Executive Summary / Key Takeaways

• Grid Reliability Trumps Energy Transition Narratives: ARLP is positioned to benefit from a fundamental shift in U.S. energy policy, with the Trump administration's executive orders explicitly supporting coal plant extensions and grid stability. This creates a durable demand floor that contradicts the consensus view of coal's imminent demise, as evidenced by PJM capacity auction prices increasing tenfold and 10.6 GW of previously retiring coal plants now likely to operate beyond 2030.

• Operational Excellence Meets Policy Tailwinds: The company's Illinois Basin operations deliver industry-leading costs at $34-36 per ton, while Appalachia's challenges at Tunnel Ridge and Mettiki are resolving through strategic longwall moves and automation investments. This cost discipline, combined with $541.8 million in liquidity and 0.6x net leverage, provides financial flexibility that pure-play coal competitors lack.

• Diversified Cash Flows Reduce Commodity Dependence: Oil and gas royalty volumes hit record levels in 2024 and continue growing, while coal royalties surged 54.5% in Q3 2025. These royalty streams, plus Bitcoin mining and strategic investments in power generation infrastructure, create multiple levers for cash generation beyond coal sales.

• Asymmetric Risk/Reward at Current Valuation: Trading at $24.25 with a 10.7% dividend yield, 5.53x EV/EBITDA, and 12.8x P/E, ARLP offers bond-like income with equity upside. The payout ratio appears elevated at 142.86%, but this masks the underlying free cash flow strength and management's commitment to maintaining distributions while funding growth.

• 2026 Volume Inflection Point: Management has secured 29.1 million tons committed and priced for 2026, up 9% quarter-over-quarter, with potential for 2 million tons of additional volume growth as Tunnel Ridge enters favorable geology and River View's new portal comes online. This volume acceleration could drive margin expansion even as legacy pricing rolls off.

Setting the Scene: The Coal Producer That Refused to Die

Alliance Resource Partners, L.P. traces its origins to 1971, but the modern entity emerged in May 1999 as a Delaware limited partnership, acquiring substantially all coal production and marketing assets of Alliance Resource Holdings. This historical foundation matters because it established ARLP's core competency in the Illinois Basin, a region where geological conditions and operational expertise create sustainable cost advantages that competitors cannot easily replicate.

The company operates as a diversified natural resource partnership, generating income from coal production and marketing, oil and gas mineral royalties, coal royalties, and ancillary investments. This structure is crucial: while pure-play coal miners face existential questions, ARLP's royalty segments provide non-operated, high-margin cash flows that buffer against commodity cycles. In Q3 2025, these royalties contributed $44.8 million in segment Adjusted EBITDA, representing 28% of total coal segment EBITDA.

Industry dynamics have shifted dramatically. The consensus narrative held that coal would steadily decline as renewables and natural gas displaced baseload generation. However, two forces have intervened. First, the rapid expansion of AI data centers and domestic manufacturing is driving unprecedented electricity demand growth—the White House now forecasts 16% demand growth over five years, triple prior estimates. Second, grid reliability concerns have forced policymakers to confront the intermittency problem of renewables, creating political support for preserving coal capacity. This structural change transforms ARLP from a melting ice cube into a critical infrastructure provider.

ARLP's competitive positioning reflects this reality. As the second-largest coal producer in the eastern U.S., the company holds a 15.06% market share, trailing Peabody (BTU)'s 26.53% but operating with superior margins and balance sheet strength. The key differentiator is cost structure: Illinois Basin operations produce at $34-36 per ton, well below Appalachia's $60-62 per ton and materially below Peabody's blended costs. This cost leadership isn't accidental—it reflects decades of geological knowledge, operational refinement, and strategic infrastructure investments.

