Alliance Resource Partners Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 28, 2024

There are 8 speakers on the call.

Operator

Greetings, and welcome to Alliance Resource Partners LP Third Quarter 2024 Earnings Conference Call. At this time, participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Carrie Marshall, Senior Vice President and Chief Financial Officer.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good morning and welcome everyone. Earlier this morning, Alliance Resource Partners released its Q3 2024 financial and operating results and we will now discuss those results as well as our perspective on current market conditions and outlook for 2024. Following our prepared remarks, we will open the call to answer your questions. Before beginning, a reminder that some of our remarks today may include forward looking statements 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.

Speaker 1

While these forward looking statements are based on information currently available to us, if 1 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 will also be discussing certain non GAAP financial measures. Definitions and reconciliations of differences between these non GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of this morning's press release, which has been posted on our website and furnished to the SEC on Form 8 ks. With the required preliminaries out of the way, I will begin with a review of our results for the Q3, touch on our guidance for the year and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer for his comments.

Speaker 1

Starting with our coal operations, our performance during the Q3 of 2024 which we refer to as our 2024 quarter continue to be impacted by persistently low natural gas prices, low export market activity and difficult mining conditions at our Appalachian operations. However, our total and domestic coal sales shipments did improve from the previous quarter increasing 6.7% and 11.9% respectively. Additionally and in response to the soft market conditions, we took proactive steps during the Q3 to more closely align production with shipments. The increased shipments and adjustments to production resulted in a reduction of our coal inventory by over 500,000 tons, which we expect will continue to decline over the coming months to an end of year target range of 500,000 to 1,000,000 tons. Coal sales volumes of 8,400,000 tons were essentially in line with the 2023 quarter and increased 6.7% sequentially, while coal production of 7,800,000 tons declined 7.2% year over year and 8.1% sequentially.

Speaker 1

In the Illinois Basin, tons sold increased by 3.1% sequentially due to higher sales volumes from our Riverview and Hamilton mines. In Appalachia, tons sold increased by 16.9% in the 2024 quarter compared to the sequential quarter, primarily due to improved conditions on the Ohio River allowing for higher shipments from our Tunnel Ridge operation. For the 2024 quarter, coal sales price per ton sold of $63.57 was down 2.1% year over year and 2.6% sequentially, primarily due to lower Appalachia volumes and pricing related to our export sales from our MC Mining and Metiqui operations. Appalachian coal sales price per ton declined 5.8% and 7.7% compared to the prior year and sequential quarters respectively. Segment adjusted EBITDA expense per ton sold was $46.11 during the 2024 quarter, increasing 11.9% year over year and 1.6% sequentially.

Speaker 1

In Appalachia, segment adjusted EBITDA expense per ton sold increased 19.3% versus the 2023 quarter, but declined 1.3% versus the sequential quarter. The increase in year over year cost was due to a longwall move at our Tunnel Ridge operation, higher subsidence costs and challenging mining conditions at all three Appalachia operations that lower recoveries and increased costs related to roof control and maintenance. In the Illinois Basin, segment adjusted EBITDA expense per ton sold was $37.79 an increase of 7.2% year over year and 1.2% sequentially. The increase versus the 2023 quarter was due primarily to lower shipments and extended longwall move at our Hamilton operation due to high inventories at the mine. Turning to our oil and gas royalty segment, our 3rd quarter volumes reached 864,000 barrels of oil equivalent or BOE representing an 11.9% increase year over year and a 5.8% increase sequentially driven by new well activity on our royalty acres in the Permian Basin.

Speaker 1

Higher volumes were largely offset by lower commodity pricing for crude, natural gas and NGLs. Average realized sales prices per BOE were down 9.8% versus the 2023 quarter and down 10.6% sequentially. During the 2024 quarter, our coal royalty segment reported a 2.3% increase in coal royalty volumes and a 3% decrease in coal royalty revenue per ton compared to the prior year. Sequentially, coal royalty tons were up 2.7%. Overall, consolidated revenue was $613,600,000 down 3.6% from $636,500,000 in the year ago period.

Speaker 1

Sequentially, consolidated revenue was up 3.4 percent due to higher coal sales tons. Our net income for the 2024 quarter attributable to ARLP was $86,300,000 or $0.66 per unit, which compares to $153,700,000 or $1.18 per unit in the year ago period. Adjusted EBITDA in the 2024 quarter was $170,400,000 which compares to $227,600,000 in the prior year period. These decreases reflect the lower revenues and higher total operating costs previously disclosed. Now turning to our balance sheet and uses of cash.

