SunCoke Energy Inc (SXC) 2011 Q3 法說會逐字稿

Welcome to the SunCoke Energy Incorporated Third Quarter 2011 Earnings Conference Call. My name is Christine, 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 today's conference is being recorded.

I will now turn the call over to Ryan Osterholm, Director of Finance and Investor Relations.

Thank you, Christine. Good morning, everyone. Thank you for joining us on our third quarter 2011 earnings conference call. With me on the call are Fritz Henderson, our Chairman and Chief Executive Officer; Mark Newman, our Senior Vice President and Chief Financial Officer; and Mike Thomson, our President and Chief Operating Officer.

Following the remarks made by management, the call will be open for analysts and investor questions. This conference call is being webcast live on the Investor Relations section of our website, at www.suncoke.com. There will be a replay available on our site. If we don't get to your question during the call, please call our Investor Relations Department at 630-824-1907.

And 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 reconciliations of any non-GAAP measures discussed on the call.

Now to Fritz.

Good morning. Thanks, Ryan. Welcome to the call. Turn to the chart deck, page two. It was a busy quarter for us. In some ways, actually, I forget -- but in the third quarter, we actually went public, did the IPO, did the debt raise. So, therefore, in terms of our earnings, actually, it's the first quarter where EPS becomes a really meaningful measure because the shares are outstanding.

And then, we have the interest cost associated with the capital structure and our numbers in the third quarter, whereas in prior years, you would've had the capital structures -- prior periods for you to have the capital structures associated (inaudible).

So the quarter was busy in terms of getting the Company public. The quarter was also busy operationally, as you're going to see through the presentation this morning. Our adjusted EBITDA in the quarter at a little bit shy of $45 million, reflected improved sequential performance over both the first and second quarter of this year. The reconciliation and the analysis versus third quarter 2010, Mark will go through in his comments.

We did in the quarter see Indiana Harbor return to its targeted coke production and actually has significant improvement in terms of its cost position as well. You'll see that in the analysis. We did on September 30th complete the purchase of GE [credits] 19% stake in Indiana Harbor partnership. We paid $34 million for it. That purchase we expect to have an accretive effect in 2012 on EBITDA of approximately [$8 million].

And then, finally, we did commence Middletown startup in mid-October. We pushed our first coke on October 31st at 3 am in the morning. And we expect that plant to achieve 100% throughput by no later than July of 2012.

And if the startup goes as we've been targeting, we could do faster than that. But we certainly wouldn't expect both -- we would expect both power as well as coke to be fully accelerated by no later than July of 2012.

Page three, coal operations in the quarter did improve in terms of adjusted EBITDA by $9.5 million driven by stronger metallurgical coal pricing. We'll spend quite a bit of time this morning talking about coal. Our production was flat year-over-year, which reflects continued challenges in our Jewell deep mining expansion. And I want to come back to that later.

Corporate expenses were $14.3 million, which reflected both the impact of our standalone cost and the acceleration of those as well as relocation. And in the quarter, we included Middletown startup expenses in corporate cost, not in our domestic coke segments. You'll see that flip obviously as we move into the fourth quarter given the startup of the Middletown plant, but we did incur costs in the third quarter for Middletown startup.

We ended the quarter with cash of $111 million and with our $150 million revolver undrawn.

So at this time, I'll turn it over to Mark.

Thanks, Fritz. So it was a busy quarter for us, and, in addition, I acknowledge the questions and comments that we've received from investors. In this deck we've tried to address some of the issues that have been raised relative to increased transparency on our coal cash cost and what we expect from our coke portfolio going forward. So, we hope you find those additional charts helpful.

Turning to chart four, we reported EPS of $0.26 in the quarter and an adjusted EBITDA of $44.8 million. As we indicate in the chart, 85% of our earnings is attributable to our coke business. We do like our coal exposure, but we just want to remind our investors that our earnings are predominantly from our Jewell domestic coke and our international coke business.

On a year-over-year comparison, our results are impacted by the ArcelorMittal settlement and higher corporate cost. And in this particular quarter, we had the combination of high standalone cost, continued relocation spending, as well as the startup cost associated with Middletown.

And as Fritz mentioned, we've shown sequential improvement in each of the quarters this year. You'll recall in Q1 of this year, we reported $26.6 million of adjusted EBITDA increasing to $37.6 million in Q2, and in this quarter, $44.8 million.

If I turn to chart five, this provides a bridge from our Q3 2010 results to the current quarter. And as you'll note, the first variance really relates to the ArcelorMittal settlement impact. And here, this is the net impact related to the elimination of the so-called Jewell multiplier as well as increased fees at Haverhill.

On the corporate cost, as I mentioned earlier, we have the impact of roughly $11 million on a year-over-year basis. We have the ramp-up of our standalone cost, relocation, Middletown, as well as we had a particularly lumpy quarter in terms of corporate expense related to some of our business development initiatives.

Our other domestic coke and our Jewell Coke segment had an exceptional Q3 2010 performance. And so on a year-over-year basis we're actually showing ourselves down here in both segments. With respect to Jewell, we actually had spot sales in Q3 of '10, which were not reported in this quarter, which contributes to the unfavorable variance there.

