SunCoke Energy Inc (SXC) 2012 Q1 法說會逐字稿

Welcome to the First Quarter 2012 Earnings Conference Call. My name is Sandra, and I'll be you operator for today's call. 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 Mr. Ryan Osterholm, Director of Finance and Investor Relations. Mr. Osterholm, you may begin.

Thank you, Sandra. Good morning, everyone. Thank you for joining us on our First Quarter 2012 Earnings Conference Call. With me on the call are Fritz Henderson, our Chairman and Chief Executive Officer; and Mark Newman, our Senior Vice President and Chief Financial Officer.

Following remarks made by management the call will be opened for analyst 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 website. If we don't get your question during the call please call our Investor Relations department at 630-824-1907.

Now before I turn over the call to Fritz, let me remind you that various remarks about future expectations constitute forward-looking statements, and the cautionary language regarding forward-looking statements in our SEC 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 this call. I would like to turn the call over to Fritz.

Thanks, Ryan. Good morning. Page two -- chart two of the deck summarizes both earnings per share and adjusted EBITDA. The first quarter results were really driven by strong Coke business performance. When we entered the year, we talked about three drivers of our improvement year-over-year being startup and acceleration of our Middletown plant; improvement in our Indiana Harbor operations, and third, improvement in the coal business.

We are going to touch on where we stand on each of those this morning, but on the Coke side of our business we had a successful Middletown startup, we saw improvement in the Indiana Harbor, but as you're going to see later in the deck, there is more to do with Indiana Harbor, but we did see improvement.

What we saw in the quarter, was strong performance at our other Coke [batteries], Jewell, Haverhill and Granite City all posted both yield and cost improvements, so our Coke performance was reasonably strong and can be better as we look out into the rest of the year. Earnings per share were up from $0.17 to $0.24. EPS isn't really comparable. The first quarter of last year didn't have our capital structure included in it, whereas the first quarter this year does.

On an adjusted EBITDA basis, which is comparable, we are more than double, so that was driven by, you know, better coal performance. We ended the quarter with a strong liquidity position. As we look out for the rest of the year we expect positive free cash flow for the balance of year, as Mark will show you. We had some working capital online which hit us in the first quarter and we don't expect that to recur, necessarily, to the next nine months.

And finally, we are reaffirming our guidance for 2012 of adjusted EBITDA between $250 million to $280 million driven by Coke performance, and you can see where we were in the first quarter at $55.8 million. So let me turn it over to Mark.

All right. Thanks, Fritz. If you turn to page three, it's great to start the year with year-over-year improvements in both revenue -- adjusted EBITDA and earnings per share. Our revenue was up primarily based on our production up of roughly 206,000 tons, most of which came from the startup of Middletown which achieved a full run rate in Q1, and we also enjoyed higher average coal prices which are favorable to both our coke and coal revenues.

On adjusted EBITDA, as Fritz mentioned, more than doubled with Middletown contributing roughly $11.5 million; we had meaningful improvement at Indiana and Haverhill, I will cover that more on the following chart. And across our entire Domestic Coke business we really saw consistent operation at all of our plants with yield and operating costs improvements; and we also benefited from a mild winter which helps us on the yield side. And then finally, on earnings per share, as Fritz mentioned, $0.24 per share and this is inclusive of our interest cost related to our stand-alone capital structure.

If I turn to the next chart, chart four, we have our adjusted EBITDA bridge year-over-year showing the improvement. Again, Middletown contributed $11.5 million improvement. I will note, for those listening, that we did incur roughly $4 million of startup-related cost in the quarter, so while we achieved full run rate we believe Middletown can contribute more as we go forward.

With respect to Indiana Harbor, we bifurcated this to show non-recurring items separately and first -- excluding nonrecurring items, our performance was up $4.4 million year-over-year. This is really attributable to higher coke sales as a result to the improved production there, and improved yields on a year-over-year basis. On the nonrecurring side, you'll recall that we incurred $12.2 million of Coke cover cost, and this, again, is net of non-controlling interests last year.

And this year we incurred roughly $3.7 million in nonrecurring costs. $2.4 million relates to a Coke inventory adjustment that we took, and $1.3 million relates to a write-down in value of our pad coal reflecting market conditions and our inventory balances that we would determine in the quarter.

Finally, the rest of our Coke business contributed roughly $10.3 million of improvement, again, the portfolio ran well across the board, but we saw particular improvement, on the year-over-year basis, at Granite City and Jewell.

As Fritz mentioned, our Coal business is off to a disappointing start. The main story here is that our cash costs are higher and then more than offsetting the increase in sales price on a year-over-year basis, but we'll cover that in more detail. And finally, our corporate costs are relatively flat and in line with our full year expectation of unallocated corporate costs being a little bit above $30 million for the full year.

