Page1

HaalladorEEnergy((HNRG)
www.halladorrenergy.com

LasstClose:$5.1
13(8AUG2016
6) Sales$M
Mil:$318
Industryy:Coal
August9,2016
BasicMateriaals
InttrinsicValue:$9.00$11.0
00 MktCap
p$Mil:150
Sector:B

InvvestmentThe
esis:HalladorEnergy(HNR
RG)isasmallIllinoisBasin coalcompanycurrentlytrradingatadisscountto
peeersandintrin
nsicvalue.The
emanagementteamisexperiencedan dhavedemo
onstratedcou
untercyclicalcapital
allo
ocationskill.SShareholderaandmanagem
mentinteresttsarealigned viasignifican
ntinsiderown
nership.Givenrecent
acq
quisitions,oneofwhichwastransformaative,thebalancesheetissremarkablysstrong.Theb
businessmod
deliswell
suitedtothecurrentcoalmaarketandhassgeneratedhealthyreturnnsforthelasttfiveyears,producinganaaverage
RO
OICof12.03%.

AnenterprisinginvestorcanaccumulatessharesinHNR
RG,whilema intainingamp
plemarginoffsafetyatpriccesupto
$5..50ashare.A
Atsuchlevels,,weexpectareturnofbettween45%a nd80%,exclu
udingdividen
nds,overthecourseof
theenext2yearss.

als:AlthoughthecausesoftheUScoalindustriessoorrystatearenumerous,abysmalbalan
ncesheet
StrrongFinancia
maanagementhaasplayedabiigroleinthemostrecentsstringofcoalcompanyba nkruptcies.A
Assuch,debtlevels
sho
ouldbeapartticularfocuso
ofanyoneloo
okingatcoaliinvestmentsccurrently.Un
nlikethebalan
ncesheetsoff
com
mpetitors,wh
hotookonde
ebttobuyasssetsatthepe
eakoftherec entcommoditycycle,Hallladorsbalanccesheetisa
strength.TotalDebtiscurre
ently48%ofccapitalvs.ape
eermeanof770%,andhassbeenaggresssivelypaiddo
ownby
maanagement.

Forrmostofthecompanysh
historyasaco
oalminer,the
ebalancesheeethasbeend
debtfree.Itw
wasonlywheenan
opportunitytorroughlydoub
bleprovedreccoverablereservesin20144presentedittselfthatman
nagementtoo
okondebt
($3
350million,ofwhich$100millionhasaalreadybeenrepaid).Asooftheendoftthe2ndQtr20
016Halladorhas$250
milllionindebt,$67millionin
nundrawnre
evolvercapaciity,aratioof netdebttoEEBITDAof2.7
77xand(EBITD
DA
Cap
pEx)/Interestratioof2.65x.Comparedtotherestoftheindustryythisispristin
ne,Illinoisbasincompetito
orForesight
Eneergy,forexam
mple,hasaNetDebttoEB
BITDAratiooff6.69xandinnterestcoveraageof1.46x.Onlyindustryyheavy
weeightAllianceResourceParrtners(ARLP)maintainsabetterlongteermsolvencyyprofile.

Go
oodbalancesh
heetmanagementisnottheonlyfinan
ncialmeritbaddgeHalladorhasearnedthough;healthycashflow
isaanother.Inaperiodwhen
neventhemo
ostconservativeminingcoompanieshavvestruggledw
withcashflow
w,andcoal
nershaverarrelyseencash
min
hflowintheb
black,Hallado
orhasmanaggedtoproduccepositivefreeecashflowfforallbut
oneeyearinthelastfive.Mo
oreover,Halladorhasproducedgrowinggfreecashflo
owpersharesince2006,aaFCFreturn
oninvestedcap
pitalof9.81%forthelastfiiveyearsandacashreturnnratioof7.0%
%vsapeeraverageovertthesame
perriodof4.1%.

