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Edited Transcript of ARLP earnings conference call or presentation 26-Jul-19 2:00pm GMT

Q2 2019 Alliance Resource Partners LP Earnings Call

Tulsa Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Alliance Resource Partners LP earnings conference call or presentation Friday, July 26, 2019 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. - Chairman, President & CEO of Alliance Holdings GP LP

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Conference Call Participants

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* Daniel Walter Scott

Clarksons Platou Securities, Inc., Research Division - Analyst

* George Stien

Corre Partners Management, LLC - Partner & Senior Analyst

* Lin Shen

Hite Hedge Asset Management LLC - Analyst

* Mark Andrew Levin

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

* Matthew Wyatt Fields

BofA Merrill Lynch, Research Division - Director

* Nicholas Jarmoszuk

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

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Presentation

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Operator [1]

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Good day, and welcome to the Alliance Resource Partners, L.P. Second Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. At this time, I'd now like to turn the conference over to Mr. Brian L. 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, Ian, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its second quarter 2019 earnings, and we'll now walk through these results and discuss our outlook for the remainder of the year. Following our prepared remarks, we'll open the call to your questions.

Before we start, a reminder that some of our remarks today may include forward-looking statements that are subject to a variety of risks, uncertainties and assumptions 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. Definitions and reconciliations of these differences between non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP's press release, which is posted on our website and has been furnished to the SEC on Form 8-K. With these preliminaries out of the way, I'll start with a review of our results and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his perspectives on the markets and ARLP's outlook for the remainder of 2019.

We'll begin this morning with a look at our results from our coal operations for the 2019 quarter, which were impacted by numerous factors as noted in our earnings release this morning. Coming into the 2019 quarter, we expected to make up most of the 750,000 tons deferred from the first quarter of this year. Unfortunately, weather-related transportation issues persisted, causing further delays of approximately 500,000 tons. In contrast, the 2018 quarter benefited from the shipment of 1.4 million tons delayed during the first quarter of last year.

With coal sales volumes down 2.6%, coal sales revenues for the 2019 quarter also declined to $461.3 million compared to $475.9 million for the 2018 quarter. Lower coal sales volumes and prices also drove coal sales revenues down by 3.1% compared to the sequential quarter. Lower sales tons also contributed to higher cost per ton, which increased 4.6% to $31.11 in the 2019 quarter. In addition, cost per ton were impacted by longwall moves at Hamilton and Tunnel Ridge, adverse geology encountered at River View, higher labor expenses and a noncash actuarial increase to workers' compensation expense, due primarily to lower discount rates.

These factors as well as the seasonal impact of miner's vacation on cost per ton in the 2019 quarter also led segment adjusted EBITDA expense per ton higher by 6.7% compared to the sequential quarter.

Lower coal sales revenues and higher expenses in the 2019 quarter drove total segment adjusted EBITDA from our coal operations down to $154.2 million, a decrease of 12.8% and 16.5% compared to the 2018 and sequential quarters, respectively.

Reflecting strong performance to start the year, ARLP's coal operations posted increases to all major and operating financial metrics during the first half of 2019. Compared to the first 6 months of 2018, coal sales and production volumes increased 3.3% and 5.8%, respectively, during the 2019 period. Increased coal sales volumes and prices led coal sales revenues higher by 4.2% to $937.3 million for the 2019 period, while segment adjusted EBITDA from coal operations also increased to $338.8 million.

Turning now to our minerals segment. Oil and gas royalties and lease bonuses contributed total revenues of $12.4 million during the 2019 quarter. Including the equity income from our AllDale III limited partnership investment, ARLP's minerals segment delivered segment adjusted EBITDA of $11.1 million for the 2019 quarter, which compares to $4.7 million in the 2018 quarter.

We continue to benefit from drilling and completion activity on our acreage as production volumes and segment adjusted EBITDA increased 8.7% and 21.5%, respectively, compared to the sequential quarter.

During the first half of 2019, our minerals segment contributed total revenues of $23.2 million, while segment adjusted EBITDA, excluding the gain related to our AllDale acquisition earlier this year, increased to $20.2 million compared to $8.2 million during the first 6 months of 2018.

