Good day, and welcome to the Alliance Resource, L.P. Third Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Brian Cantrell, Senior Vice President and CFO. Please go ahead.

Thank you, Matt, and welcome, everyone. Earlier this morning, Alliance Resource Partners released its third quarter 2020 financial and operating results, and we’ll now discuss these results as well as our perspective on market conditions and outlook. Following our prepared remarks, we’ll open the call to your questions. Before beginning, a reminder that some of our remarks today may include forward-looking statements that are 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. 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’ll 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’ll begin with the review of our results and then turn the call over to Joe Craft, our Chairman, President and Chief Executive Officer for his perspective. Encouraging trends in economic activity, coal demand and oil and gas production and prices were beginning to emerge as we entered the 2020 quarter. And we were cautiously optimistic that ARLP's financial and operating results were poised to improve. ARLP's strong performance this quarter certainly justified our optimism. During the 2020 quarter, Alliance delivered significant increases to all major operating and financial metrics compared to the sequential quarter, reflecting improved performance from both our coal operations and our mineral segment. Total revenues increased by 39.4% to $355.7 million; net income attributable to ARLP climbed 158.3% to $27.2 million; and EBITDA jumped 146.4% to $118.8 million. These increases and ARLP's continued focus on reducing costs, expenses, working capital, and capital expenditures resulted in free cash flow of $103 million for the 2020 quarter, a 79% improvement over the sequential quarter. Increased free cash flow allowed ARLP to expand liquidity by 41.4% to $422.2 million, reduced total debt by $100.8 million and lowered total leverage to 1.69x at the end of the 2020 quarter, keeping us comfortably in compliance with all debt covenants. Turning to our consolidated results, let's take a closer look at the strong performance delivered by each of ARLP's business segments. Starting with our coal segment, improved coal demand and a resumption of production at all of ARLP's mining complexes led coal sales and production volumes higher by 48.5% and 66.6%, respectively, compared to the sequential quarter. Increased sales volumes more than offset lower price realizations, driving coal sales revenue higher by 42.1% to $335.8 million and contributing to a 124.4% increase in segment adjusted EBITDA of $123.8 million. Segment adjusted EBITDA also benefited from lower cost per ton during the 2020 quarter. Segment adjusted EBITDA expense per ton decreased 22% in the 2020 quarter, to $28.03 per ton compared to $35.95 per ton in the sequential quarter. The decrease reflects the impact of ongoing expense control initiatives at all operations, higher coal volumes, a favorable sales mix from our lower-cost mines, and lower coal inventory costs. The performance of our mineral segment also rebounded in the 2020 quarter, as stronger commodity prices led oil and gas operators to bring previously shut-in wells back online and slowly resume drilling and completion of wells on our mineral acreage. Compared to the sequential quarter, oil and gas production on our acreage increased 13.9% to 468,000 barrels of oil equivalent, and our realized price per BOE increased by 9.5%. Increased volumes in pricing led total revenues from oil and gas royalties and lease bonuses up by 23.9% to $9.7 million and segment adjusted EBITDA higher by 29.3% to $8.9 million. That completes our review of results for the 2020 quarter. And I'll now turn the call over to Joe. Joe?