Speaker 1

Alliance generated $209,300,000 of cash flow from operating activities in the 2024 quarter compared to $215,800,000 in the sequential quarter, invested $110,300,000 in capital expenditures and paid our quarterly distribution of $0.70 per unit. At quarter end, our total and net leverage ratios were 0.64 and 0.39 times total debt to trailing 12 months adjusted EBITDA and liquidity was $657,700,000 which included approximately $195,400,000 of cash on the balance sheet. During the 2024 quarter, we continue to make good progress on all of the capital and infrastructure projects at our operations that we have discussed throughout previous earnings calls. The new portal at our Warrior operation should be occupied by the beginning of 2025, which will consolidate 3 portals into 1 and generate meaningful expense savings. The West Alexander portal at Tunnel Ridge is anticipated to be fully completed by the beginning of 2025 and will allow us to access better mining conditions than the current panel and reduce over time and other expenses next year.

Speaker 1

We are beginning to receive shipments of the new longwall shields at our Hamilton operation and anticipate all of the shields to be delivered and in place in mid-twenty 25, which we expect will enhance productivity and generate considerable maintenance related savings for Hamilton at that time. And finally, at the Riverview complex, the Henderson County mine interseam slope is approaching completion 1 month ahead of schedule. The first unit is now scheduled to start December 1. By September of 2025, we expect the production mix at the Riverview complex will be 3 units at the Riverview mine and 6 units at the Henderson County mine. This project when completed should also contribute to lower operating cost per ton beginning next year from our Riverview complex with the full benefit of the investment occurring in 2026.

Speaker 1

Now turning to our guidance. Based on our results year to date, current visibility into our order book and outlook for markets through year end, we are maintaining our full year guidance for coal sales volumes, coal sales price per tonne sold, segment adjusted EBITDA expense per ton sold, royalties volumes and royalties unit expenses. We now expect total coal volumes and realized coal sales prices to be closer to the bottom of their respective ranges and for segment adjusted EBITDA expense per ton to be at the high end of the range. For modeling purposes, the 2 longwall moves previously scheduled for the Q4 of this year at Tunnel Ridge and Metiqui are now planned to occur in the Q1 of 2025, leaving 1 in the Q4 at our Hamilton mine. We made some minor adjustments to our 2024 committed and price sales tons to reflect modest net contracting activity and movement in the timing of customer shipments that occurred during the 2024 quarter.

Speaker 1

At the end of the 2024 quarter, our committed tonnage for 2024 was 33,400,000 tons. Of that total, 28,200,000 tons are currently committed to the domestic market, while 5,200,000 tons are committed to the export markets. More notably, we increased our committed tonnage for 2025 by 5,900,000 tons with significant contracting activity from our domestic customers. In total, we are in the process of finalizing new contract commitments for approximately 21,700,000 tons over the 2025 to 2,030 timeframe. We are also in active discussions with our customers to add to future commitments that if secured will lift our 2025 domestic sales order book to a level near our historical contracted positions heading into the New Year.

Speaker 1

The remainder of our guidance ranges remain the same. And with that, I will turn the call over to Joe for comments on the market and his outlook for ARLP. Joe?

Speaker 2

Thank you, Carrie, and good morning, everyone. I want to begin my comments by thanking the entire Alliance organization for their resilience, continued hard work and dedication. At our co operations, we had our lowest injury rate for a quarter since the Q4 of 2017, excluding the 2020 COVID impacted quarters. Every operation safety statistics have improved from 2023 to 2024. Our results year to date are currently 32% below the ARLP 2023 year end comparable incident rate.

Speaker 2

In addition to the excellent safety results, Alliance had 2 national champions from the National Mine Rescue Contest in August. Jake Sayer from Tunnel Ridge in the bench competition and James Forrest for Warrior in the pre ship competition. Congratulations to Jake and James. Kerry did an excellent job summarizing challenging near term market conditions and adverse mining conditions that impacted our Q3 2024 results. Unfortunately, the hotter than normal weather we saw at the start of the summer in several regions of the country failed to carry through in the back half of the twenty twenty four quarter, limiting spot domestic sales opportunities and caused shipments on some of our higher contracted co sales to be deferred.

