SunCoke Energy Inc (SXC) 2013 Q3 法說會逐字稿

Welcome to the SunCoke Energy, Inc., third-quarter 2013 earnings conference call. My name is Trish and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

I would now like to turn the call over to Ryan Osterholm. Please go ahead.

Thank you, Trish. Good morning, everyone. Thank you for joining us on SunCoke Energy's third-quarter 2013 earnings conference call. With me are Fritz Henderson, our Chairman and Chief Executive Officer, and Mark Newman, our Senior Vice President and Chief Financial Officer.

Following the remarks made by management, the call will be open for Q&A. 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 to 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 the various remarks we make about future expectations constitute forward-looking statements, and the cautionary language regarding forward-looking statements in our SEC filings apply to the remarks our call today. These documents are available on our website as are reconciliations of any non-GAAP measures discussed on the call.

Now I will turn it over to Fritz.

Thanks, Ryan. Good morning. Earlier this morning we had our first standalone call with SXCP unitholders, and this is obviously the call to discuss SunCoke Energy. So welcome.

The quarter's highlights. Another reasonably strong quarter from an operating perspective. Sustained high level of operating performance in our coke business; the focus continues to be a driving cash costs in the coal business.

Frankly, as I look at the coal results in the quarter, pretty much similar to what we've been experiencing through the year. Good progress on cost -- or maintaining our cost position I guess is what I would say. But nonetheless, obviously, the downdraft from pricing continues to weigh on our results.

And then maintaining top-quartile safety performance both in coke and coal actually continues to be a priority for the Company.

In terms of growing the business, starting with organic growth, in the quarter we saw a renewal of our Indiana Harbor contract with ArcelorMittal, a very positive development for us in terms of this was the only coke contract we had whose expiration was prior to 2020. So this was renewed on a 10-year basis, effective 10/1; so the results -- you won't see any impact of that in the third quarter, but you will begin to see that in the fourth quarter.

We actually have a chart which will touch on Indiana Harbor later in the deck. The project itself, we continue to spend on the project about $85 million is the project size, which involves both repairs to ovens, repairs to common tunnels, new equipment. And the project is, I guess I would say, on track. There is a lot of moving parts to this project, but it remains on track and we are really pleased that we were able to renew the contract in the quarter.

We continue to leverage SunCoke Energy Partners as our growth engine. We did complete two acquisitions, one of which took place in the third quarter, one of which took place on 10/1. So we will touch on that later in the chart deck.

We did also in the quarter receive a favorable private letter ruling on iron ore concentrating and pelletizing. Those of you that follow us will know that we submitted that private letter ruling earlier this year, and we did receive a favorable response. So we were encouraged by that.

Then in terms of SXCP distributions, we did raise our -- earlier this morning on the SunCoke Energy Partners call we discussed our plan, our expectation to raise our fourth-quarter distribution payable in February of next year. And that would reach the first incentive distribution right, or IDR, split. So continued good performance in terms of SXCP, which then enables a stronger distribution both from the coke business as well as through the acquisitions.

Finally, in terms of our guidance for the year, we now have three quarters in. We expect to end the year in the upper half of our initial 2013 adjusted EBITDA and EPS guidance.

I would point out also we would say that even without the acquisitions. We still would expect to be in the upper half of the initial 2013 adjusted EBITDA and EPS guidance.

In terms of the third-quarter results themselves, on page 3, EPS is $0.09. As I mentioned before, it really reflects a continued challenging coal environment. Also it does reflect lower production and higher depreciation expense in Indiana Harbor.

The depreciation expense is something you have seen through the year. It is as equipment is being refurbished and other equipment and/or assets are being extinguished, we are obviously accelerating some depreciation in Indiana Harbor, which affects EPS. And finally the reduction year-to-year, a significant portion of which is attributed to the attribution of earnings to SXCP unitholders.

Liquidity, we ended the quarter with about $269 million of cash, $79 million attributable to SXCP and another $140 million of revolver available at SXC. We in the quarter increased our SXCP revolver to $150 million. Mark will touch on later how we financed the KRT acquisition 10/1, but we did use a part of that revolver to finance the KRT acquisition.

Finally, in terms of the guidance, as I mentioned previously we expect to land in the upper half of our initial 2013 guidance on both adjusted EBITDA and EPS. At this point, turn it over to Mark.

Thanks, Fritz. I'd describe the quarter as another decent quarter in which we are in line with our full-year guidance, which Fritz just took you through. On a year-over-year basis, our adjusted EBITDA comparable is impacted by really a very strong Q3 of 2012, and the continued weakness in the met coal market on our Coal Mining results and in the ongoing refurbishment at Indiana Harbor, which affects both production and operating and maintenance costs.

Looking at revenue, we are down roughly 19%. Again that reflects a lower coal price impact on both our coke and coal segments. Our coke sales are actually down on a year-over-year basis by about 33,000 (sic - see slide 5, "32"). Again it is a comparison against a very strong Q3 last year, also again reflecting the impact of lower production at Indiana Harbor. We also had lower production at some of our other units, primarily related to the placement of trains.