Thank you, Brian. Good morning, everyone. Before I get started this morning, I'd like to express my condolences to the family of Bob Murray, a giant in the coal industry. I'm sure you all have heard, he passed away yesterday. Bob has touched the lives of everyone associated with the coal industry for more than 40 years. His importance to our country cannot be overstated. So please join me in a moment of silence to reflect on the many contributions Bob made during his lifetime for the good of America. Thank you all. As Brian mentioned this morning, we had some very encouraging signs that were beginning to take shape in June and continue to develop as the 2020 quarter progressed. After falling by 7% year-over-year during the first half of 2020, increased economic activity and favorable weather patterns during the 2020 quarter resulted in overall power demand in the Eastern United States increasing by 23% over the sequential quarter. With peak electricity loads increasing in July and August to support cooling demand, coal-fired generation rebounded even stronger in the third quarter, jumping 71% compared to the second quarter. After experiencing historically low oil prices in this sequential quarter, oil and gas commodity prices also rebounded during the 2020 quarter, resulting in oil and gas operators bringing shut-in wells back into production and slowly resuming drilling and completion activity in the lower 48. While these improving macro trends certainly contributed to ARLP's strong performance in the 2020 quarter, the solid results we delivered could not have been accomplished without the dedication and resilience of our people. Our coal mines worked through the disruptions created by the pandemic, reducing inventories and ramping up production to successfully meet the increased requirements of our customers during the 2020 quarter. The entire Alliance organization worked aggressively to maximize the cash flow of our businesses, reduce working capital and control capital expenditures and expenses, all of which has enhanced our financial position and liquidity. I am proud that through their efforts, ARLP was able to post significant improvements to all of our operating and financial metrics during the 2020 quarter. To close out 2020, our customers remain committed to taking delivery of all contracted tons this year. And we continue to anticipate full year 2020 coal production and sales volumes of approximately 27 million tons and 28 million tons, respectively. Looking ahead to next year, utility inventories continue to move lower, and several utilities have recently issued solicitations seeking significant coal supply commitments for multi-year terms. ARLP currently has priced contract commitments for approximately 20 million tons in 2021 with expectations for higher natural gas prices and increased energy demand as the economy recovers post-pandemic. We are currently targeting total coal sales volume in 2021 to be approximately 10% above 2020 levels. We also anticipate the results from our mineral segment will continue to modestly improve over the remainder of this year and throughout 2021. Our expectations reflect the recent rebound in commodity prices and production volumes, as well as the uptick in activity by the E&P companies. As global and domestic inventories continue to draw down and return to a more normal historical balance, supply-demand fundamentals will again incentivize E&P companies to increase their pace of development. Due to this strategic location of our minerals, coupled with the quality of operators with positions on our acreage, we feel ARLP's mineral segment should see increased drilling and completion activity next year. In conclusion, we will keep our focus on maximizing cash flow from ARLP strategically located oil and gas minerals, in our low-cost long-lived fully capitalized coal operations, to provide us with the ability to return cash to unit holders, maintain access to the capital markets and generate attractive long-term total returns for our stakeholders. With that, I'll ask the operator to open the call for questions.

Our first question comes from Mark Levin from Benchmark Company. Please go ahead.

Okay. Thanks very much and congratulations, particularly on the cost side that was something we have not seen in a while, which leads me to this. So when you're thinking near-term now for a second on Q4, if you kind of assume 28 million tons of sales, it looks like you would be up modestly quarter-over-quarter. Does that mean that the cost performance that you saw in Q3 should be comparable in Q4 or would there be reasons why it wouldn't?

Some of the increase in sales volume will come from inventory. We started the quarter with a target of reducing 750,000 tons last quarter, but we ended up with a reduction of 500,000 tons due to some transportation delays. We believe the railroads are operating more efficiently now, and they have been able to get their workforce back in place towards the end of last quarter and into this quarter. Therefore, we expect that the tons we intended to sell in the third quarter will instead be sold in the fourth quarter. From a production perspective, we are still aiming to produce at a similar level this quarter. There may be some holidays that could increase our costs slightly, but I remain optimistic that we can maintain the progress we made in the third quarter. While we might not achieve the same low costs again due to the excellent performance last quarter, I think we are operating close to full capacity considering the challenges posed by COVID. As a result, we should expect our costs to remain fairly consistent from quarter to quarter over the next year.

That's great. That's very good news. And let me just kind of turn to '21 for a second. I think you mentioned you have 20 million tons priced and shooting for maybe 31 million tons roughly next year. At this point, Joe, what can you tell us kind of about those 20 million tons? Where they've been priced either up or down relative to what you've done so far this year, or if you look at it year-over-year '21 versus '20, anything that you can do to help us with where those tons have been priced for '21?

