Greetings. Welcome to Alliance Resource Partners, L.P. Fourth Quarter 2021 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to Brian Cantrell, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Sherry and welcome everyone. Earlier this morning, Alliance Resource Partners released its fourth quarter and year end 2021 financial and operating results and we will now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we will open the call to your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements, subject to a variety of risks, uncertainties and assumptions that are contained in our filings from time to time with the Securities and Exchange Commission and are also reflected in this morning’s press release. While these forward-looking statements are based on information currently available to us, if one 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 the differences between these non-GAAP financial measures and the most directly comparable GAAP financial measures are contained at the end of ARLP’s press release, which has been posted on our website and furnished to the SEC on Form 8-K. With the required preliminaries out of the way, I will begin with a review of our results for the quarter and year and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer, for his comments. As we outlined in our release this morning, Alliance reported strong increases to key operating and financial metrics for the 2021 quarter and year compared to the 2020 quarter…

Thank you, Brian and good morning everyone. During our last earnings call, we outlined several reasons why fossil fuel prices and by that, I mean, oil, natural gas and coal have risen dramatically around the world, primarily because supply fell woefully short of growing demand as economies around the world continue to adjust from the COVID-19 disruptions that began in early 2020. The energy crisis persists today as the pandemic remains disruptive to supply chains and just as importantly, due to continued pressures from governments, regulators, financial institutions, ESG activists and even customers unwilling to make commitments, all of which are contributing factors restricting growth in fossil fuel production and investment. These conditions remained intact, both in the domestic and international coal markets through the end of 2021, resulting in natural gas prices rising to levels beneficial for coal demand. In our primary U.S. markets, year-over-year cogeneration climbed nearly 21% during 2021 and would have been even higher if utilities had not been concerned about preserving critically low coal stockpiles. With many utilities reporting 20 days or less coal inventory and experiencing the supply shortages I mentioned previously, power companies chose to turn to higher cost natural gas generation. Similarly, our international coal markets continued to benefit from increased power demand, high natural gas and LNG prices, limited coal supply response and transportation disruptions. Reflecting positive international supply/demand fundamentals and attractive pricing, ARLP shipped approximately 4 million tons to the export markets in 2021, more than tripling our international coal sales volumes over 2020 levels. Absent any significant global economic downturn and destruction of power demand, we expect these favorable market conditions to continue for the near-term. The combination of labor shortages and the surge of the Omicron variant affecting industry-wide coal transportation and production on the supply side, along…

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

Hey, good morning, Joe, Brian. Thanks for taking my questions.

Good morning, Nate.

Good morning.

Maybe I will start on the sales side. It looks like midpoint of your full year ‘22 shipment guidance is towards the high end of your prior up 6% to 12% commentary. Can you guys give us your thoughts on the new range? Is the increase in demand mostly on the domestic side export maybe both, where is the increased production going to come from? And kind of along that front, how is your current labor situation, both on the hiring front and any effects from COVID. I know you touched on that briefly in your prepared remarks? Thanks.

Sure. Yes, the demand is robust both domestically and internationally. So, our target for total sales this year – as you suggested, we would believe it will come in at the high end of the range that we have given with the one main issue being COVID interruptions and the workforce that we plan to hire to add the unit that gets us to this higher production level. We have been successful in the latter half of 2021 hiring people to add two units. So that’s allowed us to run at the – run rate that you saw in the fourth quarter, which we believe is sustainable and will continue to grow as we hire people to meet that higher production level. So labor is tight, but we’ve been successful so far. We feel comfortable that we will be able to hire the people, but the range is really there primarily for whether we can or cannot hire those people. So if we could – we get to full staffing sooner than we anticipate, then we would definitely be at the high end of the range that we have here. So it’s not a demand issue. It’s definitely our ability to find and attract the workers for the market opportunities we see.