Speaker 2

This coupled with export pricing keeping us out of the market led to our sales volumes being below expectations for the 2024 quarter. During the 2024 quarter, our coal segment operating team focused on improving the safe operation of our facilities, providing reliable service to our customers, managing through difficult operating conditions and adjusting production lower to meet demand. During the quarter, we advanced major capital and infrastructure projects at our Tunnel Ridge, Hamilton, Warrior and Riverview complexes as part of our stated long term commitment to our customers and our operations. These investments will make our operations more productive, improve their future cost structure beginning in early 2025 and extend their mine lives, allowing us to remain the most reliable low cost producer in our operating regions for many years to come. The overall mild summer that followed a mild winter last year continues to impact prompt coal demand.

Speaker 2

However, looking at the intermediate and longer term, the underlying coal demand fundamentals of non traditional demand growth from data centers, AI and on shoring of manufacturing capacity are accelerating, particularly in the markets we serve in the Midwest, Mid Atlantic and Southeast United States. On October 16, the Federal Energy Regulatory Commission hosted a major conference focused on electric reliability. Participants discussed the urgent need to preserve baseload generation to meet the growing demand for electricity. Recent integrated resource plans filed by utilities also support the view that power demand will exceed generating supply, increasing dangers to grid reliability. The harsh reality is that the push to electrify many aspects of our economy, coupled with accelerating computation and storage speed demand requires more generation capacity than our current renewables based energy policy can provide.

Speaker 2

The sources of this new demand require 20 fourseven reliability, which we believe only fossil fuel and nuclear generation sources can provide. A recent report by McCloskey echoes this, calling for a doubling of data center electric demand from 17 gigawatts in 2022 to 35 gigawatts by the end of the decade, which they estimate represents 74,000,000 tons of incremental utility coal burn during that time period and an additional 179,000,000 tons across the next decade. They plus other third party sources also importantly point out that over 40% of previously announced nationwide coal plant retirements have pushed back their planned closure dates, some indefinitely, while new announcements of coal unit retirements have virtually stopped. The chronic underinvestment in fossil fuel and nuclear generation became readily visible in the results of the recent PJM capacity auction. Capacity payments, which are the market signal mechanism used to incentivize the construction of new generation sources increased almost tenfold.

Speaker 2

This is a clear market signal that our power grid continues to become more unreliable in a time of rising demand forecast. This situation is not limited to PJM, but extends to all regions we market to and we believe it will continue. Many of our largest customers have been in the market recently with solicitations for significant tonnage to serve their plants in 2025 and beyond, with some looking for volume commitments through 2,030. As our customers look to fulfill their long term and short term coal needs, we will leverage our well capitalized operations and history of reliability to maintain and opportunistically grow our market share in the coming months. Before I wrap up, I would like to highlight a few points related to our oil and gas royalties business.

Speaker 2

As Carey mentioned, we realized another solid quarter of year over year volumetric growth. We continue to reap the benefits of the minerals portfolio that is heavily weighted towards the Permian Basin, where top tier upstream operators are actively drilling and completing new wells on our minerals. Additionally, we continue to enhance our position in the Permian, successfully closing $10,500,000 of ground game acquisitions during the 2024 quarter. As we previously mentioned, the value and prospects for our oil and gas royalty segment was a major contributor to the successful completion of our June 2024 senior notes offering. We remain committed to growing this segment as a complement to our coal excuse me, to our core coal operations.

Speaker 2

And as we scale the business, we believe investors will continue to recognize the intrinsic value this segment possesses as a growth vehicle. In closing, while our 2024 quarter results reflect a difficult market and operating conditions, I will repeat what I said on our last quarterly call. We believe the fundamentals for electricity demand over the next 5 years and beyond are poised for rapid growth. We also believe reliable, affordable baseload generation is a cornerstone of our nation's economy. With our well capitalized and strategically located coal mines and growing minerals acreage portfolio, we are well positioned to benefit from the anticipated increased demand for many years to come.

Speaker 2

That concludes our prepared comments and I will now ask the operator to open the call for questions. Operator?

Operator

Thank you. Our first question is from Nathan Martin with The Benchmark Company. Please proceed.

Speaker 3

Thanks, operator. Good morning, Joe. Good morning, Kerry.

Speaker 1

Good morning, Nate.

Speaker 3

Kerry, you gave some updates on the full year guidance ranges. Maybe starting on the shipment front. I believe you said the expectation is now to be towards the lower end of that range. Clearly, what transpired with the mild summer low gas prices likely caused your 3Q shipments to be a little bit shorter than you planned as Joe mentioned. But thinking about the export side, right?

