SunCoke Energy Inc (SXC) 2011 Q2 法說會逐字稿

Welcome to the 2011 Earnings Conference Call. My name is Monica and I will be your Operator for today's conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Ryan Osterholm. You may begin.

Thank you, Monica. Good afternoon, everyone, and thank you for joining us on our Second Quarter 2011 Earnings Conference Call.

With me on the call are Fritz Henderson, our Chairman and Chief Executive Officer and Mark Newman, Senior Vice President and Chief Financial Officer.

Following the remarks made by management, we'll open the call to analysts and investor questions. The call is also being webcast live on our investor relations section of our website at www.suncoke.com. There will be a replay available on our site, and in the Q&A, if we don't get to your question during the call, please call our investor relations department at 630-824-1907.

And finally, before I turn the call over to Fritz, let me remind you that the forward-looking statements in our earnings release, 8-K and 10-Q filings apply to the remarks on our call today.

These documents are available on our website, as are reconciliation of any non-GAAP measures discussed on this call.

Thanks, Ryan. Good afternoon. I'd also add that I have Mike Thompson joining us as well, for the call.

Pleased to have you here today, at our first earnings call. We did complete, recently, our initial public offering of Suncoke Energy shares, or SXC. At the same time, concurrently, we issued $700 million of long-term indebtedness and $150 million revolver. All of these closed concurrently.

The debt was broken down into $400 million of senior notes and then $300 million of secured term loans. We repaid the proceeds of the debt. We repaid Sunoco, $575 million of the balance and net proceeds were paid for general purposes and our $150 million revolver is currently undrawn.

And at the same time, we established in the -- before, but a substantial amount of progress during the second quarter was made in establishing the management at the company, three independent board members were named and the management team and the Board members, including the Board members who still serve from Sunoco, there are charts of that in the appendix to the presentation today.

And this final point I'd make, Sunoco does intend to distribute the remaining Suncoke shares, a little bit over 80% to Sunoco shareholders, on or before 12 months from the IPO, which would be 12 months from July 21, 2011 and it would not be before 120 days from that date, however, that's 120-day lock-up.

I wanted to just briefly touch on the second quarter's results versus both the second quarter of 2010 as well as the first quarter of 2011.

Relative to the second quarter, the year-over-year comparison, the results reflect the impact of the ArcelorMittal settlement, which really drives the significant reduction in earnings from the second quarter of 2010 to the second quarter of 2011.

It also reflects relocation costs that were incurred in the second quarter and public company readiness costs, which have been ramping up.

Let me spend a minute, we undoubtedly have people on the phone who have -- who are quite familiar with the ArcelorMittal settlement. We likely have some who are not. So I'll spend a minute just summarizing that matter.

When I joined the company last fall, this is one of the most significant issues that we were facing as a company, we had litigation with our largest customer, ArcelorMittal. It had to do with one contract, called the Jewell contract.

The long and short of it is as we settled that litigation in January of this year. We settled it prospectively. The litigation is about how we priced the Jewell contract and, most specifically, we marked up coal, and we did that through a mechanism, which was called the multiplier, effective January 1st of 2011, that multiplier was eliminated.

The multiplier was a significant driver of profitability for the company in the past, and when we talk about the comparison with 2010 later, Mark will show you what the pro forma impact was when we look at 2011 versus 2010, without that multiplier.

But it was a significant driver of the company's historical profitability. We eliminated the multiplier going forward on a prospective basis.

The second thing we did was we raised our fixed fees on two different contracts. One, the Jewell contract, and second, on the contract we have with ArcelorMittal at Haverhill. So we raised fixed fees in two contracts.

And third, those two contracts had their take-or-pay periods expire at the end of 2012. And we, mutually with our customers, we'll extend those take-or-pay contracts, through 2020.

So we saw in the first quarter, certainly in the second quarter, in the first six months' results, you see the unfavorable effect of that, it did drive profitability in 2010, which we don't have in 2011. That was the single biggest driver and Mark will take you through the details of that.

Our net income attributable to the parent declined to $22.4 million from $44 million in the second quarter of '10. And, again, the drivers were those two points I'd mentioned. And just the EBITDA of $37.6 million, down from $68.7 million, we did file during our road show of the public offer, a free written prospectus, where on a preliminary basis, we reported both adjusted EBITDA as well as net income, and these numbers come well within that range. Mark will take you through the details, but they come within that range.