Yes. Nate, I would add, as we look at our sales ranges for this year, Joe mentioned that we’ve been managing tight labor situations impact from COVID as the Omicron variant has touched us as it has in most other companies. The rails and barges have been struggling to manage it on their end as well. So it’s a question of, as Joe indicated, can we hire the people and get the tons produced – and then can we actually sell – move those tons to our customers as scheduled. We noted in this quarter, we had about 197,000 tons that were in transit that had a meaningful impact on our results for the fourth quarter of last year. Hopefully, that’s just a timing issue. We expect to deliver all those tons this quarter, but we will – we are very cognizant of the fact that transportation delays could hit us as we move through 2022 as well.

I think on that score, I mean, right now, we’ve got 2.3 million tons committed to the export market. And in 2021, we shipped 4 million. If the rails aren’t responsive, then that will push us more to the export market, which is basically delivered off of our barge loaded operations.

Great color there, guys. I appreciate it. And that was going to be my next question, Brian, Joe, about transportation. So the only thing I would ask is, I mean have you guys seen transportation improved at all sequentially or do you have any thoughts on when you think or hope that, that could normalize?

It’s really dependent on customer and mine. So we have definitely seen some improvement at some of our mines and customers that have the capacity to be able to have railcars as an example. But it’s still spotty. It’s still not where we want it to be. It’s still not as predictable as we wanted it to be, and that’s evident by the number of tons we had in transit at the end of the year.

Yes. Everybody is working closely. We’re in daily communication with the transport providers and our customers. Hopefully, if the variant slows down the impact moving forward, things will get back on schedule, but it remains a challenge today.

Got it. Got it. Makes sense. I guess maybe shifting over to 2022 CapEx guidance. Spending looks like it’s expected to be up around $100 million year-over-year. Can you guys give us an idea of what’s behind that increase? Thanks.

Yes. A lot of it’s due to the volume expectations. You see the increases that we’re forecasting in our initial guidance. I think last year, our 5-year average per ton cost for maintenance capital was about $490 per ton. Our ops have worked very, very hard to be as efficient as possible and use everything at their disposal to keep our CapEx in check. And in fact, I believe if you look towards the back of our release and one of our reconciliation tables, our per ton costs are actually dropping to about $4.41 per ton over the next 5 years, but increased volumes will definitely have an impact on the aggregate amount that we spend in 2022.

Okay. Got it, Brian. I was just wondering if there was any additional spending on equipment and things like that as you guys are bringing on multiple…

Yes. It gets into the timing of rebuild schedules, etcetera. But it’s gratifying to see that our per ton costs are expected to come down but increased volumes do result in higher capital costs.

There will be some growth capital for that increased production by adding a couple of units that you just spoke of.

Yes.

But that will be in the growth capital and be taken from our excess cash flow for growing the company. But it’s not a large numbers.

Got it. Thanks, Joe. Thanks, Brian. And then just finally, and I know I asked this question post every quarter, but can we just get your thoughts on what your priorities are from a capital allocation standpoint? Obviously, just raise your distribution by next 25%, again, consistent with your 35% of free cash flow before growth. Do you expect to maybe revisit that target at any point or maybe consider a variable target there still investment opportunities out there you guys are considering, whether it be in coal or in the Oil & Gas Royalties side of the house or do you plan on kind of focusing on paying down debt, giving access to capital. Just I would appreciate your thoughts there? Thanks.

So as we mentioned, we have 30% of our free cash flow targeted for distributions. To your question, will we consider variable in the future? And I think the answer is yes. Right now, we’re focused on maintaining that distribution as we evaluate growth opportunities. We still remain committed to our Minerals segment, and we do plan to continue to invest in that segment. We’re looking at several non-fossil opportunities. We don’t have anything to report on that, but we do have several ideas in our sight. I think the main issue that we continue to work on is what is the financial capacity or access to capital as we think about growing the company. And as we invest in non-fossil fuel type investments, what kind of capital would be available to that relative to going forward, when our current revolver expires. So we’re having conversations with our lenders who love our credit, and they love our management team, they love what we’ve been able to do, but they are feeling ESG pressures. So we’re trying to work through construct that will totally support our coal operations for decades, but at the same time, allow us capital so we can’t put leverage on acquisitions that’s not totally defined. And so that’s one reason we’re cautious on what our distribution level is so that we do not miss an opportunity to grow this company as these opportunities present themselves. If we can’t find those opportunities, we still have the ability to further pay down debt. But our primary focus is on growing the company, and that’s what we’re hoping to be able to find opportunities to where we can deploy that free cash flow for growth in the future.