Speaker 3

So prompt API 2, I think was around $115 for the Q3. It's close to $120 today, which I think is kind of your target level. Are there any opportunities for you guys to ramp up export sales in the Q4? And could that determine ultimately where you end in that 4 year shipment range?

Speaker 1

Yes. I mean, I do think that is fair that we do have opportunities in the Q4 to be able to participate in the export market. We have been in active discussions with our partners on the export market to commit to volumes, some in the Q4 and we are obviously having discussions as we move into the New Year given where the pricing range is right now. The discounts are still a little bit higher than what we have typically seen in terms of participating in the export market. But certainly with where the API 2 pricing is today, you're certainly getting within that range particularly for our lower sulfur Gibson product to be able to have some conversations to where we can participate in that export market in the Q4 and into the New Year as well.

Speaker 1

Joe, I don't know if you'd like to add to that as well.

Speaker 2

Yes. The only other thing that I would add is that we do have one customer that have contracted tons that declared force majeure in the Q3 and we're trying to determine whether that will be lifted or not. I think that we'll not forgive the tons that may impact the timing of the tons. So even if we do pick up some volume, it could be offset by timing with this one customer that has declared a force majeure for some operations difficulties that they have that they use our product as a blend into their shipments. So I think that our midpoint is still 34, we'd love to get to that right at this 10 seconds.

Speaker 2

I think it's a little bit less than that, but there is that potential just based on how the market times out.

Speaker 3

Okay. Thank you for those thoughts, guys. And then maybe just related on the inventory front, what amount of inventory drawdown was kind of assumed in getting to that range? I think, Kerry, you mentioned you wanted to get down to 500,000 to 1000000 tons by year end. Where are you today?

Speaker 1

Today, at quarter end, we were right at 2,000,000 tons at quarter end. So as we look into the Q4, we do anticipate that inventory level coming down to being within that range here within the Q4.

Speaker 3

Got it. Thank you. And then maybe on the cost side, as you guys talked about Appalachian costs, well above the high end of full year guidance, I think that's Q2 in a row, right? So longwall move, challenging mining conditions at all three operations. It looks like Appalachian costs in particular will need to improve kind of meaningfully in the Q4 if you want to get within your full year guidance of $57,000,000 to $60,000,000 for that segment.

Speaker 3

Kerry, you said, I think overall, I've been assuming that overall company costs will be at the higher end of the range. Is there any risk to not hitting that range? Are you through those challenging mining conditions? Any other color there would be great.

Speaker 1

Yes. I do think as you look at the range when I made the comment of being toward the higher end of the range that was specifically meant to be in total for the costs. So when you combine both Illinois Basin and Appalachia regions, Illinois Basin costs have been pretty fairly consistent. It's within that range. The Appalachian cost as you point out is on the higher end of the range.

Speaker 1

So it could very well be as we move into the Q4 as you mentioned it could be a little challenging to get to the upper end of that range just as it relates to Appalachia. So we could have Appalachia fall outside the range for the total year. But we do think within the range toward the FRM when you combine them both makes sense. As it relates to conditions through October, we have started to see some improvement toward the end of October, particularly at Tunnel Ridge in terms of those conditions. So we do anticipate it being improving in November December.

Speaker 1

Still you're going to see levels that our anticipation is it should come down slightly within the Appalachia region within the Q4, but that'll be what impacts the numbers overall. But to your point on have we started to see improvements? Yes, we have started to see improvements as we move into November.

Speaker 3

Got it, Carey. Appreciate that. And maybe just one last question. As we look out to 2025, looks like you guys added 5,900,000 tonnes of Canadian priced Canadian priced 5,900,000 tonnes since last quarter. 5,500,000 of that domestic, looks like 400,000 export.

Speaker 3

Can you give us an idea on the pricing for those tons?

Speaker 2

I think when you look at 25, I would just say that we are target to have sales our goal is to have sales back at the 35,000,000 back to the 30,000,000 domestic, 5,000,000 export. Right now or if you look at this year, if we would hit what our goal would be, we would be basically we would need another 1,000,000 tons of market next year on the domestic side. When we look at the cost savings that Kerry talked about relative to various projects and I also mentioned, and then we look at the revenue just in total that we think we can maintain margins. So our target is 30%. So we believe we should be able to achieve that this year.

