ALLIANCE RESOURCE

PARTNERS, L.P.

Ticker: ARLP

Last Price:

Fair Value: $50.30

Market Cap: 1.60 B

Yield: 7.3%

Recommendation: BUY

Investment Theme Industry – Coal Production

Coal - main fuel source for electricity generation

Stable commodity price – 2009 coal price fluctuation +/- 10%

Utility companies – Energy coal generation infrastructure mainly established in U.S.

Why Alliance Resource?

Long-term sales contracts

High return – 7.3% yield

Consistent distribution growth

Strong balance sheet and liquidity

Exceptional management performance

Well geographically positioned within the U.S.

OverviewOklahoma based company founded in 1971.

Engage in marketing and production of coal.

The company has grown through acquisitions and internal development

Fifth largest coal producer in the eastern part of the United States.

RevenueTotal Revenue for 2009 was $1.23 billion.

Company Revenue from Locations:

Illinois: 69%, C. Appalachia: 19%, N. Appalachia: 12%

Company Revenue distribution

Revenue comes principally from sales of

low and high sulfur coal, second income comes

from transportation from mining complex to

the delivery point and finally 2% comes from

machinery rentals or services to third parties.

Competitive Advantages

Long-term contracts

The company secures about 90 to 95% of its revenues through long-term contracts

Production management

The company created a division called “Department Calendar”. This department focus on tracking important bid renewal dates.

High yield

Alliance Resources paid dividends the highest dividends in the industry, 7.3% yield.

Risk

With the current economic uncertainty some of ARLP’s costs could outweigh its short-term benefits

Dollar valuation could affect negatively coal prices, so ARLP’s revenue could decrease.

Long-term contracts could mean a prolonged price suppression, which could lead to losses if operations costs increase unexpectedly.

Key Competitors

ALLIANCE RESOURCE

PARTNERS, L.P. VS.

Financial AnalysisGrowth

ARLP revenue growth on 2009 was 6.44%. The growth was result of increase in operating income and decrease of operating expenses.

Profitability

ARLP’ ROE of 60% is the highest in the industry. Healthy Free Cash flow subsidize acquisitions and new investments.

Financial Health

Quick ratio of 1.43 shows a liquid company that is able to pay its obligations and finance their investments.

ValuationDiscount Cash flow model

Assumptions for Alliance Resource Partner

Current Stock Price $41.81

Shares Outstanding (mil) 36,717

Next year’s free cash flow (mil) = $151,601

Perpetuity growth rate (g) = 3.5%

Discount rate (R) = 9%

FCF growth rate = 7% first year, 3.95% next years

Per share value = $50.30

Technical Analysis

Up Trend Channel

Support on channelBouncing on 2nd SD

Momentum crossing 0

Stochastic approaching oversold area

On chart Bollinger bands are showing an entry point on bouncing the 2nd standard deviation which also follows an uptrend channel. Volume in getting up after a smooth decline. Momentum entry point starts after momentum line crosses 0. Stochastic is at 45% and it is approaching oversold area at 25%.

Recommendation

Buy 200 Shares of ARLP at any price below 43.74 which is 15% below the stock fair value of $50.30.

Sell -2 ARLP 100 SEP 45 CALL as hedge strategy

Exit points:

Stop: $38.63

Before SEP 10, 2010 Target: $50.30

On Sep 10, 2010 Target: Any price above $45.02

Trade Simulation

Thank YouAny Questions…?