If I turn to chart five, our EPS Bridge, again, it shows the improvement related to our coke earnings and it also reflects increase in depreciation and amortization. Most of this is attributable to Middletown, and Middletown adds roughly $3.5 million a quarter, and then the rest has to do with some of the capital improvements we made in our Coal business last year.

And then the fairly negative financing cost, again, reflects the interest costs on our stand-alone debt. It also reflects the fact that we no longer receive interest from an affiliate. When we were a division of Sunoco last year we were receiving interest on the [Claremont] Note which is not fully consolidated and eliminates on consolidation; so net-net, an improvement of $0.17 to $0.24 on a year-over-year basis reflecting the full impact of our stand-alone capital structure.

Turning to chart six; this is a -- this should be a familiar chart to our investors. Again, on the production side, just to the left of the chart, shows that we had strong production across the entire domestic Coke fleet including Jewell. On the right side of the chart, what we show is the adjusted EBITDA and the adjusted EBITDA per ton. Again, in this quarter we benefited form the addition of Middletown and the improvements that we made at Indiana Harbor, which contributed $55 million of adjusted EBITDA or $51 per ton.

And as I mentioned earlier these -- this performance is inclusive of the $4 million in startup costs that we incurred at Middletown in the quarter and the $3.7 million of nonrecurring cost that we had at Indiana Harbor. So we expect that as we move throughout the year, that the EBITDA -- adjusted EBITDA and EBITDA per ton can be improved from the levels that we saw in Q1.

Turning to chart seven; this is the return on -- the pretax return on invested capital for our domestic coke business. As you'll see, we achieved 17% ROIC -- pretax ROIC in the quarter. You will recall that all of the numbers prior to the 2012 exclude Middletown, so basically what we have in Q1 is reflective of the earnings of Middletown, but it's also reflective of a fairly significant increase in our allocated invested capital related to Middletown.

Again, as we improve the earnings of our portfolio, based on my comments on the prior chart, we would expect to see improvements here as well. I would also mention that you know, our entire leadership team is very focused on minimizing our working capital that we have tied up in the business, and as we make improvements there as well, which we'll talk more about as we get into the cash flow section, we would see the ability to move this number again.

The next chart, chart eight, is a new chart we've not presented before. We thought it was appropriate at this point, now with Middletown at full run rate, to update our expectations with respect to the EBITDA per ton of our domestic Coke business. You will recall, last year in Q3 we indicated that, excluding Middletown, our domestic Coke portfolio which is inclusive of Jewell Coke, could produce roughly $50 of EBITDA per ton. We now believe that we can expect $55 to $60 per ton going forward and we think this rate will allow for seasonality, will also allow for planned outages that we need to take throughout the year.

If you look further down in the chart in terms of our expectation on coke sales volumes going forward. We believe that we can operate between $4.3 million and $4.4 million a year, and if on that basis our domestic coke business would produce between $237 million and $264 million of adjusted EBITDA.

If you take away from that, our ongoing capital expenditures for this entire fleet of assets we would be able to generate domestic -- domestic adjusted EBITDA less ongoing capital expenditures in excess of $200 million a year. Again, we believe this measure is a key indicator of the cash earnings that we can get from our coke business and, again, this excludes international coke, it excludes coal, and any unallocated corporate costs.

Finally, on the chart we have some of our liquidity ratios and we've used the term illustrative because our actual liquidity ratios exclude any of our unrestricted subs -- subs like Indiana Harbor which are in these results. But what this shows is based on the earnings, the anticipated earnings of our domestic coke business, we will be more than adequately able to service our current indebtedness of $730 million.

Turning to coal mining, on chart nine; again, this was a quarter in which adjusted EBITDA declined to $7.4 million, we experienced very high cash cost at Jewell, came in at roughly $161 a ton, and it's primarily attributable to the increase in reject rates. You will recall that in 2011 our reject rate for the full year was approximately 65% and we really had a very bad quarter so -- and that really is attributable to both our geological conditions as well as to some issues that we were having with respect to our prep plant which we are trying to address.

Additionally, based on the higher selling price of our coal this year, on a year-over-year basis, we incurred higher royalty cost. Finally, we had some permitting delays at Revelation, and Revelation would serve to reduce our overall cash cost, so we had, you know, the -- we had the detriment of not having high enough -- or as high as we expected in terms of Revelation production in the quarter which also served to increase our cash cost.

For the full year we are going to be reducing our coal outlook, as Fritz mentioned at the beginning of the call, for the total company we are reaffirming our total EBITDA guidance, but we are acknowledging at this point that coal will be less of a contributor than we believed earlier in the year.

On chart ten, this really talks to what we are doing in our coal mining business. Our key focus here is to have the coal mining business as close to cash neutral as possible in 2012. Our focus today is on reducing cost, primarily at our Jewell mines where we incurred very high cash costs in the quarter. We will be taking actions to idle our highest cost mines and reallocating that workforce to our better mines where we will be, you know, then reducing overtime and the number of contractors that we have on hand.