Turning to adjusted EBITDA, we are down roughly 31% to $50.7 million in the quarter. Again, the primary factor here is the year-over-year comparison on coal prices; we will go through in detail the reduction there. And then on Domestic Coke, really our business was quite flat outside of Indiana Harbor, where we have a major refurbishment on the way.

On the EPS front, our decline to $0.09 really reflects the impact of coal, the impact of Indiana Harbor, as well as the attribution of earnings to our SXCP public holders, which is about $0.08 in the quarter.

Turning to chart 5, we reported adjusted EBITDA of $50.7 million in Q3 versus $73.7 million in Q3 of last year. As you will notice in the chart, our Domestic Coke business was down slightly about $1 million, where really gains at Middletown and Haverhill were offset by poorer results at our Jewell Coke and Granite City facilities.

But net-net, I would say flat coke performance outside of Indiana Harbor, which as you will see in the chart was down $4.5 million. Again, primarily lower volumes and higher O&M cost.

Coal Mining is down roughly $13.3 million. The biggest single driver is about a $46 per ton price decline, which is partially offset by cash cost being reduced by about $20 on a year-over-year basis.

Additionally, the year-over-year comp is affected unfavorably by a $3.2 million contingent consideration adjustment comparison between the two years. I.e., without that we would be down roughly $10 million on a year-over-year basis.

On International Coke, our results were down roughly $1.5 million. India accounted for $2.1 million of that on an adjusted EBITDA basis. As you will see in the India chart later on, it was a pretty rough quarter with respect to devaluation of the rupee, and that really more than explains the deterioration in our India results.

Then finally, Coal Logistics on the operating side, we only had one month of our Lake Terminal results included. It was a good month; we had lower cost there than anticipated. We also provided some additional services that weren't in our forecast.

We do not expect that to be an annualized type number going forward. And, obviously, we will have more to talk about in subsequent quarters on Coal Logistics, having closed KRT on October 1.

On the corporate cost side, our corporate costs really are in line with last year, with the exception of the acquisition costs at both -- in the MLP. Recall we had a $1.8 million payment to DTE related to Lake Terminal, and we had roughly $600,000 of other due diligence costs related to both the Lake Terminal and KRT acquisition. Then finally on a year-over-year basis, we have the additional cost of running the MLP of about $0.9 million.

Turning to chart 6, the EPS walk, we reported EPS of $0.09 in Q3 of 2013 versus $0.45 in Q3 of 2012. The lion's share of that is really explained by the reduction in adjusted EBITDA that I just went through.

Additionally, we had higher depreciation. About $0.02 of that is related to higher -- accelerated depreciation, rather, at Indiana Harbor. We still are forecasting a full-year impact of roughly $0.14 EPS related to accelerated depreciation at Indiana Harbor.

The remainder of the depreciation really relates to CapEx in our coal business that is now flowing through, as well as we had a write-off of some assets at Haverhill related to work we are doing there on HERSGs.

On the tax front, we had a favorable gain of $0.10, really reflective of the lower earnings. We also had some return to provision adjustments in the quarter that were favorable. On a full-year basis, our effective tax rate guidance is unchanged.

Then, finally, net income attributable to noncontrolling interests, the lion's share of the $0.07 indicated here really relates to the distributions to our SXCP public unitholders.

Turning to chart 7, where we focus on our Domestic Coke business, again another solid quarter, at the upper end of our guidance range of $55 to $60 per ton, in spite of the headwinds related to the Indiana Harbor refurbishment. As you will note on the production aspect of the chart, our production is down roughly 16,000 tons, much of which is again attributable to production levels at Indiana Harbor.

Looking at the EBITDA per ton, again just to reinforce, we had a very strong Q3 of 2012 where we actually ran above our guidance range. I guess the other thing I would just note here is the line in terms of EBITDA per ton is relatively flat. And about a year ago, I guess, we predicted that this is really something that we aspire to keep this line flat, within the $55 to $60 guidance range.

For the full year, we expect production of about 4.3 million tons, again based on the continued lower output at Indiana Harbor.

Speaking of Indiana Harbor, on chart 8, we have try to lay out here an indication of where we are in the journey of remediating this asset to its full potential. If you recall, going back to 2011, the only time in our corporate history we missed our minimum production requirements, we had to go and procure coke to meet our supply obligation.

In 2012, we basically determined the level of refurbishment that was required, and we started that refurbishment project in late 2012 coterminous with our negotiations with ArcelorMittal on the extension of our supply contract with them there. So now we are in 2013; we are really in the middle of this five-year journey. The refurbishment is about 50% complete.

We have completed the 10-year renewal of the agreement, where we will earn a solid return on the $85 million of refurbishment capital. In Q4, we expect an uplift as a result of this new contract, primarily related to the increased fees related to the return on capital mentioned above.

As we look out beyond this calendar year, our expectation is that Indiana Harbor would be accretive to SunCoke earnings in 2014 and 2015. In 2014, we plan to complete the refurbishment.

At this point, the refurbishment has primarily been focused on the vent stacks and the ovens. There is some other equipment that will be replaced in 2014 to complete the refurbishment project.

