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HaalladorEEnergy((HNRG)
www.halladorrenergy.com

LasstClose:$5.1 13(8AUG2016 6) Sales$M Mil:$318 Industryy:Coal August9,2016

InttrinsicValue:$9.00$11.0 00 MktCap p$Mil:150 Sector:BBasicMateriaals

InvvestmentThe esis:HalladorEnergy(HNR RG)isasmallIllinoisBasin coalcompanycurrentlytrradingatadisscountto

peeersandintrin nsicvalue.The
emanagementteamisexperiencedan dhavedemo onstratedcou untercyclicalcapital
alloocationskill.SShareholderaandmanagem mentinteresttsarealigned viasignificanntinsiderown nership.Givenrecent
acq quisitions,oneofwhichwastransformaative,thebalancesheetissremarkablysstrong.Theb businessmoddeliswell
suitedtothecurrentcoalmaarketandhassgeneratedhealthyreturnnsforthelasttfiveyears,producinganaaverage
ROOICof12.03%.

AnenterprisinginvestorcanaccumulatessharesinHNR RG,whilema intainingamp plemarginoffsafetyatpriccesupto

$5..50ashare.A Atsuchlevels,,weexpectareturnofbettween45%a nd80%,exclu udingdividen nds,overthecourseof
theenext2yearss.

StrrongFinancia als:AlthoughthecausesoftheUScoalindustriessoorrystatearenumerous,abysmalbalan ncesheet

maanagementhaasplayedabiigroleinthemostrecentsstringofcoalcompanyba nkruptcies.A Assuch,debtlevels
sho ouldbeapartticularfocusoofanyoneloookingatcoaliinvestmentsccurrently.Un nlikethebalan ncesheetsoff
com mpetitors,wh hotookondeebttobuyasssetsatthepeeakoftherec entcommoditycycle,Hallladorsbalanccesheetisa
strength.TotalDebtiscurre ently48%ofccapitalvs.apeeermeanof770%,andhassbeenaggresssivelypaiddo ownby
maanagement.

Forrmostofthecompanysh historyasacooalminer,theebalancesheeethasbeend debtfree.Itw

wasonlywheenan
opportunitytorroughlydoub bleprovedreccoverablereservesin20144presentedittselfthatman nagementtoo okondebt
($3350million,ofwhich$100millionhasaalreadybeenrepaid).Asooftheendoftthe2ndQtr20 016Halladorhas$250
milllionindebt,$67millioninnundrawnre evolvercapaciity,aratioof netdebttoEEBITDAof2.7 77xand(EBITDDA
Cap pEx)/Interestratioof2.65x.Comparedtotherestoftheindustryythisispristin ne,Illinoisbasincompetito orForesight
Eneergy,forexam mple,hasaNetDebttoEB BITDAratiooff6.69xandinnterestcoveraageof1.46x.Onlyindustryyheavy
weeightAllianceResourceParrtners(ARLP)maintainsabetterlongteermsolvencyyprofile.

Gooodbalancesh heetmanagementisnottheonlyfinan ncialmeritbaddgeHalladorhasearnedthough;healthycashflow

isaanother.Inaperiodwhen neventhemo ostconservativeminingcoompanieshavvestruggledw withcashflow
w,andcoal
min nershaverarrelyseencash hflowinthebblack,Hallado
orhasmanaggedtoproduccepositivefreeecashflowfforallbut
oneeyearinthelastfive.Mooreover,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 eviatheacquuisitionofreservescontiguuoustoexisti ngassets.Basedonassum mptionsoutlinnedinthe

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acccompanyinge excelspreadsheetwebelie evethattheaacquisitionoffVectrenFueelcoalassetsiin2014willlikelyhavean

IRR
Rofatleast5.87%vs.aneestimatedcommpanyWACCof3.16%.

Maanagementco ontinueditsggoodstewardshipin2016,withasmall boltonacquisitionofadd ditionalcontigguouscoal

st
s
resservesfromBBlackhawkow wnedTriadMininginthe1 quarter.Raatherthanusingcashfrom moperationsttopaydown
$188millioninoutstandingde ebtaheadofschedule,maanagementaccquired14.2milliontonso ofcoalreservveswhich
cannallbemineddviatheexisttingOaktown
n1mine,andgainedaccessstoapreviouslyinaccessible1.6millio ontonsof
resservesthecommpanyalread dyowned.Intotal,thispu
urchasenetteedthecompany15.8millio ontonsofnew wreserves
anddasalesagre
eementfor1.4milliontonssofcoalatacostof$1.144pertonofcooalintheground.