I believe the pricing for the 20 million tons is slightly over $41 per ton. In terms of the unsold tons, approximately 60% are in the Illinois basin and 40% in Appalachia. We currently have many solicitations and natural gas prices are around $3 today. We aimed for that 30.8 or a 10% increase based on our performance in the third quarter and our plans for the fourth quarter. We're operating at a run rate of 7.7 million tons, and we're looking to maintain that pace. We hope that if gas prices increase, as many anticipate, we can achieve higher volumes. However, we're cautious due to economic uncertainty and the implications of COVID, the upcoming election, and whether the economy will remain open or face shutdowns. All these factors will influence our final assessment. Ultimately, we are confident that we can sustain at least a demand of 7.7 million tons for our production each quarter.

And Joe on the tons that have not been priced, we look at obviously different coal rags and they put out numbers and you guys tend to price above that when I look at it historically. But are you starting to see prices for calendar '21, calendar '22 Illinois basin prices? Are they moving up now with gas? Are they into the upper 30s now? Or are they still kind of in the mid 30s? Where would you characterize pricing now and how it's moved with gas moving higher?

I think the publications mainly focus on the spot market and not the term market. Currently, there are about nine major solicitations that have either taken place or will take place this quarter and into early next quarter, all of which are for longer terms with a minimum of 2 years. Two of these may extend up to 10 years. As an industry, we can't sell coal on a multi-year basis at the prices reflected in those indexes or publications, as they are not sustainable. There is no willingness to negotiate for the large market we have, which involves 150 million a day in the Illinois basin and Northern App, as the cost structure does not support those prices. Therefore, I anticipate that pricing will be significantly higher than what is currently shown in those publications. I can't provide further details, but we are actively engaged in discussions to determine a fair price for our customers.

That's very helpful. My final question relates to cash allocation. You've done an excellent job of reducing debt, bringing your leverage ratio down to below 1.7x. Moving forward, what are the priorities? Is maintaining a strong balance sheet or further deleveraging still the top priority? Is there a specific target in mind, either absolute or net? How does the distribution factor into these priorities? Also, are investments in oil and gas currently on hold? I'd appreciate your insights on balancing capital allocation, distribution, and further investments. Thank you.

What we are aiming for is some stability moving forward. It's important to determine what is normal, if there is a new normal, or if we are reverting to the old normal. Once we have vaccines and fewer headlines focused on daily case spikes and workplace reopenings, we need to navigate these uncertainties to establish what a stable run rate will be. Until that clarity is achieved, our Board has decided to suspend distributions. Therefore, we will not be paying a distribution this quarter, and we do not anticipate a distribution for the fourth quarter because we do not expect to have a clear understanding of our cash flows by January. We plan to revisit this decision in our April Board meeting, hoping that we will have greater clarity by then. The developments regarding vaccines, the election outcomes, and the overall state of the economy, including air travel, will contribute to our future outlook. Additionally, we will have insight into the outcomes of the solicitations I mentioned earlier. We are confident that our cash flow generation will stabilize, allowing us to consider distributions again in the future. Right now, our focus remains on maximizing cash flow, minimizing costs, being efficient, and maintaining prudent operations as a low-cost producer in a challenging industry. We are currently prioritizing debt reduction as we assess our earnings, which will provide better clarity on our options moving forward. All possibilities are on the table, including debt reduction, unit buybacks, distributions, and acquisitions. We are eager to make acquisitions and grow our company, which we have successfully done for the last 20 years. However, the COVID pandemic has created setbacks that we need to recover from, impacting not only the coal sector but the oil and gas industry as well. We do want to invest in minerals, but assessing these investments this year is more complicated due to numerous disruptions and uncertainties on the mineral side. We are observing various acquisitions in that area, which could be beneficial, but we need to understand how these merging companies will allocate their capital. We believe we are well-positioned with our current mineral purchases, but we need to decide on future acquisitions. The variable factors include commodity prices, the timing of drilling, and government regulations on permits. We intend to stay active in that market, but predicting the value propositions between buyers and sellers and the possibility of transactions remains challenging. I hope this addresses most of your questions.