I'll close my comments with a quick look at the balance sheet. We ended the 2019 quarter with liquidity of approximately $561 million and leverage remains conservative at 0.88x ARLP's total debt to trailing 12-months adjusted EBITDA. In anticipation of completing early next month the recently announced acquisition of mineral interest from Wing Resources, we are evaluating options to extend our current revolving credit facility and potentially access the debt capital markets to term finance ARLP's investments this year in oil and gas properties.

In evaluating these options, we believe our strong balance sheet provides ARLP with several attractive opportunities to consider. We continue to believe that our financial strength is a strategic advantage, providing ARLP with flexibility and capacity to execute our plans and take advantage of future opportunities.

With that, I'll now turn the call over to Joe. Joe?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [3]

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Thank you, Brian. Good morning, everyone. Since our April earnings call, the thermal coal markets, both domestic and export, have fallen further than we anticipated. The combination of persistent transportation challenges in the United States, which disrupted export shipments, and excessive stockpiles in Europe, moderate springtime temperatures and competition from low natural gas and LNG prices have pressured coal demand and prices.

On the April call, we reported a need to reduce expectations for export sales and production growth plans in the Illinois Basin for 2019 and target full year results at the lower end of our initial guidance ranges for coal sales and production volumes, revenues, net income and EBITDA.

Today, market conditions are fluid and volatile, creating uncertainty throughout the entire coal industry. In light of this uncertainty, ARLP is lowering its current 2019 full year guidance as outlined in our earnings release this morning. And to reflect the range of options currently under evaluation, we are also widening our ranges for coal sales and production volumes. Even with lowered expectations, at the midpoint of our revised guidance, 2019 coal sales and production volumes will be at record levels for ARLP, which is celebrating its 20th year as a publicly traded partnership.

API 2 has been on a roller coaster over the last 2 months, hitting a low during the second half of June. Since the beginning of July, API 2 pricing has rebounded. The month has risen 18%, Q4 is up 13% and calendar 2020 is up 8%. Due to this market uncertainty, our revised guidance reflects export sales of 9 million tons for the year, 2 million tons less than what we were targeting last quarter. Production has been adjusted lower by the same amount as we delay our Illinois Basin ramp.

Looking offshore, ARLP continues to believe future demand fundamentals for international coal markets are favorable, and we expect continued improvement in the forward price curve, creating the possibility for additional contracting this year as these markets recover.

Domestically, the recent heatwave in the Eastern U.S. has also increased coal burn this month. We have begun to see some supply response both in the U.S. and internationally, and anticipate additional reductions are likely as producers continue to assess their options and determine an appropriate path forward in this environment.

We anticipate pressure on high-cost producers will intensify, potentially creating opportunities for ARLP to step in to fulfill customer contracts as supply comes off-line. As we evaluate the myriad of options in front of us, we are fortunate that our low-cost operations have ARLP better positioned than most to benefit from the uncertainty created by these volatile markets.

Anticipating the timing of when market conditions may improve or when opportunities may become actionable is difficult. We are hopeful that market reaction will be quick and that our current guidance will be conservative.

As the year progresses, we will continue to monitor market conditions and evaluate appropriate production levels for ARLP. In doing so, as we did in the 2015-2016 timeframe, ARLP will be focused on matching our production to market demand with an eye towards maximizing our lowest-cost operations as the situation unfolds.

Looking to our oil and gas minerals segment, we continue to be pleased with the performance from this part of ARLP's business. As Brian mentioned earlier, ongoing drilling and completion activity on our existing acreage is driving consistent growth in the contribution from this platform to ARLP's total financial performance. And our expectations for 2019 full year results from these assets remain intact.

We are committed to building ARLP's oil and gas minerals business and continue to see attractive opportunities for long-term growth, as evidenced by our announcement last month for the acquisition of an additional 9,000 net royalty acres in the Midland portion of the Permian Basin, enhancing ARLP's already strong position in this attractive part of the Permian.

We're on track to close this transaction early next month and expect existing production on this acreage will increase the EBITDA contribution guidance from oil and gas minerals to ARLP's 2019 financial results by approximately 10% to 15%, net of transaction expenses. With significant drilling, completion and permitting activity underway and on the horizon for the Wing assets and on our existing acreage, we anticipate this new business platform will deliver meaningful growth in cash flow for ARLP in 2020 and beyond and long-term value for our unitholders.