With respect to other domestic coke, we had better margins at Granite City and Haverhill, and the margin impact was really related to three things. We had in the quarter last year approximately 3.5 million of favorable coal inventory adjustments we had an exceptional yield performance at Granite City last summer.

And then, finally, we had the benefit of a fixed price contract on our sales to AK from Haverhill last year, which contributed roughly 1.4 million favorability. In addition, we had roughly 1.5 million in lower energy and coke volumes, primarily related to power and steam sales at our Haverhill operations.

Turning to our coal business. On a year-over-year basis, we're favorable by approximately 9.5 million. As Fritz mentioned, it's primarily driven by price. On a year-over-year basis, we have the benefit of higher volumes related to our Harold Keene acquisition and then we've had a ramp-up in our cash mining cost, which we'll discuss later in the day.

By turning to chart six, this shows the improvements that we have in our business relative to our Q2 results. As the chart indicates, our improvement is primarily related to the improvement at our domestic coke plants on a quart-over-quarter basis. We have continued improvements at Indiana Harbor, which accounts for 5.6 million improvement.

In Q2 you saw an improvement over Q1 which was primarily related to production volumes. In this quarter, we do have some benefit from volume, but the benefit here is really related to improved yields and lower operating cost in the quarter. So, again, Indian Harbor shown steady improvement over the last two quarters.

We also had a good quarter at Granite City. On a quarter-over-quarter basis, we had the benefit of not having any (inaudible) outages on our energy sales. We also had the benefit that we mentioned earlier this year of seasonality with dryer coals, particularly at our Granite City location. And then, finally, we had some favorable volume in the quarter.

At Jewell we had favorability here primarily related to higher volume in the quarter and this has to do with the number of trains that we actually received from our Jewell Coke facility by ArcelorMittal. In the period, we actually had one extra train this quarter attributed to the higher volumes.

On the negative side on a quarter-over-quarter basis, obviously, we have the cost associated with the Middletown startup. And the other bucket is primarily related to higher corporate cost, again, the ramp up of our standalones, some relocation and some business development and legal in the quarter.

If I turn to chart seven, this chart should be familiar to most of you who follow our stock. On the left hand side of the page, we indicate our production by plant. And again, this is both for our Jewell and other domestic coke facilities. And what you'll see on the left hand side is that we achieved record production this quarter primarily on the basis of the increased volumes at Indiana Harbor.

On the right hand side of the chart, we show the pro forma EBITDA and EBITDA per ton of our domestic coke facilities. And again, just as a reminder, in these pro forma results, we adjust for the ArcelorMittal settlement in prior periods and we also, on the coal price, set the transfer pricing from Jewell coal equal to the pass-through coal cost in the Jewell Coke contract. And in this way, we avoid any transfer of value from our coal mining segment to our coke segment and vice-versa.

What the chart shows is the exceptional quarter we had in Q3 of 2010 last year as I've discussed in chart five. There were a number of favorable margin improvements that are not repeatable on a go-forward basis that are reflected in those results. And we also had the spot sales at Jewell which shows up in their results in the quarter.

But what the chart really shows is the improvement in our coke results from Q1 to Q3 with very steady performance at our Jewell Coke facility and improvements in our other domestic coke, again, primarily at Indiana Harbor, but also, to some extent in this quarter, our Granite City operations.

I'd like to go to the next chart on chart eight, which shows our pro forma EBITDA per ton over an extended period. And what this chart demonstrates is that we've been able to achieve a fairly significant margining expansion in our EBITDA per ton, going from $36 per ton in 2008 to $50 per ton in Q3 2011. And we've annualized Q3 just to make it representative against the prior periods.

We believe, based on our Q3 results, that $50 per ton is representative of what our current domestic coke assets will be able to achieve going forward, excluding Middletown operations. There will be puts and takes in any particular quarter.

And, for example, in Q3 we did have the higher Jewell sales and we did have the benefit of seasonality. But going forward, based on our acquisition of GE stake in Indiana Harbor we would expect to have higher results from our Indiana Harbor with less minority interest there.

So, again, a number of folks have asked us to give some sense as to what our plants are able to do on an earnings basis and we believe the Q3 results are indicative of what we should be able to achieve going forward relative to the domestic coke assets excluding Middletown.

We've also been asked to provide more transparency relative to the return on capital for coke assets. We're continuing to do some work on that, but what I would say is if you take our results for Q3 annualized and you adjust for depreciation and taxes, you should have a fairly good indication of what the numerator of that calculation is.

On the denominator side, we have debt and equity roughly $1.3 billion in total invested capital. And if you adjust that for Middletown, which is approximately $400 million, our international assets and our coal assets, I think you will see that our denominator for our other domestic coke and our Jewell Coke business would total about $700 million of invested capital. So, that perhaps [farmer's] math for now.

Again, we're working on a more detailed disclosure that we will be able to share in subsequent quarters, but I thought that would be helpful given the questions that we've had on this topic.

Turning to our coal mining business on chart nine. The top chart shows our sales production and a small amount of purchased coal in each quarter. And what the chart shows is, on a year-over-year basis, our production increase is primarily due to the acquisition of Harold Keene.

As Fritz mentioned earlier, we've had some challenges relative to our Jewell expansion and what we're showing here is very flat year-over-year production, which is really reflective of the challenges we continue to face both in geology, staffing and regulatory compliance.