We also are anticipating that ArcelorMittal will take an outage related to the blast furnace at blast furnace number 7, and that will result in lower production in 2014. And then beyond that outage, which we expect in the first half of next year, we would expect the facility to show continued improvement through year end and then into 2015, as the renewal is complete and we get back to full production volumes in 2015 without the outage.

Turning overseas to India, I think admittedly we are off to a rough start with the joint venture. Most of the issues that we faced in this quarter really relate to foreign exchange losses on coal shipments.

You will recall that most of the coal that we use -- or all of the call that we use is imported. It is purchased in US dollars, and then we convert that to coke locally and sell coke locally in rupee.

With the significant rupee devaluation -- it was a rupee devaluation of about 17% -- between May and August, it impacted our results unfavorably. As you know, we report our India results one month in arrears, so these results really are reflective of our June through August results in the JV. Since August 30, the rupee has revalued about 6%.

As you will note in the chart, capacity utilization in the quarter is up significantly. The market is firming. And our view is with a more stable rupee and with the work we have done to hedge our exposure on the rupee going forward, we would expect less impact from that in subsequent quarters.

Our near-term focus really is on running the operations well and also finalizing our JV trade financing for the venture. We have had some issues putting facilities in place, which have affected our ability to actually import the required amount of coal.

So, our expectation is these issues will be behind us this year. For the full year, our expectation is that we will be very close to a breakeven result in this venture.

Turning back to our domestic operations on the Coal Mining front on chart 10, EBITDA down roughly $13.3 million year-over-year. We reported a $2.6 million EBITDA loss in the quarter, again, in line with where we were in Q2 of this year versus a $10.7 million EBITDA gain last year.

Again, the headline story is the significant year-over-year decline of about $46 per ton in pricing. And as I mentioned earlier, if you exclude the favorable contingent consideration gain adjustment that we had last year, the deterioration is more like a $10 million on a year-over-year basis.

As Fritz mentioned at the beginning of the call, the work on cash costs continues. On a year-over-year basis, we are down roughly $20.

Cash cost in the quarter was up slightly from where we were in Q2. We did have some geology issues in the quarter; but I would also say we have a bit of a mix issue here, with less tons from Harold Keene and Revelation in Q3 than we had in Q2. So that is also impacting the results.

But, I would say net-net we are holding the line on costs. Volumes were little bit lower in the quarter; and then we had this mix issue in terms of the supply of our coke tonnage, which resulted in a slight cash cost increase. For the full year, three quarters in, we are expecting an EBITDA of minus $10 million to minus $15 million for the full year.

And then, finally, we continue to do work on assessing the potential of building a new prep plant. We see two primary benefits here, one of which is obviously to drive cash cost down further by another $10 a ton, and also look to see if that could also provide a basis on which we could delink both our coke and coal operations at Jewell.

Turning to chart 11, we show our liquidity position. As Fritz mentioned, our consolidated cash position was reduced by $270 million -- by $79 million, rather, in Q3, ending at approximately $269 million in the quarter. Really it reflects two primary aspects in the quarter.

First, on the working capital front, we paid out roughly $17.5 million in tax credits. You will recall that we accrue nontraditional tax credits as we go along; but those are typically paid once the tax returns are finalized in September. So with the finalization of our tax returns and the Sunoco tax returns for prior years, we paid out $17.5 million.

Accounts payables really relates to timing of coal payables. And then finally, we have our bond payments in August; that is reflected in the quarter as well.

On the CapEx and acquisition front, we were quite active in the quarter. We spent roughly $45 million between the work we are doing at Indiana Harbor as well as the Lake Terminal acquisition.

On the financing activities, you will see we have the distributions to noncontrolling interests there, really relating to the SXCP public unitholders. We also did some share repurchases in the quarter, really for the purposes of reducing dilution on stock option exercises under our benefit plan.

You will note on chart 11 all the way to the right, that we have a note related to our post Q3 close. What you will notice here is that we purchased or completed the acquisition of KRT on October 1, and we funded it with $46 million of cash in the MLP and a $40 million draw on the SXCP revolver. So, taking into account the KRT transaction, we would have roughly $338 million of liquidity at SXC, and roughly $143 million of liquidity, cash, and undrawn revolver at the MLP for a total liquidity of about $480 million.

As Fritz mentioned in his opening remarks, we also upsized the MLP revolver to $150 million. And there was a $40 million draw related to the KRT purchase. We have undrawn capacity remaining of $110 million.

Turning to chart 12, with three quarters in we decided to update our full-year guidance. As you will see in the chart, our guidance now is updated from the original of $205 million to $230 million, to $215 million to $230 million.

We show the first three quarters here on the chart. And typically Q3 is our strongest quarter, but it was not this year.

I'd just point out that in our Q3 results we have the $2.4 million of acquisition costs that are not in Q1 and Q2; and we also have the results of India of about $2.1 million. So if you add those back, it would be a stronger quarter than we have had in either Q1 or Q2.

Looking forward to Q4, we expect $60 million to $75 million in the quarter. You will recall that we accrue the Brazil dividend in Q4; it is paid in May of the following year and is typically about $9.5 million.