Appreciate that color, Joe. Thank you, guys for the time and best of luck going forward in the 2022.

Thank you, Nate.

Our next question is from Scott Ferguson with Pacific Value. Please proceed.

Hi, Brian. Hi, Joe.

Good morning, Scott.

So I have two questions. One of them got predominantly answered on the balance sheet. So you talked about potential investments this year. But looking out a year, where do you see the balance sheet? Do you guys have it where you want it as far as debt cash or where do you see us at 12 months?

Yes. I mean if you look back at what we’ve done to strengthen the balance sheet since COVID hit, we made significant progress during 2020 and again in 2021. Strong cash flow generation in the most recent year, if you look at our guidance, there will be some cash flow generation this year. We’re undrawn on our revolver. We’re undrawn on our AR securitization. We are amortizing – continuing to amortize some equipment leases and we have the bonds outstanding. As Joe mentioned, we are in contact with our advisers and the capital markets to determine what our access to capital could be and what – how that might be priced. As you know, we’re fortunate, we don’t have any near-term maturities to deal with, but we definitely want to understand what our options and opportunities are when it is time to address those. So I – look, we’re looking to grow the company. I mean, we’re – we have been an energy company today, and we’re looking to be an energy company for the future and want to return cash to our unit holders at an appropriate level, but our real focus is on growing the organization for the next several decades.

And I would just add, I think we’re confident that we can we do have access to the capital markets. And as Brian said, we’re just trying to determine what is the proper level at a reasonable pricing point and then the other many things, what I said earlier is as we go into next year, hopefully, we will have more opportunities to invest than possibly what we will have this year. So – and I would expect those to have some form of ability to be financed that could bring more financing capacity to the table. So I feel really good about where we are in our balance sheet and the flexibility we have to be able to manage all aspects of our strategic plan.

I do as well. And as you may recall, we have said in the past that we prefer operating at a one-time levered historically. We’re below that today on a gross basis and when you look at the cash that is on the balance sheet, even better than that on a net debt basis. So I agree with Joe. I’m comfortable with where we are, absolutely believe we will have access to capital. It’s just a question of how that might be structured and the cost around it. But very, very pleased with how we’ve been able to maintain the balance sheet. We’re the highest-rated coal company in the country. And if you look at our financial metrics, credit worthiness alone, we are investment grade. So I second Joe’s comments that we should have the access to the capital that we need to grow our business and maintain our core businesses today.

Alright, thanks. As far as ‘23 forecast for tonnage, so say that’s about 40%, 45%. How does that compare to prior years?

Pre-COVID, we were right at the 38-something million, I believe, something on that. And so we – if we can hire the people, we will be back at that run rate by the end of the year.

And so – so yes, as far as that, yes, like 1.5 years out, so you’ve got about 40%, 45% already presold. Is that pretty typical to the past?

It’s been at that level for some time. As we’ve talked previously, utilities continue to take a relatively short-term view. We have been successful in closing some term business. But as Joe mentioned in his comments, many customers are continuing to look at this on a shorter term basis, 1-year type arrangements, etcetera. So where we are today, it probably is a little bit better than we have been in the very recent past. As you know, utilities are – their stockpiles are very low. They need to replenish those at a minimum. And if nat gas pricing stays where it is, you should continue to see some strong coal burn. So I’m confident that our marketing team will be able to secure the – fully book out the contracts as we move forward.

Alright. Thanks, guys.

Thank you, Scott.

Our next question is from Lucas Pipes with B. Riley Securities. Please proceed.