StrrongManagement:WhilemanagementtatPeabody,,Arch,Alpha andmanyotthersleveredupbalancesheetsatthe
peaakofthemosstrecentcoallcycle(seeFigure1),engaaginginafrennzyofdestrucctiveM&Aatapointofpeeakearnings,
Halladormanaggementsensib
blyoperatedabasicallyde
ebtfreeshop until2014.W
WhenHallado
ormanagemeent
eveentuallysawffittotakeondebt,itwasduringanind
dustrytrough andwasapu
urchasethatttripledtheco
ompanys
pro
oductionbase
eviatheacqu
uisitionofreservescontigu
uoustoexisti ngassets.Basedonassum
mptionsoutlin
nedinthe

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acccompanyinge
excelspreadsheetwebelie
evethattheaacquisitionoffVectrenFueelcoalassetsiin2014willlikelyhavean
IRR
Rofatleast5.87%vs.ane
estimatedcom
mpanyWACCof3.16%.

ontinueditsggoodstewardshipin2016,withasmall boltonacquisitionofadd
ditionalcontigguouscoal
Maanagementco
st
s
resservesfromB
Blackhawkow
wnedTriadMininginthe1 quarter.Raatherthanusingcashfrom
moperationsttopaydown
$18
8millioninoutstandingde
ebtaheadofschedule,maanagementaccquired14.2milliontonso
ofcoalreservveswhich
can
nallbemined
dviatheexisttingOaktown
n1mine,andgainedaccessstoapreviouslyinaccessible1.6millio
ontonsof
resservesthecom
mpanyalread
dyowned.Intotal,thispu
urchasenetteedthecompany15.8millio
ontonsofnew
wreserves
and
dasalesagre
eementfor1.4milliontonssofcoalatacostof$1.144pertonofco
oalintheground.

Figu
ure1Source:C
CreditSuisseU.S.CoalIndustryyInitiationofCo
overage,26MA
AY2015

Usiingsimilarassumptionsto
oourVectrenacquisitione
exampleabovveandassumingthenewlyyacquiredan
ndaccessible
resservesaremo
onetizedoverra16yearpe
eriod,thisacq
quisitionhasaapotentiallyoutstandingIIRRof49%.W
Webelieve
thaatthisisanotherdemonstrationofthestrongcapitaalallocationsskillofManaggement.Theaassetswereaavailableata
tim
meofdistress,,fromaregio
onalcompetittor,requiredlittleinthew
wayofnewCaapExtomoneetize,couldbeepaidfor
witthouttakingo
onadditionaldebtandcam
mewithafreeoptioninthheformofaccesstoalread
dyownedresserveswhich
weerenotprevio
ouslyaccessib
ble.Whatmorecouldanin
nvestoraskfoorfrommanaagement?

Inaadditiontobe
eingsolidcap
pitalallocatorrs,manageme
entandthebboardofHallaadorownasiggnificantporttionofthe
bussiness,alignin
nginterestsw
withshareholders.TheCEO,BrentBilsl and,isthefo
ourthlargestsshareholderw
with3.5%of
theesharesoutsttanding.Mr.Bilsandhasb
beenwiththe
ecompanysinnce2006,and
dbasedonareviewofSEC
Cfilings,has
nevversoldanyssignificantblo
ocksofstock, preferringto
ogrowhisho ldingsfrom3365,000shareesin2008toaacurrent
1.0
04millionshaares.Addition
nalinsiders(b
boardmembe
ers,institutionnscontrolledbyboardmeembersandsenior
exeecutives)control33%ofth
hesharesouttstanding.

