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This analysis of Rhino Resource Partners (NYSE:RNO) was provided to TradingIPOs subscribers in advance of its Wednesday, Sept. 29, IPO. The company sold 3.24 million shares for $20.50 each, raising about $66.5 million, in its IPO.

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Rhino Resource Partners plans on offering 3.7 million units (assuming over-allotments) at a range of $19-$21. Raymond James, RBC and Stifel are leading the deal. Post-IPO RNO will have 25 million total units outstanding for a market cap of $500 million on a pricing of $20. Bulk of IPO proceeds will be used to repay debt.

Wexford Capital will own 85% of RNO including the general partnership. RNO is a collection of coal assets that have been acquired beginning in 2003. This is the second attempt Wexford has made bringing Rhino public. The first was ill-timed in August/September 2008. That deal looked okay, albeit with an aggressive valuation in range. It was not structured as a Partnership, however. This second attempt appears structured far better and offers value/yield to the holder.

Yield - RNO plans on distributing $0.445 quarterly to unit holders. On an annualized $1.78, RNO would yield a strong 8.9% annually.

From the prospectus:

We produce, process and sell high quality coal of various steam and metallurgical grades.

The company sells steam coal for electric utilities and metallurgical coal to steel and coke producers.

Coal reserves located in Central Appalachia, Northern Appalachia, the Illinois Basin and the Western Bituminous region. As of 3/31/10, RNO controlled 273 million tons of steam coal and 12.5 million tons of metallurgical coal with an additional 122 million tons of non-reserve coal deposits.

The company operates 11 mines, 6 underground and 5 surface. Mines are located in Kentucky, Ohio, Colorado and West Virginia. Production is at 4.7 million tons of coal annually with another 2 million tons purchased for reselling.

One major issue when structuring E&P operations as a partnership: It can be quite difficult to pay a sufficient yield and also cover capital expenditures needed to replace reserves that have been turned into production. We've seen this in the recent similar IPO Oxford Resource Partners (NYSE:OXF). OXF simply will not have sufficient cash flows to cover both the distribution and reserve replacement capex. The result is OXF will be loading up the balance sheet with debt going forward to distribute cash to holders.

***RNO is forecasting sufficient cash flows to cover all distributions as well as all capital expenditures. This is a very good sign.

RNO plugs in the current selling prices for coal when making their cash flow projections for the first 12 months as a public company. While they've locked in commitments on volume/price for 60% of production, a steep drop in coal prices would negatively affect cash flows. Should prices drop appreciably, RNO would need to borrow to cover both distributions and capex. Note that RNO has already committed and locked in prices on 60% of their expected coal sales the first 12 months public.

Financials

$40 million in debt. These debt levels will not impact operations or cash flows severely.

Forecast for first 12 months public (ending 9/30/11):

$348 million in revenues (equating to 5.1 million tons of coal sales) with net earnings of $2.32 per share.

Distribution coverage from cash flows projected at 107%.

There are currently four publicly traded coal partnerships- OXF, Penn Virginia Resource Partners (NYSE:PVR), Natural Resource Partners (NYSE:NRP) and Alliance Resource Partners (NASDAQ:ARLP). A quick comparison:

RNO - Would yield 8.9% annually at $20. They are forecasting cash flows sufficient to cover entire distribution as well as all capital expenditures the first 12 months public. Very nice balance sheet with just $41 million of debt.

OXF - Yields 9.1%. $91 million in debt. OXF is forecasting cash flows to cover only 61% of distributions/capex first 12 months public. OXF will need to borrow to both pay distributions and spend on replacement capital expenditures. That 9.1% yield carries far more risk than RNO's 8.9% yield.

PVR - 7.8% yield, $650 million in debt. PVR is a classic case of continued borrowing to fund yield/capex as their debt increases annually. Note that PVR has also moved into the natural gas pipeline business.

NRP - 8% yield, $640 million in debt.

ARLP - 5.4% yield, $450 million in debt.

When including distributions, PVR/NRP and ARLP are all up quite strongly over the past 12 months.

Conclusion - Good looking coal partnership. Structure is favorable to unitholders and should allow for sufficient reserve replacement while also paying a strong yield. These sort of deals often do not do much for a while and following OXF's lackluster debut, I would not expect much in the short run. However, this is a superior deal to recent comparable OXF and mid-term should provide appreciation through distributions and price. Recommend.

Source: Rhino Resource Partners IPO Structure Looks Favorable for Unit-Holders