Good morning gentlemen. Great to hear your voice and good work on all these fronts. Thank you very much for taking my question. I first wanted to follow-up a bit on the cost side. And maybe you addressed it in the prepared remarks, but would you be able to give a kind of rough breakdown of the drivers between mix, labor and material? Any additional color there would be very much appreciated. Thank you.

Yes. We should be able to have a similar mix in terms of – and I am assuming you are talking about met and thermal.

Yes, I was thinking of kind of higher cost versus lower cost operations, I assume maybe there is a change there, too.

Not as much. I mean we – where we are increasing production, it is at our lower-cost operations. Currently, our longwalls are running very, very well where we have had challenges, and in particular with the impact of the Omicron variant has been at our room and pillar operations. You may see some slight difference in the mix between met and thermal in 2022 over 2021 depending on the factors that we have talked about earlier. The real issues are on inflation, as I mentioned, generally around steel and petroleum related products. Our mines are also doing a really good job of making sure that we have sufficient materials and supplies on hand today. So, if you look at how we are acquiring those materials to address those issues. In the fourth quarter, it was probably in the $1.2 million to $1.5 million range, just making sure that we have sufficient stockpiles on hand. They do get consumed very quickly, but we are making advanced purchases. Productivity, which also impacts costs, we were impacted by Omicron and talking to our operational teams, really difficult to specifically quantify, but it probably hit productivity around 5% or so during the quarter. And given the needs of our customers, our men and women stepped up, worked overtime, extra shifts, etcetera, all of which impact costs. So, we know that inflation is here. It’s a little bit difficult to specifically predict how and when it may impact us going forward. But as we planned out our business for 2022 and beyond, looking at specifically our individual vendors that are critical to us, we hopefully have taken that all into account.

Very helpful. Thank you very much for perspective. And I wanted to ask on the met coal side. First, the prices we are seeing on the screen are remarkable. And I wondered if you have a view on what has been driving those prices in particular. And then secondly, to what extent you might be able to take advantage of those be it shifting tons from thermal to met, etcetera? Thank you.

Yes. So, the general economy is obviously what drive income as well as the supply issue. Our international producers are facing the same things we are facing as far as COVID is concerned. And some of those countries have been a lot more stricter than others, which has impacted the supply on production. So, there is just – the global economy is stronger. Then the spine, it’s impacted somewhat by investments. A year ago, the financing community was very willing to support the metallurgical suppliers, but they too have even had some impact in the Asian countries back to ESG. So, we expect pricing to continue to be very strong and very constructive. So, we would expect that we have an opportunity to double our met sales – not quite double, but increasing by 50% of where we were in 2021. So, we are hopeful for that. It’s not totally baked into our guidance, but because it’s unpredictable, but I think the first quarter has been impacted by the Chinese and the Olympics. And – but I think that from our conversation in the marketplace, we expect the met market to be very, very supportive over the next two quarters for sure at the prices that you are talking about being printed right now. And so it’s very attractive, and we would like to take advantage of it. But we only have the one met mine in West Virginia and some of our product out of our MC Mining operation goes into the met market. So, we are looking forward to participating in that marketplace.

Thank you very much for your perspective and best of luck.

Thank you, Lucas.

Our next question is from Arthur Calavritinos from ANC Capital. Please proceed.

Okay. Thank you. Hi guys. Just a couple of questions. With the Russian cramping and you mentioned it in the sentence in your opening remarks. So, our administration has gone to all the Asian countries and said, “We want some LNG, we direct it to Europe.” And it got me really thinking about it. Have you guys been, or the industry has been approached by the administration to see if you can get more coal supplies to Europe. And the other thing is, as I was thinking about it, if you are at one of these Asian countries, all the way from Vietnam down to the Philippines, and you got these LNG ships and somebody is asking you high-level ask for cargoes. And even if you kick them – you don’t give them back to Europe, I am thinking must like you must question the supply of natural gas, and you must be – I would think you think about a little better coal mix in the future. Just because I know you know the business so well. I just want to get your thoughts on that.

