IPO Preview: SunCoke Energy

| About: SunCoke Energy (SXC)
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Based in Knoxville, TN, SunCoke Energy (proposed symbol SXC) has scheduled a $186 million IPO with a market capitalization of $1.1 billion at a price range mid-point of $16 for Thursday, July 21. The full IPO calendar for the week of July 18 includes seven IPOs.

SXC is a spin-off of Sunoco (NYSE:SUN), one of the largest petroleum refiner-marketers in the United States. Sunoco’s market capitalization is $5 billion.

The SXC IPO is a sweet financial deal for SUN. The price-to-book value ratio is almost 50% higher for SXC; the price-to-sales is eight time bigger; and, annualizing the March 2011 quarter, SXC's price-to-earnings is a very high 117, while the parent SUN produced a loss.

SXC Valuation Metrics

It’s always better to buy IPO spin-offs if the parent’s stock is on an uptrend. SUN’s stock price has slightly declined $41.83 from $42.90 in the last three months.

Based on traditional metrics, SXC appears overpriced at 117 times annualized March quarter earnings. SXC is also priced at eight times the parent’s price-to-sales ratio: 0.8 to 0.1. However, given SXC’s expected plant expansion, it may be able to grow into its IPO valuation.

SXC is the largest independent producer of high-quality metallurgical coke in the Americas, as measured by tons of coke produced each year, and has over 45 years of coke production experience. Metallurgical coke is a principal raw material in the integrated steelmaking process. SXC has designed, developed and built, and currently owns and operates four metallurgical cokemaking facilities in the United States. SXC is currently constructing a fifth U.S. cokemaking facility that it also will own and operate, which is expected to be completed in the fourth quarter. Upon its completion, its total U.S. cokemaking capacity is expected to increase to 4.2 million tons of coke per year.

SXC also owns and operates coal mining operations in Virginia and West Virginia that have sold an average of approximately 1.2 million tons of metallurgical coal per year (including internal sales to SXC’s cokemaking operations) over the past three years.

In January 2011, SXC acquired metallurgical coal mining assets contiguous to existing mining operations that will increase annual coal production by an additional 250-300,000 tons per year with the potential for future production expansion.

An expansion plan is underway that could increase SXC’s coal production from its underground mines. Reflecting existing tightness in the Appalachian labor market and, to a lesser degree, lower yields from newly developed mine seams, SXC now expects to increase annualized production by approximately 350,000 tons in 2012 and to reach a 500,000 ton annualized increase by mid-2013. This would increase the annualized rate of coal sales to two million tons by mid-2013. SXC expects capital outlays for this project, primarily for new mining equipment, to total approximately $25 million, of which $10 million is expected to be spent in 2011.

In early June 2011, SXC entered into a series of coal transactions with Revelation. Under a contract mining agreement, Revelation will mine certain coal reserves at its Jewell coal mining operations that are not included in SXC’s current proven and probable reserve estimate. This coal will be mined, subject to the satisfaction of certain conditions, over a three-year period beginning in 2012 and is expected to produce approximately 1.3 million tons of predominantly metallurgical coal over such period.

In addition, SXC intends to build a state-of-the-art rapid train coal loading facility in the proximity of its Jewell coal mining operations at an expected cost of approximately $20 million, of which $6 million is expected to be spent in 2011. Once completed, the throughput capacity of the loadout facility will be 2.6 million tons per year. The loadout facility will be operated by Revelation and rail service will be provided by Norfolk Southern (NYSE:NSC).

SXC borrowed $700 mm and will pay parent Sunoco $575 mm after the IPO, including IPO proceeds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.