As we pointed out earlier, we expect about a $4 million uplift on Indiana Harbor. And then finally, based on a run rate of our Coal Logistics acquisitions, we would expect probably another $4 million or so related to those acquisitions.

So if you add those three numbers up, it is about $17.5 million which gets you to the midpoint of the range in the $60 million to $75 million.

On an EPS basis, again really reflective of the first three quarters and the favorable impact on EBITDA in the last quarter that I just went through, our full-year guidance summary is included in the appendix on page 21. What you will see there is that our full-year effective tax rate is unchanged. So the EPS tightening really relates to the improvement that we see in our EBITDA guidance range for the full year.

With that, I will turn the call back over to Fritz.

Thanks, Mark. Page 14, last chart in the deck is just a summary of our growth strategy. Again, on the top of the chart between cokemaking, Coal Logistics, and ore processing or ferrous activities, the areas of focus and down the left side, that which would be organic versus that which might be through acquisition.

On the cokemaking side, obviously remains our core business and generated -- actually the lion's share would be my understatement of the morning. But it is the generator of the EBITDA of the Company.

We do continue to do work on permitting a new plant; preferred location, Kentucky. Anticipate no change actually from what we talked about in prior quarters, that we might receive that permit first quarter of next year. Early next year, I guess the way I would put it.

The contract renewal and refurbishment of Indiana Harbor I view as probably the most important near-term priority on the domestic cokemaking side of the business. We have received a lot of questions post the renewal as to how might -- what this might do for SunCoke; and so the chart today was intended to try to answer that question.

Recall what was being done in Indiana Harbor is about allowing the plant to run on a stable, sustainable basis. So have the plant run at production volume levels, have the plant run at production yield levels, targeted yield levels, have the plant run within a cost budget, and then earn a return on the capital that is being invested to refurbish the plant.

So we were pleased that we were able to reach a win-win -- excuse me, arrive at a win-win contract renewal in the quarter. And we are looking forward to finishing the project and allowing it to add even further to SunCoke Energy's cokemaking results going forward.

The India follow-ons remain an opportunity for us. Our focus today in India is stabilizing the operation today. But I do think that everything we have seen in terms of fundamentals of the Indian market are still there, in terms of the opportunities to grow the business.

Focus obviously today is about stabilizing the operation, getting credit lines in place for the coal. And interestingly on the hedging, it had been our intention to implement a hedging policy. It so happened that the rupee devalued a fairly significant degree in the short period of time where we were working with our partner to implement that policy. So we think over time we can certainly attenuate the degree of volatility through an implementation of a rational hedging program.

On the M&A side, we do continue to talk to potential partners on targeted coke plant acquisitions. But as I have said before, the complexity of these sorts of deals would imply deals that would be done in 2014 and beyond, not anything that would be in 2013.

In Coal Logistics, we are pleased to be able to get our first two deals done. Obviously, Lake closed on August 30 and KRT 10/1.

With KRT, we bring aboard a management team that we are really excited about in terms of them. And then we look at opportunities to grow the business further, whether it is organically by growing and using more of our available capacity at KRT; or alternatively, by looking at other bolt-ons or other acquisitions we might do that we could leverage. So Coal Logistics remains an opportunity for us.

And then finally, with receipt of the favorable private letter ruling, our discussions therefore then move into the area of ferrous, which is a much larger part of the steel value chain. Obviously brings with it discussions with steelmakers, but also here the steelmakers could involve both what -- particularly if you broaden it to DRI -- both the arc furnace as well as the blast furnace and other parties that operate pelletizing plants. Ore miners for example that might have an interest in working with us in pelletizing plants. So we were pleased to get that private letter ruling in the third quarter, and discussions continue.

That is all we have for the materials this morning. Now we will open it up for questions.

(Operator Instructions) Neil Mehta, Goldman Sachs.

Good morning. Congratulations on the guidance improvement and the progress at Indiana Harbor. A couple high-level questions.

First, can you talk through the status of the greenfield opportunity in Kentucky? How should we think about the timeline for major gating factors and then as well as when that facility could most likely come online?

Okay. Let's start with that. To gating factors, one would be permitting, which would be early next year.

Second, and frankly our most important is customer commitments. And our view is that we have had exploratory discussions with customers about this plant. Those, we think, will accelerate when we have a permit in hand.

My view is those are the discussions that will take place in more earnest I guess -- I shouldn't say they are not being done. We have had exploratory discussions to date, but for the most part it is -- well, when the permit is received, let's talk more seriously. So those discussions would take place, call it first half of next year and through the summer of next year.

If we are able to secure a reasonable part of the production via contract commitments, what portion is reasonable? Certainly it would be more than 50% in my view, but we haven't said precisely what percentage we would want to have committed before we kick the project off. But we want to have a reasonable part of this project committed before we put any shovels in the ground.

If you were to take a timeline and draw it from the middle of next year, you are not producing any meaningful EBITDA to late 2016, early 2017.

Got it. Got it. In terms of capital allocation, would you ever consider a dividend to better link the value between the parent and the MLP?

And as you get through some of this CapEx here and you're in a more free cash flow generative position, how do you think about a dividend versus a buyback versus the status quo?