Answer of your first question, no, the Energy has not contacted us to increase our coal supply, quite the contrary. But they prefer to not produce, which is sort of crazy. But LNG is short in supply that’s why the prices are so high. And the government is trying to do what they can do. Specifically, I think they are talking to cater try to increase their supply. The problem though is there is no real capacity to even receive it. And so I think on the coal side, prices are very – I mean, they are just within the last two weeks have grown dramatically into Europe. I would expect that if there is coal supply to provide that there will be opportunity because Europe has to look at any and all sources going forward, whether – they change their energy policy. You would think that the NATO nations would. We are seeing France, for example, they had a limit on how many times that they would allow to be coal tons. If that they would allow to be burned and they have suspended that temporarily through February so that there could be more coal generation. But at the same time, the politics carbon and climate and ESG, you would think with this elevated world energy prices that there would be some reassessment of what the proper transition should be and that, that would allow for more supply to balance the demand. But so far, we are seeing the governments be pretty stubbornly committed to their CO2 targets. And as a result, I think we are going to have high prices for a while because not stimulating any confidence to go out and make large investments to bring on supply. So, just like our supply we are doing it incrementally, but it’s not going – I mean it’s definitely still sort of what the demand is. And that’s why I am confident that we are more production driven right now than we are market-driven because the market is there for us. So, all we got to do is find the people so we can try to benefit from these higher prices.

Yes. Thank you. And it’s funny at the last two sentences you are talking about the ESG and whatnot. And there was a story which coverage where China see their premier said the low carbon ambitions must not interfere with normal life. So again, he is not going to get any pushback, but it seems like it’s starting to take – these prices are starting to take a bite. And let me – one other thing, I think on two last questions, two quarters or three quarters ago, I thought you guys were sort of close to doing something in an oil and gas royalty deal. I was – I thought it was going to happen or something like that. I am just wondering what’s going on in that space, because I think it was an oil might have been $40 or something like that, and I am sure everything has changed. And just what’s going on in that environment in terms of M&A and transactions, and that’s it.

Yes, you may be referring to an acquisition that we closed in the Permian in October.

But I thought it was another one. I thought that was – you were close to another one. I don’t know for whatever – but I am sorry, go ahead.

That’s okay. Not sure exactly what you are referring to there. But in terms of the activity in that space, it has picked up. We are definitely in the deal flow, are evaluating numerous opportunities routinely. Disciplined in how we approach it. We want to make sure our economic underwriting is appropriate, but there could be significant opportunities to increase our activity there. And the bank markets have begun to open back up a bit RBL transactions are definitely available to us. So, we are generating nice cash flow out of that part of our business, if necessary, we could finance activities there as well. So hopefully, we will continue to see growth out of that part of our business.

Okay. Got it. Alright. Thank you very much.

Thanks Arthur.

Our final question is from Private Investor. Please proceed.

Hello. I noticed you mentioned about non-fossil fuel investments, would that by any chance you guys be open-minded as some non-fossil fuel mining. So, for example, in Bloomberg, I read that one of the trona mines up in Wyoming might be for sale by Tata from India there. Is anything like that across your guys’ minds as being possible with your mining experience and so on. Yes, that’s very green that used for glass for solar panels and this kind of a thing that might help for financing the whole company.

Right. Mining, obviously, is a core competency of ours. So, that is definitely a vertical that we are evaluating. Again, I don’t have anything specific I can share with you. We are not advanced enough to layout of a real concrete strategic discussion on that. But mining is the core competency of ours, and we are definitely evaluating areas where we could produce other products and use our skill set.

Excellent. Thank you.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the call back over to Brian for closing comments.

Thank you, Sherry. We appreciate everyone’s time this morning as well as your continued support and interest in Alliance. Our next call to discuss our first quarter 2022 financial and operating results is currently expected to occur in early May, and we hope you will join us again at that time. This concludes our call for today. Thanks to everyone for your participation and continued support of ARLP.

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.