That has resulted in higher mining cash cost. We had cash cost in the quarter as shown in the bottom half of the page of approximately $132 per ton, which is up from the $126 per ton that we saw in Q2 and up over year -- last year of $106 a ton. Some of the quarter-over-quarter impact actually has to do with our mining production mix.

We had less Harold Keene production in the quarter, and Harold Keene is lower mining cost, also lower sales price given the quality of the coal there.

I turn to the following chart on chart 10. We have attempted here to provide more insight into our ongoing cash mining cost at Jewell. What the chart show is a number of factors that really are contributing to the significant year-over-year increase in our cash mining cost.

The first and perhaps foremost factor is the increase in our reject rate primarily related to geology. That shows a deterioration in our reject rate from 58% in 2008 to 65% on a year-to-date basis.

And the math for that reject rate is really reflected in the raw tons and the clean tons noted below the chart. The chart also demonstrates the expansion in our employee base at our Jewell coal facility. And of note, in the 374 employees on a year-to-date basis, approximately 43 of those are so-called red-hat miners, which has a direct impact on our productivity on a raw ton per employee.

In fact, if you were to eliminate the red-hat miners or raw tons per employees, instead of being 8.1 for the first nine months, would increase to approximately 9.1. Still down on a year-to-date basis, but not down significantly.

And then, finally, with the shortage of manpower miners in Appalachia, we're seeing the impact of inflation on our payroll and benefits, which is compounded again by the reject rate increasing in the same period. We're also showing higher royalties per ton. Again, royalties are in some respect tight to the higher price of coal that we're seeing and which we benefit from on a profit-per-ton basis.

So, again, I hope this chart is helpful in providing more detail on our cash cost of mining.

On chart 11, again, this is a pro forma EBIT and EBITDA per ton of our coal mining business. It shows a year-over-year increase in coal prices from $100 a ton in Q3 2010 to $155 in this quarter. And that really provides the primary driver of our year-over-year increase, which is offset by a fairly significant increase in the cash mining cost that I discussed on the prior page.

I also want to point out that in the quarter we had $1.9 million favorable -- fair value adjustment related to the contingent consideration on the Harold Keene purchase, which is also embedded in the $9 million in EBITDA that we reported in the quarter.

And then, finally, with respect to coal pricing, we would expect to set pricing for 2012 deliveries later this month. As many of you will know, the market is softer than where it was earlier this year, but still at this point above our current contracts for this year which are set at approximately $165 per ton.

Turning to chart 12, I'd like to spend a little time on our corporate cost. As the chart shows, our standalone cost and a year-to-year basis $4.3 million higher in the quarter. This is versus $3.9 million higher in Q2, and basically reflects the ramp up of being fully staffed to run as a standalone public company.

As you recall it in our perspective as we indicated that we expected this to settle out in the $15 million to $20 million annualized range, and so, this $4.3 million is in that range. We're still having some relocation cost flow though in this quarter, again, it was $1.7 million on a year-over-year basis, and that was down from $4 million on a year-to-year basis in Q2.

On a year-to-date basis, we were roughly at $8 million in total relocation cost, in a range that we provided of $8 million to $10 million for the full year.

And then, we had -- in the quarter, the startup of Middletown. Prospectively, Middletown cost will be reflected in the other domestic coke segment, given that that segment is now producing revenue in the quarter.

And then, finally, in this quarter, we have some fairly lumpy business development and legal cost flow through. These are primary related to our the work that we're doing on the next potential US plant and the work that we're doing in India relative to global coke, as well as some other business development cost in the quarter.

Again, on a go-forward basis, we would expect the relocation cost to roll off and obviously the Middletown cost, and that should provide some indication of where we would expect corporate cost to settle out on a prospective basis. We'll probably have more discussion on that as we get into 2012.

Before I turn it over to Fritz to discuss our Q4 outlook and to provide a more comprehensive business update, I thought it would be also helpful to provide an update on our liquidity position. Again, this was the core that in which we transition from being funded by Sunoco at the beginning at the quarter to having a standalone capitalization at the end of the quarter.

But at immediately following the IPO, as a result of the debt issuance and the payment to Sunoco $575 million, we started as a standalone company which approximately $110 million in cash on the balance sheet. We ended the quarter though with the $111 million, so about the same amount of money and a $150 million revolved undrawn even after a quarter of fairly heavy capital spending and of course, the acquisition of GE's interest in Indian Harbor.

If you look -- on the issue of capital spending, again, we've broken up for you here the difference between ongoing and expansion. And, again, we had a total of $56 million of CapEx in the quarter. As we look beyond Q4 with the startup of Middletown, we would anticipate our 2012 capital spending to be lower, as a result of not having any significant or major coke expansion projects in the works.

And with that, I'll turn it over to Fritz.

All right. Thanks, Mark. Page 14. As we look into the fourth quarter which will almost halfway through at this point in the calendar, Indiana Harbor we will have the benefit of high ownership interest of and then operation in the fourth quarter. International, we do preferred dividend on our stake and our Brazilian is declared in recognizing the 4Q paid generally in May of the following year.