Versus the first quarter of '11, we saw an improvement. And that was driven by stronger results at our Indiana Harbor facility, into the call in the first quarter, our Indiana Harbor facility, we had both coke cover costs and significantly lower yields and higher operating costs, which cost us about $25 million in the first quarter.

We saw -- we were able to run Indiana Harbor at or close to the minimum in the second quarter, which meant we had no cover costs. We saw significantly improved yields. And while we still have higher oven prepare and maintenance costs than we're able to pass along to our customer, and higher than we would target, we did see a significantly stronger performance from Indiana Harbor in the quarter.

And our adjusted EBITDA will adjust -- perform accordingly. We were $37 million versus $26 million in the first quarter of '11. And finally, on our growth initiatives, and I'll come back to this later, we did make good progress during the second quarter on our, both, near term as well as medium term growth initiatives.

So at this point, I'm going to turn it over to Mark.

Thanks, Fritz.

Turning to chart four, we'll -- we reported revenue of $378 million for the quarter and net income attributable to net current investment of $22.4 million, and adjusted EBITDA of $37.6 million.

As Fritz indicated, we issued a free writing prospectus as part of our road show activity, where we had indicated a net income range of $20 million to $23 million and an adjusted EBITDA range of $35 million to $38 million. So these results are within the range that we had previously published.

You'll notice we are not reporting earnings per share, the IPO, which occurred after the end of the second quarter. We will report our earnings per share going forward, in our next earnings call, which will reflect the impact of the IPO and the debt that we issued as part of the IPO transaction.

Turning to the year-over-year comparison, as Fritz mentioned, adjusted EBITDA is down approximately $31 million. We'll cover that in detail. But the primary elements here are the ArcelorMittal settlement, performance at Indiana Harbor and higher corporate spending, primarily related to relocation, which occurred -- of our headquarters, which occurred in the second quarter.

Comparing to our first quarter of this year, you'll notice that adjusted EBITDA has improved by approximately $11 million. We'll, again, cover this in more detail, but the headlines here, again, Indiana Harbor improvement over Q1, offset by higher corporate costs.

Turning to chart five, we have the walk from Q2 of 2010 to our performance in this quarter. As you will notice, the big adjustments here are ArcelorMittal settlements. This the impact of both the removal of the multiplier and the increase in fees at both Jewell and Haverhill 1.

Indiana Harbor is still down year-over-year. Again, it was better than our Q1 performance, but we're still reflecting higher operating and maintenance costs and, to some extent, lower yield performance over last year.

Haverhill and Granite City show improvements, primarily related to pass-through of operating and maintenance costs as well as volumes and steam sales at Granite City.

And then finally, our coal performance was down slightly year-over-year. For our coal mining activity, what we have actually done is normalized the transfer pricing in both periods and we set it equal to the embedded coal price in the Jewell coke contract. So we're really isolating, here, the operating performance of our coal business, which is down slightly, year-over-year.

And then finally corporate expenses are higher. They -- the breakout here is roughly $4 million related to relocation cost. And, then, the increase in standalone or separation costs of about $3.9 million in the quarter.

Turning to chart six, we show the walk starting from Q1 2001. Adjusted EBITDA, again, we had fairly significant improvement at Indiana Harbor. We had no coke cover cost in Q2.

Actually, we had a small true up of about 800,000, related to the Coke cover cost that we booked in Q1, which we recognized in Q2. We had other improvements, primarily related to Indiana Harbor's volume. And, then, at Harbor Hill, we had both higher energy sales and higher production in the quarter over Q1.

Again, we were up on corporate expense, with $2.3 million of the increase over Q1, related to higher relocation costs, which occurred in the quarter.

And, then, finally, on the other items, we're starting to ramp up our expenses related to middle town, as we prepare that plan for launch in Q4.

Turning to chart seven, this chart shows, on the left hand side of the page, the production in our domestic coke segments. And, as you'll notice here, almost in every plant, we're up over the last year and up over Q1.

So, we had a very strong quarter, approaching approximately 100% capacity utilization in our domestic coke business. Both Jewell and other domestic coke.