Again, our forecast here is that our Jewell production will remain relatively flat for the year versus our prior estimates. We will however be reducing our output at Harold Keene, given the low pricing environment primarily for hi-vol. and thermal coal, we are basically reducing that production significantly and that accounts for most of the reduction. And then as I mentioned earlier, we have experienced some delays in permitting at Revelation and we are acknowledging in these estimates that that production will be down slightly, you know, versus prior expectations.

And finally, to remain cash neutral in our coal business, we have decided to reduce our capital expenditures from roughly $60 million to $40 million this year. We are deferring any further expansion at, you know, Jewell mining activity, and really, the focus of our capital expenditure is to improve our efficiency in our mining, in our prep plant, and to complete the real load out that was part of our commitment with Revelation Energy.

On chart 11, we look at our cash balance sheet. We ended the quarter with very solid liquidity position, approximately $113 million in cash and our revolver is approximately $150 million. We have a number of small letters of credit against our revolver but for the most part, our revolver is un-drawn, so we have significant liquidity.

As Fritz mentioned at the beginning of the call, we had fairly significant working capital unwind in the quarter. As you'll recall we built up coal inventory at our coke plants towards year-end as we switched over to these new blends, and we have 30-day payment terms on most of our coal supply, and so that really affected our accounts payable in the quarter.

We are focused on reducing our coal inventory, we achieved some of that; you'll see $18.9 million favorable versus our year-end balance sheet. We think there's more to be had here and we would expect to see that in Q2 and beyond.

So, again, for the quarter we ended with $114 million in cash, and most of our revolver intact, so we have significant liquidity as we move forward into the rest of the year. And Fritz will talk to you a little bit more about, you know, how we see free cash flow. Free cash flow in the quarter was negative $12.6 million, again, mainly attributable to the working capital on line. So with that I'll turn the call back over to Fritz, who will cover our 2012 outlook, and our update on our MLP evaluation.

Thanks, Mark. 2012 is an overlay, if you will, on our 2012 outlook. Domestic Coke business, with the start of Middletown, at this point, completed we have a good confidence level in our outlook. Our 2012 production is now expected to be in excess of 4.3 million tons; as opposed to the 4 million to 4.2 million when we started the year. We expect our average adjusted EBITDA per ton to be between $55 and $60 for the balance of the year.

So our Domestic Coke batteries are performing and, I think, as Mark talked about, in Indiana Harbor, while we saw improvement year-over-year on an operating basis, the level of results is still not satisfactory, and we know what needs to be done in terms of yield, in terms reducing coal spillage, and in terms of operating costs, and in terms of production, so we have a very clear focus on improving the operations in the Indiana Harbor while seeing the fruits of the Middletown startup really take place with the startup cost come out of the operations, and the rest of our plants are running reasonably well.

So you know, we feel confident in their outlook on Domestic Coke. In terms of growth we will outline in our 10-Q, but our permitting efforts for the next plant, we've not focused on permitting in a plant about the size of Granite City, about 660,000 tons with 120 ovens we previously said, it would be up to 1.1 million tons. We think at this point, this is a more manageable number, it's also one that's reasonably capital efficient, so we are focusing our efforts on that.

And, again, we are not spending capital against this, we are really working on acquiring permits in the first half of 2013 while staying in dialogue with customers today, but really that -- a lot of that work would take place early next year.

On International Coke, we are not pursuing the investment opportunity with Global Coke, and there are a number of reasons for that, that led us to discontinue those discussions. We remain committed to an India-entry strategy. There are other opportunities, we are discussing those opportunities to several other merchant coke producers, but we are also committed to doing a disciplined deal.

We are not going to enter India at any cost. We are going to enter India on a reasonable basis, and we think we can, but we are going to be patient about it because we want to get a reasonable -- we want to have a reasonable deal and a reasonable entry point into the country. If we see a deal, again, we have a couple of discussions underway, we don't see anything materializing in 2012, it would not be likely to close until early 2013, so the capital associated with that is really in the 2013 period now.

Currently on mining, it was a very -- it was a disappointing to very disappointing quarter. We had higher pricing and our met-coal pricing is reasonably attractive, but as Mark talked about, our costs were very high. With reject rates at 68% which is what we saw in the quarter it is a -- I call it -- it's a negative spiral because number one, you are mining a lot of rock to get your clean tons, and number two, you are running a lot of overtime in order to mine the gross tons.

You have a lot of contractors onboard, and so our focus today is really -- the further expansion plan and we came into the year, we'd already slowed our expansion plans, we really, at this point have said, let's just defer that and focus on mining as productively as possible at our most efficient mines.