Effective tax rates through the first nine months, our effective was 16%. Expect the year to be in 14% to 16%, so therefore, the fourth quarter would be our best estimate between 7% and 10%.

Working capital -- we have increased our coal inventory, actually at the end of the third quarter as well, but our coal inventory at Middletown -- as part of the startup not only we will be spending on capital to complete the Middletown plant, we're also spending on building working capital so that we have coal to charge in Middletown. So, we have that which will pay for actually in the payables roll off in 4Q.

We do expect to reduce our coal inventory excluding Middletown over the next two quarters. We had an inventory building into 9/30 which we expect to roll down through the next two quarters. We also do not anticipate being cash tax payer in the fourth quarter of '11.

Our visibility expects to 12 at this point is limited, it is as much as we need to work with Sunoco on Maryland tax position given the nature of our tax sharing agreement. So, more to come on that. I think as we get into a talking about 2012 later this year, early next year. And on CapEx, we do expect our 2011 CapEx to be a about $235 million with our year-to-date at 184.

Page 15, in terms of just what's going on in the business, contract renewal negotiations with (inaudible) had begun at Indiana Harbor. We've continued to refine our engineering estimates of capital associated with -- or spending associated with provision of the facility. We now expect that the amount we need to spend to be approximately $50 million. You recall in the prior quarters we talked about that, being in the range between $50 million and $100 million.

So we continue to get better estimates as to what we think we need to do there, that would be spend over the next three years. We'll refurbish the facility in the anticipation of a contract renewal. Middletown, we've already talked about that. We expect to reach full production by no later than July, 2012 and opportunities to improve on that if execute out plan the way we expect. You will have power lighting coke however as it normally does.

Haverhill and Granite City, discussions continue with the EPA with respect to NOVs on an ongoing basis. In prior quarters, we had disclosed a project of approximately $65 million to improve the reliability of the boilers associated with both Granite City and Haverhill.

And at that point, we didn't really have good visibility as to what we thought we would need to do in order to address the NOVs. So, that was basically a project to improve the reliability of the boilers. But we did not have good visibility as to what we thought we would need to spend in order to, not only improve the reliability, but address the NOVs.

At this point, while we still haven't reached the final agreement with the EPA, our best estimate today of the range is spending with between $80 million and $100 million at those two facilities, which would be spending the both improve the reliability of our boilers, but also to provide some amounts of redundancy in order to address the environmental performance to the site. The discussions of the EPA with regard Indiana Harbor's NOV have been postponed until early next year.

Page 16. The steel industry in general levels of capacity utilization and what's happening in primary demand. We made -- taken the decision to really focus our efforts on the next US coke plant to permitting the plant.

So, work continues on permitting the plant up to 1.1 million tons. Kentucky remains our preferred location, but not the only one. As we looked at where we might locate, but we've decided to defer seeking customer commitments until further progress on permits takes place, and also which is given us the current environment.

It didn't make sense for us to be out talking to customers and as much as the customers today are -- the industries in an operating level where it's a reasonable one but certainly there's a lot uncertainties out there. And we didn't feel it was appropriate at this juncture to be pushing that.

So, we're holding off on seeking customers (inaudible) which would obviously slow the development of this project. But that said, the tall pole in the tent, if you will, is permitting and we're going to continue to work on permitting the plant.

In India, due diligence is a continuing on global coke. It's progressing well and we're negotiating definitive agreements on estimated $30 million investment in that company in India.

Page 17, our coal expansion. Based on results today, we anticipate our 2011 production at Jewell. At Jewell mine, not Harold Keene, not Revelation, but Jewell of approximately 1.15 million tons.

With the challenges we've seen in both geology as we go deeper in the mines, we've seen thinner and thinner seams and higher and higher reject rates. We've concluded that the best thing for us to do at this point is to focus on improving the productivity of our existing mines in 2012.

So with respect to our expansion plan, which included both improving volume from existing mines but also opening mines, we're going to fairly opening on those new mines until 2013 to focus on deploying our people to make our mines as productive as possible to the existing mines, and also to improve our compliance -- in compliance activities.

So, we expect our production in 2012 at Jewell again to reach 1.15 million tons in '12 increasing to 1.45 million of '13 as we open those new mines.

So, what we've done is we slowed our expansion program to try to deploy our people in the most effective way possible to improve the productivity of existing mines and to improve our compliance at those mines.

Surface Mining -- Revelation. We expect the first coal shipments to take place later in this quarter. And so, we've actually begun mining activities there. We expect to be able to ship coals later this quarter.

And production associated with the surface opportunity, we now expect to be about 1.2 million tons, before it was about 1.4. We've refined that as we've gotten further and further into that project. And we've also refined the rate at which we expect the mine -- we expect it to be about 350 000 tons in 2012 to '14 per annum. And the breakdown would be about 75% in mid-vol and 25% thermal from that project.

On production and mining cost, page 18. With our total mining production of 1.8 million tons in '12, that would be Jewell at 1.15, Surface at 350,000 and Harold Keene at 300,000. We would expect our underground mining cash cost to remain in about $130 a ton until our -- both productivity and volume improvement take hold in later '12 and specifically in '13.

