Oct 25, 2013
Executives
Ryan Osterholm Frederick A. Henderson - Chairman, Chief Executive Officer and Chairman of Executive Committee Mark E.
Newman - Chief Financial Officer and Senior Vice President
Analysts
Neil Mehta - Goldman Sachs Group Inc., Research Division David Gagliano - Barclays Capital, Research Division Timna Tanners - BofA Merrill Lynch, Research Division David Adam Katz - JP Morgan Chase & Co, Research Division Sam Dubinsky - Wells Fargo Securities, LLC, Research Division Nathan Littlewood - Crédit Suisse AG, Research Division Lucas Pipes - Brean Capital LLC, Research Division
Operator
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.
Ryan Osterholm
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 opened for Q&A. The 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 on our call today. These documents are available on our website as are reconciliations of any non-GAAP measures discussed on the call.
Now I'll turn it over to Fritz.
Frederick A. Henderson
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 on driving cash cost 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 costs -- 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 is the only coke contract we had whose expiration was prior to 2020, and so this is renewed on a 10-year basis, effective 10/1.
So the results, you won't see any impact to 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 in 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's a lot of moving parts to this project, but it remains on track.
And we're really pleased that we were able to renew the contract in the quarter. We continue to leverage SunCoke Energy Partners as a growth engine.
We did complete 2 acquisitions, one of which took place in the third quarter; one of which took place on 10/1. So we'll touch on that later in the chart deck.
We did also in the quarter received a favorable private letter ruling on iron ore concentrating in pelletizing. Those of you who 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. And then in terms of SXCP distributions, we did raise, 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 a continued good performance in terms of SXCP, which then enables a stronger distribution, both from the coke business as well as through the acquisition. Finally, in terms of our guidance for the year, we now have 3 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 -- we would expect to be in the upper half of the initial 2013 adjusted EBITDA and EPS guidance.
In terms of third quarter, our 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've seen through the year, and as equipment is being refurbished and other equipment and/or assets are being extinguished, we're 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. And 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.
And finally in terms of the guidance, as I mentioned previously, we expect to land in the upper half of our initial 2013 guidance in both adjusted EBITDA and EPS. At this point, I'll turn it over to Mark.
Mark E. Newman
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 the production and operating and maintenance costs. Looking at revenue, we're down roughly 19%.
Again, that reflects the low 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.
Again it's 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're 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'll 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 underway.
On the EPS front, we -- 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'll 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 result at our Jewell Coal and Granite City facilities. But net-net, I'd say flat coke performance outside of Indiana Harbor, which, as you'll see in the chart, was down $4.5 million, again, primarily lower volume 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 costs 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 2 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'll see in the India chart later on, it was a pretty rough quarter with respect to devaluation of the rupee, and that really explains -- more than explains the deterioration in our India results. And then finally, Coal Logistics on the operating side, we only had 1 month of our late terminal results included.
It was a good month. We had lower costs 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 of number going forward.
And obviously we'll have more to talk about in subsequent quarters on Coal Logistics, having closed KRT on October 1. On the corporate costs 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. And then finally on a year-over-year basis, we have the additional costs 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 '13 versus $0.45 in Q3 of 2012.
The lion's share of that is really explained by the reduction in adjusted EBITDA that we 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're doing there on Herzig.
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. And then finally, our net income attributable to noncontrolling interest, the lion's share of the $0.07 indicated here really relates to 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'll 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'd 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've tried to layout here an indication of kind of where we are in the journey of remediating this asset to its full potential.
So 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 '12, we basically determined the level of refurbishment that was required, and we started that refurbishment project in late '12, coterminous with our negotiations with ArcelorMittal on the extension of our supply contract with them there.
So now we're in '13. We're really in the middle of this 5-year journey.
The refurbishment is about 50% complete. We have completed the 10-year renewal of the agreement, where we'll 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 focused on the vent stacks and the ovens.
There's 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 #7 and that will result in lower production in '14.
And then beyond that outage, which we expect in the first half of next year, we'd expect the facility to show continued improvement through year end and then into '15 as the renewal is complete and then we get back to full production volumes in '15 without the outage. Turning overseas to India, I think admittedly we're 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 shipment. You'll recall that most of the coal that we use or all of the coal that we use is imported.