So, dividend policy, share repurchase policy is obviously a matter for the Board. It is also a premature discussion because really the limitations that come with our tax-sharing agreement have basically meant that we haven't had that discussion in any meaningful way with the Board and wouldn't until we got through the expiration of the tax-sharing agreement which is January of next year, to be specific.

I would say dividend policy, share buyback then becomes an interesting discussion to have with the Board relative to capital allocation. Because I think it is a worthwhile discussion that -- we should -- not just a worthwhile discussion, it is an important discussion to have with the Board. I wouldn't rule it out.

We are not saying that we are going to do it today, but I think we will engage the Board. But I think in our business given the stability of the cash flows, given the MLP, given the earnings we receive from the MLP, that it would be prudent for us to have the discussion with the Board about, I will call it, capital returns to shareholders. And then the question of dividend versus share repurchase.

And (inaudible) today actually. So I think it would be something that we would talk with the Board about early next year.

Got it. Final question. It looks like you got approval here on qualifying income on the pelletizing and concentrating, so that is good progress. How should we think about the potential market size for this relative to the cokemaking opportunity?

Mark, you want to take that one?

Yes. Round numbers it is about 4 to 5 times the cokemaking opportunity in terms of the amount of ferrous materials used in steelmaking versus coke. So that is kind of an -- so, I think of the coke market as 20 million tons in North America -- US and Canada.

So I think this is considerably larger. Again, we just got the ruling, so I think it is early days in terms of what the true potential is today.

Fair enough. Thank you very much, guys.

David Gagliano, Barclays.

Great. Thanks for taking my questions. I just have a couple questions related to the slides. And thanks, by the way, for the extra information on Indiana Harbor. It is very helpful.

My first question is actually tied to that slide. What are the volume assumptions behind the 2014 and 2015 targets that are laid out in the slide?

Let me turn to that page. As we said, in 2014 we do anticipate the customer will have a blast furnace outage, to do some work on the blast furnace.

Typically the capacity of that plant is 1.22 million tons. We would anticipate in 2014 being probably about 100,000 less than that, but the exact number could move around a little bit.

And then by 2015 we would anticipate being able to run this plant at 1.22 million tons or potentially more, because we obviously need to see how the project works. But it is not like it is going to be a lot more because these coke plants generally run at their targeted capacity.

Okay, great. Then in terms of the refurbishment itself, what, if any, are the biggest risks in terms of getting this done on time and on schedule, budget, etc.?

I would say, first of all, we are confident. We are on schedule. The spending level, about $85 million, we feel pretty good about that.

The interesting thing about this project is the biggest risk of this project is we are doing it while running the plant at the same time. And we have been doing that, so I wouldn't say we don't have experience.

And I would say the experience we have had, we learn as we go and we get better as we go. So I think that we get into early next year, other than the equipment, which we know will come in the middle of next year, we have a good chance of finishing up this project. It won't be January, but it will be by the spring this project should be completed.

I think the second risk of the project is, everything needs to be done. In other words, this is not one where you have your punch list and the plant is operating well. This is one where each element of the project is critical to the plant's overall capability to produce at yields, at cost, and at volume.

So the way I think about it is we are confident we are on schedule, but this is one where each part of the project has got to get done, and we are doing it while we are running the plant. So we feel good about the project. We just think we will get there, and we are confident we will get there.

Okay. Then just last on Indiana Harbor, are the ground conditions -- so then the ground condition issues are way, way in the past, nothing to worry about in terms of any of the targets here?

Interestingly, once in a while I get a good seismic update, and I would say actually the last one I had you have seen some movements which have been measured in millimeters or inches. But, frankly, the facility has pretty much settled.

You can't say it doesn't move any further, but I would say that it is not on our list of top 10 things to worry about is how I would look at it.

Okay, perfect. Then -- I am almost done, sorry. Just on slide 10, turning it over to the coal business, in terms of the pricing for your 2014 contracts. What are you seeing in terms of the outlook for 2014 contract prices?

It is early, we don't have it yet; but I will give you some estimate based upon what we see today. As we looked at pricing for 2013, without the carryover tons from the prior year, the numbers were $115, $114. And then overall, including all the carryover tons in all the business we did we would be between $120 and $130.

As I look at it coming into next year, again pulling out carryover tons because I think that distorts the analysis, and frankly I am not sure we will have any carryover tons -- we will be down, we think, probably about $10 from where we were in 2013. But that is as of today. This is one that could move around even by the week or the month.

So if you thought $114, $115 was the number for new tons, particularly in the Jewell contract actually, you could be down $105 with a range of maybe $100 to$110 based upon what I know today. Again, though, it is frankly -- we are probably 45 days away; maybe within 45 days we will have better line of sight as to what the pricing will look like for 2014.

Okay. Then if that pricing plays out as it appears now over the next 45 days, should we expect the volumes to remain stable?

Interesting. As I look at what we have accomplished this year, a relatively large driver of our push to the cash cost of $120, or $121, $126, a big driver of that has been mining more coals with 20% less manpower, significantly fewer mines. And we continue to see significant improvements in productivity in terms of feet advancement per shift. And even with the geology issues we have had, it has been a driver of our actual cash cost reduction.