If you turn to the right hand side of the page, as Fritz mentioned, we've made two adjustments in the pro-forma adjusted EBITDA.

One, is we have eliminated, or we've taken into account the ArcelorMittal settlement. And, secondly, we have set up the coal transfer price from Jewell coal to Jewell coke, equal to the embedded coal price or pass through in the Jewell coke contract.

And, we think these two adjustments help us to better isolate the profitability in our coke and coal segments.

So, with that adjustment, what we show is roughly a $36 million in EBITDA in Q2, 2011. Which, equates to roughly $39.00 per ton.

You'll notice that in Q2 of 2010, the Jewell coke EBITDA was $14 million. We benefited from some one time spot sales of coke out of inventory last year that are not repeated in this quarter. And, so, otherwise, Jewell coke is a fairly steady contributor to our overall EBITA and EBITA per ton.

Finally, if you take the adjustment, or if you take the year-over-year deterioration in Indiana Harbor of roughly $5.9 million and added back to our performance in the quarter, we would approach approximately $45.00 a ton, versus the $39.00 a ton shown on the chart of Q2, 2011.

Chart eight reflects our coal mining financials. At the top of the chart, what we're showing is the production -- the sales production and coal purchases in the quarter. And, this quarter, the production was relatively flat to Q1 of this year. However, our Jewell coal production was actually down from Q1 of this year.

So, this is the combined results of Harold Keene and Jewell Coal. And, so, we had a relatively weak production in Jewell Coal.

Our sales were, actually, down this quarter, as a result of some customers not taking coal deliveries in the quarter. And, so, we actually put some coal into inventory in the quarter, which reflects in our cash flow statements.

At the bottom of the chart, on the left hand side, we show or cash production cost. And, we, actually, have two lines, one that shows the internal transfer price, and the other aligned with the open boxes. Which, shows the pro-forma sales price, which includes the adjustment that I mentioned earlier, where we set the transfer price from Jewell Coal to Jewell Coke equal to the embedded coal price in the Jewell Coke contract.

When you make those adjustments, what you'll see is that we contribute -- coal contributed roughly $11 million of EBITDA in the quarter. And, on a per ton basis, was very similar to our Q1 results of $34.00 per ton.

Okay, turning to our capital expenditures. We're on track to spend $231 million in capital this year, $50 million of which will be spent on ongoing projects, and $181 million will be associated with our expansion.

The line share of our expansion activity remains in the Middletown facility, which we expect to spend $165 million this year. And, with coal expansion roughly $16 million.

So, for the rest of the year, we've spent, roughly, $128 million. For the rest of the year, we plan to spend another $103 million, and another $71 million of that 103 will be related to expansion projects. Most of which will be on Middletown, approximately 61 in Middletown, and another $10 million or so related to our coal expansion projects.

On chart 10, I just want to, maybe, just make some comments about our capital structure. As Fritz mentioned, we have issued $700 million in long term debt. We also have a Revolver facility of $150 million.

And, as a result of the payments made to Sunoco, we were left with approximately $110 million cash after repaying payables to Sunoco. So, we have a very adequate liquidity position, with both the undrawn Revolver and cash on hand.

We anticipate to fund our growth going forward with cash flow from operations and from our current liquidity. And, at this time, our plan is to not initiate any dividends or share buybacks.

With that, I'll turn it over to Fritz to talk about near term growth initiatives.

Thank you, Mark. I'm just wrapping it up. What are we looking at as we look to the remaining part of 2011 and the end of '12 and '13?

The Middletown plant startup is our most important initiative in the coke part of our business. The plant itself is approximately 95% complete. It's in commissioning. We're 90% staffed, we're on track to commence operations in the fourth quarter. Expectation is right around November.

And, so, we feel good about our readiness to that plant. It's very important for us, it's very important for our AK Steel. And, we're in the process of, actually, beginning the coal procurement process and we're excited about this coming aboard. It's an important driver of our results, and particularly as we look into 2012.

Second, Indiana Harbor. At this point, we run the plant in the second quarter at our near the minimums. July was another good solid month for Indiana Harbor in terms of production.