Absolutely. It did. And again, congratulations on a super cost quarter. Thanks.

Thank you.

Our next question comes from Lucas Pipes with B. Riley Securities. Please go ahead.

Hey, good morning, everyone. And I'd like to add my congratulations to a very strong quarter on the cost side. Well done.

Thank you.

I wanted to delve a bit deeper into the cost aspect with my first question. Is it possible to provide a breakdown of the cost improvements either year-on-year or quarter-over-quarter? You mentioned it's mainly driven by mix, but I would appreciate any additional insights into other factors beyond mix, such as lower input costs.

Wow, that's getting into quite a bit of detail, Lucas. I mean I think it's just been a very strong focus by our operations to critically evaluate all costs, line item by line item. I haven't really looked at it. That's not fair. I have looked at it at that level of detail, but to try to give a cohesive response in this form will be a bit challenging. Clearly bringing down inventories has helped, inputs on materials and supplies has helped. I mean, it is multifaceted across the board focus, Lucas.

Just a couple of things. I mean, back to the mix side of it, if you're comparing to 2019 versus 2020, you can recall that we did have higher operating parts in 2019, which was a higher cost. We ended up closing down our Gibson North operation, so there have been some closing costs that have sort of burdened some of the 2019 cost numbers. Of course, COVID impacted the second quarter of 2020. So when we came back from that, we basically were able to bring people back in an efficient manner, and everybody was very focused back to the challenges we've had in the urgency to pay attention to every detail that you can pay attention to. Another factor year-over-year is in East Kentucky. We had a high-cost mine, we're transitioning to the lower-cost mine. Those haven't even really been benefited yet, not yet in these numbers because we just got that operation rolling in September. So it helped a little bit in the third quarter relative to the second quarter, as well as last year. But we're feeling that will be a lower-cost driver some of our numbers on a relative basis year-over-year. So I think those are the major things and it really just gets down to productivity. It's bottom line.

Right. And volume, I mean, obviously our volumes were impacted significantly in the second quarter. And they've ramped back up nicely. When you're producing more tons, selling more tons across those fixed costs on a per ton basis, it's obviously very meaningful.

Yes, that's very helpful. I may have some follow-up questions on that. My second question is about the election next week and its relation to the coal industry. In your opinion, what's on the ballot? Thank you.

It's difficult to determine the exact implications of the election on the coal industry. Joe Biden appears to have conflicting statements regarding fracking, which makes his position unclear. He has mentioned a desire for all utility generation to transition away from fossil fuels by 2035. We've held discussions with some of his policy advisors in the energy sector who assured us that the Biden administration understands the significance of affordable energy and the role of coal during the transition to 2035 and beyond. However, the current electoral focus seems to be primarily on the oil and gas sector rather than coal. It seems contradictory to push for electric vehicles while resisting the construction of new power plants, especially since current renewable technologies do not yet meet the anticipated demand for electricity. From a more localized perspective, we are confident that there are sufficient power plants within our operations that are well-funded and compliant with environmental regulations. These utilities are interested in running these facilities until at least 2035, or in some instances, 2048, and we are working with them to ensure these plants remain operational. We believe Biden's policy advisors recognize the vital contributions coal makes to local communities, and if he were to win the presidency, we hope he would adopt more balanced policies rather than sticking purely to campaign rhetoric. Historically, the coal industry has faced challenges under prior administrations, and I believe a victory for Trump would be more favorable for coal. However, if Biden wins, we will have to see if he follows through on his promise to unify and create jobs, or if he opts for a divisive approach. It's hard to predict more than that, but I'm willing to share additional insights if there’s interest from listeners.