Speaker 2

And then going forward, we're our goal and expectation is we'll be at that same 30% margin. So we will see some reduction in average sales price, but we'll also see corresponding savings on the cost side that our expectation is still a little early because we don't have all the sales contracts completed. Don't really want to get into actual pricing on ranges because we're still in negotiations with folks, but we do anticipate that our margins will be at that 30% level in the coal segment next year as well as this year. And hopefully, we'll have an extra 1,000,000 tons of sales next year.

Speaker 3

Appreciate that, Joe. Thank you both for your time and best of luck here in the 4th quarter.

Speaker 1

Thanks, A.

Operator

Our next question is from Mark Reichman with Noble Capital Markets. Please proceed.

Speaker 4

Just focusing on Appalachia for a moment, roof control and maintenance expenses were an issue in the second and third quarters and in the Q2 of 2023 when there was a roof fall in July of 2023. So what steps is the partnership taking to cure this issue? And then what factors will have the biggest impact on improving Appalachia segment adjusted EBITDA expense going forward?

Speaker 2

The impact is in large part has been geologic. So as we look to the future mine plans, as we indicated with the Tunnel Ridge longwall move the 1st part of next year, right in the beginning of January, we're getting into a new district, new reserve area that is going to be better conditions than what we experienced. I mean, Tunnel Ridge has been a very consistent mine for us ever since we've opened it. Unfortunately, this last panel that we have in this district has been the worst conditions we've seen. And fortunately, we're moving out of this district and into the new district that we've already planned or we are in the process of developing.

Speaker 2

And so we know the conditions are going to be better there than they have been in this panel that we're currently in. And as we look at Matiki, we've got a similar situation. We knew that the longwall panel that we are in this particular quarter or this past quarter had some challenging geology and we don't anticipate to have the same situation in the next panel as we had in the one that we are currently in. So I think those are 2 observations that give us hope that our costs will improve next year at both Natiki and Tunnel Ridge. MC is just tough.

Speaker 2

It's a thin seam. It's just and it's really driven more by the fact that it is such a thin seam and in order to mine that seam, we do have higher recoveries or lower recoveries just because of the amount of overburden we have to take to cut that coal seam. So there's not much we can do there. The geology is what it is, but we do believe that both at Metohi and Tunnel Ridge, brighter days are ahead starting next year.

Speaker 4

And then Alliance experienced an equity method investment loss of $2,300,000 in the Q3. And I was just kind of curious what your expectations are for that line item going forward? And does it cause you to rethink any of your investments?

Speaker 1

I think as it relates to the number going forward, we don't anticipate any of those on a going forward basis. It was related to one of the investments that we've made historically where related to the EV charging side of it. Our Francis Energy investment was related to some adjustments we made for that particular investment we've made where we mark to market on that.

Speaker 4

And just one last question, considering the pending merger between Arch and CONSOL, do you think there are any more consolidation opportunities within the U. S. Coal industry? And then what is your outlook for the U. S.

Speaker 4

Versus the international market?

Speaker 2

I don't know that there would be any other major consolidation. I don't anticipate any myself. I think that as the impact of that on the markets, I don't believe it will have any impact on the domestic market. It may in fact improve the domestic market opportunity for others because I think with that merger, there will be some efficiencies that may enhance their export opportunities and that could mean that they would ship more export than they are domestic, but I don't they're going to have to speak to that. But as far as impacts to us, we see no impact relative to that merger impacting our current market competitiveness.

Speaker 4

Thank you very much. That's very helpful.

Speaker 1

Thank you, Mark.

Operator

Our next question is from David Marsh with Singular Research. Please proceed.

Speaker 5

Hi. Thanks guys for taking the questions. First, just wanted to touch on the crypto briefly, if we could. Since the halving is behind us, could you give us an update on your cost to mine Bitcoin? And are you continuing to do that?

Speaker 1

We are continuing to mine Bitcoin. At quarter end. We don't really provide too much guidance as it relates to the cost side of that. But as we look at quarter end, total holdings of Bitcoin was a little bit over 4.57 $1,000,000 or 457 coins, which at quarter end price was $63,330 it was $29,000,000 in total of coins that we owned at the end of the quarter. The net addition of about 5 coins for us over the quarter, as we mentioned in previous quarters talking about those operations, we do sell our on a monthly basis to cover our operating costs.

