More risk, broader focus
For more intrepid investors, Rhino Resource Partners, L.P. (NYSE:RNO) might be an interesting option. The partnership owns coal mines across the United States including in Northern Appalachia and an expansion project in the Illinois Basin. That new mine is expected to come on line in 2014 and already has a long-term sales agreement in place.
Unlike Alliance, however, Rhino Resource Partners, L.P. (NYSE:RNO) has been struggling through the coal market’s correction. For example, Rhino sold about 18% less coal in the second quarter of 2013 than it did in 2012. Couple that with a nearly 4% drop in realized coal prices and the company’s coal revenues fell over 20% year over year. That’s clearly not good news.
However, Rhino is selling non-core assets, still investing in growth projects within the coal space, and is expanding into other areas, like oil and gas drilling. The latter effort is small today, but it’s been growing quickly, with oil and gas revenues advancing nearly 300% sequentially between the first and second quarters. With only 15 wells on line at the end of July, the growth prospects here are notable and will help to offset the weakness in coal that Joy Global Inc. (NYSE:JOY) suggests will last through year end.
The most notable aspect of Rhino, however, is probably its yield of around 14%. Although the company isn’t performing nearly as well as Alliance, investors are being paid very well to wait for a coal market recovery.
Still, the distribution was trimmed in early 2012 and the general partner (GP) has chosen not to receive distributions on its subordinated units. These actions might appear concerning on the surface, however, both moves have allowed Rhino to continue to invest in its future while maintaining an exceptionally low debt level.
In fact, debt makes up just a third of the capital structure, essentially unchanged from the same period a year ago. The GP could have easily used debt to fund growth and pay distributions. So, what appears on the surface to be a negative is actually pretty positive. It’s also an impressive statement about Rhino’s management’s alignment with shareholders.
A fall and a turn
The U.S. coal industry is in the process of balancing supply and demand. That’s being achieved through mine closures and the burning of coal stockpiles at utilities. Although these trends will likely remain a drag on mining equipment companies like Joy Global, they are setting the stage for a recovery at Rhino and a continuation of the strong results at Alliance.
The article The “Joy” Of High Yielding Coal Miners originally appeared on Fool.com is written by Reuben Brewer.
Reuben Brewer has a position in Rhino Resource Partners. The Motley Fool recommends Alliance Resource Partners, L.P..
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