Our reduction in production is really focused on hi-vol. in steam where we've really cut it off to a very significant degree, focusing our efforts on the mid-vol. which is the lion share of our production anyway, but even within mid-vol our objective is to mine our most productive mines while making improvements in our prep plants with the objective to arrest this deterioration in the reject rates.

Not only arrest the rate of deterioration, but see improvement in the reject rate, which we think we can do, which will help us not only mine more clean tons per ton of raw rock and coal that we are mining, but also reduce overtime, reduce contractors and reduce absolute levels of cost, so it's really about driving our cash cost per ton.

As Mark talked about, we've also reduced our capital spending to $40 million which would allow us to make the investment in the equipment and efficiency in order to -- including our prep plant, in order to be more productive, but really, we've removed expansion capital from that number.

And then, again, focusing our investments on mining equipment replacement and refurbishment prep plant efficiency and, as Mark said, finishing the load out facility which also will make us more productive as we go into next year.

Page 13, if you look at the bridge of 2011 to '12, this update from the guidance we provided earlier in the year, and you can see now we -- as I said at the beginning of the call, we were reaffirming our $250 million to $280 million adjusted EBITDA for the year, but more of the improvement is being driven by the Coke business. So $95 million to $110 million in the Coke business, mining would be up $5 million to $15 million which does require us to improve as we go, sequentially, through the quarters this year.

With what's happening there, we are confident in that number, but what's really driving our year-over-year improvement is the Coke business, but we do expect that we can make progress in mining as well, as we go throughout 2012. And I do note that almost 90% of our mid-vol. production is already committed at pricing -- reasonably attractive pricing levels, and even recently we've done some spot sales not as high -- at levels of pricing, not as high as our contracted terms, but at reasonable levels in order to reduce inventory.

So the pricing environment on mid-vol. while not attractive, per se, is certainly not anywhere near what you see in either hi-vol. or steam. Our issue is cash cost and being productive.

And finally, on corporate cost, no real change there, it will be up $9 million to $14 million and that's in line with what we had talked about as we entered the year, really driven by stand-alone costs and driven by a full-year stand-alone cost.

Page 14, when you look at the other elements of our guidance, I've already touched on adjusted EBITDA, EPS would flow that, that's consistent with what we had talked about as we entered the year, this assumes a 22% book tax rate. CapEx and investments approximately $100 million now, that was number before was $150 million.

Free cash flow in excess of $75 million, that's also an increase from where we were before; our cash tax rate -- effective tax rate and corporate costs are in line with our expectations previously. Coke production and coal production are revised as we've already mentioned.

Finally, on MLP evaluation, as we talked about on prior calls, we do believe our Domestic Coke assets could qualify for an MLP. Our coal business is not under consideration for inclusion in the MLP. We did engage, in the first quarter, key advisors, both financial and legal advisors while [securing] support to assist in the MLP evaluation.

That analysis is underway to assess the structuring alternatives that we have and the work that needs to be done, in order to prepare for this, and we do plan to provide a more substantive update at the end of our second quarter call, if you will, but at this point work is underway and that's the most I can say about it today because there's a lot of work that's had got to get done between here and June/July. At this point, it closes the prepared remarks, and we'd like to open it up for questions.

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

(Operator Instructions)

And the first question is from Andre Benjamin from Goldman Sachs. Please go ahead.

Good morning.

Hi, Andre.

Hi. I was hoping you could maybe help me better understand what exactly is driving the increase in the reject rate at the mining operations. How much it's up versus prior periods? And then understand that, is getting it down something that you have a pretty good conviction, you should be able to do, or is it just something that you're kind of hoping will improve as you move to a different area of the mine?

Well in the first quarter we were almost 68%, we were 67.6%. Last year we were at 65.4%; 2010 we were 63.5%; 2009, 60.1% and 2008 58%. So obviously you've seen a rate of deterioration through this period.

Really, as we look at the diagnosis, Andre, what's the driving the increase in reject rate is really -- part of it is geology, mining conditions, and we don't necessarily expect that to improve, but it hasn't really, also, significantly deteriorated. What we've seen is our prep plant efficiency has not been satisfactory, in our coal -- our mining practices, if you will, at the mining [face] have also not has been as sufficient as we think we can make it.

By redeploying our experienced miners in our more productive mines, we've been too spread out, we've had a lot inexperienced miners, we are concentrating our experienced miners in fewer mines. We are mining in mines with better geology, so both at the mine face we do expect and we've already begun to see, even among small measures, improvements in terms of efficiency, and the work we are doing in the prep plant we've got investments earmarked in the prep plant in order to make improvements.

Hope is not a strategy so, you know, what we have is work under way both in terms of mining more productive mines to get better geology, focusing our experienced miners in a more concentrated way so that we can get better yield at the mine face; and third, making investments in improvements in the prep plant in order to arrest this deterioration.