No, Joe, I really appreciate your perspective. It's a question that comes up frequently among investors, and it's very helpful to hear your take and I wish you and your team and company all the best especially during these times.

Yes, but again, I think just in summary, we shouldn't panic. I mean, there's definitely opportunity here for us, our company, we're a low-cost producer. And you'd like to think that our elected officials would do the right thing. And if they feel like they've got a transition, they do it in a respectful and over a sufficient amount of time that there's no unintended consequences that are going to be bad for American, bad for the people that they represent.

Yes. Yes. Thank you very much, Joe.

Our next question comes from Matthew Fields from Bank of America. Please go ahead.

Hi, everyone. First, I just wanted to follow-up on a comment I think Brian might've made earlier where you’re talking about the 2021 kind of preliminary guidance about that 30.8 million ton level. It might've been just a comment in passing, but did you say at current kind of natural gas strip, which is a little above $3 for 2021? There could be upside to that 31 million ton number?

Yes. This is Joe Craft. I'm the one that said that.

Sorry, Joe.

That's okay. We're currently observing demand dynamics, but we haven't encountered $3 gas until recently. In the third quarter, gas prices were significantly lower, yet our company maintained a demand rate of 7.5 to 7.7 million tons. Personally, I don't think that the demand we've seen in 2020 has been influenced by natural gas prices exceeding $3, as we've not faced that situation. We contemplated what might occur if natural gas prices rise to $3.50 or $4, as some analysts predict, particularly regarding gas to coal switching. The economic data suggests that there is significant potential for this switch, but our projections for a 10% increase in 2021 ignore that possibility. We're basing our projections on the current demand rate of 3.8 million for 2021, even considering COVID-related factors and the likelihood of not returning to normal by January 1, 2021. This projection assumes there won't be a significant economic shutdown like we experienced in the second quarter. Should we enter a situation where there is a push for a shutdown similar to what we had in April or May, demand would certainly be affected, but I'm optimistic that regardless of the election outcome, we won't see a return to those conditions. Biden has stated he intends to control the virus without shutting down the economy, but I can't predict the future.

Okay. Just to clarify, the 31 million ton estimate is based on the assumption that there won't be any major economic disruptions and that there will be a return to coal usage due to high natural gas prices.

Correct.

Okay. Thank you for that clarification. And then, I appreciate the clarity on the capital allocation. I think Mark asked about your capital allocation and you said kind of we want to wait to see what happens with the pandemic, with the economy and maybe kind of no changes to the distribution policy until your April Board meetings. So with the December and the March quarter, presumably reasonably cash flow positive, we're assuming that that goes to debt repayment like September was. My question really is, your bonds are trading at such distress levels, $0.60, $0.65 on the dollars. Appreciate that liquidity is paramount and you want to maintain revolver availability, but at some point you kind of can't ignore that the value in buying back bonds at $0.60 cents on the dollar versus paying back revolver at $0.100 on the dollar?

That's fair. What we will be doing in the interim is going back to the banks. We do have restrictions under the revolver ability to buy back bonds, but we'll be visiting with our banks to try to get as much flexibility as we can to potentially take advantage of that. So that if we do choose to go in that direction, we can. You also have to recognize that our bonds are fairly closely held. They are publicly traded, but the level of volume on at any given point in time is fairly limited. So the ability to go in and transact in the open market at any type of scale is a bit of an unknown at this point in time. But I believe in answering to your question, we'll be working to get as much flexibility as we can and assessing our ability to actually participate in the market to take advantage of what is clearly very strong math in terms of where the bonds are trading today and our cost of otherwise available capital.

So today your revolver limits RPs via this available cash concept, right? So can you just give us an estimate of how much kind of capacity you have to buy back bonds?

Well, we'll just maybe go back to the banks and work through that to see how much flexibility we can get.

Okay. All right. Thanks very much and good luck.