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

Usiingsimilarassumptionsto oourVectrenacquisitione exampleabovveandassumingthenewlyyacquiredan ndaccessible

resservesaremo onetizedoverra16yearpe eriod,thisacq
quisitionhasaapotentiallyoutstandingIIRRof49%.W
Webelieve
thaatthisisanotherdemonstrationofthestrongcapitaalallocationsskillofManaggement.Theaassetswereaavailableata
tim
meofdistress,,fromaregioonalcompetittor,requiredlittleinthewwayofnewCaapExtomoneetize,couldbeepaidfor
witthouttakingoonadditionaldebtandcam mewithafreeoptioninthheformofaccesstoalread dyownedresserveswhich
weerenotprevio ouslyaccessibble.Whatmorecouldanin nvestoraskfoorfrommanaagement?

Inaadditiontobeeingsolidcap
pitalallocatorrs,manageme entandthebboardofHallaadorownasiggnificantporttionofthe
bussiness,alignin
nginterestswwithshareholders.TheCEO,BrentBilsl and,isthefo ourthlargestsshareholderw
with3.5%of
theesharesoutsttanding.Mr.Bilsandhasb beenwiththeecompanysinnce2006,and dbasedonareviewofSECCfilings,has
nevversoldanyssignificantblo
ocksofstock, preferringtoogrowhisho ldingsfrom3365,000shareesin2008toaacurrent
1.0
04millionshaares.Additionnalinsiders(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 easonablysignificantdiscoountandgiventhefirmsm
nkruptpeers,,Halladoristradingatare multiplestrenggths

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waarrantsarerattingbythem market.Atthesametime,w webelieveitiisworthnotinngthatoutsid

deofthebannkrupt
plaayersthecoallsectorhasraalliedstronglyythisyearandthatseveraalcomparableesarelikelytradingatorsslightly
abo oveintrinsicvvalue.Withtthatinmind,aswellasaD
DCFmodel,w eestimatein ntrinsicvaluetobebetweeen$9.00and
$11 1.00ashare.(SeeExcelDataFileforCo ompsandDC CF)

AtthehighendHNRGshould dtradeatadiscounttoaccompanylike CNXC,bothccompanieshaaveconservattivebalance

sheeets,theyareeoperationalllyfocusedonasinglemine einasinglebbasinandwhiileCNXChasasignificantlyystronger
divvidendgivenitsMLPstructture,thecom mpaniesarem materiallysimiilarinmosto
otherrespectss.Onediffereence
bettweenthetw wothatwarrantscarefulco onsiderationiisthefactthaatCNXChasnnoorganicgroowthpotentiaal,itneeds
ano otherdropdo ownfromitsGPinordertogrowitsunitdistributionn.HNRGontheotherhand,hasthecapacityand
infrastructureatitscurrentm minestogrowwsalesbyasmuchas40% %(currentcappacityofthem
mineandinfraastructureis
abo out10millionntonsayear)),anopportunitythatinthhechaoticcoaalindustrymaymaterialize.Wedonottprescribe
add ditionalvalueetothisgrow
wthpotentialaaswebelieve etheuncertaiintiesaretooonumerousto oputaprobaabilityonit,
buttbelieveitisworthnotingg.

LTMReevenue LTMEBBIT LTMEBITDAA

Hallador 32
20.2 43.1 85.4
TEV/LTM
MRevenue TEV/LTMEBIT TEV/LTMEBITDDA
CNXCoalResourcesLP( NYSE:CNXC) 2.3
30x 13.90xx 7.20x
ImpliedTEV 7366.46 599.099 614.88
+TotalCash 15
5.2 15.2 15.2
TotalDebt 24
49.9 249.9 249.9
/ShareesOutstanding 29
9.3 29.3 29.3
ImpliedPerShareValuee 17
7.12 12.44
4 12.98
Average 14
4.18

Ouurvaluationisstemperedbyytheresultso ofaDCFmod del,whichwehaveusedto oestablishthelowerendoofour

valuationrangeandsuggestssthatHNRGiisworthabou ut$9.39persshareata10% %discountrate.WeliketheDCF
anaalysisforthelowerendoffourvaluationrangebecauseofconcerrnsthattherrecentcoalrally,whichHalladorhas
nottbeenapartyto,isoverdone,afactorthatdoesno otplayintoouurDCFmodell.