Speaker 1

So that is a net addition of, as I mentioned, 5 coins during the quarter.

Speaker 2

During the quarter, we did buy some miners and retire some of our older miners, so that 1 third of the fleet and we think that will improve our efficiency going forward to where we should be in position to mind end up realizing or retaining a little higher bitcoins on a quarterly basis and what we've done most recently.

Speaker 5

Okay, that's good. And then just kind of a bigger picture question with the election in front of us and obviously it's tough to predict where things end up, but if we were to have an election result that was kind of a blue heavy, if you will, What do you see on the legislative landscape that could be potentially adverse to the company? And what do you think that the timing would be of enacting any type of legislation that would be harmful to the company and the industry overall?

Speaker 2

I think we're in a unique situation with the growth of AI, which is a national security issue and the primary investors in that space, the hyperscalers are all historically leaning towards wanting their power generated by renewables as opposed to baseload generation generating by fossil fuels. So we are seeing that growth significantly right now. They want to grow right now 25%, 26%, 27%, 28% and into the future that the growth numbers are pretty staggering. So when you look at those growth numbers, as I mentioned the FERC conference that they had just recently, they are emphasizing the need to maintain what we have and continue to warn that we will be short capacity because of delays in replacing and or even meeting the demand of AI. So I think the economic aspect, the national security aspect will limit any adverse legislation to try to restrict any type of generation just because of the demand that's going to be expected and advocated for by the hyperscalers.

Speaker 2

And when you look at that growth, almost a lot of it's in the Washington DC area and it's being instigated by the Department of Defense and other aspects of government. And that's one reason why you see that growth in PJM and in the Washington DC area. So I don't anticipate any adverse legislation. Now the regulatory environment, we'll continue to have debates on what the timing of transition is. We've been very clear repeatedly that the transition that the Harris Biden administration has been pushing is way too fast.

Speaker 2

It's in total conflict with their goal to try to electrify America. So there will be reality that comes to bear there. I think also as those regulations that are already being advocated for political reason in my opinion not environmental reasons that is those make their ways through the court, we don't believe they'll we believe they'll be overturned. So I think the reality of what the demand picture is to maintain power, reliable low cost power is going to mitigate or potentially negate any political desires to advance the premature closing of coal fired generation. So elections matter for a lot of other reasons.

Speaker 2

I'd be glad to get into that, but probably it's not the appropriate time for me to share what my view is. I think most people have heard that in the past. But I think back to if it goes the other way, how impactful could it be, I still believe that we're in great shape. People are going to need our generation. One of our largest customers just came out with their IRP in October and they said that they're expecting low growth by 2,032 of anywhere from 30% to 45% compared to 2024 and they backed off of closing plants that were in their last IRP in 2022, recognizing that they're going to need those plants to 2,035 to 2,040 something.

Speaker 2

And we're hearing that consistently by our domestic customers. So it would be nice if our energy policy would track our domestic policy for on shoring for growth in electrification. So it would be nice if that was clear to the markets. But like I said, even if there is political motivation to continue down a path that has crossed currents or across purpose of that objective. I think that the demand for the AI is going to actually rule, the science is going to rule over the politics.

Speaker 2

That's my view.

Speaker 5

Very helpful. Thank you very much. Appreciate it.

Operator

Our next question is from Dave Storms with Stonegate. Please proceed.

Speaker 6

Good morning. Just hoping we could start with outside purchases were a little bit above expectations. Is that just lingering challenges or how should we think about that going forward?

Speaker 1

I think going forward for the quarter, I think you're referring to we came in outside purchases were about $8,200,000 for the quarter. As we've talked in the past, we do purchase some bling coal at our Metiqui operation for our metallurgical exports. And so that's what those purchases are related to. That is a little bit higher than where I would anticipate the Q4 number to come in. We do anticipate continuing to purchase some coal in the Q4.

Speaker 1

I think in the past it's ranged anywhere from $2,000,000 to $2,500,000 per month $2,000,000 to $2,500,000 per month of purchased coal. I would imagine somewhere within that range is a good estimate in terms of where we would anticipate the 4th quarter number to come in this year.

Speaker 6

Perfect. Thank you. And then just looking forward to the contract negotiations and increased order book, how would you classify some of that order book pickup? Is that new customers coming into the fold or is that current customers increasing their demand?