While there are a number of challenges in running ARLP today, we also see opportunities. We are focused on both successfully managing the current difficulties facing the coal industry and positioning Alliance to take advantage of opportunities that develop.

We are confident that ARLP will generate distributable cash flow in 2019 to support the announced increase to our quarterly unitholder distribution while maintaining a comfortable coverage ratio. Longer term, we remain committed to investing in our business to create sustainable cash flow growth and deliver on ARLP's objective of returning cash to our unitholders.

This concludes our prepared comments. And now, with the operator's assistance, we will open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mark Levin of Seaport Global.

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

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Just a quick question as it relates to the distribution. So this morning, the units are yielding about 12.5%, which might imply the market is thinking at some point along the way that conditions won't get better and there would be or could be a distribution cut. When you guys -- if you go back to early '16, it looks like the coverage got to about -- around 1x and then that was the point at which you guys decided to cut the distribution. Maybe you can give us some thoughts about -- obviously, you've raised the distribution by $0.005 this morning. But maybe you can give us some thoughts about how you view the distribution into -- later this year and into 2020 if market conditions don't improve.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [3]

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Yes, so essentially, when we -- when the Board makes a decision to increase the distribution, they do so with the belief that it is sustainable over some period of time. Because we look at our current year's results as well as what we're projecting over the next 5 years, we feel like that is a sustainable rate for our distribution with, again, safe distribution coverage. If market conditions change and if our view of the outlook does in fact reverse from where we're seeing the world today, then -- excuse me, the Board would act appropriately. So they would take action to possibly stabilize distributions. Based on our environment today and what we're looking at, we believe that it is sustainable. So I don't see a need to talk about anything that's lower than where the current rate is.

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

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Fair enough. I'm sorry go ahead.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [5]

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This is Brian. Just to clarify, too. In the 2016 environment, the actions we took around our distribution were really driven more by the bank markets at that point in time. We had always believed that our distributions were sustainable. But given the large bankruptcies that were occurring at the time, the bank markets were very skittish and we wanted to make sure that we retain control of our distribution policy and didn't cede that to the bankers. So there were a variety of factors that influenced our decisions several years ago.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [6]

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That's a fair point. So it's not like you're trying -- if the distribution went to, let's say, below 1x, then all of a sudden that you would necessarily -- that's a trigger point for you guys, that's not a fair statement. Is that right?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [7]

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It's really looking forward and our belief in the sustainability of the distribution that's in place.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [8]

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Got it. Got it. Got it. And then just a question on the export market. So I think you guys mentioned today that you will go to 9 million tons or so. What's the math? Or how do we think about if, in fact, you get to 2020 and API 2 prices are at a point where it's still very difficult to contract tons, is there a way to maybe think about what the contribution from exports has been in 2019, so that we can kind of get a good baseline for what it would be in '20 if it's either flat or worse or what have you?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [9]

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Yes, I think what we've seen in the market, we believe, was an overshoot. I think that, that has been evidence of the fact that in June, prices went to levels that were obviously bottomed out because we've seen this rise since July and nobody was selling into that market in the -- with the June price points. So we've seen that improvement. We think that will continue. Again, just based on what the cost levels are around the world for the different basins that will be selling into that market. The back half of this year still has a lot of tons committed. And there's still some transportation disruption that it's hard to determine what will in fact happen, how fast this curve will respond to reasonable profit levels for producers to produce into this market. So we do think longer term that, where we were a quarter ago to where we could participate in the 11 million ton level, that we should be able to get back to that, but the pricing is going to have to reflect that. We still don't see any major supply investments worldwide, yet we continue to see coal-fired power plants being built and we do see that -- the increased demand coming onto the market. So we continue to feel bullish about the longer-term effect of the international market.