Fin
nally,wehave erunareversseDCFinanaattempttosee ewhatkindooffutureFCFthemarketisscurrentlypricinginto
theestock.Assum mingFCFfrommtheLTMasastartingpo oint,aterminaalgrowthrateeof2%(shriinkingindustrry)anda
10% %discount,HHNRGFCFhasstodecline1 10.66%ayearrforthenextttenyearstojustifythecu urrentsharevvalueof
$5..14.ForcomparisonpurposeswedidtthesameanalysisonCNXCCandFELP,ou urpreferredcomparableffroman
opeerationalperspectiveandabasincomp parable.Inboothcases,theeresultssuggeestthatHNRG Ghasbeenoverly
pen nalizedbytheemarket.Atthecurrentpprice,CNXCtrradesasifFC Fwillgrowatt5.9%ayearforthenextdecadeand
FELLP,acompanyflirtingwith hinsolvency,ttradesataprricewhichsugggestsFCFwiillonlyshrinkkat3.3%ayearforthe
nexxtdecade.Giventhesuperiorityofthebalanceshee et,HNRGisunnlikelytosuffferassignificantlyasFELPinthe
commingyearsan ndgivenoperrationsandm
managementw willproducerresultscompaarabletoCNX XCalbeitwith
houttherich
divvidend.

InvvestmentRiskks

Theerisksarisinggfromcoalinvestmentsarrenumerous,theregulato ryandenviro onmentalriskksareobvioussandbest

expplainedbythe ecompany'sthemselvesin nregulatoryffilings.Operaationalrisksin
ncludedeclin
ningdemandfforIllinois

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BassincoalasarresultofcompetitivepricinngbyNorth/C CentralAppallachianminerrsoraggressiivepricingbyPowder
RivverBasinprod ducerssuchaasCloudPeak(CLD).Fuelsswitchingbyuutilitieswillbbeanongoinggissue,especciallywhen
natturalgaspriceestrendbeloow$2.50perMMBtu.Wed donotbelievvethatHallad dorislikelytotriggeranyo
ofitsdebt
connvents,especciallyastheyssecuredloose ercovenantsearlierthisyeear,butitisaalwaysaposssibilitywithacoal
commpany.Curre btcovenantsontheprimaaryCreditAgrreementinclu
ently,thedeb udemaintenaanceofaDebtService
CovverageRatio(definedasEEBITDA/Intere estandPrincipalReductionns)ofatleastt1.0to1.25aandmaintainiinga
LevverageRatio((definedasTo otalDebt/EBITDA)ofnom morethan4.225throughSeeptember201 18.Atthecurrrenttime,
HalladorhasaD DebtServiceC CoverageRatioof4.56xan ndaLeverageeRatioof2.999x.

Apprimaryriskfoorinvestorsissthepossibilitythattheco
ompanyremaainsobscure..Asasmallccapcoalcomp pany,witha
smmalldivided,H
Halladorcould dbeconsidere edboringwh henviewedthhroughtheeyyesofWallStreet.Itmayffailto
atttracttheneceessaryinvestoorattentionaasignificantmmovehigherreequires.ThepossibilityHaalldorisadeaadmoney
invvestmentshouldnotbeovverlooked.

Dissclaimer:Opin nionsexpresssedhereinbytheauthorarenotaninvvestmentreco ommendation nandarenotmeantto

berelieduponininvestmenttdecisions.Th heauthor'so
opinionsexpreessedhereinaddressonlyselectaspecttsof
pottentialinvesttmentinsecuritiesoftheccompaniesme entionedanddcannotbeasubstitutefoorcomprehen nsive
invvestmentanalysis.Anyanaalysispresenttedhereinislimitedinsco pe,basedonanincompleetesetofinformation,
and dhaslimitatio
onstoitsaccuracy.Theauuthorrecomm mendsthatpootentialandeexistinginvestorsconductthorough
invvestmentrese earchoftheirrown,includingdetailedreeviewoftheccompanies'SSECfilings,publicstatemen ntsand
commpetitors.Co onsultingaquualifiedinvesttmentadviserrmaybepruddent.Theinfoormationupo onwhichthismaterialis
bassedwasobtainedfromsourcesbelieve edtobereliab
ble,buthasn otbeenindependentlyveerified.Thereffore,the
autthorcannotgguaranteeitsaccuracy.Anyopinionsorrestimatescoonstitutetheauthor'sbesttjudgmentassofthedate
ofpublication,aandaresubje ecttochangewithoutnoticce.Theauthoorexplicitlydisclaimsanylliabilitythatm
mayarise
fro
omtheuseofthismateriall.

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