The economics of the surface mining with Revelation are expected to be similar. Now, how does that work? The answer is it's at 75/25 obviously, you'll have lower net pricing because we'll have 25% thermal, on the other hand, the mining cost is low. So, as we look at the profit opportunity per ton, we expect it to be grow up to incomparable to Jewell.

And then, finally, on mining, we are doing work to refine our Black Lung Liability. We're evaluating the impact of the Patient Protection and Affordable Care Act, discount rate another assumptions on expected Black Lung cost. We've seen what the act changes in how Black Lung is both administered and evaluated, which has resulted in increased claim activity.

We've not reached any conclusions to-date, but we expect that we will need to increase our obligation or our liability, if you will, in the fourth quarter. Our best estimate today is approximately $4 million to $6 million. We do anticipate completing that evaluation in the fourth quarter of 2011.

I'll wrap up at the end of the call, but at this point, we'll take questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instruction)

The first question comes Andre Benjamin from Goldman Sachs. Please, go ahead.

Good morning, guys.

Good morning, Andre.

First question, I was wondering if you could maybe walk us through the path to receiving your new 1.1 million tons to -- the permanent, sorry, for the new facility, and how we should think about the upside and down side to reach there as you proceed?

Well, I'd say, Andre, on the permitting, we continue to work with, nit just one side as I mentioned but our preferred that would be Kentucky, we continue to do site work, we continue to do engineering evaluations of our actual approach on how we build the plant, we will do that through 2012.

If we're successful, we would have an opportunity to obtain the permit later in 2012. That permit is good for a certain period of time. I think the gating item in terms of really revenue generation has to do with when we would actually commit building the plant, at this point, given to what I've talked about, we would expect that would be delayed.

At least we would agree just because at this point where the customers are and we still got customers here in North America, you just don't think it makes sense for us to be pushing this hard. I think our job is to get the permits done and have the plan ready to go, stay in dialogue with the customers, an if things turns more quickly, obviously, we'll be able to move because we have that off the critical path.

Thank you. And then, as regarding the long-term opportunities that you identified, I know, you're concern to due diligence in India, how is your thinking about the international market change over the last couple of months? Does India remain the primary vehicle by what you think you'll be able expand internationally or are you still considering some other locations?

India is our first priority today and over the last week, and it continues to look very attractive. I mean, if you just look at steel consumption per capita, what's happened with infrastructure, obviously, there will be challenges and, I mean, associated with any international project in the margin market, but I'm more encouraged today than I even was before on India.

Brazil there are -- we are continued to talk to a couple of -- several customers in Brazil about possible projects. And we do continue to do work on China, although, that is longer term. So, I would say India, Brazil and China really is we're ramping up our work. We're late, but we do think we should do some work there to see if there's an opportunity for us.

Thank you.

You're welcome.

The next question comes from Timna Tanners from Bank of America Merrill Lynch. Please, go ahead.

Yes, good morning.

Good morning, Timna.

From your discussion real quick on the steel utilization and slowing things down, I mean, your project wouldn't come on until 2015, 2016. So, is there something that your customers are telling me that gives you more caution even that far out?

No. Actually, I think, the issue Timna is it's just not a good time for us to be trying to get customers. We talked about this project -- we would want to have some of that project spoken for, with customer commitment. Now is not the time to be doing that. That could change by the way if the industry turn quickly, and the industry does quickly.

But I would say now certainly the fourth quarter 2011 and early 2012 given what we know, now is not the time for us to be trying to sign a customer commitments. We wouldn't like our economics. I would say though that that can turn quickly and therefore, the key thing is for us to continue to do the work on the permits.

And yes, I think 2015 would be -- to think about when you might go to production that would be a reasonable period to think about.

Okay, great. And then, the environment when you talk about, is that a combination of the current economic environment utilization? Or, does that have anything to do with some of the comments about trying to consume less coke from the integrated domestically?

Well, on the ladder consuming less coke, that is a continue trend and we expect that to continue. So, I don't think that could any change there. It's really more just the overall economic environment.

Okay, super. And then, if you don't mind just last from me and providing a little more detail on the press release. You did talk about some coal concerns about -- let's see, what's the language? Augmenting compliance activities, can you give us a little more detail on what that entails?

Well, basically, what's happening with the regulatory environment in Central Appalachia the (inaudible) requirements, we've had to step up and in cruise more staff in order to be able to comply and address the more stringent environment. That's not -- we're not complaining, it's just the facts, and we need to do it.

So that's in part -- if you look at the manpower. For example, you've got a pretty significant increase in manpower, 43 of those folks were red-hats, as Mark talked about, so they're in training. They're actually not -- they're not doing compliance activities, they're not doing any mining; they're in training.

I would say a fair amount of work has been done to provide better staffing both above and typically below ground to try to improve our mining performance in terms of the regulatory environment.

Okay. And thanks to all the great color. I appreciate it.

Thank you.

The next question comes from Paul Cheng from Barclays Capital. Please go ahead.

Thank you. Hey, guys.

Good morning, Paul.

Good morning. Several question. First, if you look at the coke, it seems like that is a one problem after the other. And given the size of the operation, and as Mark point out that 85% of your EBITDA anyway coming from coke. One has got to wonder -- I mean, whether that you should even stay in that business.

I mean, do you really have the economy or scale or any competitive edge to suggest that you do well in that business?