MaarketFactorsandValuatio
on(pricedataaasof8/8/20
016):Halladoorcurrentlytrradesat0.7xtangiblebookvalueand
0.4
47xLTMsaless.Atthecurrentprices,th
hecompanyh
hasamodest dividendyieldof3.1%.Co
omparedtoitsnon
ban
nkruptpeers,,Halladoristradingatare
easonablysignificantdiscoountandgiventhefirmsm
multiplestrenggths

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waarrantsarerattingbythem
market.Atthesametime,w
webelieveitiisworthnotin
ngthatoutsid
deoftheban
nkrupt
plaayersthecoallsectorhasraalliedstronglyythisyearandthatseveraalcomparableesarelikelytradingatorsslightly
abo
oveintrinsicvvalue.Withtthatinmind,aswellasaD
DCFmodel,w eestimatein
ntrinsicvaluetobebetweeen$9.00and
$11
1.00ashare.(SeeExcelDataFileforCo
ompsandDC
CF)

dtradeatadiscounttoaccompanylike CNXC,bothccompanieshaaveconservattivebalance
AtthehighendHNRGshould
eoperationalllyfocusedonasinglemine
einasinglebbasinandwhiileCNXChasasignificantlyystronger
sheeets,theyare
divvidendgivenitsMLPstructture,thecom
mpaniesarem
materiallysimiilarinmosto
otherrespectss.Onediffereence
bettweenthetw
wothatwarrantscarefulco
onsiderationiisthefactthaatCNXChasn
noorganicgro
owthpotentiaal,itneeds
ano
otherdropdo
ownfromitsGPinordertogrowitsunitdistributionn.HNRGontheotherhand,hasthecapacityand
infrastructureatitscurrentm
minestogrow
wsalesbyasmuchas40%
%(currentcap
pacityofthem
mineandinfraastructureis
abo
out10million
ntonsayear)),anopportunitythatinth
hechaoticcoaalindustrymaymaterialize.Wedonottprescribe
add
ditionalvalue
etothisgrow
wthpotentialaaswebelieve
etheuncertaiintiesaretoo
onumerousto
oputaprobaabilityonit,
buttbelieveitisworthnotingg.

Hallador
CNXCoalResourcesLP( NYSE:CNXC)
ImpliedTEV
+TotalCash
TotalDebt
/ShareesOutstanding
ImpliedPerShareValuee
Average

LTMRe
evenue
32
20.2
TEV/LTM
MRevenue
2.3
30x
736
6.46
15
5.2
24
49.9
29
9.3

LTMEB
BIT
43.1
TEV/LTMEBIT
13.90xx
599.09
9
15.2
249.9
29.3

LTMEBITDA
A
85.4
TEV/LTMEBITD
DA
7.20x
614.88
15.2
249.9
29.3

17
7.12
14
4.18

12.44
4

12.98

urvaluationisstemperedbyytheresultso
ofaDCFmod
del,whichwehaveusedto
oestablishthelowerendo
ofour
Ou
valuationrangeandsuggestssthatHNRGiisworthabou
ut$9.39persshareata10%
%discountrate.WeliketheDCF
anaalysisforthelowerendoffourvaluationrangebecauseofconcerrnsthattherrecentcoalrally,whichHalladorhas
nottbeenapartyto,isoverdone,afactorthatdoesno
otplayintoouurDCFmodell.

Fin
nally,wehave
erunareversseDCFinanaattempttosee
ewhatkindooffutureFCFthemarketisscurrentlypricinginto
theestock.Assum
mingFCFfrom
mtheLTMasastartingpo
oint,aterminaalgrowthrateeof2%(shriinkingindustrry)anda
10%
%discount,H
HNRGFCFhasstodecline1
10.66%ayearrforthenextttenyearstojustifythecu
urrentsharevvalueof
$5..14.ForcomparisonpurposeswedidtthesameanalysisonCNXCCandFELP,ou
urpreferredcomparableffroman
opeerationalperspectiveandabasincomp
parable.Inbo
othcases,theeresultssuggeestthatHNRG
Ghasbeenoverly
pen
nalizedbythe
emarket.Atthecurrentp
price,CNXCtrradesasifFC Fwillgrowatt5.9%ayearforthenextdecadeand
FELLP,acompanyflirtingwith
hinsolvency,ttradesataprricewhichsugggestsFCFwiillonlyshrinkkat3.3%ayearforthe
nexxtdecade.Giventhesuperiorityofthebalanceshee
et,HNRGisunnlikelytosuffferassignificantlyasFELPinthe
com
mingyearsan
ndgivenoperrationsandm
managementw
willproducerresultscompaarabletoCNX
XCalbeitwith
houttherich
divvidend.