But given the reality of where the price curve is today relative to our other opportunities, that's the main reason why we're cutting back that volume. We could transact today and still make money. It's not an attractive price point compared to where we've been, and it's really not an attractive price point to where we think we can sell some tonnage this year in the domestic market, either to [AFPs] that will be coming open or with certain producers that we're talking to today to where we may be selling coal to producers to put on their contracts as if they consider rationalizing some of their production.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [10]

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That makes sense. And then, Joe, last quarter, you talked about, like, given where market conditions were at the time, you mentioned the 2020 margin per ton might be down. I think you mentioned $1.25, and that was where -- when export pricing was also very weak. Has your view changed about that sort of $1.25 down '20 versus '19 as you kind of fast forward 90 days or so?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [11]

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Not really. So our pricing is down a little bit. But some of the things we're looking at production-wise could increase some of our lower-cost production and reduce some of our higher-cost production. So we may be able to be at that same range. We're planning at this 10 seconds. It's a little early for next year, but we do see a view to get to that same level even with the prices that have dropped since the last call.

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Operator [12]

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Our next question comes from Daniel Scott of Clarksons.

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Daniel Walter Scott, Clarksons Platou Securities, Inc., Research Division - Analyst [13]

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I'm on a cellphone, so apologies. But Joe, you mentioned you're looking at a myriad of options in the market today, and obviously, there's a number of distressed companies in the domestic coal sector right now, both in and out of your basins. Where would you rank potential asset acquisitions versus capital return policy versus further diversification into minerals?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [14]

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I'll take the last one, first. I think on the oil and gas side, we're very pleased with what we've been able to acquire over the last several years, and in particular, in 2019. We see a lot of opportunities in that space. So we're continuing to evaluate that. There are several packages, if you will, that we believe will be coming on to market. So those are things we will be looking at.

On the coal side, I would say that I've been in this business a long time, and there's probably more strategic discussions going on in the industry today than I've seen in my career. So that creates a lot of opportunity. Trying to determine how to take advantage of that opportunity is a challenge, but I think that with a lot of the major guys really focusing on met coal versus steam coal, that's just changed the dynamics a bit. And I think that we're going to evaluate those things. And the Peabody-Arch transaction, first time that I've actually seen in some time an actual joint venture arrangement in the coal business. You see a lot in the oil and gas space, but you don't see it much in the coal business. So that's got people talking. So there's a lot of opportunity there. So it's got -- we've got teams looking at that and evaluating that. It's hard to predict if anything will come of that, but there's a lot of options on the table right now.

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Daniel Walter Scott, Clarksons Platou Securities, Inc., Research Division - Analyst [15]

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I believe you said in the past that your focus in such a market would be limited to basins you're already operating in. Is that still the case?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [16]

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Yes, I don't think -- and we're focused strictly in East of the Mississippi. We would include metallurgical coal in that venue though. So that could be an area where we could see some growth as well. We see the value in having some exposure to the met markets ourselves. So -- but that would still be in the same regions where we're operating today.

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Daniel Walter Scott, Clarksons Platou Securities, Inc., Research Division - Analyst [17]

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Okay. Great. Then lastly for me, is the cadence of your committed tonnage for next year, is that running about typical pace? A little over half? Are you lagging? Where are you running right now on that?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [18]

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We're actually ahead of where we were at this time last year. So this time a year ago, we were 2.5 million tons less than where we are today, I believe, something like that.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [19]

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Yes, Dan, we currently have almost 24 million tons committed and priced for 2020 at this point in time.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [20]

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And that is above where it was a year ago.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [21]

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Yes.

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Daniel Walter Scott, Clarksons Platou Securities, Inc., Research Division - Analyst [22]

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Okay. So I was going to say I've got one last thing that pops in the head then. With roughly 9 million tons of export business this year, and you did say a little while ago that you could sell -- you could place it today and make money, just not the kind of margins you would expect and could possibly get domestically. If the market stays weak on the export side, is there a concern about being able to reabsorb that tonnage domestically? Or would mine plans change? How would you kind of look that distressed kind of environment?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [23]

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Again, I think, if that market stays distressed, then that's going to put pressure on the higher-cost producers. They're our competitors today, and I think that will open up opportunities that will allow us to do some transactions without -- to where they will be bringing up production, they would have contracts that would need to be serviced, that type of an arrangement. So we feel right, again, at this 10 seconds, we see our volume next year at least where it is today, even in a flat export market, we do -- in the -- it's a flat API 2 price curve, let's say, or where the API price curve is today. Now, we believe that price curve is going to go up, as I said earlier. So we're hopeful that we will be able to maintain our export, just not growing back to where we were the first half of this year, but that will be dependent on the API 2 price curve. As far as the -- what the other producers do will be the other unknown right now. But I believe there will be action by others that will bring the supply-demand balance in place, where we can maintain and produce tons at the level we are this year, if not grow it.