So, if you -- we talked about this in the past, we're obviously small, we don't have economies of scale. We don't pretend to be a big mining company. So, what do we have? What we have is very valuable mid-vol met coal which is a very short supply.

So, our game plan is simply been run our operation safely and effectively and implement the expansion program that that's way we know how, we build the management team in mining over the last year. We brought in some key people to help us do that and the point is get the operation running well and it hasn't been running certainly direct satisfaction.

So we want to be running well and keep all of our options open. We don't, as Mark said, 85% of our adjusted EBITDA comes from the coke business. Certainly, if we didn't have high-quality mid-vol coal, we wouldn't be going through this much work.

What we have is high-quality mid-vol coal, which is in short supply, and we're well over 90% mid-vol. So, I think doing the work to make sure our operation is running safely and effectively makes sense to me, and then keeping all of our options available also makes good sense to me.

I mean, Fritz, is there kind of timeline that you give yourself to really improve that operation? And by certain time, you haven't been able to improve the operating performance to the (inaudible) that you really have to look for an alternative?

Good question. We think 2012 for us is a pivotal year in mining. We think we have the team lined up ready to manage this. We think we have a good plan. We think we've got the people deployed where we need to. We do continue to do work on geology in terms of making sure that we have the new mines ready to go.

And we continue to do work with, for example, revelation on implementing the surface. So, I think 2012 for us is an important year. We want to make sure that we improve our performance, not only in terms of hollow mining, but also our compliance activities and our compliance performance. And 2012 is the year in my judgment.

Okay. If I could [one] other relatively short question. First on Jewell, just for the transfer price, [in fact] things like your unit margin improved quite dramatically on the second quarter. Second quarter based on calculation is about $54.3 per ton and look like you're about $66.4.

So, I want to see what triggered the substantial improvement on a sequential basis. I mean, your sales volume -- I mean, yes, your production is doing a little bit better, but that doesn't seems like it would be sufficient to drive such a huge improvement.

Paul, are you talking about the second quarter of '11 versus the third part of '11 or year-over-year?

Sequentially, it's second quarter of '11 to third quarter '11.

Right. Go ahead, Mark. You want to tackle that?

Yes.

I think it has to do with the fact that we have one more train shift in the third quarter.

Mark Newman. So, I think, Paul, some of the margin expansion really has to do with sale of coke from inventory, which has a lower cost basis. And so, we had some improvement in the quarter and not only due to the higher volume but actually relieving inventory which was at a lower cost.

So you actually sell some of your inventory. So, some of your services are from the inventory?

Correct.

I see. Okay. That's clear. So that means that on the fourth quarter, we should assume the unit margin go back down closer to the second quarter level?

Yes. That was point is that we had a good quarter at Jewell both on volume and as well as on margin, to some degree, with the sales from inventory.

Could you quantify it? Mark, could you quantify what is the benefit from the inventory sale?

I think if you look at the EBITDA from Q1, Q2 and then Q3, if I go back to chart seven, our normal run rate is closer to 11 million. Per quarter, if you adjust for the volume, I think you will be able to identify what the benefit from selling from inventory of lower cost would be in that quarter.

Okay. Second question, on the Middletown, should we assume the Middletown unit margin that the profit per ton is going to be higher than your existing other domestic operation?

Yes.

Could you quantify by roughly how much?

If I did that, I would end up telling you what the (inaudible). So it will be significantly accretive, Paul, to the $50, but I can't get in to what the individual contracts are.

: Okay. That's fine. Mark, the $4.4 million capitalized interest in the quarter, what do they relate to, and should we assume that's going to continue in the next year?

That's really related to Middletown construction in progress in the quarter. And that will roll up as we complete Middletown.

So, the fourth quarter that -- we should see that will go back down to zero or --?

We're still paying for the CapEx and some of our fourth quarter CapEx is Middletown related. So, there may be a small portion in Q4 related to that. But it should smaller than what we saw in Q3.

I see. Final one, typically, I think the coke contract -- majority of them is being negotiated around this time for the coke. And so, do you have a rough idea how the contract may shake up for 2012 look like?

Actually, it's taking place almost as we speak. We'll have more to say in that, Paul, when I have more specific data. So, I just differ on that until I actually know what the exact numbers are.

We've got something done, something is not done and it depends on -- when you say something, some of the customers were getting close to being done. Other ones, specifically Jewell, I know we're not done yet. And some of the coals and other coals you don't know. So, I think it's frankly a negotiation.

I do think though that, as Mark mentioned in his comment, it would be above the 165. It's our best knowledge today. But we'll know that this month, and we'll have more --

Can you tell me what is spot price we have now? I don't have yet the --

It would be above 165 today. Yes, for sure.

All right. Thank you.

You're welcome.

The next question comes from Dave Katz from JPMorgan. Please go ahead.

Hi. I noticed that you gave the guidance for the Jewell Coke production of 1.05 million tons. But the coal production year-to-date was 1.015, and I know there are some HKCC in there. Could you clarify what you expect your total 2011 coal production could be?

So Jewell is 1.05? That is what we expect for this year. That does not include HKCC. And so, when you look at it versus year-to-date, that would have included some HKCC. So, it's not apples to apples.