We have got our arms around the costs themselves, and we think we will continue to keep that tight. But I think we could see further productivity improvements even into next year, which might mean we would actually have marginally more tons rather than ramping them back further.

My objective, as I think about this, is to try to hold the results in 2014 versus 2013, albeit they are not particularly satisfactory results; I am not suggesting they're anything other than that. But we think that even without the new prep plant we have a line of sight to try to hold our results year-to-year, from 2014 to 2013, even with the decline in coal prices.

And with a new prep plant, to the extent we can tackle it, it gives us a potential to take cost down another $10 a ton, which might give us a chance to get down closer to $100 a ton. And that's sort of targeting that we have within the Company.

Perfect. Okay. Thanks very much. Helpful.

Timna Tanners, Bank of America.

Yes, hi. Good afternoon. I think we just wanted -- I just want to take a step back and look at capital allocation decisions, if you could. Because it seems to me like you laid out really nicely on that last slide all of the different options that you are looking at; and there are quite a few.

But some of them are smaller capital allocation decisions, things like the infrastructure and the handling. And then you've got the bigger options like a DRI facility, which are hundreds of millions of dollars.

So I just wanted to hear a little bit more. What is it going to take for you to decide to pull the trigger on those bigger projects? How do you sort out between those projects that are more immediate benefit and can be MLP-able more easily, and the bigger ones? And then ration that against the decision to -- which it sounds like you're going to do, which is invest in this coal processing. So just wanted to hear a little bit more about how you are looking at different options for uses of cash.

Let me separate the financing and investment decision, talk about investment decisions, and then move into the financing side of the balance sheet. On the investment side, we kind of like these smaller acquisitions that we have done within coal handling. It is not an inexhaustible universe, but it is something where we think we can do a few more of those.

We have done those directly within the MLP as opposed to doing the acquisitions at the SunCoke level. We think that was a smart thing to do.

The MLP itself has got dry powder in terms of its leverage capacity. And obviously MLPs, to the extent that you ramp it up even further, have some ability to not only -- you could actually use leverage, but you could also do secondaries on equity if we needed to.

So I do think that within the MLP having a balance sheet that is underlevered, with dry powder, gives us ability to do these smaller deals relatively quickly. Obviously, we are still subject to limitations from not only the tax-sharing agreement, but also you get into next year then we can do things like shelf registrations. There are things you can do within the MLP that could allow you to move even faster.

Big projects, likely to be done within the parent or SXC, big construction projects. The parent itself also has significant dry powder in terms of its leverage capacity.

To the extent we don't have plans today to do drop-downs, but to the extent we did do drop-downs, that would be another source of a significant amount of cash and financing capacity for the parent to do such projects.

So as I think about it, Timna, I think we could continue to do small acquisitions. I think those could be done directly within the MLP, and I think we have got the financing capacity to do that within the MLP.

The parent itself, again, we think we have substantial dry powder in terms of the leverage of the parent. But if we were going to take on some of these big projects, we'd need to raise some more capital for it to try to preserve a 3 to 3.5 debt/equity ratio.

And I think the one option we would have available to us is drop-downs. Not the only option, but that would be the logical one.

Last point on capital allocation. We get past the tax-sharing agreement date, obviously things like dividend policy, share repurchases we talked about before then become an element that need to be included in your capital allocation discussion. And I think that would be a discussion with the Board.

I would say on the large projects, again just to reinforce the earlier question, we need to have some customer commitments in order to take these on. Obviously, we need to finance them. But we certainly think that if we had the requisite amount of customer commitment as a way to reduce the risk of these projects, again we think we have ample, very ample financial flexibility to finance the projects.

Let me take a step back. I don't think that question was designed to talk about leverage and ability to finance. I'm actually -- let's home in on the big projects.

So DRI, we just heard Cliffs say that they are holding off on DRI pellets because they want to make sure they have a buyer. Those big projects, how do you think about going ahead with them?

The challenges you found in India, the global coke market conditions, those are the type of things I'm trying to get a handle on, your sense of those things.

So how do you think about the greenfield? Like what is the step that brought the Board's process of thinking about whether or not you want to do a greenfield in this market or thinking about DRI particularly in this market? Thanks.

Yes. I think the answer is, obviously, dialogue and customer commitment, period. We won't do it without it. We're not going to kick off a major merchant project without having a reasonable part of commitments signed up.

And with respect to the question on commitments, the interesting question, I think on the coke side as I said earlier, having a permit in hand I think will allow us to have even more tangible discussions with the blast furnace customers who might be customers for that plant.

And in the DRI, it is interesting. There is a lot of activity going on in this area. Just a lot of activity.

It is not lost on me what Cliffs has said, nor what Nucor has said nor what [Moshelpean] has said. Frankly, we are still new to this game, but as I think about it, Timna, we have a reputation with customers of being able to be a good supplier and provider of capital as well as an operator of assets in a way that is noncompetitive with them. And I think that provides us a pretty unique role in the industry.

Okay, great. Thank you.

Dave Katz, JPMorgan.