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Operator [24]

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(Operator Instructions) Our next question comes from Matthew Fields of Bank of America Merrill Lynch.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [25]

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Just want to follow up on that last question about kind of being able to take exports down, but still maintain sales, I guess, because of increased domestic sales. Do you primarily see yourself winning contracts and share over from distressed -- the suffering producers in your basins? Or do you see an opportunity to maybe win some contracts from PRB producers that are -- you have an enormous cost advantage of, especially into the southeast or things like -- like what are these domestic opportunities that are better than exporting?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [26]

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I think that there could be rationalization by high-cost producers that will be cutting back supply, and that they will be giving up market share if they do that. So I'm not suggesting that we're seeing a growing domestic market. I'm suggesting that, yes, we will either compete with them and we will bid lower and win that business because we got low-cost operations or there will be some form of supply response by the high-cost producers that will free that market share up for the low-cost guys, which we would be one of those in being able to take advantage of that.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [27]

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Do you worry that that the companies that are going through bankruptcies right now, Blackhawk, Black Jewel, et cetera, are pricing irrationally because of their financial distress and actually having the opposite effect?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [28]

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They're not really competing with us in the thermal coal space. Black Jewel is talking about -- they're trying to decide whether they're going to do 11 or 7, and Blackhawk, I think, is more focused on the met side of the business. So they don't really influence that outlook that I just mentioned. I think it's going to be the other...

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [29]

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It's a lot. [Big cloud, big opportunity, Cameron], right, there's a lot.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [30]

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Yes, but your question about PRB impacting the markets in the East, I don't really see that happening. I just -- you're seeing the significant reduction in production in PRB. If it was going to happen, it would have happened this year. The utilities have decided how much PRB they're going to buy East of the Mississippi, and that appears to be pretty constant. We do hear some PRB buyers in the East talking about buying more Eastern production. So we see it more of the other side than PRB coming into the Eastern markets.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [31]

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I mean, with transportation cost, you should have a huge cost advantage, especially like into Georgia and Florida, where maybe you could get some more penetration.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [32]

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We could. Again, I'm not counting on that, I'm not counting on the domestic market mix changing and I'm not counting on the domestic market growing. I'm just saying, we can absorb -- if there's no export market or the export market stays flat, there are opportunities for us to sell coal domestically that would be more attractive than selling into the current price curve for API 2. I think that's what you were asking earlier. And we would get that by either, a, bidding at a lower point. If these other high-cost guys decide they want to compete, then we could bid at prices where it's below their cost, but still be profitable for us. Or we can work out a deal, where either they decided to throw in the towel or may just decide to hold on, but buy coal and put it on their contracts.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [33]

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Okay, now that's helpful. I appreciate that color. On the Wing acquisition, you guys said 10% to 15% increase in mineral royalty EBITDA from Wing. Is that right?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [34]

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Net of transaction costs, correct.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [35]

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Okay. So that's -- on $37 million to $47 million of EBITDA, that's about $4 million to $7 million of EBITDA. Is that the right way to think about it?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [36]

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That's fair, yes.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [37]

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And that's for '19.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [38]

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That's for '19, and then we see both on our existing assets today as well as the drilling and development that's occurring on the Wing assets, we see line of sight to attractive volume growth heading into the next 18, 24 months.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [39]

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Okay. Because that's -- I was about to say that's like a 20 to 40x on '19 EBITDA, imagine that's a lower multiple when you take some forward projections on that.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [40]

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There is also transaction cost embedded in that. If you exclude those, it's a different dynamic.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [41]

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Okay. All right. Great. And then just you mentioned financing, which I just wanted to hear this again, because I don't think I heard correctly. You're going to finance the Wing acquisition with a term loan in the third quarter for closing?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [42]

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No, no. We have plenty of capacity available on our existing revolver that will allow us to close the transaction. As we look forward, however, we are evaluating options and the bank and the debt capital markets. It will extend our existing credit facility and potentially term out some of the oil and gas activity we've done this year.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [43]