Thank you. And then on the longer-term Kentucky coal facility where you say you're thinking that facility might be a little bit smaller, is that decision something that you will continue to revisit through the course of the year, and could maybe end up deciding to take it back up towards where your prior growth expectations were? Or are you pretty certain that a small facility is the way you're going to end up going?

Right, the Coke facility, for other folks on the phone, this is a coking plant we have put in Kentucky, and now -- I mean, it's [660], we feel like that's the right number now, and we are going forward with permitting on that. Once you start the permitting process, the chance of you actually increasing it then, you basically foreclose that option unless you want to restart the permitting process all over again. So at this point, we are focusing at the [660] level.

Thank you.

You're welcome.

Thank you. And the next question is from Ian Zaffino from Oppenheimer & Company. Please go ahead.

Great. Thank you. A question (inaudible), Fritz, I know you mentioned about the interest rate and that. You know, can you give us, maybe, some comfort that maybe the same thing that happened with Global Coke won't happen also in India -- you know, endemic in the Indian market that this stuff happens, or is this really just [one-off]?

Well, a couple things. First, as we entered into the Global Coke discussions we did -- we focused our efforts on Global Coke, and we had an exclusivity period which lapsed, but we continued the discussions, or tried to achieve a deal. But, again, we just couldn't do it on parameters that made sense, either for them or for us.

In that case, it wasn't a question of willingness; it was a question of inability for our counterparty, if you will, to provide what we thought we needed in order to close the deal. We also said at the time, that the -- other parties that we could have discussions with and we are, but we are going to be disciplined about this.

I know that as I was looking at some comments and watching the middle (inaudible) projects in India, which are all -- which have all taken a very long time, obviously a major -- steel plant is different from what we are looking at, but I would say -- you know, as I look at the market, there are opportunities and it's still attractive.

There are multiple companies, it's not just one other company, there are multiple companies we are talking to, but I would say that we are committed to doing a disciplined deal. I'm not one of those people that say that you should enter, and you wouldn't expect me to say this, but you know, I would -- I think we should do a good, reasonable deal, well structured, and carefully crafted to represent our entry into India.

So, you know, I think what that means is that we will enter into discussions, and we are under discussions, but there's no guarantee it's going to close. You know, we have confidence that we can close, there are multiple parties, it's not like we are focused only on one but, you know, what I would say is that India is a challenging place, and other companies have had challenges and, you know, we've obviously experienced one already ourselves.

Okay. And then, Mark, on the clients, how much do you actually -- you know, I know you gave us the production, but from an EBITDA level, how much would you take out from your coking guidance, and how much did you take down in your coal guidance?

Yes. Our prior range on coal was being up $74 million to $84 million, and our newer range is up $95 million to $110 million.

Yes, on chart 13.

So you know, we are up you know, $15 million to $20 million on coke but a similar amount reduction on coal. And really that's attributable to the startup at Middletown and some of the improvements we've seen at Indiana Harbor as well as the improvements we've seen in the other Coke portfolio, and then an acknowledgement that, quite frankly, our steel customers appear willing to take all the coke that we can produce.

And, you know, our expectation is that we can produce and sell 4.3 million to 4.4 million tons of coke this year.

Okay. And then the final question would be, I don't think it changed at all, but with the sale of Sunoco, that doesn't your Indemnification Agreements or anything like that, does it?

No. No, it doesn't, it's unchanged. My presumption would be our indemnification obligations would run [throughout] the organization.

Okay. All right, thank you very much.

You're welcome.

Thank you. And the next question is from Dave Katz from J.P. Morgan. Please go ahead.

Hi. I understand that you guys are still in the process of investigating the MLP, but I was curious if you have a timeline even within six months, years, or are we talking about 2014 then or are we talking maybe a 2012 event?

Dave, good morning. As I said in my chart, we are going to come back to you with a more substantive review at the conclusion of our second quarter earnings. We are doing the work now on both structuring alternatives, which obviously includes timing. So I would say there's a lot of interest in the subject, I can only tell you we are very focused on it, but we really, today, think it's best that, you know, let us do our work and we will be back to you in three months.

Okay, understood. And then with regard to coal, you talked about -- I think you said that 90% of your mid-vols. is already committed, what does the contracted submitted picture look like for 2013?

We are 88% committed, so it's almost 90%, and none of our volumes is committed for 2013.

Okay. And when would you look to commit those?

Typically we commit in October and November.

Okay. Thank you.

You're welcome.

Thank you. And the next question is from Richard Garchitorena from Credit Suisse. Please go ahead.

Thanks. Good morning, guys.

Hi, Richard.

So my first question is on the Coal business, given the fact that you've cut the growth CapEx for this year, should be expect production next year in 2013 to be flat versus '12, and also going out, you know, you had previously guided to a ramp up going forward. Is it safe to say that you're reevaluating that strategy given the current environment?