Thank you.

Our next question comes from Nick Jarmoszuk with Stifel. Please go ahead.

Good morning. I was hoping to get a little additional color on the '21 book. I appreciate the commentary earlier. How can we think about of the tons that are contracted? Are any of those multiyear terms? How many of those tons carried over from the current 2020 contracts as well?

There's not too many that have carried over from 2020. I mean, the only reason they would carry over are shipment delays that I remember.

That's right.

As we consider 2021 and move into 2022, do you have that information, Brian? I can't remember offhand how many commitments we have for 2022.

Yes, I think we've got about 8.5 million committed in '22. At this point in time, we've got some volumes committed out into the '24 timeframe as well.

What’s the longest term that the company would consider?

We would entertain 10-year contracts at an appropriate price.

At a structure that would have reopened.

Okay. Understood.

We believe there needs to be a good contract that is close to market. If it strays too far from market value, it's detrimental for both parties. We would prefer some mechanism to keep it aligned with market conditions, and so would they. Both parties require security of supply. It is encouraging that several customers are communicating to the market, including lenders, bondholders, and investors, that they need our presence for the next 10 to 20 years, which emphasizes the need for supply security. We are open to entering such agreements, but both sides will want assurances that the pricing structure will enable us to operate responsibly.

Sorry, the type of construct that Joe just described, where you have periodic reopeners and the ability for pricing to move, plus or minus within a band over time to keep both sides as close to market as possible is what we've seen historically.

Could you discuss the changes in the power plant mix, particularly regarding the direction of shipments historically? Are you acquiring any new power plant customers, or is the situation fairly consistent?

It's quite stable. We're seeing fewer suppliers while our market share increases. There are some targeted customers we haven't shipped to before, but I'm focused on building relationships with each of our existing customers. To answer your question, we're still working with the same customers and plants. The only change is the higher cost of gas in the market, which has allowed us to gain some market share.

And then what's the like, or what’s the reception you get for power plants that you have not historically sold to? Is it difficult to get the coal spec store? What are the hurdles that you see?

Yes. We are focusing on plants that have traditionally only used river basin coal. We have a lower sulfur product from the Illinois basin and our Gibson operation that we are marketing. We have gained some volume in that region. Customers with coal-fired generation are definitely interested in speaking with us because they recognize our long-term commitment to the industry, our strong balance sheet, and the reliability of our operations. Overall, the reception has been positive. We haven't discussed the export market much, and we don't have any volume planned for thermal tons sold in 2021. However, next year, we aim to ship 600,000 tons to the metallurgical market from our operations, and our MC product also competes in the PCI market with around 300,000 tons expected there. This means we could potentially export between 900,000 and 1 million tons, all of which is incorporated into our 2021 plan.

Okay. And then on the subject of balance sheet and your competitors who are either potentially in bankruptcy post reorg, does your balance sheet give you advantage when you're going in for RFPs?

Every solicitation says that it does. Whether it does or not is up to our customers.

Okay. All right. I appreciate your time. Thank you.

Our next question comes from Lin Shen with HITE. Please go ahead.

Hey, good morning. Thanks for taking my question. Just want to clarify the cost for 2021. I think you mentioned that you expect that cost to be predictable for next year and assuming you are producing 31 million or so next year, should we think about the cost for 2021 going to be lower than 2019, given what the cost structure is?

Yes, I mean, we believe that right now, I think that we would be slightly lower than 2019.

Got it. A few years ago, the industry was discussing coal to cash parity or the relationship between coal demand and gas prices. Now, even with gas prices $3 higher, I don't see a strong outlook for coal demand next year. I understand there are uncertainties related to COVID-19 and overall demand, but how should we view the new parity between coal and gas, considering the recent policy changes and ESG pressures affecting the utility sector?