We anticipate being able to run the plant for the remainder of this year, at or close to the minimum. Then, we also expect that in 2012 and '13. And, we don't anticipate any contractual shortfalls over this period of time, up to the expiration of the contract, which is late '13.

We have identified spending in the range of $50 to $100 million to support contract extension. This would be a continuation of the oven repair process that we've been on. But, in addition, it would fund some things we needed to do in the plant to improve reliability to facilitate an extension over a reasonable period of time.

And, we're working hard to finalize it and narrow within that range. Because, I think there's still engineering work that we can do to finalize the near-term game plan. But, at this point, we've also engaged our customer in preliminary discussions about renewal, and I anticipate that those discussions will take place through the remainder of this year.

This contract, though, expires in late -- the later part of 2013. So, we're actually getting a head start on it, relative to what you might normally expect.

In the coal area, we do expect to reach -- in the coal area, we've been in the process of expanding our mind. In our disclosure statements and in prior public reviews of Suncoke Energy, we talked about the acquisition of Harold Keene, which was done in January of this year.

We also talked about our status of a 500,000 ton expansion of our mine in Jewell. Our plans are to reach 350,000 tons of additional volume on an annualized basis in 2012. And, another half a million, which would be the endpoint of this expansion by mid-'13.

This is slower than we had desired. We originally attended to complete this project by the end of '12, but given both shortage of mining resources, labor, if you will. And, then, some coal geology, in terms of what's seen, we've pushed back our expected completion date.

I also make the comment here before I move on that our mining costs in the second quarter were higher than we expected, higher than the first quarter.

When we look at our mining costs, our cash production costs, we have all the costs associated with the expansion plan, really, being born today. And, we've not been able to get the volumes we're looking for. In fact, our volumes in the first and second quarter declined versus the first quarter.

We've talked about -- there's some details in our 10-Q, which I refer you to. But, in the end, we need to bring -- we need to get our mining production back, up to where it needs to be. And, interestingly, a lot of the shortfall hasn't been the expansion plan. It's been from our existing minds.

And, it's about making sure that we're properly staffed. We've had some issues, which interrupted production in the second quarter, which we don't expect to repeat themselves in the third and fourth quarter. And, we've taken a number of measures in order to maintain our mining staff, both labor, as well as foreman, skilled miners and electricians.

So, we've taken a number of steps recently in order to preserve our capability and support our expansion plan.

Last point on expansion, we did on the second quarter execute a contract mining agreement, with a company Revelation Energy. That company with us, we planned to mine approximately $1.3 million tons of surface reserves from met coal over three years. Anticipate production beginning early next year.

So, we are in the process of expanding our mines -- mine production, excuse me. We've -- the costs have been born. We've seen production below levels that we're targeting in the first and the second quarter of this year.

We think we have a good game plan in order to bring ourselves back on track as we move into the second part of this year, and into '12 and '13.

In terms of longer term growth, internationally, steel continues to grow on a global basis, led by China and India. India is attractive for us, given the expected rate of growth in primary coke demand.

Historically, our growth has been driven in the US by replacement coke batteries and import substitution. Outside the US, it's really driven by primary demand. India is attractive and it's, actually -- I look at India, it's kind of where China was 12 to 15 years ago.

So, we signed in the second quarter a non-binding memorandum letter standing with a company called Global Coke. We would make a $30 million investment to take a subsidy minority stake in the business. And, we'd get into business in India with Global Coke as the shareholder.

The money that we would inject would inject would be used to fund growth. Not to take out the existing shareholder. And, in fact, we've been doing due diligence, anticipate that we'll continue to do due diligence through the third quarter. And, we're excited about this opportunity.

But, we've also got other options available to us. If this doesn't bear fruit where we can enter the Indian market, but we feel this is a very good way for us to enter India.

In terms of our next US coke plant, the permitting process in Kentucky is underway. We're also keeping our options open with respect to other sites in other states.

But, Kentucky is our preferred location. The plant is being sized for 1.1 million tons of capacity, with a portion reserved for market coke sales. We anticipate this plant would be multi-customer.

And, the work that's being done today, in addition to permitting work, there's a significant amount of engineering work being done that's targeted to reduce the capital's cost per ton of coke capacity.