Through the third quarter, Jewell production is, you guys have that piece of data while I continue. But what we try to do is I isolate what Jewell is alone, 1.05 in 2011, 1.15 next year and 1.45 in 2013. And we're about 800,000 at Jewell through the third quarter.

Okay. And then I understand that you guys are looking to increase productivity there. And that's where you're focusing your effort. But as you said, you're encountering thinner seams, higher reject rates. And one will expect that as time goes in. the seams will only get thinner.

What gives you confidence that you can increase it from 1.05 to roughly 40% increase two years later?

Well, part of it is we've been undermanned in some of the seams, and so -- even on the existing mines. So, we're going to make sure that we'll be able to mind the seams that we have available to us today. That's number one.

Number two, we do think we can get some productivity out of our processing plant to allow us to get better yields. In other words, more clean tons for the raw tons produced -- and equipment. We've got some new equipment being delivered into the existing mines.

In terms of the people side, remember 43 people being trained today as red hats become minors next year. So I do think even with the seam challenges that we've got, we do think we're able to go from the 1.05 to the 1.15 next year.

And you don't think - let me put it different. Where do you think the cost will go? I'm understanding that you said around 130 now, but towards 2013 how do you balance the center themes and perhaps more people on the ground in comparison to the higher productivity that you expect?

So, as I think about going forward, 130 is a good number we think for next year in that range. I do think that as you look at the expansion in 2013, we think we start to see some of the favorable impact of the higher volume as we look at 2013 cash money.

Coming back to your question on seams, the deeper you go, obviously, the narrow they are you're getting better. But there are things we can do to mind our existing mines in a more effective way. Again, getting productivity from the red hat, so at least mining per person we're getting more volume. And I do think that what we can do in our processing plant and our washing plant to try to at least hold the current yields is important, and we have a capability of doing it.

So, again, we're able to hit the 1.15 next year based upon the mining plans that we have in place. And I think our costs are going to stay elevated next year. And I do think as we look at '12 -- excuse me '13, and we are opening those new mines. We've got three that we've permitted and will be ready to go that we'll be able to go get some benefit as we look into '13.

Okay. And then, finally, when you pointed to -- I think it was on slide 11, and said that the pro forma sales price was $155 per ton. You talk about the $165 contract. If met coal were to stay kind of where it is right now in November, where do you think that price would move over the next couple of quarters?

That's the same question Paul asked, actually. And I will tell you as we finish the negotiations here this month, but I just at this point don't want to get in to try to speculate as to what that number is. We're close with our customers to be able to talk more about it as we finalize this agreement.

Yes, I appreciate that Paul asked that question. Let me rephrase it then. Is there some way to look at kind of the benchmark price, and to say more or less that equated to x dollars off for you guys, or is it just depend on individual negotiations?

I think it depends on individual negotiation. I do think that importantly most of our coal is mid-vol to Jewell. Actually, Jewell is almost entirely mid-vol. And so, when you look at what the reference price is, if you were to turn the Platts, you would want to look at mid-vol. And then you want to adjust for a metric versus short and then you would to adjust for Australia versus [FOB] mine.

And I think what I'm saying is that if you were to do that today, it would be above to 165, even today, even with the prices haven't been off 25% in the last three months. That would be my answer. But we have a finalized negotiation yet.

Okay. Thanks very much.

You're welcome.

Your next question comes from the line Matt Gembrin from Wells Fargo. Please go ahead.

Good morning, gentlemen.

Good morning.

You talked earlier about going to mills with the potential Kentucky facility and you said -- obviously those guys have things they're dealing with. The utilization rates are low. The economic environment is not good. My question is, how that's impacting the negotiation part in the harbor and any potential for customers to come back and try to renegotiate lower rates?

We haven't had anything like that. I mean, I think the negotiations in Indiana Harbor have begun. The early -- we are supplying a high volume of coke to the most important blast furnace. So, we have not had any hint of what you just asked about.

Basically, it's been all about making sure that we just line up -- at this point, the discussion with customers to focus on lining up coals for next year, and developing our operating plan for next year. But no, we haven't had any discussions about opening up contracts.

Thank you.

You're welcome.

Your next question comes from the line of Lance Ettus from Tuohy Brothers. Please go ahead.

As far as the pullback or the delay of expanding your production, I'm just wondering how effective that was by coal prices and if there maybe -- I know that you have other factors. But is there may be a tipping point where you decided to delay that and focus on your current production -- to kind of maximize the productivity?

Lance could you just -- I missed the question. I'm sorry.

Oh, okay. I'm just wondering if the delay of expanding the coal production, how much that was related to the recent pullback in pricing. And if there's a tipping point that made you sign that decision, like -- whether there's 260 benchmark pricing or whatever it was.

Good question, actually. I think logically you would say that if pricing had stayed 260, we would be doing something different. My issue is if you look at the practical constraints of labor availability, equipment availability, compliance responsibilities, I think even if coal prices were markedly higher than they were today, we probably would still be doing what we're doing because we face decision, for example, about doing staff the expansion mines.

But if you had done that, we probably wouldn't have achieved the right scale of those expansion mines and we haven't significantly heard our existing mines in terms of their production. So I think even if coal were appreciably higher, I still think we would be doing what we're doing just simply because we're just limited in manpower availability, equipment availability to where we are.

