I opened a three part position in thermal coal recently.
music selection: “Mindtraveler” — Falconer
The thermal coal space is pretty beaten up. Low natural gas prices have cut into demand and a lot of miners have gone bankrupt. There are a few low cost operators however that have remained profitable. Importantly, they operate as MLPs and are obligated to pay out cash flow to shareholders. I wanted to spread my risk here so instead of one position about 10k in size, I went with three around 3,300 each. Just a little diversification for peace of mind.
First is CNX Coal Resources LP (CNXC). This one is a micro-cap and has no options available so I bought the shares directly. I snagged 358 shares for 9.76 each. The 2.05 annual distribution thus yields 23.81% against my cost basis. The company has a reasonably strong balance sheet and solid cash flows despite depressed prices for thermal coal. I think I will do well here.
The second position I entered was Alliance Holdings GP (AHGP). This one yields about 12 percent but I went with an options play and sold AHGP160617P00017500 for 1.05 a share. The trade will be in force for 52 days and yields an astounding 42.12% annualized. The trade also enjoys 11.61% downside protection. I’ll be glad to be assigned and start writing covered calls against the position while collecting 12% in distributions. Not bad for a company that is still turning a respectable profit in a down market.
The final position I entered was Alliance Resource Partners LP (ARLP). This one yields about 11 percent but it also has options available. I sold ARLP160617P00015000 for 1.20 a share. The trade will be in force for 52 days and does even better than Alliance at 56.15% annualized with 11.99% downside protection. Like Alliance, I decided to go at the money instead of gain extra downside protection around 12% yield because I’m keen to get assigned and start writing covered calls while collecting distributions. ARLP also has maintained profitability in a difficult pricing environment and looks like another survivor.
Devour your prey raptors!