Yes. We've removed the growth -- we would see growth in Revelation year-over-year, but you would not see any growth -- I mean, based upon current market conditions, you wouldn't see any growth in Jewell year-over-year. At Harold Keene we've actually -- you would see us either maintain or reduce because of the hi-vol. on steam that's produced there.

Obviously, this is one where, I think in my 18 months at SunCoke I've seen three peaks and three troughs in the net coal business, so it is volatile. This is one where we will continue to evaluate market conditions, but based upon the market today, we wouldn't anticipate growing our mid-vol. production next year other than Revelation.

Okay, great. And then in terms of cash cost, Revelation probably is the one area where you could see a surface mining, help the cost side?

Yes. It would. The way the deal is structured we -- Revelation does the mining, we cover their cost and then there's a profit-share above that, and their cost is considerably less than our cost of deep mining.

Great. And then on the Coke business, the potential new plant, any way we can think timeframe for that?

Yes. So if it's permitted in '13, early '13, you wouldn't see production until '15 -- late '15. So it's -- because it's about two, two-and-a-half-year period from permitting through production. Obviously, it's dependent upon acquiring a certain amount of customer commitment as we've said before. We would anticipate this plant being multi-customer and having some amount available for the emerging market.

That said, we would look -- one of the reasons we've actually looked at a smaller plant is one, we think it's actually -- it's probably more suitable for the market. And the second is, if we were to look at a plant as much as 1.1 million tons, our thinking was, we could end up requiring three different customer commitments; whereas a plant at 650,000, I think was too reasonable customer commitments for a certain amount -- a reasonable amount of tons over a reasonable period of time we can get moving. So it would allow us to move faster rather than slower.

Okay, great. And my last question on Middletown. Obviously a very good production quarter, is it safe to say that you're fully ramped up now so that number in Q1 is a good run rate? Or do you expect further production increases, you know, at Middletown specifically?

I think we ran well in the first quarter, you know, you might see a little bit, because I'm just thinking about January a little bit below, but I would say the more important thing is cost and yield.

When I look at cost and yield, as Mark articulated, we had about $4 million in the quarter, and startup costs and yields below what we are currently running at, that influenced our financial results, so we don't expect those to continue as we get into the second, third and fourth quarters, but you might see a small amount of increased production, but it's really due -- you know, I think what's more important is we'll get better yields and better cost performance.

Okay. Thank you.

You're welcome.

Thank you. And the next question is from Sam Dubinsky from Wells Fargo. Please go ahead.

Hi, guys. Thanks for taking my questions; just a couple of quick ones. Did you disclose new mining cost targets for 2012, and do you have any idea where mining costs can be for 2013?

No, we didn't. In part, obviously, we did disclose it at (inaudible) wanted to, well in excess of the targets that we had coming into the year, for the reasons we articulated. So at this point our focus is on reducing the cost rather than providing a different target. I mean, obviously we'll come back and talk about what's been done as we release the second quarter, but we haven't -- we specifically chose not to update the cost targets at this point; while we are doing our work to try to get our arms around and to drive improvement in the operations --

Well would the improvement --? Oh sorry.

And then on '13, it would be too early for me to give you any sense of that at this point.

Great. Will the improvement --

And I would say, the actions we've taken are -- we are taking these actions in Q2, we really expect, you know, the impact of these actions, along with the ramp up in Revelation, to be in the second half of the year.

Okay.

So at this point we felt, hey, it's appropriate to reduce our coal guidance for the full year, and we will revisit targets, you know, when we get our arms around things here in Q2.

It's fair to say, as we looked at the -- as I look at the [miss] on the cash cost, we entered the year -- we had a plan, and we are working on maintaining our reject rate, roughly at about a 65% level.

Obviously, in the first quarter our reject rate went up significantly, which drove our cash cost per ton much higher, and obviously the work underway is not going to happen overnight, but you know, a lot of that work -- we actually have already begun at the first quarter, but a lot of it is underway now. We expect to see the benefit of that as we get into the second half.

Okay, great. And then it seems like you've been running Coke assets really well, I know you've had -- you can improve yields a bit, but in terms of linearity, is there any quarter where you guys had to shut down some capacity just temporarily for maintenance?

Well when we do turnarounds where we basically do maintenance, we end up with some level -- we actually never shut our plants down, we are always producing coke. We do reduce our energy sales as we take down our boilers for maintenance, and what happens when we do outages, is we end up with higher costs because we [extend] the cost associated with doing two repairs and the maintenance work we do during outages.

So what you see is -- with continued coke production, you'll see low-energy sales and you'll see higher costs when we do outages, and we do outages typically in the summer, so you'll see it in the -- usually in warmer weather, so although this year was an anomaly, but you're going to see outages in the second and third quarter.