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Okay. All right. Thank you for that clarification. And then lastly, understand the push to acquire more oil and gas properties and potential coal opportunities that come your way. What are you comfortable levering up the balance sheet to, in terms of like a leverage total or a net leverage ratio, in order to achieve these strategic goals?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [44]

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I don't think you would see us lever to a point where, in our view, we would be putting our franchise at risk. We have generally been operating at 1x or less. For a large strategic transaction, we may be willing to go up above that as long as we were comfortable that we had a path to bring it back down into 1.25 to 1x over a reasonable period of time. But you wouldn't see us go and lever up significantly to chase a deal.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division - Director [45]

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Okay. Great. And if there was a significant opportunity, whether it's in oil and gas or coal, and you would lever it up above where you're comfortable, would cutting the distribution temporarily kind of get back to that?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [46]

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Let me rephrase that. I would not lever it up above where we're comfortable. We may lever up above where we have traditionally been operating. But we would only do so if we had a view that we can bring that back down to levels that are within our historical past within a reasonably quick period of time.

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Operator [47]

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Our next question comes from Nick Jarmoszuk of Stifel.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [48]

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On the 2020 domestic book, indicatively, can you give us a sense for is that pricing up or down year-over-year relative to the tons that it's replacing?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [49]

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It will be down a little bit. So as -- I think it was Mark mentioned earlier, we had talked about...

(technical difficulty)

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [50]

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I'm sorry.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [51]

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About a $1.25 year-over-year, and that may be a little bit wider since our last call. But that factors in both export and domestic. So -- but it's going to be down compared to this year, more than likely.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [52]

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And in the prepared remarks, you commented that long-term positive fundamental demand for export markets long term, and you're seeing more contracting opportunities. Can you talk about the contracting opportunities that you are seeing? What markets they are going into? How you think about the netback economics of those opportunities?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [53]

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I mean, we sell to...

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [54]

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We sell to 31 different countries. I mean, predominantly, we're going into -- Europe, Africa and India is where, I think, 88% of our total volumes go into. The remaining 12% is fairly spread. That's...

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [55]

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Yes. So there are contracting opportunities in Latin America, there are contracting opportunities in India, there are contracting opportunities in Eastern Europe and in Northern Africa. So there are some opportunities for us to lock in volume. Sometimes the pricing is set quarterly, some off indexes. There are different ways to structure those contracts. But yes, so there's -- the ones that I was mentioning specifically was just looking ahead, in 2019, there is a possibility that we could be selling that volume, and maybe even more depending on how fast the price -- prices rebound. That's the only point I was trying to make.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [56]

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So with the major markets of Europe, Africa, India, can you give us a sense for how the mix of export volumes has trended over the past couple of years? Are you getting more exposure to Africa and India? Or is the mix basically stable over the past several years and going forward?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [57]

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No, no, there has been more exposure to those countries away from Europe -- away from Western Europe.

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Nicholas Jarmoszuk, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [58]

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Okay. And then last one. In terms of the API 2 price, what sort of range of price, given that there are some moving parts, the sulfur discount and freight rates, what range do you need to be breakeven on a netback basis?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [59]

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That varies by operation. So -- and we don't like to look at breaking even.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [60]

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Breakeven.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [61]

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Right. So we really are trying to price our product in the export market closer to where the API 4 would be relative to API 2. So earlier in the year, we were looking at numbers in the 80s -- mid-80s. We could transact at 70. We'd like it to be closer to the mid-80s than those low 70s. So somewhere in that range would be opportunities that we could potentially sell into.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [62]

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Yes, I mean, we could be profitable at the lower end of that range, but not at margins that we would otherwise like.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [63]

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Yes.

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Operator [64]

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Our next question comes from George Stien of Corre Partners.

