The text of the letter follows.
Date: October 21, 2019
To: SunCoke Energy Inc. Board of Directors SunCoke Energy Inc. 1011 Warrenville Road, Suite 600 Lisle, IL 60532
From: Nokomis Capital, LLC 2305 Cedar Springs Rd., Suite 420 Dallas, TX
Dear Board of Directors:
Nokomis Capital is a long-term shareholder of SunCoke Energy, Inc. (SunCoke). We have engaged in regular, reasonable exchanges with management over the last two years, but the time has come for us to increase our engagement. Twice in the last month, we have held calls with CEO Mike Rippey, and we are surprised and disappointed by the lack of openness and responsiveness. We laid out our concerns and suggestions to Mike in calls on September 18th and October 11th. Mike made it clear that he is not open for discussion on topics we brought up with him then and address in this letter. Having received no acceptable solution or even openness to discuss, we are notifying the Board of our discontent. We believe other shareholders share our frustration and support our proposed remedies, and we welcome further discussion with directors and other shareholders. The Board of Directors is not sufficiently representing shareholders, and we believe that a majority of shareholders want to see that changed.
The Board should now act with urgency to fix major problems around capital allocation and corporate governance. Having been stonewalled so far in our attempts to collaboratively engage with management in an informal and non-public fashion, we are taking additional steps, starting with this letter and potentially (though hopefully not) taking action in regards to the upcoming annual shareholder meeting. We have been patient, and we want to be helpful in creating value for all shareholders.
We think the Board and management have erred in their plans for capital allocation, which has damaged shareholder value. SunCoke provides a relatively stable, long-term cash flow stream that is materially undervalued because of unfounded transference in expected volatility from associated industries. While that is a burden to the current valuation, the volatility creates an opportunity for shareholder value creation if a dynamic capital allocation process is applied. We are aware of business complexity related to the Indiana Harbor rebuild, the gas sharing project, the simplification transaction, and logistics customer issues. Shareholders have been patient as those problems have been tackled. Now shareholders want action toward reinvestment that focuses on shareholder returns. The language around ‘aggressive¦acquisitions’ in the second quarter call was a woefully miscalculated interpretation of what both current and prospective shareholders desire from a capital allocation standpoint or what is the highest return allocation of the companys capital. There is no evidence that either management or the Board acknowledged that misstep, or that the Board or management have changed their allocation philosophy. Acquisitions were the wrong answer at the time (and share price) that the comment was made, and are a much worse idea now. We have yet to speak to a shareholder who agrees with acquisitions as a highest and best use of free cash flow for SunCoke.
Additionally, we observe deep misalignment between the Board and shareholders from a governance and ownership perspective. We are disturbed by the meager purchases and ownership by insiders, even though cash flows are up, remediation projects are working, simplification has been complete, and the shares are down about 50% in the last year. This betrays a lack of confidence by the Board and senior management in their own plans and drives decisions motivated by interests other than the shareholders. SunCoke suffers a rating in the bottom half of all companies rated by leading proxy advisor, Institutional Shareholder Services (ISS) for Shareholder Rights. That has created an insular Board with no useful direction on capital allocation. This serves shareholders poorly.
The Board should take immediate steps to de-classify. Since the annual report and proxy statement for the annual shareholder meeting will presumably not be done for several months, the Board has ample time to make these changes in time for the next annual meeting. The Board could wait for us to put it up for a vote as we are currently considering doing, but taking action proactively would help restore much needed credibility with shareholders.
Thoughtful refreshment of the Board is critical and needed now. SunCoke needs new Board members with expertise in finance and capital allocation. Further, while we appreciate the potential wisdom that comes with age, the current SunCoke Board members (as of the 2019 Proxy) are 73, 72, 72, 71, 66, 61, and 58. In 2018, ISS noted that As the percentage of younger directors decreases, some boards [may] be missing certain skills that may be more prevalent among younger directors. Further, many Board members have sat on this Board for years, collecting fees and approving capital allocation plans with no material skin in the game. Directors incentives need to be more aligned with outside shareholders and, thus, a minimum stock ownership requirement for Board members needs to be instituted.
Since face-to-face communication is always most effective, we would prefer to have an opportunity to present our ideas and our capital allocation analysis to the Board in person and would be happy to jump on a plane to Chicago in order to discuss our ideas with the Board. We want to be collaborative and helpful. We would also appreciate a response to our proposals by November 1st as these corporate governance problems have been allowed to stay in place too long and are now increasingly showing themselves in value destructive ways.
Luke Gittemeier [email protected] 972.590.4106
Brett Hendrickson [email protected] 972.590.4104