Hi, I was hoping just to drill down into Brazil a little more. The volume there has been lower year-on-year; but the EBITDA has been, if memory serves me right, higher. Could you talk about what has been driving that?

Yes, go ahead, Mark.

Yes, I mean essentially we had higher corporate costs allocated last year to Brazil, primarily as a result of some legal issues that we were dealing with there that we don't have this year.

Is the volume and the EBITDA that we are seeing on a quarter-on-quarter basis now, with the exception of the fourth quarter, the proper run rate?

Yes. We do have a floor there on fees, and so the volumes are low. But when the floor kicks in, effectively what you are seeing is a run-rate EBITDA at the current volumes.

Okay, thank you.

Sam Dubinsky, Wells Fargo.

Great, thanks for taking my question. Just to be clear, you expect Indiana Harbor to show a $15 million to $20 million improvement in EBITDA in 2015. Is that compared to 2013 levels, or is that above 2014?

Above 2014.

Okay, perfect. Then does the JV need an improvement in currency rates to break even or generate meaningful profitability?

No. What we have had is just enormous volatility, actually, which -- without the hedge in place, we mark the liabilities to market, and that is what affected the quarter. The focus -- our focus really on operational stability is about how do you price the coke relative to, I will call it replacement cost of the coal. That is the more important and the more relevant statistic in terms of ongoing operating performance.

We have, as I said, worked with our partner to put in place what I think is a commonsense approach to hedging the coal as it is on the water. So I think that issue -- you are always going to have some risk because the coal is denominated in dollars, even if you hedge it versus where you're pricing your coke in rupee.

I think the more important issue is just stability of the underlying business. And I think the business could be profitable with even reasonable amount of volatility. If you had high volatility in a given quarter, you could see it affect the results.

But it is -- I think the particular quarter we had was unusual. The rupee moved 17% and we didn't have a hedge in place.

If I just had to what Fritz said, typically in this market, when the rupee devaluates the price of coke locally goes up, so you have a natural hedge. We actually had a situation where the rupee devalued and, because of the overall economic weakness as well as some of the issues unique to iron ore mining in India, we had a weak coke market. So we weren't able to price through with higher coke prices.

So we think a more normal market activity, along with a prudent hedging strategy, we should be able to moderate volatility around FX going forward.

Moderate, but you can't really eliminate it inasmuch as this is a merchant model.

Correct.

So we are going to have that risk as part of running the business.

Okay. Just my last question on ferrous. Do you think there is greater opportunity in greenfield, or are there are a lot of assets to be bought?

I will that Mark take that question.

I would say ferrous is very capital intensive, so there are a lot of assets that exist today. Again, we just received the ruling in the quarter, and so at this point we have nothing to say about potential acquisitions, other than to say there are many assets there that could be potentially acquired.

On the new, greenfield opportunities, again there is a lot of interest in this whole area of DRI, including making DR pellets from available iron ore here in the US and Canada. So we think in terms of greenfield opportunities, vis-a-vis the ruling we have received, there is certainly the opportunity to look at DR pellets as new investment.

So I would say there is probably more assets out there today than there are new investment opportunities. But obviously we are interested in both.

Okay, great. Thank you very much. Good luck.

Nathan Littlewood, Credit Suisse.

Yes, hey, guys. Thank you for the opportunity. I have got, I guess, a follow-on line of questioning about this whole ferrous side of things. I am really curious to understand, I guess, how you are thinking about exposure to different parts of this whole ferrous chain. You just touched on the DRI versus the pellets.

But have there been any conversations about possibly going further back in the chain? In other words, could you even get into concentrating and moving further to the mine site?

Well, I will let Mark touch on concentrating. I will touch on mining. The answer is -- we are not a miner.

Yes. No, wasn't thinking you would go down --

Don't see us doing that.

No, no, no.

Nathan, if I can just built on what Fritz said. First of all, in our cokemaking business we are essentially processing met coal into an input that is used in the blast furnace; that is, coke. So we have a processing model where we are not -- other than our small Coal Mining business, we are not really mining. We are just really processing.

The ruling that we have received on ferrous is really around two primary activities -- converting iron ore to concentrate, which typically happens at the mine mouth, and then converting concentrate or iron fines into pellets. So in our view, we don't need to be -- we don't need to own resources in the ground or extract resources, iron ore, out of the ground.

But we can add a processing step like we do with met coal for the steel industry, where we'd effectively deploy a business model that is fairly consistent with our current cokemaking business model. I.e., where we are providing the capital, we are running the asset, and we are effectively being paid for our processing activity without taking the underlying commodity exposure.

Sure. Absolutely. That makes sense. No; I wasn't suggesting for a second that you would be mining.

But I guess I am just trying to understand the potential size of the earnings pull here. You commented earlier that in terms of tonnage the ferrous side of things is 4 or 5 times bigger. But the difference between a concentrate and a pellet is maybe only $25 to $30 a ton; there is going to be a big chunk of that which is the cash cost.

So the available margin in there is maybe going to be something around $10 a ton, which is obviously a lot less than the $50 a ton or something that you are making in the coke business at the moment.