It's purchased in U.S. 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 1 month in arrears.
So this results really are reflective of our June through August results in the JV. And since August 30, the rupee has revalued about 6%.
As you'll 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've 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've 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'll 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 and 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 $10 million on a year-over-year basis.
As Fritz mentioned at the beginning of the call, the work on cash cost continues. On a year-over-year basis, we're down roughly $20.
Our 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'd also say we have a bit of a mix issue here with less tons from Harold Keene and Revelation in Q3 that we had in Q2.
So that is also impacting our results. But I'd say net-net, we're holding the line on costs.
Volumes were a 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, we've got 3 quarters in, we're 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 2 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 de-link both our coke and coal operations at Jewel.
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.
And really it reflects the 2 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. And so with the finalization of our tax returns and the Sunoco tax returns from prior years, we paid out $17.5 million.
Accounts payable really relates to timing of coal payables. And then finally, we have our bond payments in August that's 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're doing at Indiana Harbor, as well as the Lake Terminal acquisition.
And then on the financing activities, you'll see we have the distributions to noncontrolling interest 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'll note on Chart 11 all the way to the right that we have a note related to our post-Q3 close. What you'll 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 3 quarters in, we decided to update our full-year guidance. As you'll 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 3 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. If you add those back, it would be a stronger quarter than we've had in either of Q1 or Q2.
Looking forward to Q4, we expect $60 million to $75 million in the quarter. You'll recall that we accrued the Brazil dividend in Q4.
It's paid in May of the following year and typically about USD 9.5 million. As we pointed out earlier we expected about a $4 million uplift on Indiana Harbor.
And then finally, based on a run rate of our Coal Logistics acquisitions, we'd expect probably another $4 million or so related to those acquisitions. If you add those 3 numbers up, it's about $17.5 million, which kind of 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 3 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, and what you'll 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'll turn the call back over to Fritz.
Frederick A. Henderson
Thanks, Mark. Page 14, last chart on the deck, is just a summary of our growth strategy.
Again, on the top of the chart between coke-making Coal Logistics and ore processing or ferrous activities, the areas of focus, and double upside [ph] that which should be organic versus that which might be through acquisition. On the coke-making side, obviously, it remains our core business in the generating the -- 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 -- we'd receive that permit first quarter of next year, early next year, I guess, the way I would put it.
The contract renewal and refurbishment in Indiana Harbor, I view as probably the most important near-term priority in the domestic coke-making side of the business. We've 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 its cost budgets and then earn a return on the capital that's being investment 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're looking forward to finishing that project and allowing it to add even further to SunCoke Energy's coke-making results going forward. The India follow-ons remain an opportunity for us.
Our focus today in India is stabilizing the operations today, but I do think that everything we've seen in terms of fundamentals in the Indian market are still there in terms of the opportunities to grow the business. The 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 it happened that the rupee devalued a fairly significant degree in the short period of time when we're 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've said before, the complexity of these sorts of deals would imply deals that will be done in 2014 or beyond, not anything that would be in '13.
And Coal Logistics, we're pleased to be able to get our first 2 deals done. Obviously, Lake closed on August 30; KRT, 10/1.
With KRT, we bring aboard a management team that we're really excited about in terms of -- and we look at opportunities to grow the business further, whether it's 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, and then move into the area of ferrous which is a much larger part of the steel value chain, obviously brings with it discussions with the steelmakers. But also, here the steelmakers could involve both, particularly [indiscernible] both the arc furnace, as well as the blast furnace and other parties that operate pelletizing plants, or minors for example, that might have an interest in working with us in the pelletizing plant.
So we were pleased to get that private letter ruling in the third quarter, and discussions continue. That's all we have for the materials this morning.
Now we'll it open up for questions.
Operator
[Operator Instructions] And our first question comes from Neil Mehta from Goldman Sachs.
Neil Mehta - Goldman Sachs Group Inc., Research Division
A couple of high level of 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?
Frederick A. Henderson
Okay. Let's start with that.
So 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've 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're not being done.
We've had exploratory discussions today, but for the most part it's, "Well, when the permit's received, let's talk more seriously." So those discussions will take place, call it, first half of next year through the summer of next year.