Our Middletown plant of $410 million was for 550,000 tons of coke, plus another 44 megawatts of power. And, as we look at a plant, it would be about double the size of Middletown. It's our objective to significantly reduce the capital cost per ton and capacity. And, so, engineering work is underway to accomplish that.

So, just wrapping it up. We feel, with the public offering behind us, we certainly feel we're well positioned as a company. The fundamentals of our business, both steel demand globally and opportunities for us to continue to grow in the US through replacement batteries and import substitution, our opportunities to grow are there.

We feel like we can continue to drive our coal assets and optimize them and bring production to the levels where they should be.

Our coke assets in the second quarter, particularly operating in 100% capacity utilization, perform well. And, while our costs of Indiana Harbor are in excess of where we would want them to be, we think we have a good game plan to not only address those, but also put ourselves in the position to negotiate a contract extension with our customer [in Middleton].

[Apollo], this is about driving our business, growing our business, creating value for our shareholders. And, as we look in growing our business into '12 and beyond. At this point, operator, let's open it up for questions. Thank you.

Thank you. We will now begin the question and answer session. (Operator Instructions). Our first question comes from Dave Katz of JPMorgan. Please, go ahead.

Hi. I was hoping to get a little clarity on a couple of things that you were talking about. With regard to the 350 annualized rate in 2012, that's what you were guiding on the road show as well, correct?

Yes.

Okay. With regard to the costs there, how would you expect those to come down over time, in terms of coal? I understand that you had some issues in the second quarter.

Dave, I think I'll ask Mark to answer that question.

Yes. So, we had the combination of ramping up resources to increase capacity and lower production at Jewell in the second quarter. We would expect -- we would expect this to moderate, as we go forward throughout the rest of the year. So, I'd expect the Q2 cost to be the high point in terms of our cash cost for the year.

And, obviously, to the extent we can get the production ramped up, the denominator will start to take effect, and we'll see some moderation from our Q2 costs.

Dave, we actually ran below our Q1 volume levels. And, below the prior year. There were some specific, explicit reasons for it, which we don't anticipate continuing in the third and fourth quarter.

Okay. But, when you look towards ramping up, I thought I heard you say that some customers didn't take coal this quarter.

Is there any possibility that will happen again, that you won't find the customers that you want for the increased production?

Actually, that was Harold Keene. And, it was a steam customer that didn't take coal. And, we, actually, were able to partially market that, actually, as high vol met.

So, that, really, didn't have anything to do with our Jewell minds, it had to do with Harold Keene, and it had to do with one steam customer.

Okay. But, with the expansion, the expansion is entirely non-steam coal?

Yes. Jewell is 100% met.

Okay. And, then, I was hoping that you could talk about working capital. It was -- it was used this quarter, and we're just curious if that's going to reverse in the back half of the year?

So, what happened in the second quarter, it's interesting. So, let me talk about Indiana Harbor here for a minute.

Indiana Harbor, in the first quarter, we contracted for cover for the year. And, we delivered about 40,000 tons of that to our customer, ArcelorMittal earlier in the year.

The plant, actually, ran at minimums in the second quarter, such that the remaining cover that we acquired wasn't necessary. So, we have that in inventory, we're marketing it. We anticipate being able to market it at our book value. And, we're in the process of doing that today. But, that was in part -- it was actually the large part of the wire working capital built in the quarter.

I mean, the good news is that we've got Indiana Harbor's production to where it needed to be. Therefore, we overbought coke and we're in the process of marketing it.

Okay. Thank you very much.

You're welcome.

Once again, for any questions, please (Operator Instructions). Our next question comes from Michelle Applebaum of Steel Market Intelligence. Please, go ahead.

Hi. Congratulations on the IPO.

Thank you, Michelle.

And, welcome to Chicago.

Thank you.

It's not always 90 degrees.

It's 102.

102 in Lisle, I'm sorry. I'm further east. So, it's a little cooler here.

So, I wanted to talk a little bit about what you're doing in Kentucky. And, what kind of opportunities there might be for -- I know this may sound a little out of the box, but do you estimate, potentially, to be a place where coke could be exported from, rather than to?

Okay. So, let me just talk a bit about Kentucky, thanks Michelle. First, we're sizing this plant to be multi-customer. And, to have some amount of merchant capability. We haven't made decisions on that, but we've sized it preliminarily at $1.1 million.