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George Stien, Corre Partners Management, LLC - Partner & Senior Analyst [65]

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I wanted to follow up on the consolidation comments you guys made, I think in particular, the opportunity set. You guys are probably the -- or you guys are the biggest Illinois Basin producer, the second largest is clearly in some -- having some issues. I just wanted to kind of check or at least kind of understand how you think about kind of any potential anti-trust issues as you guys think about consolidation opportunities. Or conversely, would you guys be targeting NAPP instead?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [66]

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No. I have a hard time understanding how there could be any anti-trust issues in the markets we have today and with the way natural gas is priced. It's setting really the market in large part. I think there's plenty of competition for coal, thermal coal in particular, to where our customers have alternatives. So I think everything is back to how you define markets. And I think if you define them with the true competition that we feel every day, I think it would be a very, very hard argument for the government to make that the markets would be concerned about a consolidation impact in the coal industry. But yes, we will see with the -- how the government reacts with the Peabody deal. But just my opinion is, I don't see how they can step in and make a very solid case that there's anti-competitive impacts by that consolidation. And I think that's unlikely with the Trump administration. And if there would be a change, it's really hard for me to see how the Democrats could make a case when they're trying to put more constraints on the coal industry. So I would think that they would welcome the consolidation effort as opposed to trying to continue to have coal be -- to want to step in and interfere with that. That's just my view.

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George Stien, Corre Partners Management, LLC - Partner & Senior Analyst [67]

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Got you. Appreciate that. Secondarily, just in terms of kind of diversification, is there a bias between kind of NAPP opportunities and the Illinois Basin as you kind of evaluate the M&A landscape?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [68]

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No, there is not a bias.

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Operator [69]

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Our next question comes from Lin Shen of Hite.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [70]

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I just want to clarify, for the Wing acquisition, so what is your expectation for 2020 EBITDA based on the current assumed price?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [71]

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We haven't provided guidance for 2020, Lin.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [72]

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So the $4 million to $5 million is the annual run rate for 2019. Is that right?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [73]

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No, no. The transaction didn't occur on January 1. So that will be -- no, it is not a full year run rate.

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Lin Shen, Hite Hedge Asset Management LLC - Analyst [74]

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Okay. So [that] was only for the deal closed for the 2019, okay. That makes sense. And also, you mentioned that natural gas price is low. So if we think about the current natural gas price, $2.20, $2.30-ish, what is the like price parity like or equivalent Illinois Basin coal price you're seeing now if they want to price for their coal when they can buy gas like $2 -- $2.20? Sorry.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [75]

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Well, I think, Lin, for the people that have coal-fired power plants that are consuming Illinois Basin coal today, they're not making a gas-versus-coal decision on a daily basis. So in order for them -- within their particular generation mix, it does influence it, but it's further away from the Illinois Basin. The further transportation you go, more the gas has an impact, and we've seen that with some reduction in demand. This year, it's strictly for gas. But for those utilities that have coal plants and are committed and they still need to have a large percentage of their generation be coal-fired, it does have some influence, but it's not as if it's going to be a day-to-day call on dispatch based of 2/3 of gas. So it's more of a market impact broadly speaking than it is micro.

So if we're seeing -- we'd like to see it be more $2.70-plus because that provides the opportunity further away in the southeast, say. But, yes, I think if utilities thought that gas would be at $2.30 forever, that might change some of their plans to build new gas plants. But based on the capacity that exists today, coal still has to be in the mix, in the mid-20s percent market share, even higher than that really in the regions where we compete. In our markets, you're over 50% in some of these markets, close to 60% in some of these markets so.

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Operator [76]

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Our next question comes from Mark Levin of Seaport Global.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [77]

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Yes. Great. Just two quick follow-up questions from earlier. When you think about your EBITDA guidance for 2019, and maybe if you were to carve out oil and gas, is there any way to get an idea for how much the export coal business is contributing to your overall coal EBITDA?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [78]

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Well, for the guidance, if you look at the guidance that we got for 2019, we got -- we do have 1 million tons anticipated, roughly, or 1.250 million tons to be sold in the export markets. And those are at prices that are reflective of the Q4 price curve. So they're quite a bit lower than what the domestic price is. And then we'll be looking to determine whether -- so we'll be looking to determine whether we're going to want to sell into that export market or whether some of these other transactions will come to bear, where we can potentially sell on other people's contracts. If we can sell on other people's contracts, that's what we would do, and you would see some improvement in the midpoint of the EBITDA that's in our guidance for 2019.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [79]