If we're able to secure a reasonable part of the production via contract commitment, 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 kick the project up.
But we'd want to have a reasonable part of this project committed before we would put any shovels in the ground. If you were to take a timeline and draw it from the middle of next year, you're not producing any meaningful EBITDA until late 2016, early 2017.
Neil Mehta - Goldman Sachs Group Inc., Research Division
Got it, got it. And 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?
Frederick A. Henderson
So dividend policy, share repurchase policy is obviously a matter for the board. It's 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.
It wouldn't until we got through the expiration of the tax sharing agreement, which is January of next year, [indiscernible] to be specific. I would say dividend policy or share buyback then becomes an interesting discussion to have with the board relative to the capital allocation because I think it's a worthwhile discussion and we should -- not just a worthwhile discussion, it's an important discussion to have with the board.
I wouldn't rule it out. We're not saying that we're going to do it today, but I think we'll 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'll call it, capital returns to shareholders. And then the question of dividend versus share repurchase and on the view today actually.
So I mean, I think it would be something that we would talk with the board about early next year.
Neil Mehta - Goldman Sachs Group Inc., Research Division
Got it. And then final question.
It looks like you got approval here on qualifying income on the pelletizing and concentrating, so that's good progress. How should we think about the potential market size for this, relative to the coke-making opportunity?
Frederick A. Henderson
Mark, do you want to take that one?
Mark E. Newman
Yes. Round numbers, it's about 4 to 5x the coke-making opportunity in terms of the amount of ferrous materials used in steelmaking versus coke.
So that's kind of it. I think of the coke market as kind of 20 million tons in North America, U.S.
and Canada, and so I think this is considerably larger. Again, we just got the ruling so I think it's early days in terms of what the true potential is today.
Operator
Our next question comes from David Gagliano of Barclays.
David Gagliano - Barclays Capital, Research Division
I just have a couple of questions related to the slides. And thanks, by the way, for the extra information on Indiana Harbor, it's very helpful.
The -- 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 slides?
Frederick A. Henderson
Well, let me turn to that page. So as we said, in 2014 we do anticipate the customer will have a blast furnace outage -- to do some work on the blast furnace.
So typically the capacity of that plan is 1.22 million tons. We would anticipate in 2014 being probably about 100,000 less than that, but the exact number can 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's going to be a lot more because these coke plants generally run at their targeted capacity.
David Gagliano - Barclays Capital, Research Division
Okay, great. And 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 and budget, et cetera?
Frederick A. Henderson
I would say, first of all, we're confident. We're 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're doing it while running the plant at the same time.
And we've been doing that, so I wouldn't say it's we don't have experience. And I would say the experience we've 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'll be -- by the spring this project should be completed.
I think the second risk of this 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 yield, at cost and at volume. And so the way I think about it is we're confident we're on schedule.
But this is one where each part of the project's got to get done and we're doing it while running the plant. So we feel good about the project, but we just -- we think we'll get there and we're confident we'll get there.
David Gagliano - Barclays Capital, Research Division
Okay. And then just last on the Indian Harbor.
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?
Frederick A. Henderson
Though interestingly, once in a while I get a good seismic update and I would say -- I mean, actually the last one I had you've seen some movements, which have been measured in millimeters or inches. But frankly, the facility's pretty much settled and it's not -- you can't say it doesn't move any further, but I would say that it's not on our list of top 10 things to worry about is how I'd look at it.
David Gagliano - Barclays Capital, Research Division
Okay, perfect. And then I'm almost done, sorry.
Just on Slide 10 the coal -- turning over of the coal business. What -- in terms of the pricing for your 2014 contracts, what are you seeing in terms of the outlook for 2014 contract prices?
Frederick A. Henderson
So it's early. We don't have it yet, but I'll give you some estimate based upon what we see today.
As we look 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 thought we'd be between $120 and $130. As I look at it coming into next year, again, pulling out carryover tons because I think it's -- that distorts the analysis, and frankly, I'm not sure we'll have any carryover tons, we'll be down, we think, probably about $10 from where we were in 2013.
But that's as of today. This is one that can 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's -- frankly, we're probably 45 days away.