And, the primary target is, even with the steel market as it is today, it is still, our best judgment, 3-3.5 million tons of coke imported into the country, where we could be significant more cost effective to our customers by import substitution. And, there was also -- there were also batteries that from time to time go out of commission. So, our primary purpose of this would be serving the domestic steel maker.

We're locating it in a place, of the Kentucky location, actually, is well located for both barge as well as rail transportation to serve our customers in the Midwest.

We've not looked at it, really, as an export opportunity. As I look at the economics of exporting, I think it's -- exporting coal is, actually, quite an interesting -- a lot of companies are exporting coal. A lot of the big coal companies are exporting sizable amounts of met coal today.

Exporting coke involves both transportation and significantly handling losses. And, so, I am -- I wouldn't rule it out, Michelle, but that's not why we're doing the project.

Every time you look at the economics of exporting coke, even with a good manufacturing base in the weaker dollar, the handling losses make it -- it's not the most profitable use of your capacity.

So, the first goal is to, kind of, eliminate the import that's coming in, long before -- and, that has meaningful potential to the three times the size of what you're doing in Kentucky. Because, there's not a lot -- I'm trying to think if there's any merchant coke capacity expansion going on anywhere. There's none, right?

We're not aware of any, no.

Okay, so --

I don't think the import coke would ever go to zero. We don't believe that would be the case. But, we think imported coke is a good opportunity for us to do a substitution of that and then have flexibility to help our customers to the extent that they, you know, they need to take action with respect to their own coke batteries.

Yes, so there's still a lot of room for growth?

Yes.

Okay. Exciting. Well, thanks.

Thank you.

(Operator Instructions). Our next question comes from Paul Cheng of Barclays Capital. Please go ahead.

Hi, Fritz. How are you doing?

Good, Paul. How about you?

Pretty good. Just maybe -- I have to apologize, by coming in late, maybe you already explained that.

In Jewell, in your first quarter, your segment earnings is about in the 18 million. You dropped down to about 11.6 million. Did -- can you -- I mean, the sales [won't] -- really didn't drop down that much and the fee is supposed to be fixed. So what's causing the drop?

So the first quarter, I mean, Mark's chart -- I'll just touch on it real quick. We have -- we made $14 million of adjusted EBITDA at Jewell in the first quarter, just to turn to --

It's on chart seven.

Chart seven.

Yes.

Go ahead, Mark. Sorry.

So it's -- we made $14 million last year, Paul. And --

No, I'm talking about from the first quarter, I'm sorry.

The first quarter was 11, the second quarter was 11.

So if you look at the segment earnings for Jewell, first quarter is $18 million. Your six months is $29.5 million and your first half is -- your first -- your second quarter is $11.6 million, so your first quarter is $18 million.

If you -- Paul, if you refer to the reconciliation in the deck on chart 20, what you will see is that there is an impact to Jewell coke, based on the differential between the internal transfer price from Jewell coal to Jewell coke and the actual coal price that Jewell coke is paid as part of the coke contract. And that benefit was roughly $8 million in Q1.

So it -- what we tried to do on chart seven is on a pro forma basis, set the transfer price equal to what's in the coke contract to take that lag differential out from the internal transfer price to the embedded pass-through price in the coke contract.

So that's the primary reason why there's so much differential in the earnings from Q1 to Q2, based on the movement of coal transfer pricing.

So it's really just an internal transfer price that previously is benefiting Jewell and maybe penalizing the coke -- the coal mining, now that you are just reversing the impact?

Correct. And so chart seven and chart eight in the deck, the pro forma adjustment that we make in addition to the ArcelorMittal settlement, is just to set the transfer price from Jewell coal to Jewell coke, equal to the coal pass-through that's in the Jewell coke contract.

So it removes that noise.

I see. And going forward, that your transfer price will be set the same as whatever is the contract price?

Well -- so, let me spend a minute. No. The problem is we do our internal transfer pricing based upon some very rigid predefined formulas, which also tie together with our licensing agreements, with respect to royalties and what we pay lessors in Jewell. So our internal transfer price is -- we're not planning to change how we do that.