I wouldn't say that we're not optimistic; rather, I would describe our stance as cautious. What I can share is that we believe we can sustain sales at 7.7, although we haven't provided specific guidance. I also want to clarify that I haven't included natural gas in our considerations, so I didn't express a definitive opinion on that front. However, if natural gas remains around $3 or increases, which is a common expectation, there could be potential for upside that we haven't incorporated into our projections.

Lin, the starting point is power demand, which reflects economic activity. If the economy recovers and approaches pre-COVID levels, combined with current natural gas prices, we may see a transition from gas to coal. However, predicting this is quite challenging at the moment. I share Joe's perspective and remain hopeful about an increase in coal demand next year, but it ultimately depends on the state of the economy and overall power demand.

Yes. I want to clarify when speaking with your utility clients, do you think they are discussing the same metrics as before? For instance, when gas was $3, they would increase coal consumption due to energy parity, but now there's also ESG pressure on the utility sector. This might mean we need a slightly higher gas price for the same conversion compared to a couple of years ago. Do you feel that way, or do you think it’s similar to how it was a few years back?

Our customers are hesitant to make commitments regarding the gas curve. They want to avoid situations where they have overcommitted and the gas curve ends up being volatile, which puts them in a difficult position with coal supplies. Therefore, they are seeking more flexibility and options. Customers are expressing a desire not to commit to higher gas prices but want to be prepared for them. They are asking if we can provide options to ensure coverage if higher prices arise. Those discussions are happening, but we’re not seeing customers willing to make firm commitments. This cautious stance is partially due to the uncertainty surrounding gas prices. However, based on discussions with customers, we feel confident that they will want to purchase 7.7 million tons from us each quarter, barring a major economic downturn. If the economy does suffer, it will impact energy generation. But assuming the economy remains stable, the feedback we've received suggests they are comfortable with our target production of 31 million tons as a base case.

Last question, if I may. If you anticipate higher demand next year, do you think you could increase production by 10% or more at a similar cost, or would you need to resort to higher-cost production?

I think it's the former. I think we could generate another 10% at equal to or lower costs because it's incremental. I mean, we've got excess capacity. I think that challenge to go beyond that is we would need some term to try to make sure that it's not just a quarter-over-quarter to try to go much above another 10%.

Great. Thank you very much. I appreciate it.

Our next question comes from Tim Novak with Advent. Please go ahead.

Hi. Good morning. Tom Novak, Advent. Do you guys have a gross debt target that you would like to get to?

I'd say we typically target 1x EBITDA in total leverage. But again, we can't get more aggressive than that, if we see a recovery in the markets.

I think you've generated $180 million in free cash flow so far this year, despite it being quite a challenging period. I'm curious, if we don't account for shutdowns in March, April, and May, and if you don't make any distributions, how many years do you think it would take to fully repay your gross debt balance?

I mean, I think in that type of a scenario, we'd have sufficient cash flow to completely pay down all of our debt within their maturity schedules.

Yes. I mean, I guess what I'm getting at is you generate a lot of free cash flow and it's not unreasonable to think that coal companies are permanently shut out of the high yield market, right? So in that scenario, why run really with any material debt levels at all? Why not just use the free cash flow, take debt down to a de minimis level, maybe a little bit of secured bank debt and then just pay out the rest to equity holders in the life of these assets?

I’m not sure if we're relying on debt financing or primarily on the cash flow we're generating. I’d like to think that this cash flow is indeed what we're generating, and we are reinvesting it to enhance our cash flow from those investments, in addition to the growth already built into our mineral segment investments. I believe our cash flow can sustain debt levels at 1x EBITDA, and we certainly have a future beyond 2035. Aiming to reduce our debt to zero in the next two years, when we have a 15-year timeframe, seems overly cautious. While we may not be accessible to the high yield bond market, there are various other financing options available for our investment growth. We also don’t need to allocate 100% of our cash flow. I firmly believe in maintaining a strong balance sheet indefinitely. Your question seemed to probe what a reasonable net flow would be to uphold a robust balance sheet as we look ahead for our company. Currently, I’m confident that we can manage a 1x debt level, which aligns with a very conservative but strong balance sheet. This would enable us to use any excess cash to further grow our business or reward shareholders in some manner. That remains my focus moving forward.

