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SunCoke, ArcelorMittal Extend Contract

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SunCoke Energy Inc. (SXC - Free Report) received a 10-year extension of its existing agreement with steel making giant ArcelorMittal (MT - Free Report) for the supply of 1.22 million tons of metallurgical (met) coke from its Indiana Harbor cokemaking plant annually. The cokemaking plant is primarily owned by SunCoke Energy (85%) while DTE Energy Company (DTE - Free Report) holds the remaining 15%.

Coke is the primary raw material used in the production of steel. The renewed contract is expected to come into effect from Oct 1, 2013 and the conditions remain more or less unchanged from the previous contract.

These include continuing pass-through of costs, recouping operating and maintenance expenses subject to certain metrics and price adjustments per ton of coke to recognize the roughly $85 million capital investment incurred for revamping and upgrading the Indiana Harbor facility.

The plant retrofit tasks are projected to be concluded by the first quarter of 2014. However, upgrades related to the replacement of equipment with long-lead order will take time and will be entirely implemented in early 2015.

SunCoke Energy expects a substantial boost in its operation and financial results in 2014 on account of these measures although the full positive impact will be realized in 2015. SunCoke Energy and ArcelorMittal’s business relationship goes a long way with the latter being one of SunCoke Energy’s key clients.

The company has been delivering met coal from the Indiana harbor plant since 1998 and was the first to implement its heat recovery technology. With the deal supposed to expire in 2013, getting the extension was SunCoke Energy’s primary agenda.

Located in East Chicago, Ind., the cokemaking plant is central to SunCoke Energy’s operations. The company has been working to improve the plant’s production capabilities. Recently, it acquired Lakeshore Coal Handling Corporation from Beemsterboer Corp. which will offer coal handling and blending services.

The contract renewal is a major catch for SunCoke Energy this year which will offer a steady revenue stream for a decade. In addition, the company’s Brazil operations are poised to gain from increasing steel demand as the country plays host to important events like the World Cup Football and Olympics in 2014 and 2016, respectively.

However, the persistent weakness in met coal prices remains a concern. Currently, the company holds a Zacks Rank #3 (Hold). Meanwhile, a coal market operator looking good at the moment is Zacks Ranked #1 (Strong Buy) Alliance Resource Partners LP (ARLP - Free Report) .

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