What we're going to show you, though, each quarter, is what the impact is to the extent that that transfer price is different from the coal price that's in the Jewell contract, which is why we're going to do this chart, seven and eight, on a regular basis.

I see. Okay.

So, Paul --

Hm. But for the total company that you -- will be a wash, is just that it's -- in between the segments that you have that potentially big fluctuation or big strength?

On the reconciliation, you will see that the net impact to the total company is zero. It just transfers between Jewell coal and Jewell coke.

All right. Although that means, I think, that people may pay a different multiple for your coke EBITDA compared to your coal?

Well, that -- there are different values, but our view, Paul, is that -- that's actually -- we don't -- the term transfer pricing is done, and has been done consistently, but it does create, particularly when coal prices have been volatile, it creates a lot of volatility in the Jewell segment, Jewell coke segment, which really doesn't reflect the underlying economics of the contracts. And so by doing this adjustment, we're showing you and investors what the -- what we think is the real profitability of coke and coal.

I see. And that the -- in the Jewell, I think that you have about 7,000 -- seven tons that is not being -- is put into inventory, right? So, so far in the third quarter, should we assume that the inventory is going to get used up? Or it's just going to sit there for awhile?

It was some additions to inventory, as Fritz mentioned, we were able to sell some of that steam coal at actually met coal prices, as met coal. But we did build inventory in Q2, which reflects in our cash flow statement.

Right.

And I think today we have approximately 30,000 tons in inventory.

Yes. And so far, that you're seeing the market condition is bad, are you expecting that inventory is going to continue being built? Or that it's being drawn down? I guess that's my question.

It would be drawn down, actually. Because this was the -- overall, a lot of that coal was actually [Harold King] coal and it was steam -- it was steam/high-vol met. Overall conditions in coal are very tight and so I wouldn't anticipate inventories building. I would anticipate inventories depleting over time. Because the situation in coal, across the industry, is very tight.

Yes. And that my ignorance on that, please. On the transfer pricing on Jewell, is that a similar issue on the domestic coke -- the rest of the domestic coke or this is just unique for Jewell?

No, it's just unique for Jewell.

I see. Okay. Thank you.

You're welcome.

Thanks, Paul.

Our next question comes from Evan Calio of Morgan Stanley. Please go ahead.

Oops. Sorry about that. Hey, good evening, guys.

Hi. How are you doing?

I'm doing well. I'm doing well. I have a question on kind of unsold steam volumes, just to understand that. Is there -- when you acquired Harold King, were there legacy delivery contracts on that volumes? Because I mean, I ask you from the context of I thought the plan was to kind of blend with the Jewell volumes and to sell into the met market or to -- am I not understanding that correctly?

We bought the company, it had pre-existing agreements which went through the end of 2011.

Okay.

I would anticipate that some of this delivery that wasn't taken, we will fulfill the rest of that contract. And it could go into early next year, but I'm not positive. We were able to sell a part of it, though, into the met market. It would actually -- which actually gave us even more confidence we'll be able to do it as we look into '12. But when we bought the company, it had pre-existing commitments and we're fulfilling those.

Okay. So that's why that -- otherwise that would have been blended. Is that correct?

We would have probably done more.

Yes. That's right. And if we think about, just to be clear, on 2012, is it -- we're talking about 1 million, 1.2 million, plus 0.5 million, plus 350,000 is where we're guiding right now?

No. The base point of the expansion plan was Jewell running at about 1.2 million.

Right.

[Away]. Looking at the first half, obviously, we've not been running at that level, which is our operating challenge, to get our existing mines back.

Yes.

The event had [Arrow Keen], which added another 300,000.

Right.

We would, on an annualize basis, by '12, get our dual expansion up another 350,000.

Right.

Add 350,000 to that. And then you've got the Revelation deal, which 1.3 million over three years, obviously we need to see how quickly we ramp up next year. But it would be 4,000 to 5,000 a year. I just don't know how quickly we'll ramp it up next year.

Okay. So some -- something in that range for 2012?

Yes. So you'd add up those numbers and you would get --

Yes.

We would not be to our full capacity by the end of 2012. We don't think we would achieve that until the middle of '13. But those are the key components to those plans.