Okay. Got it. Thank you very much. That's helpful.

Our next question comes from Mark Levin with Benchmark Company. Please go ahead.

Thank you for the opportunity to follow up. I have a question regarding liquidity and surety bonds, specifically about whether there is a minimum level of liquidity you want to maintain. This question arises in light of what we’ve seen from other coal companies, like Arch and Peabody, concerning cash collateral calls related to surety bonds. My first question is whether there is a comfort minimum liquidity level, and secondly, have you had discussions with third-party surety bond providers about the possibility of needing to provide more cash collateral? Thank you.

Yes. Let me take the second part of that question first, Mark. I think at year-end between our asset retirement obligation bonds, workers' comp, the amount of collateral and other performance bonds, total surety bonds in place were roughly $280 million or so. It's obviously a very fluid market, not just with our space, but across the board in many industries as sureties are really reassessing. What is an appropriate level of collateral, we've seen some increase. It's been relatively modest. I think our total collateral outstanding at this point in time is still less than 10% of our total bonds in place. But it does remain very fluid and we're talking not only with our surety providers but with our insurance companies, et cetera, on how to best manage that. In terms of overall liquidity, I think probably at a minimum we've generally been focused in somewhere on the $250 million range or so and clearly increasing collateral requirements each in to what your overall capacity availability looks like. And we'll be trying to manage through that as that market continues to evolve.

That's a great answer. I appreciate all the clarity there. Thank you.

Sure.

Our next question comes from Private Investor, Sam Johnson. Please go ahead.

Thank you for taking my call and congratulations on a good quarter. I have two questions. First, have you considered a reverse stock split? If not, what is the reasoning behind that? Also, you mentioned your acquisition strategy earlier. What are your thoughts regarding renewables? Many oil companies like BP, Total, and Shell are venturing into the renewables sector. What do you envision for your company in that area?

For the first question, I had considered the stock split, and we are continually looking for ways to unlock the value of our company, especially in our mineral segment, where we believe we are not receiving an adequate valuation for the cash flows generated by those assets and their future prospects. This is one of the focus areas for us, but evaluating this is challenging due to the current treatment of the energy sector by the markets. I don't think simply doing a stock split now would make a significant difference. There's no certainty that traditional methods we might consider to enhance long-term value would be recognized in the short term. That's why a stock split hasn't occurred yet, but it remains a possibility for the future that we should think about as shareholders. Regarding your question on mergers and acquisitions, I still see a need for consolidation in our industry, which I have stated many times before. Following the Arch-Peabody merger, we need to understand its implications and the timing in relation to the upcoming election, which complicates decision-making from a seller's standpoint. We’re observing that producers are beginning to join forces in the exploration and production sector, primarily influenced by their financial conditions or the leverage in the industry. It’s clear that the management and boards of these companies are responding to what lenders and investors are indicating. There has been significant capital flight from the sector, both from private and public investors when considering investment in the industry. Moving forward, the coal industry may require the direction of lenders or the investing community to attract funds. If consolidation is to happen, it will entail more than one party being willing to engage. It will also necessitate some catalyst to encourage communication. With the upcoming election so close, there may be a wait-and-see approach regarding the coal industry's future under a Biden administration. All stakeholders will need to assess the situation and come together to determine what is in the best interest of the companies’ owners.

Okay. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Cantrell, Senior Vice President and Chief Financial Officer, for any closing remarks.

Thank you, Matt. And thanks to everyone for the robust discussion this morning as well as your time and continued support of Alliance. Our next call to discuss our fourth quarter financial and operating results is currently expected to occur in late January. We hope you'll rejoin us again at that time. This concludes our call for today. Thanks to all for your participation.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.