It's actually second quarter actually, we have a little, we have a lot of them scheduled for this quarter, and third quarter, for example, last year we went with our strongest period in terms of production.

Okay, great. And this is my last question just looking at the model. It seems like SG&A, I think, was pretty low. What's a normalized figure from our (inaudible)?

Our cost is a corporate cost; we haven't changed our guidance in that regard --

Yes.

Un-recovered corporate costs between $30 million and $35 million when allocated -- excuse me -- corporate cost between $30 million and $35 million that's still a good number.

Okay, great. Thank you.

You're welcome.

Thank you. And the next question is from David Rosenberg from Oaktree Capital Management. Please go ahead.

Hi, guys.

Good morning, David.

I have a few questions. Good morning. On the Global Coke opportunity, you guys had decided not to pursue, you had made a commitment, if I remember correctly, a while ago to make a $30 million investment. Does that go away, or do you still have to -- will that money still get invested, how--?

No. It was -- that money -- that was never -- basically we signed an MoU, we didn't have -- we did not have a definitive agreement, so we have no commitment to spend $30 million and actually any capital that we spend in India is likely, as we said in the guidance, would very likely be in early 2013.

So David, we had earmarked in our planning for this year to -- we had earmarked $30 million for an Indian investment, which comes out of the 2012 number. So in going from CapEx and the investments of $150 million to $100 million, we've effectively taken out the $30 million for India, and we've reduced coke by -- coal by $20 million.

Got it. And then, I may have missed it before. You said there was an increase in the reject rate which is what kind of caused cost in the coal mining to go up, and I saw that the -- I heard you mentioned that the reject rate is currently at 68% and I was curious what it was previously.

It was 65% last year, 65.4%.

Yes.

And then we can come back -- let me find that chart with the numbers. I think Andre asked about it; it was 65.4% in '11; 63.5% in 2010; 60.1% in 2009; and it was 58% in 2008.

Thank you. And the next question is from Mark Parr from KeyBanc Capital Management. Please go ahead.

Thanks very much.

Hi, Mark.

Hi, Fritz. Good morning. Hi, Mark

Good morning. Hi, Mark.

Yes, Fritz, I was wondering if you could give a little more color on the decision to downsize the new facility. I mean are there any new market dynamics, or are you seeing less growth or is this, you know, coke for natural gas thing, is that having an impact on your view related to the market over the next couple of years?

It is. I mean, I wouldn't say it's -- you can't draw a linear linkage between natural gas, but what you've seen is -- you know, our domestic customers are -- operating rates are about [80%] which are reasonable. And I think all of our customers are optimizing and maximizing the use of natural gas in their ovens.

Interestingly, our assets are producing levels of coke, which they're taking all of our coke, but our assets in some cases are producing, you know, 20,000 tons, 30,000 tons more than they've historically produced. And what you've seen is that as we look out into 2013, '14, '15, the aging in the Coke batteries we are -- let's face it, we've got US Steel, we have AK Steel, we have ArcelorMittal.

And then if you look out at the other blast furnace operators, you know, it's basically (Inaudible) RG, and ether, and we know a lot about what's going on with everyone of their coke batteries, but as we looked at it, our conclusion was, operating rates are pretty much stable.

Natural gas application is having a significant effect. I mean, our customers are doing exactly what they should be doing. Some element of that, we think, might be displacing PCI rather than [coke]. It is -- but there is -- you do see continued reduced application of [coke], but pointed actually in our favor because of the quality of coke that they've used then has been extremely important and it's has worked well for us.

But I would say that, you know, as we look out, our customers are continuing to maximize the use of natural gas, and so we just -- you kind of make the judgment and you say, we need to permit something in order to be ready to go, and it will be better to permit a plant along the size of Granite City which was -- as we look at it, it's reasonably, it's a reasonable compromise between capital efficiency.

At 660, actually we can utilize a lot of equipment, you add 20 more ovens to, lets say, a traditional Haverhill plant, but utilize the same amount of equipment if capital efficiency is good, and we probably only need a couple of different customer commitments for perhaps 350,000 tons or 400,000 tons in order to get going. So whereas if at [1.1] we'd probably want 750,000 tons or 800,000 tons spoken for and that probably requires three different customer commitment. So that was the judgment we made.

Okay. I really appreciate the extra color; and good luck on the second quarter.

Thank you.

Thank you. And the next question is from Lucas Pipes from Brean Murray. Please go ahead.

Hi. Good morning, gentlemen.

Hi, Lucas.

The first question regarding your Indiana Harbor facility, you mentioned that's running a little bit below your expectations. Could you walk us through the steps that you think will get this facility up to its full potential?

So in Mark's charts he broke out the difference between, we call it, recurring and nonrecurring, and you saw about a $4.4 million improvement year-over-year in the -- I call it recurring operations; but that still is just not satisfactory. Basically as Indiana Harbor, on a recurring basis, operating at or around breakeven, and we know we can do better than that. So what are the drivers? First...

