Thursday, March 14, 2013

Further exploring the capital intensity of Alliance Resources

In the last post of my Alliance series I demonstrated on key operating metrics that Alliance Resource Partners was not just a bad coal mining operation - it was a flat-out terrible operation.

It had raised its capital intensity 350 percent, substantially reduced the grade of the coal it exported and reduced labor productivity over 20 percent. And it had become more bureaucratic at the same time.

Moreover the maintenance capital expenditure per ton produced has risen from 43c to over $8. These seem to be fairly brittle machines - put a ton of coal through the chute and you have induced $8 of repair obligations on the kit. Like wow - imagine all the people running around repairing stuff.

This is - to put it mildly - surprising. It is surprising because Alliance Resource Partners is the highest valued coal mining operation in America with the best performing stock. There is at this company a very large disconnect between operational performance and financial performance.

To be fair though - rising capital intensity is a problem across the industry (it is just more intense at Alliance). Peabody is the biggest coal mining company - and a good comparable.

In 2000 Peabody had $5.2 billion of property, plant, equipment and mine development with which they produced roughly 190 million tons. That was roughly $27 of PP&E per ton. (Many of Peabody's tons are lower-quality Powder River Basin tons.)

By 2000 Peabody had 15.4 billion in gross PP&E was 225 million tons. The capital required per ton was now $68.4. The capital intensity had gone up 2.5 times. Clearly this is an industry trend - albeit a worse trend at Alliance than at Peabody.

Employee numbers had moved from 7200 to 8200. Tons per employee thus moved from 26,400 to 27,400 - a slight improvement in labor productivity.

Peabody does not separately identify maintenance capital expenditure - but suffice to note that Peabody's total capital expenditures per ton are well below Alliance's maintenance capital expenditures per ton. Peabody's equipment is clearly less fragile...

The same trends are everywhere I look. The industry has substantial increases in capital intensity - but not as intense as Alliance Resources, but marginal improvements in labor productivity. It is on the labor productivity metric that Alliance stands out most intensely. Alliance has declining labor productivity.

However just how startling Alliance is is better demonstrated when you look only at the plant and equipment part of property plant and equipment.

You see, most of the PP&E at Peabody is land and coal interests - just the right to mine. This is the breakup:

Peabody - $million - 2012
Property, plant, equipment and mine development
Land and coal interests10947.7
Buildings and improvements1321.3
Machinery and equipment3162.2
Less: accumulated depreciation, depletion and amortization-3629.5
Property, plant, equipment and mine development, net11801.7

Peabody is only using roughly $4.5 billion gross in buildings, improvements machinery and equipment. And it produces 225 million tons annually.

Alliance Resource partners $million
Mining equipment and processing facilities1435
Land and mineral rights304
Buildings, office equipment and improvements208
Construction in progress130
Mine development costs285
Property, plant and equipment, at cost2362
Less accumulated depreciation, depletion and amortization−832
Total property, plant and equipment, net1530

Alliance it seems uses over $1.6 billion (gross) in mining improvements, processing facilities and building improvements to produce about 35 million tons of coal annually.

To put it mildly - Alliance Energy uses a lot of machines both relative to competition and relative to its size and relative to its history.

This thing keeps installing machines and its labor productivity keeps falling.

Very strange. Doubly strange because the profitability measures at Alliance are so outstanding.



Anonymous said...

BTU's geology could not be more different from AHGP.

The PRB accounts for most of the volume... you simply don't need that many machines to dig that stuff out vs some deep underground Illinois Basin mine.

Comp it to an Eastern coal miner -- CNX, WLT, ANR, etc.

dede said...

"In 2000 Peabody had $5.2 billion of property, plant, equipment and mine development"
"By 2000 Peabody had 15.4 billion in gross PP&E"

Looks like the second one refers to 2012.

Anonymous said...

Why are

Mining equipment and processing facilities of 1435

Property, plant and equipment, at cost of 2362

separate line items?

ps there is a typo in your account of Peabody indicating that there was a change between 2000 and 2000.

Anonymous said...

totally off topic, Sears Holding company has a lot of job postings for Real Estate people...

Anonymous said...

it's all very interesting, of course, but at the end of the day... look... i have avoided investing in ARLP because i didn't like the look of the accounts... instead i went for other high yielding mlps whose accounts i did like... YTD... i might as well have invested in ARLP.

Makrointelligenz said...

Maybe they just dig stuff up from deeper in the ground? This does not seems that convincing so far.

Ionson said...


we need some sort of a catalyst -- a clear boundary beyond which this is not sustainable: the moment when they can no longer keep paying ever rising distributions, better yet -- when they have to cut or eliminate it. i don't see it. do you?

Anuj Kumar said...

While EBITDA may be high because of capitalized expenses, it trades at under 5x 2013 EBITDA, right? Which isn't expensive by any means. They are actually distributing cash and not raising more equity as well. However they have distributed more cash flow than they generate (I define generate as OCF-ICF) each of the last two years. Low or negative OCF-ICF is not uncommon in the commodity game (drillers, coal, iron ore, etc.). I've never fully understood how these companies continue for long periods of time without generating positive cash flow. When they are structured as an MLP and are distributing high amounts of cash flow (essentially net income), investors seem solely focused on the yield and not on whether or not their are underlying cash flows to back it up.

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