Speaker 2

It's current customers basically fulfilling their book for contracts that are expiring. So we're in most cases maintaining market share with those customers. In some cases, we're actually increasing our market share. But in most cases, they're just maintaining their purchasing with some optionality to increase volume in anticipation of this growing demand that they see, it's going to that they anticipate will occur starting in 2026. So there's some optionality to the upside for increased demand on their part.

Speaker 2

But when we're looking at the $30,000,000 commitment, we're just maintaining or anticipating and maintaining of the market share we've had with existing customers. So there is potentially some upside to that. But our primary planning horizon is to be consistent in a 35,000,000 ton production rate, 5,000,000 export, 30,000,000 domestic.

Speaker 6

Understood. Thank you. And then just one more for me. You made the 10,500,000 dollars oil and gas closing. I understand that's in the Permian.

Speaker 6

Is there anything else you can tell us about this acquisition? Was it just opportunistic? Maybe how it all came together? Anything like that?

Speaker 2

So these are several small transactions. So we have what we call a ground game where we contracted land with landmen that are going out and buying individual tracks. It just add to our portfolio, so we allocate around $25,000,000 a year for that program. And so I would not say it's opportunistic. I'd say that we have underwriting standards and if there are people that would like to sell their mineral position, then we will make offers at economics that are pretty much consistent to what the market is, but at least it's definitely consistent with what our normal underwriting standards are to get attractive returns.

Speaker 2

So we do anticipate that there will be opportunities for us on a year in, year out basis in that range and we feel that we can execute on that based on the normal activity in the marketplace where there's sellers that are trying to look to monetize their assets for whatever reason.

Speaker 6

Understood. Thank you for taking my questions and good luck in the Q4. Thank

Speaker 3

you.

Operator

Our next question is from Yves Siegel with Siegel Asset Management. Please proceed.

Speaker 7

Thank you. Hey, good morning. Good morning. Hey, guys. Can you just update more broadly your thinking on capital allocation?

Speaker 7

And then also within that context, how you're thinking about the new ventures investments going forward?

Speaker 2

Yes. So I think from a capital allocation standpoint, we've indicated that first priority will be maintaining our coal operations. So we've done that over the last 2 to 3 years with the major projects that we've talked about in addition to their normal maintenance. So starting in 2025, we expect that the capital for maintenance capital or the actual capital expenditures and our coal operations will decrease to a level, Carey.

Speaker 1

Somewhere in the neighborhood of $6.75 to $7.75 per ton produced is kind of what the current thinking is right now, somewhere within that range.

Speaker 2

Yes. So that's a decrease of $100,000,000 from what In terms of total capital. Yes. Yes. This year.

Speaker 1

That's right.

Speaker 2

So then the next allocation goes to our minerals group, which we've taken a position historically that whatever cash flow they generate that they could reinvest within the minerals group. And then the third would be for other type investments that could include what we're doing at our Matrix subsidiary that we discussed in the past that most of their growth is organic in nature, but does take some working capital. And then as far as looking at participating in the transition, we've continued be active in that area to evaluate the landscape and as you know we've made some investments in battery recycling with Ascend, we've made investments with Infinitum on their innovative motor design. We've got the joint development agreement with Infinitum that's going well. We expect to see some benefit in that in 2025 and 2026 for sure.

Speaker 2

As we think through the rest of the transition, I think the election may matter. So we're trying to wait and see what happens. If the current incentives stay in place and investor excuse me, if customers demand more EVs, etcetera, trying to understand what the demand for batteries are. We're continuing to look in the battery space, whether it's recycling or battery storage, but we're waiting to see what happens with the election and if Trump wins, there's been some indication he'll look at some of the tax credits in the Inflation Reduction Act. So I think the investment in that space is all trying to anticipate what the policy of the new administration is going to be before they take any major steps in making investments.

Speaker 2

So we're still very interested in looking at opportunities. We're very focused on trying to continue to grow year after year and we do believe because of our relationships with our utilities, because of our knowledge in the space and our strategic location and the human resources we have to participate in that space that there are opportunities for us to invest and add value to our shareholders over the next decade. But exactly what that strategy is going to be in large part is going to be dependent on what the next administration is and what incentives are either continuing or discontinued and how the market reacts to that.

Speaker 7

Hey, Joe, you didn't mention distributions.

Speaker 2

Oh, yes. We like those too. So that's definitely high on our list.

Speaker 7

Just a quick follow-up though. Has your thinking changed at all given that the narrative has changed in terms of I think folks are recognizing that fossil fuels and coal are going to be here for a long time. Has that changed

Speaker 3

or

Speaker 7

informed how you think about capital allocation going forward?