I don't think we could expand it any faster. We just can't produce the minors.

Thank you.

You're welcome.

The final question comes from Andre Benjamin from Goldman Sachs. Please go ahead.

Andre, are you there?

I'm sorry about that. I have two quick follow-ups, I guess. One would be, actually, the same question about the expansion of the met coal mines. The reverse, is there a price level at which you would reconsider the expansion? I know a lot of people talk about 200 is this magical price.

If prices were to fall below that level, would you reconsider, or do you feel like your coal structure is competitive enough to continue to move forward?

Well, I mean, let's just going to go through the math. Even at 165, which is where we are today, we'd be pursuing the expansion program. I would say, if you were to see prices fall to 130 or less, yes, you definitely would be reconsidering things.

On the other hand, if that would happen, I think the inflation we've seen on minors and equipment would abate. In other words, the inflationary issues that we face have been directly tied to the price of coal. And so, the price of coal were to fall markedly, yes, we would reconsider but we probably would have -- we probably would see some easing in our inflation in the mining cost.

So that one-third is at the mine. When I was saying 200, I meant more of the benchmark price. But you do the same - 130 at the mine. Right?

Oh, yes. Yes, 130 is at the mine.

And the last thing would be on the Indiana Harbor negotiation, when would you expect to start spending the $50 million in CapEx, and how will the measures that you're taking down different from what you're currently doing expensing?

So I would say what we've been able to do in terms of oven repair, Andre, is we become more and more efficient in oven repair. And Indiana harbor in the third quarter certainly are run within its budget and cost number. So, we were able to affect oven repairs within the budgeted amount going out, which was very good to see.

And so, as we've refined our project expense, we said we become more efficient in terms of repairing ovens. And the remaining 50 million is largely associated, and frankly, we need to do probably do some work - not probably, we need to do some work at the common tunnel. And the work on that will continue to be refined. We would anticipate spending on that largely next year, next year and a little bit in '13. But it would be -- a significant that that would be next year.

Thank you.

You're welcome. I think we have time for one more.

Thank you. The last question comes from Evan Calio from Morgan Stanley. Please go ahead.

Hey, good morning, guys. It's actually Ben Hur for Evan. Most of my questions have been answered, but I just have a simple one for you more on just corporate-to-corporate on your parent Sunoco. And it really just kind of regards, when can we, the sale side investors, expect full separation of SunCoke from Sunoco Inc.?

I wish I could answer that question directly because they're coal. I mean, obviously, they have 120-day lockup, which expires November 21st. They've talked about within a year. I can't really speak for Sunoco, I know that their focus has been on doing it at the right time, doing it in orderly way.

Let's face it. The Sunoco shareholder already own 81 percent of our share through a donorship with Sunoco. So, of course, it's not a market issue as much as it when could it be done in an orderly way. With orderly -- I mean you don't want to be out there, for example, on December 31st trying to figure out how to move the shares when people on vacation, for example.

So I think what they're trying to do is find out when the most effective date might be for the distribution, but it really is their call. I can't speak for them.

Understood. So, would you expect, kind of like what you said, we're not going to look like a full separation into the holiday season. We obviously have to wait after November 21st. But does that seem like more of a 1Q thing in your opinion, not speaking for the actual parent corporation on that?

I think I would get myself in a fair amount of travel if I were to answer the question the way it is. Because it really, in my opinion doesn't count, the only thing that counts is the decision of the board. But I guess I'm quite confident they will do it in a way that's orderly because that's been the focus. And beyond that I just can't speculate.

Okay. Wonderful. Thank you so much.

No problem. So let me summarize here and then we'll let you go. Last chart of the deck, page 20, the third quarter did see continue sequential improvement operationally as well as financially in the quarter. Coke earnings, growth is on track with the Indiana harbor improvement, the partnership purchase, and the startup in Middletown.

We're quite encouraged about what's happened in the Indiana Harbor and encourage by the early results. I never declared victory too soon, but a lot of work has been done at Middletown. But the team there, to learn from our prior startup experiences at Haverhill, at Victoria and at Granite City. So we think we have a very good plan and we're encouraged by what we've seen so far.

That was spending the discussion of mining and the challenges. We have seen significant earnings growth year-over-year despite the production challenges. And I believe the results of Jewell in the mining segment, the share will be the best they've been. It's just been what we would like. We'd like them to better.

But I think our focus today has been delay the expansion, focus on productivity improvement with additional upside likely certainly in volume particularly in '13. But we anticipate being able to drive better performance in '12 as well beyond just the 100,000 tons of expansion from 1.05 to 1.15 at Jewell.

We do have the revelation of project coming on late this year. And so that will provide the contribution meaningfully next year. And then, finally, our liquidity position even after the Indiana Harbor partnership goes to solid, we obviously have to finish the Middletown project. We've got coal build up associated with Middletown.

And so, you got to manage the day-to-day liquidity needs of the business effectively. But we think we ended the quarter of the liquidity position. We go in to next year feeling good about our capital structure.

So, I appreciate everybody's time today, I look forward to speaking with you soon. Take care.

This concludes the SunCoke Energy Incorporate Third Quarter 2011 Earnings Conference Call. Thank you for your participation. You may all disconnect at this time.