Technology, Operations, and Strategic Differentiation

The Illinois Basin operations represent ARLP's crown jewel. In Q3 2025, this segment sold 6.6 million tons at $51.03 per ton, generating $105.4 million in Adjusted EBITDA despite a 9.94% price decline. The segment's Adjusted EBITDA expense per ton fell 6.4% year-over-year to $35.37, driven by increased production, reduced longwall move days at Hamilton, and improved recoveries at River View. This cost reduction is structural, not cyclical, reflecting completed infrastructure projects that will benefit operations for years.

Automation provides the next leg of competitive advantage. The Hamilton mine's new automated longwall shields, operational immediately after an August 2025 longwall move, are expected to enhance productivity, reduce face personnel, and minimize maintenance demands. This isn't mere cost-cutting—it's a step-change in operational efficiency that competitors with older equipment cannot match. The River View complex's Henderson County mine achieved a key infrastructure milestone with a new portal facility in late August 2025, with equipment and personnel transitions planned for early 2026 to access better mining conditions. These investments position the Illinois Basin for volume growth without proportional cost increases.

Appalachia operations tell a different story—one of temporary disruption giving way to improvement. Tunnel Ridge's challenging geology has plagued results for several quarters, but the longwall move completed in mid-July 2025 puts the mine in "much more favorable mining conditions moving forward." Q3 2025 results already show progress: Appalachia Segment Adjusted EBITDA increased 44.2% year-over-year to $54.1 million despite a 13.3% volume decline, as expense per ton fell 11.7% to $57.74. Management expects Tunnel Ridge to add 750,000 to 1 million tons of volume in 2026 as favorable geology translates to higher production.

The Mettiki mine faces specific geologic issues in Q4 2025 that will raise costs temporarily, but management emphasizes this is not systemic. The mine has already moved to a new longwall panel with positive early results. This demonstrates operational transparency and realistic guidance—management isn't smoothing earnings but rather signaling temporary headwinds that will resolve, allowing investors to distinguish between noise and fundamental deterioration.

Financial Performance: Profits Growing Despite Revenue Headwinds

ARLP's Q3 2025 results reveal a company managing through commodity price declines with exceptional operational discipline. Total revenues fell 6.9% year-over-year to $571.4 million, primarily due to a 7.5% decline in average coal sales prices as higher-priced legacy contracts from the 2022 energy crisis rolled off. Yet net income attributable to ARLP increased 10.2% to $95.1 million, or $0.73 per unit. This divergence is the story: cost reductions and efficiency gains more than offset pricing pressure.

Coal operations illustrate this dynamic clearly. Segment Adjusted EBITDA expense per ton declined 11.1% to $40.99, driven by multiple factors. Labor and benefit expenses per ton fell 11.3% to $12.90. Material and supplies expenses per ton dropped 12.1% to $14.01. Maintenance expenses per ton decreased 16.3% to $4.73. These aren't one-time benefits—they reflect higher production volumes, improved recoveries, and reduced longwall move days across the mining complex. The implication is structural: ARLP's cost base has permanently improved.

Royalty segments provide crucial diversification. Oil and gas royalty revenues decreased 5.6% in Q3 2025 to $32.8 million as average sales price per BOE fell 10.6%, but volumes increased 4.1%. For the nine months, volumes are up 3.1% year-over-year, demonstrating the segment's ability to grow through commodity cycles. Coal royalties surged 48.1% in Q3 to $24.7 million, driven by a 38.1% increase in royalty tons sold and higher average royalty rates. This growth is directly tied to higher Tunnel Ridge volumes, creating a natural hedge—when ARLP's owned mines produce more, its royalty income increases simultaneously.

The balance sheet reinforces financial strength. Total liquidity stands at $541.8 million, including $94.5 million in cash. Net leverage is just 0.6x trailing twelve-month Adjusted EBITDA. This gives ARLP options: the company can fund growth investments, maintain distributions, repurchase units, or acquire assets without external financing. In a capital-intensive industry where peers face liquidity constraints, this is a decisive competitive advantage.

