other suppliers and they would like to diversify their supplier base. And so we're hoping that we'll be able to compete and pick up some of that net market to grow our domestic book.

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Operator [21]

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Next question will be a follow-up from Mark Levin with Seaport Global.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [22]

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Just 1 more question, this time on the balance sheet. So I think, Brian, you referenced being roughly 0.7x. What is a good long-term level at which you are comfortable in terms of a gross leverage ratio? Where do you think the businesses should be over the longer term?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [23]

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Yes. Mark, we've talked in the past that if there was a very large, strategically important opportunity for us, we'd be willing to leverage up somewhat as long as within a reasonable period of time. We felt like we could bring it down to something in the 1.25 to 1.5x range long term, but it will be dependent on facts and circumstances.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [24]

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And the reason why I asked that because that's -- kind of what I remember was kind of in that 1.25 to 1.5x range. And sitting at 0.7x, is there any movement around or any discussion at the Board level? With the stock or the unions yielding roughly 10% or 10%-plus, almost 11%, that using some leverage maybe to buy back stock more aggressively or buy back units more aggressively just because they are, at least in my humble opinion, mispriced by the market. I think you referenced a 1.5 coverage ratio and fundamentals getting better and yet the units are still yielding 11%. So I'm just curious if leverage, even for a short period of time, would make sense in the eyes of the Board to go back and buy back stock more aggressively.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [25]

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We do have $100 million authorized at this point in time. We indicated in the release how much we had done through the end of the second quarter -- third quarter, I'm sorry. And since then, we have been in the market as well. We have worked with our Board to establish parameters under which we would be active. At this point in time, we do continue to believe that we will be purchasing markets. We agree with your humble opinion in terms of our unit price. So I don't know that we're prepared to step up and say we're going to go in and be extremely aggressive, but the program's in place and we're continuing to execute on it.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [26]

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I think it goes back to your earlier question as compared to what. And so we've continued to look for avenues to provide that long-term stable cash flow growth. And given that the opportunities and the size of the things we're looking at, that's been a factor in what level of investment we're making in our own units.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [27]

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And as we tried to articulate, Mark, just to reiterate, as Joe mentioned, our first capital allocation priority is to grow the long-term cash flows of our business, both within our core coal operations and opportunities in addition to coal. And then the second being with that long-term cash flow growth, focusing on returning cash to our unitholders. And we have been on a pattern of increasing distributions on a quarterly basis. And with the simplification and the ability to buy back units, we've got several tools at our disposal to execute on those priorities.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [28]

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No, that makes sense. I was just curious. And then the last question is just more for my own edification. When I'm looking at the cost increase in the Illinois Basin, I think you referenced some geologic issues at the Hamilton, which we know is a low-cost mine, and you also referenced some additional hiring. How should we think about those buckets, Brian, in terms of like what was the bigger contributor? Was it the issues at Hamilton? Was it additional hiring? And then just kind of a baseline from which to think about cost in the Illinois Basin in 2019.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [29]

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Yes. I think the biggest issue for the quarter were the challenges that we had at Hamilton. That was the primary driver on cost increases during the third quarter. The reference to additional headcount and training, we have begun that without question. But you'll probably see more of an impact on that side between now and the end of the year. Going forward, we do see the 6%-to-10% increase in production that we're currently anticipating. We are continuing to work through our planning process, Mark, so it may be a little bit early to say what the per ton cost will look like next year. But again, we'll be providing all that detail in January.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [30]

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And I think when you look at the third quarter, we did have 3 longwall moves.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [31]

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Yes.

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [32]

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So we also had a longwall move at Tunnel Ridge and we have one at Mettiki. So overall, again, this is looking at beyond the Illinois Basin. But when you look at consolidated, that had an impact. We've got one in the fourth quarter. We're going to have the benefit in the fourth quarter of additional volume because of -- we will see the full impact of adding that 10th unit and -- well, not the full, but a significant step-up of the 10th unit at River View plus the second unit at Gibson. So our sales tons and production should be up maybe 1 million tons in the fourth quarter compared to the third quarter. So even though our cost will be higher as we're training and bringing that on, we'll have volume that will offset that because these are 2 of our lowest-cost operations. And I believe once we roll that in at full capacity next year, and we only have -- I think we have, well, just in Illinois Basin, I would expect the cost to come in comparable, if not lower, in 2019 because of the added volume that we're bringing on at our low-cost mines.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [33]

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No, that's perfect. That answered my question. I was just -- it's a good kind of follow-on. Are you guys seeing any raw material or labor cost inflation? I know a number of other mining companies are beginning to kind of see the beginning stages of some inflationary pressure. Are you guys seeing any of that?

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Joseph W. Craft, Alliance Resource Partners, L.P. - President, CEO & Director of Alliance Resource Management GP, LLC [34]

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Yes. And that's factored into that 4.5%. So we are definitely seeing some impact of the steel prices rolling through our consumables. And our labor costs are up, benefit costs are up. So we're seeing some of that, but that's been factored in to what I've said to you previously today.

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Operator [35]

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Next question today will be from Walt Sosnowski with SRC Capital Management.

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Walter Francis Sosnowski, SRC Capital Management, LLC - Founder [36]

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For 2018 production volume and 2018 sales volume, I know we're just about done with the year here and I apologize. I may have missed this. What do you all anticipate for production volume in 2018 and sales volume in 2018?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [37]

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Yes. Well, we left our previous guidance ranges intact. So on the production side, we're anticipating 40 million to 41 million tons. And on the sales side, 40.3 million to 41.3 million tons.

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Operator [38]

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At this time, this will conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Cantrell for any closing remarks.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [39]

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Thank you, Brian. We appreciate everyone's time this morning as well as your continued support and interest in Alliance. Our next quarterly earnings release and call will occur in late January of 2019, and we look forward to discussing our fourth quarter 2018 results with you at that time as well as our outlook for the 2019 year. This concludes our call. Thanks to everyone for your participation.

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Operator [40]

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The conference has now concluded. We want to thank you again for attending today's presentation. And at this time, you may now disconnect.