Maybe within 45 days, we'll have better line of sight as to what the pricing will look like for 2014.
David Gagliano - Barclays Capital, Research Division
Okay. And then at that -- if that pricing plays out as it appears now over the next 45 days, should we expect the volumes to remain stable?
Frederick A. Henderson
Interesting. As I look at what we've accomplished this year, relatively large driver of our push to the cash cost of $120 -- or it's $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've had, it's been a driver of our actual cash cost reduction.
We've got our arms around costs, themselves, and we think we'll continue to keep that tight. But I think we could see further productivity improvement even into next year, which might mean we'd 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 '14 versus '13, albeit they're not particularly satisfactory results. I'm not suggesting they're anything other than that.
But we think that even without the new prep plant, we have line of sight to try to hold our results year-to-year, from '14 to '13, even with a decline in coal prices. And the new prep plant, to the extent we tackle it, is it gives us the potential to take costs down another $10 a ton, so -- 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.
Operator
Our next question comes from Timna Tanners from Bank of America.
Timna Tanners - BofA Merrill Lynch, Research Division
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're looking at, and there are quite a few, but some of them are kind of 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's it going to take for you to decide to pull the trigger on this bigger project? 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're looking at different options for uses of the cash.
Frederick A. Henderson
So let's -- 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 -- the smaller acquisitions that we've done within coal handling.
We -- it's not an inexhaustible universe, so -- but it's something where we think we could do a few more of those. We've done those directly within the MLP as opposed to doing the acquisitions at the SunCoke level.
We think that was the smart thing to do. The MLP, itself, is -- has got dry powder in terms of the leverage capacity.
And obviously, MLPs, to the extent that you wrap 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's under levered with dry powder gives us ability to do these smaller deals relatively quickly.
Obviously, we're still subject to limitations from not only the tax sharing agreement, but also you get into next year then we could do things like shelf registrations. There's things you can do within the MLP that can 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 significant amount of cash and financing capacity for the parent to do such project. So as I think about it, Timna, I think we could do -- continue to do small acquisitions.
I think those would be done directly within the MLP, and I think we've 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 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. It's not the only option, but that would be the logical one.
Last point on capital allocation, we could pass the tax-sharing agreement date. Obviously, things like dividend policy, share repurchase, as we talked about before, then become an element that need to be included in your capital allocation discussion and I think that will be a discussion with the board.
I would say on the large projects, again, just to reinforce the earlier question, we'd need to have some customer commitment in order to take these on. Obviously, we need to finance them.
But we certainly think that if we have 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 project.
Timna Tanners - BofA Merrill Lynch, Research Division
Well, I think it's the fact -- I don't think that question was designed to talk about leverage and ability to finance. I mean, actually, let's hone in on the big projects.
So DRI, we just heard Cliffs say that they're 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 kind of things I'm trying to get a handle on in your sense of your things. So how do you think about the greenfield?
Like what stuff that brought the board to process of thinking about whether or not you want to do a greenfield in this market or thinking about DRI particularly in this market?
Frederick A. Henderson
Yes. So, I think the answer is obviously dialogue and then 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 at 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 the DRI, it's interesting.
There's a lot of activity going on in this area, just a lot of activity. It's not lost on me what Cliffs has said, nor what Nucor said, nor what [indiscernible] said.
Frankly, we're still new to this game, but I think we have -- 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's noncompetitive with them and I think that provides us a pretty unique role in the industry.
Operator
Our next question comes from Dave Katz from JPMorgan.
David Adam Katz - JP Morgan Chase & Co, Research Division
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's been driving that?
Frederick A. Henderson
Yes, go ahead Mark.
Mark E. Newman
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.
David Adam Katz - JP Morgan Chase & Co, Research Division
And is the volume and the EBITDA that we're seeing on a quarter-on-quarter basis now with the exception of the fourth quarter kind of the proper run rate?
Mark E. Newman
Yes. We do have a floor there on fees and so the volumes are lower, but when the floor kicks in, effectively, what you're seeing is a run rate EBITDA at the current volumes.
Operator
Our next question comes from Sam Dubinsky from Wells Fargo.