Strategic Investments and Alternative Cash Flows

ARLP's Bitcoin mining operation, initiated in 2020 as a pilot to monetize underutilized electricity load capacity, has evolved into a meaningful cash flow source. The company held approximately 568 Bitcoin valued at $64.8 million at quarter-end, having invested $5.9 million in Q3 2025 to upgrade mining machines for 30% efficiency improvement. In January 2025, management decided to stop selling Bitcoin to cover expenses, believing in "more upside" and monitoring Trump administration policies. This isn't a core business—it's a creative way to capture value from stranded energy assets that would otherwise go to waste.

The Gavin Generation investment represents a strategic masterstroke. ARLP committed $25 million to a limited partnership that indirectly acquired a coal-fired power plant in the PJM service area, with $22.1 million funded as of September 30, 2025. This investment serves two purposes: it provides attractive cash-on-cash returns expected in 2026 and beyond, and it directly supports coal demand in ARLP's marketing footprint. By investing in power generation, ARLP aligns its capital with its customers' success, creating a virtuous cycle where grid reliability policies benefit both the plant and the coal supplier.

Investments in energy transition technologies—Infinitum Electric (electric motors) and Ascend Elements (battery materials)—have faced headwinds. The Ascend investment required a $25 million non-cash impairment in Q3 2025 due to a recapitalization that converted preferred stock to common, but ARLP maintained a senior position by investing an additional $2 million in convertible debt. While these investments haven't yet delivered returns, they demonstrate management's willingness to deploy capital in adjacent infrastructure opportunities. The focus has narrowed to minerals and data center infrastructure, reflecting disciplined capital allocation when transition investments face policy uncertainty.

Outlook and Management Guidance: Setting Up 2026

Management's guidance narrative reveals confidence tempered by realism. Full-year 2025 sales guidance was tightened to 32.5-33.25 million tons, with the midpoint within 1% of prior guidance. More importantly, the 2026 order book now stands at 29.1 million tons committed and priced, up 9% from last quarter. This forward visibility is rare in commodity businesses and suggests ARLP has pricing power in a tightening market.

Cost guidance reinforces the operational improvement story. Illinois Basin segment Adjusted EBITDA expense per ton is expected at $34-36 for 2025, down from $37.81 in 2024. Appalachia guidance of $60-62 per ton represents a significant improvement from $64.67 in 2024. These reductions aren't dependent on favorable commodity prices—they're driven by geology, automation, and completed capital projects. The implication is that margins can be maintained even if coal prices continue to soften.

The volume growth opportunity for 2026 is substantial. Management believes ARLP could grow total sales by approximately 2 million tons, with "a little higher growth in Appalachia versus Illinois Basin." Tunnel Ridge's favorable geology could add 750,000 to 1 million tons, while River View's new portal and prep plant capacity could enable another 1-1.5 million tons if market conditions support it. Critically, this growth doesn't require new units or additional headcount—it leverages existing capital investments and automation, meaning incremental volumes will flow at high margins.

Oil and gas royalty guidance was adjusted due to a timing delay in a Delaware Basin multi-well pad now expected online in early 2026, but full-year 2025 volumes are still projected at record levels. Management's strategy remains disciplined: recycle segment cash flows to acquire minerals in high-quality basins with top-tier operators when opportunities meet underwriting standards. This patience is prudent given oil price volatility, but it also means the segment's growth may be lumpy rather than linear.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is the structural decline of thermal coal. Despite policy support and data center demand, coal's share of U.S. electricity generation will continue facing pressure from renewables and natural gas. If battery storage costs decline faster than expected or renewable intermittency is solved through grid-scale storage, the urgency to preserve coal plants could diminish. This would impact ARLP's long-term volume outlook and potentially strand some reserves.

Operational execution remains a near-term concern. Tunnel Ridge's geology challenges have persisted for multiple quarters, and while the longwall move appears successful, mining conditions can be unpredictable. If Mettiki's Q4 geologic issues prove more persistent than management expects, Appalachia costs could remain elevated into 2026, compressing margins just as pricing pressure intensifies from legacy contract roll-offs.