Yield.

And on yield, what we've seen is the work we are doing in terms of facility improvement and the work we are doing in terms of material handling. We are making some equipment changes. There's a lot -- there's frankly, a fairly substantial team of our people out there looking at continuous improvement efforts which includes, for example, reducing the amount of spillage or pad coal.

Yield is a key driver for us, and I think in the case of Indiana Harbor, we see continued improvement, actually. We saw sequential improvement through the quarter, and we've seen further improvement as we've moved into this quarter, so I think we can continue to improve the situation and yield.

And cost, we have been -- you know, I think we've been reasonably comfortable I think with our own end cost with Indiana Harbor. Actually, last year cost was a more significant issue than it's been this year. We are spending in -- we didn't outline it in the Q but we have about a $50 million that we expect to spend in Indiana Harbor to refurbish and support the facilities.

We think about a long-term extension of the contract with ArcelorMittal, about $25 million of that we expect to spend in 2012, which to some degree is a small acceleration, but the improvements we are making, actually, on the common tunnel, and the ovens, and the doors are all, basically, resulting in the Indiana Harbor operating more efficiently and getting better yields.

So it starts out with yields. Second is preserving our own end costs, and third, as we look at the level of production in the quarter, and this is [a tight] deal, we had about 292,000 tons produced in the Indiana Harbor in the first quarter, about 10,000 tons below what we think we should be running this plant at, and we are capable of running the plant. That also, can significantly help operations as we go into the latter part of the year.

So it's basically yield, which is closely linked to production volumes in maintaining our cost. You know, cost, we feel like we've got our arms around it, it's really at this point driven by yield improvements and then therefore production volumes.

That's very helpful. Thank you. And then you mentioned earlier that you obtained some favorable pricing on your mid-vol. product recently, could you give us a bit more color on the ballpark in which you find those volumes?

Our mid-vol. pricing that we are committed for, for this year, on the new contract, not the carryover tons, is about a little over $180 a ton and that, again, is --you know, we had about 200,000 tons, as I recall, of carryover volume and $165 a ton coming into this year. And the new volume is priced at, generally, right around $180, a little bit more than $180.

The spot sales we recently done have been closer to $160, reasonable deals, and I think today a reasonable benchmark for Jewell mid-vol. could be $150 to $160, but again, we just recently did a couple different small spot sales at $160. But that gives you a sense. You know, obviously, the committed tons for the new volume is at roughly $180 and a little bit more.

That's very helpful. Thank you very much.

You're welcome.

Thank you. And the next question is from Lance Ettus from Tuohy Brothers Investment Research. Please go ahead.

Hi, guys. I just want to drill down a little further on the nat. gas -- if it would a conversion to natural gas. You know, I've heard that -- I know -- I think that's like the first 10%, kind of, can convert to natural gas pretty easily, and then there's maybe another, about 5% that takes from CapEx. Kind of, you know, I guess what kind of -- I guess, you know, do you know anything about what price is at, the day -- of nat gas and met coal, to make that extra 5% worth it, I guess?

You know, you've taken me into an area that I can't really help. I just know that with nat. gas at levels that we've seen today, our customers are maximizing the use of the nat. gas, and I just -- I don't know what their dynamics are. I think, certainly, what you saw over a long period of time is the substitution of PCI for Coke, is part of making the cost more efficient.

Today, obviously, they're seeing the maximized natural gas to displace either PCI or Coke, but I just don't know how the calculus for our customers.

Okay. Thank you.

And the last question will be from Chris Brown from Bank of America Merrill Lynch. Please go ahead.

Hi. Good morning, guys.

Hi, Chris.

Hi. If you had word to pursue the MLP route with the Coke assets, what would happen to the Coal business, would you spin it off? Would you like to sell it? Could you, sort of, give us your thoughts on that, as of right now?

Well we have a -- as part of the spin-off we have a commitment for a period of at least two years that we do nothing in terms of the Coal business, you know, we don't -- as we've said in prior calls, we don't have to be in the coal business. We would not -- we don't think it's suitable for inclusion in MLP particularly met coal.

I mean there are MLPs in steam, but met is highly volatile, we just don't think it's a right type of asset, so we wouldn't include it and, you know, we'd keep options open for what we want to do with in the future. But at this point I don't have anything other than that, I can say. Certainly for a period of two years there's nothing we are going to do with it, and our job today is, optimize its production and its operations, and keep all of our options open.

Okay, great. Thanks.

You're welcome.

I think at this point --

Go ahead, Mr. Osterholm. Thank you.

I think at this point, I appreciate everybody's time this morning. Obviously we are available for follow-up calls, and thanks very much for your attention this morning.

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