Sam Dubinsky - Wells Fargo Securities, LLC, Research Division
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?
Frederick A. Henderson
Above 2014.
Sam Dubinsky - Wells Fargo Securities, LLC, Research Division
Okay, perfect. And then does the JV need an improvement in currency rates to break even or generate meaningful profitability?
Frederick A. Henderson
No, what we've had is just enormous volatility actually, which, without the hedge in place, we mark the liabilities to market and that's what affected the quarter. The focus -- our focus really on operational stability is about how do you price the coke relative to, I'll call it, replacement cost of the coal.
That's 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 common sense approach to hedging the coal as it's on the water.
So I think, that issue you can't -- you're always going to have some risk because the coal's denominated in dollar 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, we could -- the business could be profitable with even a reasonable amount of volatility. You could have -- if you had a high volatility in any given quarter you could see it affect the results.
But it's -- I think, the particular quarter we've had was unusual. The rupee moved 17% and we didn't have a hedge in place.
Mark E. Newman
So if I just add 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 sort of a weak coke market so we weren't able to price through with higher coke prices.
So we think kind of a more normal market activity, along with a prudent hedging strategy, we should be able to moderate volatility around FX going forward.
Frederick A. Henderson
Moderate, but you can't really eliminate it in as much as this is a merchant model so...
Mark E. Newman
Correct.
Frederick A. Henderson
We're going to have that risk as part of running the business.
Sam Dubinsky - Wells Fargo Securities, LLC, Research Division
Okay. And just my last question on ferrous.
Do you think there's greater opportunity in greenfield or there are a lot of assets to be bought?
Frederick A. Henderson
I'll let Mark take that question.
Mark E. Newman
So I'd say ferrous is very capital intensive. So there 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's a lot of interest in this whole area of DRI, including making DR pellets from available iron ore here in the U.S. and Canada.
And so we think in terms of greenfield opportunities vis-à-vis the ruling we have received, there's certainly the opportunity to look at DR pellets as new investment. I'd say there's probably more assets out there today than there are new investment opportunities, but obviously we're interested in both.
Operator
Our next question comes from Nathan Littlewood from Credit Suisse.
Nathan Littlewood - Crédit Suisse AG, Research Division
I've got a, I guess, a follow-on line of questioning about this whole ferrous side of things. I'm really curious to understand, I guess, how you're thinking about exposure to different parts of this whole ferrous chain.
You just touched on the sort of DRI versus DR 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 sort of further to the mine site?
Frederick A. Henderson
Well, I'll let Mark touch on concentrating. I will touch on mining.
The answer is we're not a miner, so...
Nathan Littlewood - Crédit Suisse AG, Research Division
Yes. No, I wasn't thinking you did that.
Frederick A. Henderson
You won't see us doing that.
Mark E. Newman
So Nathan, if I can just build on what Fritz said. First of all, in our coke-making business, we're essentially processing met coal into an input that's used in the blast furnace, that is coke.
And so we have a processing model where we're not -- other than our small coal mining business, we're not really mining, we're just really processing. The ruling that we've received on ferrous is really around 2 primary activities: converting iron ore to concentrate, which typically happens at the mine mouth; and then converting concentrate or iron fines into pellet.
And 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 effectively deploy a business model that's fairly consistent with our current coke-making business making model, i.e., where we're providing the capital, we're running the asset and we're effectively being paid for our processing activity without taking the underlying commodity exposure.
Nathan Littlewood - Crédit Suisse AG, Research Division
Sure, absolutely. That makes sense.
I wasn't suggesting for a second that you'd be mining, but I guess I'm just trying to understand the potential size of the earnings pool here. You commented earlier that in terms of tonnage, the ferrous side of things is 4 or 5x bigger but the difference between a concentrate and a pellet is maybe only sort of $25 to $30 a ton.
There's going to be a big chunk of that, which is the sort of 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're making in the coke business at the moment.
Frederick A. Henderson
Right. As I think about it -- this is very good question, actually, what we're 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's the key question. That's what we're trying to get accomplished.