Right. As I think about it -- very good question actually. What we are trying to do is something that is not done. By the way, we did that with coke years ago, too.

The question is -- can you insert a processing step and negotiate a contract that provides for tolling at a reasonable return in this part of the value chain?

That is the key question. That is what we are trying to get accomplished.

Because if we end up being a price taker on both the sell and the cost side, that is not -- we are just not going to do that. Because what we are saying is that if we're going to do a major capital investment we are going to want to have an offtake that has got a reasonable way for us to recover the capital. The lower cost of capital, the reason you do it at SXCP is it gives us a much lower cost of capital. Frankly, gives us much lower cost of capital, and in our judgment provide a lower cost of capital to our customer that could be used. And that is how you create the opportunity.

It has not been done before. That doesn't mean it can't be done, actually. Because one of the things we like about having this MLP is we are the only one that has an MLP like this within the steel space.

Sure, absolutely. Just one last question before I move on to the next caller is -- DRI is obviously more aligning yourself with the EAF industry. What are your views on the longer-term outlook of BFs versus EAFs? And what is your preference for aligning yourselves more with one or the other?

Let me deal with each of those. Well-run blast furnaces today, if you look at the cost, relative to hot metal are competitive cost. But it is not -- if you look over time in the US, obviously you see a significant shift such that the arc furnace today is about 60% I think of the production versus 40% blast furnace. The blast furnaces that are run today generally are competitive if you have a good strategy within your raw material chain.

DRI and things like that might actually change the equation even more. Now here it's very long term. I.e., obviously something -- here you think about 5-, 10-year type strategies.

But I think today what you have seen is some leveling off of the blast furnace penetration of total production. Obviously you've seen the arc furnace manufacturers continue to improve the quality of their output, so that they have opened up additional markets to themselves over time. And I think the competitive dynamic today is a well-run blast furnace with a good supply chain can be very competitive from a cost perspective.

Then the second question though is from our perspective interesting. If you think about our business, we have three customers within SXC. We have -- if you take aside the Coal Logistics. And then we have two within SXCP. Any activity that we could take on that would allow us to open up additional customers to SunCoke Energy has real value to us.

The customers that we have, we love our customers. We have three customers. But anything we can do that would allow us to open an additional set of customers to us we think could have real value not only in terms of growing the business but diversifying the risk of our business.

Sure, absolutely. Makes sense and appreciate the color. Thank you very much.

Lucas Pipes, Brean Capital.

Good morning, everybody. Quick question on CapEx. I think Indiana Harbor refurbishment came down $10 million versus your previous guidance. Is that deferred? Or should we expect the total amount spent on the refurbishment to come down?

Go ahead, Mark.

Yes, the total amount stays unchanged. This is basically retiming some into next year.

Okay. That's helpful. Then back on India, could you maybe give us a sense or remind us how much of the output from your JV is sold directly to VISA Steel versus more broadly into the merchant market?

About a third would go to VISA Steel over time. It hasn't been that way in the first part of this year when VISA wasn't running their blast furnace. But ongoing basis you would expect about a third of the production would go to VISA Steel, two-thirds to go into the market.

Great. That's helpful. Then one final question on the coal business. You mentioned the prep plant earlier. How quickly do you think that is going to come online and change your costs on the coal side? And what amount of CapEx should we be looking at for that new prep plant?

Well, we are assessing the potential of that today. But if you think about it, it would be about $70 million. And that is not just a prep plant; that is a prep plant and loadout facility. Because what we would be doing is not only replacing the prep plant, we would be moving it to a different location with a coal loadout facility to de-link situation that we have today, where the prep plant is linked at the hip to the coke battery. So you'd basically run the coke plant like a coke plant; and you would run the coal mines like coal mines as part of this.

So about $70 million in total for both the prep plant and loadout. And timing, to the extent we take on the project, it would be done through -- obviously depending when we kick it off. But if we kicked it off in the relatively near term, let's say in the next -- you have to permit things. But if you kicked it off in the next three months or so it is a 12-month project, so you would be talking about it coming online in early 2015.

So with cost savings in 2014, would they be driven by a change in the mix? Or what would that be a function of?

It would be driven by further mine face productivity, further miner productivity. It would not be driven by -- we have made some improvements in the existing prep plant. We put in the fourth circuit; we did some things to try to get better yields.

Frankly, part of the reason that we have been considering this new prep plant is the current one. We have been investing about $6 million or $7 million in the existing one each year to try to address its deficiencies. It is not a very satisfying result.

Some part of it we can reuse, but we are having to spend money to try to keep the existing prep plant operating and functioning safely and effectively. And this is a prep plant that was purchased used in 1958. So part of this is it is at the end of its useful life.

But you really wouldn't get the $10 until 2015. That would be a 2015 item. It is much more about the next year productivity, mine face activity, continued cost control.

By the way, the other thing you would have is you would have some reduction in royalties. If prices were down you would have also some reduction in royalties. But the bigger issue would be productivity.

That's helpful. Thank you very much.

Thank you. I think at this point I don't -- if there are not any further questions or not. There are not any other questions, so thanks very much for your interest in SunCoke and look forward to talking to you next quarter. Thanks.

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