Speaker 2

I think we've made significant capital investments in our own operations. We believe that the operations that we have invested in do put us in a position to be the low cost producer in the regions where we operate. I think that if Harris wins, the disconnect between the enormous increase in electricity demand versus the policies and EPA rules that they continue to advocate make it challenging to think in terms of wanting to do something different. I think in answer to your question, if Trump wins a lot of it's again going to have to see how our customers react. I do believe just like the customer I just quoted a few minutes ago with their most recent IRP, we're going to see that more and more in the domestic market that utilities are not going to want to close those plants, but they're not adding plants.

Speaker 2

And so each of these plants do have useful life that still mirror the 2,035, 2,040 time period. So I think we'll really focus on coal being steady and stable, but I don't see us growing and devoting capital to that area and a large amount that would be at the expense of what we're doing in minerals as an example. We do believe the runway for minerals is significantly longer than coal. We believe we've had success in it, but to go in coal. We believe we've had success in it, but to go in steady as we go year in, year out adding and hitting our underwriting standards.

Speaker 2

We would not want to do anything that would challenge or would change the course we're doing there. So we got decisions to make rather back to distributions or reinvest in coal and I think we're pleased with where we are on the coal space. So I don't see us wanting to invest significant payout capital to participate in acquiring things, believing that the Co is going to be here for the next 25 or 30 years on these new projects, if that makes sense.

Speaker 7

Yes, it does. All righty. Well, thank you so much.

Speaker 1

Thank you, Dave.

Operator

Our final question is a follow-up from Mark Rich man with Noble Capital Markets. Please proceed.

Speaker 4

The Supreme Court recently turned down a request from parties seeking to put a hold on the EPA emissions rule when the litigation moved forward in federal appeals court. And from what I read, at least 3 of the justices seem somewhat sympathetic in states and the energy companies bringing the case. So do you think this is going to get overturned in the lower court? And if not, would you prevail at the Supreme Court level? Or if Trump is elected, would he just undo it?

Speaker 4

Kind of your thoughts on the EPA emissions rule.

Speaker 2

I do. Yes, I think that the pattern has been and it's not going to be changed. The pattern has been that the DC Circuit has not been friendly to look at these rules. They've given more discretion to EPA and other federal agencies in the past.

Speaker 6

I

Speaker 2

think with the change by the court on the West Virginia decision as well as the Chevron preference, I do believe that when it gets to the Supreme Court that it will be overturned. When you look at everybody that's in the energy space filed comments on the 111D, what we call Clean Power Plan 2 saying that it is totally outside the realm of what is achievable in that space. So the evidence is overwhelming that it should be defeated in my opinion. And I think that the court's decision was more focused on the procedural aspects of

Speaker 6

what

Speaker 2

is needed for a stay versus what the underlying fundamentals of the case are. Supreme Court has gotten a lot of heat about making decisions during political season. Maybe that was influenced, I don't really know. But I do believe that that rule and the other rules that are going to be litigated if Harris wins, It will be overturned and it is sort of a waste of the judicial process to have to go through it, but it is what it is. That's the way the government works.

Speaker 2

So if Trump wins on the other hand, I do believe that the EPA will look at these rules and do what they did his first term and take a different approach. And the Biden administration has been very strategic to try to push all these rules through before they are subject to the Congressional Review Act. So it complicates the ability for Trump to just immediately reverse them. But he can go through the same normal regulatory process that they did to get to the position that they got to. And I think that as I said earlier, the hyperscalers and the demand is going to coincide with the national security interest for America to see as much investment onshore for artificial intelligence as possible.

Speaker 2

And the inherent disconnect or conflict, I think will be more dealt with as a policy issue under the Trump administration than a political issue like it's been managed under the Biden Harris administration.

Speaker 4

All right. Well, thank you very much. That's really helpful.

Speaker 1

Appreciate it, Mark.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to Carey Marshall for closing remarks.

Speaker 1

Thank you, operator. And to everyone on the call, we appreciate your time this morning as well as your continued support and interest in Alliance. Our next call to discuss our Q4 fiscal year 2024 financial and operating results is currently expected to occur in early February and we hope everyone will join us again at that time. This concludes our call for the day. Thank you.

Operator

Thank you. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Alliance Resource Partners Q3 2024
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