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Got it. I guess what I was after is, if you took the midpoint of let's just call it $645 million of EBITDA, you back out the oil and mineral expected contribution in the -- whatever, low 40s, you're kind of around $600 million. And then if you took that $600 million number, and you said, okay, well, 5/6 of it was domestic and 1/6 of it is export, is that a bad way of thinking about the mix in terms of contribution?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [80]

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I mean, you got to look -- we're not -- if you look at what we have left, as to what the influence could be, it could be up to $10 million more than the midpoint if we elect not to sell in the export market, if that helps answer your question.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [81]

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Got it. Got it.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [82]

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We're really focused on where we are from here going out to the rest of the year. So I think there's potentially $10 million of upside if we don't sell in the export market, and there's some downside if the price curve changes.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [83]

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Got it. I was just after it because I think there are definitely people out there that fear that the export thermal market in 2020 is going to be so terrible that your ability to generate any EBITDA from the export business is going to be so severely constrained. So I was just trying to just at least frame what domestic EBIT -- coal EBITDA looks like versus export EBITDA, that was the thought process at least.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [84]

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Okay.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [85]

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Anyway, I'm sorry.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [86]

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If we have the persistent -- I mean, what I've tried to say earlier, and maybe I didn't make it very clear, if we have a persistent export market that does not improve, then that volume pushback in the domestic market is going to put pressure on the high-cost guys. And I think high-cost guys will go out of business or decide to hold their production back. And then that will provide us to have an opportunity to sell in the domestic market that we will be able to pick up and get that market uplift. That gives you that balance to where year-over-year, we feel like our earnings will be stable whether we're in the export market or the domestic market. I mean, they tie together in some respect.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [87]

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Yes, neither market operates in a vacuum, Mark.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [88]

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Absolutely. Of course.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [89]

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Lever gets pulled on one side, it can get pushed on the other. And as we assess our opportunities, we're always looking at where can we realize the highest and best value for our product as we compare those alternatives.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [90]

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Absolutely.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [91]

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And again, I think what everyone needs to understand is the demand internationally is growing.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [92]

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Right.

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [93]

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So we're seeing growing demand internationally. No increase in supply. We believe that that will -- the assumption of seeing export prices stay where they are or going back to where they are in June is just a very, very, very conservative assumption. I can understand why people may want to think of it that way. But I would just encourage them to look at the fact that there is a demand that is stable, if not growing, internationally, and the hedges are coming off. And those customers want that coal, they're going to have to pay a price that incents the producers to produce coal and sell into that market.

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [94]

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There's no question that the recent markets have been challenged, but we absolutely view these circumstances as cyclical and not structural. And as we look forward, these structural supply-demand fundamentals are favorable, and we expect we'll be able to take advantage of those.

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [95]

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Brian, maybe I'll ask it another way. You probably don't want to answer it, but I'm going to ask it anyway. Any way to say how much EBITDA has come from your exported tons so far in the first half of the year?

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Brian L. Cantrell, Alliance Resource Partners, L.P. - Senior VP & CFO of Alliance Resource Management GP, LLC [96]

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I'm sure we could calculate that, Mark, but I will be honest, I'm not assessing it on export...

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Mark Andrew Levin, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [97]

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On that type of basis. No, I got it, that's fair. Yes, that's fair. I was just curious because I was just, again, just trying to frame it. I understand the markets are completely interrelated.

Last question for me is about the Illinois Basin pricing. So maybe you can characterize, if you were to go out into the market today, calendar 2020 -- I realize the gas isn't terrific at the moment, the weather hadn't been terribly cooperative for a while. But if you wanted to go contract in 2020, where would you be doing it, around what kind of price range in the Illinois Basin?

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Joseph W. Craft, Alliance Resource Partners, L.P. - Chairman, President & CEO of Alliance Holdings GP LP [98]

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Since we are in that market, it's pretty -- it's hard to give you that -- an answer to that question for competitive reasons.

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Operator [99]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Brian L. Cantrell, Senior Vice President and Chief Financial Officer, 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 [100]

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Thank you, Ian. 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 be scheduled for late October, and we look forward to discussing our third quarter 2019 results with you at that time. This concludes our call. And again, thank you to everyone for your participation.

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Operator [101]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.