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How Algoma Steel de-risked its electric arc furnace project

Algoma Steel lays to rest concerns that new furnace costs might be snowballing out of control

Ever since the projected cost of Algoma Steel's electric arc furnace (EAF) jumped dramatically eight months ago, the investment community has pressed for assurances the price tag won't escalate further.

On the first day of the summer of 2023, the steelmaker disclosed that the game-changing construction project – already the most expensive in the city's history at its original price tag of $700 million – was expected to balloon an additional $125 million to $175 million.

Michael Garcia, Algoma's chief executive officer, attributed the price hike then to "general market pressures impacting the cost of materials, along with higher costs for skilled labour and currency fluctuations."

Garcia said the first prices Algoma locked in were for Danieli & C. Officine Meccaniche's furnaces and Walters Group Inc.'s contract for building construction.

"At that point, it was too early in the project life to award some of the other significant packages that needed detailed engineering to be completed before those bid packages could go out and get priced by the market."

After that, bids for things like installing equipment and piping, and the fume treatment plant, started coming in higher than expected.

"We went through the iteration with the contractors to make sure they had all the details they needed. We started thinking of how to take costs out."

"Management remains fully committed to addressing these challenges proactively to mitigate their impacts and to ensure the successful execution of the project," Garcia said.

All that was in late June of last year.

Since then, the company has been repeatedly asked about the risk of further cost escalations.

This past week, Algoma Steel signalled it has now significantly de-risked the project, holding to its eight-month-old projection of somewhere between $825 million and $875 million.

In notes prepared for a presentation to the BMO 33rd Global Metals, Mining & Critical Minerals conference in Hollywood, Florida, Garcia declared his company had "significantly de-risked critical EAF enablers including construction, electricity and metallics."

EAF steelmaking involves melting scrap metal and other metallic inputs using an electric arc. 

By installing two EAFs, Algoma Steel will no longer need its No. 7 blast furnace and coke ovens, improving product mix, reducing fixed costs, increasing production capacity and improving its environmental footprint.

The huge project is expected to eventually decrease Algoma’s carbon emissions by approximately 70 per cent.

De-risking construction

About 86 per cent of the budgeted EAF project cost had been contracted as of Dec. 31, 2023.

"The company continues to expect that the completion of the EAF project will be funded with cash-on-hand, cash generated through operations, federal strategic innovation fund and available borrowings under the company's existing undrawn and recently upsized and extended asset-based revolving credit facility," said a statement submitted to regulators.

Here's a building update as of Dec. 31:

  • concrete – 22,033 cu/m
  • structural steel - 11,000 tons
  • utility room #1 floor slab – completed
  • shell reline foundations – 90 per cent complete
  • dust hoods – 50 per cent installed
  • melt shop building cranes – 40 per cent
  • both charging cranes – major components installed
  • fume treatment plant foundations – 95 per cent complete
  • No. 2 baghouse equipment installation – 30 per cent
  • water treatment plant – excavation complete, foundation eight per cent

De-risking electricity

"Algoma has secured all required power to operate EAFs at current shipment volumes, de-risking the power requirements on startup."

"Algoma has made substantial progress on the development of the local 230KV line with PUC Transmission. Algoma has received significant support and commitment from the Ontario government on installing regional bulk power upgrades by 2029."

"The Ontario Government issued an order-in-council prioritizing the transmission lines, streamlining the Ontario Energy Board’s regulatory approval process."

"The company upgraded its internal power generation asset known as Lake Superior Power with two LM6000PC aeroderivative gas turbines, multiple control systems, and a full rewind of the No. 2 generator to provide 110-115 MW towards the operation of the EAFs."

"The company is progressing its discussions with the Independent Electricity System Operator, Ontario's independent electricity regulator, as well as with the Ministry of Energy in respect of securing more grid power to realize the full potential of the EAF transformation project."

De-risking metallics

"On Oct. 2, 2023, the company announced a two-year extension of its existing iron ore purchase contract with United States Steel Corp. with an option to further extend for a third year solely at Algoma’s discretion. The extended purchase contract is anticipated to cover the expected volumes of iron ore required to complete Algoma’s transition from blast furnace to EAF steelmaking."

To find scrap to feed its new EAFs, Algoma is working with Triple M. Metals LP, which it says "has a strong market presence in Canada and the US as well as strategic partnerships with an intake network of vendors across North America."

Other stuff

Some other takeaways from CEO Garcia's presentation notes and other recent disclosures to securities regulators:

  • despite the Jan. 20 piping collapse, which the company described in a recent regulatory filing as being ‘coupled with attendant fires and explosions,’ and despite a further explosion on Feb. 7 at its No. 7 blast furnace, Garcia was emphasizing his company’s safety record this past week. He said Algoma is implementing an ISO 45001 Safety Management System and participates in the Workplace Safety and Insurance Board's (WSIB) Health & Safety Excellence Program
  • the company recently completed refurbishing its lime kiln production plant at a cost of $16 million. Lime plays an essential role in steelmaking: extracting impurities, regulating slag composition and adjusting chemical balance in the steelmaking process. "The company has a constant and growing demand for lime product as it progresses through its transformation to EAF steelmaking," said a regulatory filing
  • a second phase of Algoma's plate mill modernization will necessitate two outages this year to reduce commissioning risks and to provide for lesser impact to our customers. "The company has installed and is presently commissioning the inline dividing shear and plate piler. The first 20-day outage involves installation and commissioning upgrades of onboard descaling systems for the 2Hi and 4Hi roughing roll stands; mill alignment and work roll offset at the 4Hi mill; and new cooling beds coupling the plate mill and shear line, dividing shear, plate piler and automated marking machine. The second minor outage in 2024 involves installing and commissioning the new 4Hi DC drive," Algoma said

- SooToday