Right. And then if I just look at kind of cash costs, quarter-on-quarter, can you kind of walk me through the drivers and what's stabilizing there? So kind of what's the biggest variable element? I know you're adding incremental workers, but is that really -- adding new people, training them, and that investment, is that the jump that stabilizes? Or how should we think about that ramp forward?

Yes, the costs are largely, at this point, in line. I mean, actually, the numerator, if you will, on this is in line with what we were expecting. So we've added people, we've added red hat miners.

Yes.

We've added over 100 red hat miners, for example. We've got maintenance. We've got equipment on order. We have all the things necessary in order for us to expand. Production actually declined.

Yes.

In the second quarter, which if you look at the first quarter to second quarter moved, it's almost all attributable to -- there's a little bit of the yield issue, but there's a lot of it, almost all of it is attributable to the lower volume.

Yes.

So it's getting our volumes back to where they need to be and putting ourselves on the trajectory to expand the mines. That's the key driver.

Yes. And then in terms of the kind of CapEx for adding people, equipment, etcetera, for the numerator, I mean, where are we against the projected 2012 volumes?

Well, CapEx. Let me just think about CapEx for a second. The total mine expansion plan -- oh, I've got Mark for support.

Yes. This -- total mine expansion plan is $45 million.

Yes.

Of which, $16 million will be spent this year, and the remaining $29 million will be primarily spent in '12 and '13. And so -- .

No, I -- I mean, I guess I was trying to determine if -- would -- what is the work force that is driving, maybe, a higher number where you're -- what that -- that your volumes will drive to? What is your current equipment and people in your work force? What level of production would that support, to kind of think about it differently, right?

I hear what you're saying.

Yes?

You're saying -- I don't have the exact number.

Yes.

But we're largely staffed for our expansion plan. Because we're in the process of training.

Okay.

So we've got pretty much -- if we need to hire more people, it might be another 20 or 30 people.

Yes.

We've got, pretty much, what we need in order for us to produce at the higher level.

Yes. Okay.

Some of the equipment isn't being delivered until late this year, early next year.

Right.

Actually, late this year, next year. And we've seen some tightness in delivery time on mining equipment. But I would say, in terms of the people plan, we brought -- we front-end loaded it so we can train the people.

Got it. So -- and I mean, that cash per ton clearly goes down when you move in your production volume ramp?

You would expect?

Yes, I mean, I think what we're trying to do is go from, at Jewell coal, from the 1.2 million run rate to a run rate that would increase by 350,000 tons annualized by the end of 2012. So that's the curve that we're on.

Yes.

However, in Q2, not only did we not move up the curve, we actually fell back with respect to our overall production rate at Jewell coal.

Yes.

And so we added the cost for an expansion and we actually declined our production in the quarter.

Okay. Sounds good. And then there's -- just lastly, kind of as you move into the market to setting contracts for 2012, any -- kind of any color on what that market looks like? Or I know it's -- or any guidance at all in terms of when those contracts set throughout the back half of this year? And I'll leave it at that.

Do you just mean later in the fall? We would go out, I've got Mike here, we would go out, usually, for coal, in October, November. And so coal is going to be the driver.

It's an interesting market today because met coal prices have been both volatile and still tight and high, even though certainly production, steel production, in the US has been restrained and demand has been, certainly, weaker, I guess, than we would have liked to have seen.

But it's still okay. But with met prices, met coal prices, are still high and volatile. And there's a lot of reasons for that. But as we move into the fall, that would be the key driver, is what -- where are met coal prices and then we'll work with our customers to procure the coal and develop our game plan for the contracts. So -- but I don't anticipate timing being materially different from what we've done in the past.

Okay. I appreciate that. Thanks for answering my questions.

You're welcome.

We have no further questions in queue at this time. I will now turn the conference over to Fritz Henderson for any closing remarks.

All right. Well, I appreciate everybody's time today. I -- looking at who's on the call, we have a lot of people who we've seen during the road show and we've got a lot of people who we've not seen on the road show too. So we really appreciate everybody joining us.

We hope the call was productive for you. We very much appreciate your interest and your investment in Suncoke Energy.

And if there are things that you would like to suggest that we do differently or better, certainly myself, Mark or Ryan Osterholm, we're wide open for suggestions into how to make these calls as productive as possible for you. And thanks very much.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may all disconnect.