By Lynn Cowan Of DOW JONES NEWSWIRES Steel coke producer SunCoke Energy Inc. (SXC) generated modest interest among IPO investors Thursday, while a Chinese firm that had been expected to debut instead pulled its deal. SunCoke's stock opened at $17 a share on the New York Stock Exchange, up 6.3% from its initial public offering price of $16, and was recently changing hands at $17.40, up 8.8%, amid a surging market. A total of 11.6 million shares were sold at the midpoint of its expected $15 to $17 range. SunCoke Energy, whose parent is Sunoco Inc. (SUN), is the largest independent producer of metallurgical coke, the main raw material used in steelmaking. Post-IPO, Sunoco continues to own about 83% of SunCoke, but within 12 months of the IPO, it plans to spin off its remaining ownership to its shareholders. SunCoke owns and operates four coke making facilities in the U.S., and designed and operates one other in Brazil on behalf of a customer, an ArcelorMittal subsidiary. It's in the process of building a fifth U.S. facility that it will own and operate; that location should be finished by the end of the year. It also owns and operates coal mines in Virginia and West Virginia that supplies metallurgical coal to its coke facilities. It sells about 3.6 million tons of coke per year to three primary customers: ArcelorMittal (MT, MT.AE), United States Steel Corp. (X), and AK Steel Holding Corp. (AKS). The majority of its sales are made under agreements that require its customers to either take a specified maximum tonnage or pay the contract price for any coke they don't accept. All of its expected 2011 coal production volumes are contracted for sale. SunCoke plans to continue to grow its North American coke making business, a strategy the company says makes sense because steelmakers in the U.S. and Canada must import coke at volatile prices due to a deficit in domestic production. Total revenue increased throughout the economic downturn at SunCoke, but operating and income declined in 2010 and the first quarter of 2011. In the first quarter, the company's costs and operating expenses outpaced revenue primarily due to a loss on firm purchase commitments for coke at one facility, higher coal production costs, increased volumes in a domestic coke segment, and an acquisition. In 2010, there were increased purchased coal and operating costs resulting from a full year of production at an expanded facility and start up of operations at another; higher coal prices also played a role. For the second quarter, SunCoke expects to report total revenue in the range of $375 million to $380 million compared to $349.3 million in the second quarter of 2010, and net income in the range of $20 million to $23 million compared to $47.6 million a year ago. The decrease in net income is due to lower operating margins that resulted from contract amendments with ArcelorMittal that became effective in the first quarter of 2011, and higher expenses associated with getting ready to go public, increased headcount and relocation costs. SunCoke warns that worsening economic conditions could cause its customers to reduce their demand for its products or default on their obligations. During periods of weak demand for steel or coal, it says customers could try to renegotiate or cancel their existing coke and coal purchase commitments or decide not to renew them when they expire. Global steelmaking is also at excess capacity, which could weaken demand for steel, especially if China continues to export steel at cut-rate prices. Though SunCoke's primary product, metallurgical coke, has been the main ingredient for steelmakers historically, many steel companies are exploring alternative technology that would require less or no use of its coke. For example, EAF technology is a commercially proven process widely used in the U.S., and as it becomes more widespread, demand for metallurgical coke could decline. Another downer for investors is a lowered outlook for SunCoke's business results. Sunoco has historically provided yearly earnings guidance for its SunCoke business, and did so last on Feb. 3. Since then, Sunoco and SunCoke have withdrawn all earnings guidance. That decision was made in part because SunCoke does not plan to provide earnings guidance going forward, and in part because of revised downward expectations regarding the results of SunCoke for 2011. All the shares being offered in SunCoke's IPO will be sold by a Cayman Islands branch of Credit Suisse in exchange for paying off debt held by Sunoco, so none of the proceeds will benefit SunCoke. Credit Suisse is also an underwriter on the IPO, along with Bank of America Merrill Lynch and Goldman Sachs. Meanwhile, Chinese consumer Internet company Xunlei Ltd. was postponed, citing market conditions. Investors have been uneasy about investing in new Chinese stocks following a spate of accounting and corporate governance issues in some companies that have come public in the U.S. in recent years. -By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com