Commodity price volatility creates uncertainty. While Henry Hub gas prices averaging over $3.50/MMBtu in 2025 support coal competitiveness, a mild winter or surge in production could drive prices lower, reducing coal dispatch. Similarly, if export markets for high-sulfur Illinois Basin coal remain weak, ARLP's ability to place incremental production could be limited, capping the volume growth story.

Regulatory and trade policy uncertainty cuts both ways. While the Trump administration's executive orders support coal, trade tensions could impact equipment costs or coal demand if economic growth slows. Management acknowledges that "current trade policy does make these costs, sales opportunities and pricing hard to predict." The April 2025 "Liberation Day" tariff announcements created significant uncertainty about inflation, supply chains, and energy prices that could affect both costs and customer demand.

Valuation Context: Cheap for a Reason or Mispriced Opportunity?

At $24.25 per share, ARLP trades at a 12.83x P/E ratio and 5.53x EV/EBITDA, metrics that suggest deep value territory. The 10.72% dividend yield is among the highest in the energy sector, though the 142.86% payout ratio raises sustainability questions. However, this ratio is misleading—it reflects GAAP earnings that include non-cash impairments and depreciation, while free cash flow remains robust at $374.4 million TTM, representing a 12% free cash flow yield.

Comparing to peers reveals the valuation disconnect. Peabody trades at 7.82x EV/EBITDA but with negative margins and a 0.57 beta, reflecting higher risk. Arch Resources (ARCH) commands 11.39x EV/EBITDA but with minimal dividend yield and pure-play met coal exposure. ARLP's combination of positive earnings, strong yield, and low leverage (0.26 debt/equity vs. Peabody's 0.11 but with far better margins) is unique. The market appears to price ARLP as a melting ice cube, ignoring the policy-driven demand floor and operational improvements.

Enterprise value to revenue of 1.55x is reasonable for a capital-intensive business, but the underlying asset base is undervalued. ARLP controls 547 million tons of proven and probable coal reserves, plus substantial oil and gas royalty acreage. At current production rates, this represents decades of reserve life. The royalty segments alone generated $87.5 million in Adjusted EBITDA over nine months—applying a 10x multiple would value these non-coal assets at nearly $1.2 billion, suggesting the market assigns minimal value to the core coal operations.

Conclusion: A Contrarian Bet on Energy Realism

Alliance Resource Partners represents a rare combination of deep value, high income, and improving fundamentals in a sector most investors have written off. The thesis hinges on a simple proposition: grid reliability concerns and surging electricity demand from AI data centers will keep more coal plants operating for longer than the market expects, while ARLP's low-cost operations and diversified cash flows allow it to thrive even in a declining market.

The company's operational execution in Q3 2025—growing profits while revenues fell—demonstrates management's ability to control costs and extract value from assets. The strategic investments in Gavin Generation and Bitcoin mining show creativity in monetizing the energy transition rather than fighting it. Most importantly, the balance sheet provides downside protection that peers lack, while the 2026 order book and volume growth potential offer a clear path to earnings upside.

For investors, the critical variables to monitor are Tunnel Ridge's production ramp in Q4 2025 and early 2026, the pace of utility coal plant extensions under Trump administration policies, and natural gas price trends that affect coal dispatch. If these factors align favorably, ARLP's multiple could re-rate as the market recognizes that coal's "death" has been greatly exaggerated. Even if they don't, the 10.7% yield and low valuation provide a compelling risk-adjusted return in an overvalued market.

The story is not about coal's long-term growth—it's about the gap between perception and reality in the next 3-5 years. ARLP is built to survive the transition while generating substantial cash flows, making it a unique opportunity for income-oriented investors who can tolerate commodity volatility and ESG concerns. The partnership's structure, conservative management, and operational excellence create an asymmetric setup where the market has priced in far more pessimism than fundamentals justify.