InvvestmentRiskks

Theerisksarisinggfromcoalinvestmentsarrenumerous,theregulato ryandenviro
onmentalriskksareobvioussandbest
exp
plainedbythe
ecompany'sthemselvesin
nregulatoryffilings.Operaationalrisksin
ncludedeclin
ningdemandfforIllinois

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Bassincoalasarresultofcompetitivepricin
ngbyNorth/C
CentralAppallachianminerrsoraggressiivepricingbyPowder
RivverBasinprod
ducerssuchaasCloudPeak(CLD).Fuelsswitchingbyuutilitieswillb
beanongoinggissue,especciallywhen
natturalgasprice
estrendbelo
ow$2.50perMMBtu.Wed
donotbelievvethatHallad
dorislikelytotriggeranyo
ofitsdebt
con
nvents,especciallyastheyssecuredloose
ercovenantsearlierthisyeear,butitisaalwaysaposssibilitywithacoal
com
mpany.Curre
ently,thedeb
btcovenantsontheprimaaryCreditAgrreementinclu
udemaintenaanceofaDebtService
CovverageRatio(definedasEEBITDA/Intere
estandPrincipalReductionns)ofatleastt1.0to1.25aandmaintainiinga
LevverageRatio((definedasTo
otalDebt/EBITDA)ofnom
morethan4.225throughSeeptember201
18.Atthecurrrenttime,
HalladorhasaD
DebtServiceC
CoverageRatioof4.56xan
ndaLeverageeRatioof2.999x.

Ap
primaryriskfo
orinvestorsissthepossibilitythattheco
ompanyremaainsobscure..Asasmallccapcoalcomp
pany,witha
sm
malldivided,H
Halladorcould
dbeconsidere
edboringwh
henviewedthhroughtheeyyesofWallStreet.Itmayffailto
atttractthenece
essaryinvesto
orattentionaasignificantm
movehigherreequires.ThepossibilityHaalldorisadeaadmoney
invvestmentshouldnotbeovverlooked.

Dissclaimer:Opin
nionsexpresssedhereinbytheauthorarenotaninvvestmentreco
ommendation
nandarenotmeantto
berelieduponininvestmenttdecisions.Th
heauthor'so
opinionsexpreessedhereinaddressonlyselectaspecttsof
pottentialinvesttmentinsecuritiesoftheccompaniesme
entionedanddcannotbeasubstitutefo
orcomprehen
nsive
invvestmentanalysis.Anyanaalysispresenttedhereinislimitedinsco pe,basedonanincompleetesetofinformation,
and
dhaslimitatio
onstoitsaccuracy.Theau
uthorrecomm
mendsthatpootentialandeexistinginvestorsconductthorough
invvestmentrese
earchoftheirrown,includingdetailedre
eviewoftheccompanies'SSECfilings,publicstatemen
ntsand
com
mpetitors.Co
onsultingaqu
ualifiedinvesttmentadviserrmaybepruddent.Theinfo
ormationupo
onwhichthismaterialis
bassedwasobtainedfromsourcesbelieve
edtobereliab
ble,buthasn otbeenindependentlyveerified.Thereffore,the
autthorcannotgguaranteeitsaccuracy.Anyopinionsorrestimatescoonstitutetheauthor'sbesttjudgmentassofthedate
ofpublication,aandaresubje
ecttochangewithoutnoticce.Theauthoorexplicitlydisclaimsanylliabilitythatm
mayarise
fro
omtheuseofthismateriall.

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