Because if we end up being a price taker on both the sell and the cost side, that's not -- we're just not going to do that because what we're saying is if we're going to do a major capital investment, we're going to want to have an offtake that's 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, it gives us a much lower cost of capital, and in our judgment, provides a lower cost of capital to our customer that could be used and that's how you create the opportunity. It's not been done before, but it doesn't mean it can't be done actually because we -- one of the things we like about having this MLP is we're the only one that has an MLP like this within the steel space.
Nathan Littlewood - Crédit Suisse AG, Research Division
Sure, absolutely. Just one last question before I move onto the next caller.
Is -- the DRI is obviously sort of more aligning yourself with the EAF industry. What are your views on sort of the longer-term outlook of BFs versus EAFs?
And what is your sort of preference for aligning yourselves more with one or the other?
Frederick A. Henderson
So let me deal with each of those. Well-run blast furnaces today, if you look at the costs relative to hot metal, are competitive costs.
But it's not -- if you look over time in the U.S. obviously, you'd see a significant shift such that the arc furnace today is about 60%, I think, of the production versus 40% blast furnace.
That 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.
And now here, very long term, i.e., obviously something you'd -- here you think about 5, 10-year type strategy. But I think, today, what you've 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've 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. So -- and then the second question now is, from our perspective, interesting.
If you think about our business, we have 3 customers within SXC, we have -- if you take aside the coal logistics, and then we have 2 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, right? We have 3 customers.
But anything we can do that would allow us to open up an additional set of customers to us, we think could have really value not only to growing the business, but diversing the risk of our business.
Operator
Our next question comes from the Lucas Pipes from Brean Capital.
Lucas Pipes - Brean Capital LLC, Research Division
Quick question on CapEx. So 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?
Frederick A. Henderson
Go ahead, Mark.
Mark E. Newman
Yes, the total amount today is unchanged. This is basically retiming some into next year.
Lucas Pipes - Brean Capital LLC, Research Division
Okay, that's helpful. And then on -- 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?
Frederick A. Henderson
About 1/3 would go to VISA Steel over time and it hasn't been that way the first part of this year when VISA wasn't running their blast furnace. But ongoing basis, you would expect about 1/3 of the production would go to VISA Steel and 2/3 will go into the market.
Lucas Pipes - Brean Capital LLC, Research Division
Great, that's helpful. And 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 our costs on the coal side?
And what the amount of CapEx would we be looking at for that new prep plant?
Frederick A. Henderson
Well, we're assessing the potential that today. But if you think about it, it'd be $70 million and that was not just the prep plant.
That's the prep plant and load-out facility because what we would be doing is not only replacing the prep plant, we'd be moving it to a different location with the coal load-out facility to de-link the situation that we have today where the prep plant is linked at the hip to the coke battery. So you basically run the coke plant like a coke plant and you'd run the coal mine like a coal mine as part of this.
So about $70 million in total for both the prep plant and load-out. And timing, to the extent we take on the project, it would be done through -- it would obviously depend on when we kick it off, but if we kicked it off in the relatively near term, let's say, over the next -- you'd have the permit things.
But if you kicked it off in the next 3 months or so, it's a 12-month project, so you'd be talking about it coming online in early '15.
Lucas Pipes - Brean Capital LLC, Research Division
So with cost savings in 2014, would they be driven by a change in the mix? Or what would that be a function of?
Frederick A. Henderson
It'd be driven by further mine face productivity, further minor productivity. It would not be driven by -- we have made some improvements in the prep plant, existing prep plant.
We put in a fourth circuit. We did some things to try to get better yield.
Frankly, it's part of the part of the reason that I've been -- we've been considering this new prep is the current one. I mean, we've been investing about $6 million or $7 million in the existing one each year to try to address its deficiencies and it's not a very satisfying result, though some part of it we can reuse.
But we're having to spend money to try to keep the existing prep plant operating and functioning safely and effectively. And this is a prep 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 '15.
That would be a '15 item. It's much more about the next year productivity mine face activity, continued cost control.
By the way, the other thing you'd have is you'd have some reduction in royalties. If prices were down, you'd have also some reduction in royalty.
But the bigger issue would be productivity. Thank you.
I think, at this point, I don't -- there are not any other further -- there are not any other question. So thanks very much for your interest in SunCoke, and look forward to talking to you next quarter.
Thanks.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.