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With auto strikes over, Algoma expects better steel prices, demand

Second-quarter net income was $31.1 million, down from $87.2 million during the same period last year
Algoma Steel CEO Michael Garcia (SooToday photo)

Recent strikes by North American auto workers are expected to adversely affect Algoma Steel's fiscal third quarter, but the steelmaker's second-quarter results were consistent with expectations.

"We delivered results in the fiscal second quarter that were in line with our previously disclosed outlook," Michael Garcia, Algoma's chief executive officer, said in a news release.

"Our results were impacted by significant declines in steel prices leading up to the now-resolved labour stoppages at auto manufacturers in the United States.

"While we do expect the impact strikes had on the price environment, along with lower anticipated production due to our usual planned maintenance ahead of winter to have a material downward impact on fiscal third quarter 2024 results, index prices have risen and forward curves have rebounded sharply on recent price increase announcements and news of tentative agreements between the UAW and automakers.

"With the strikes behind us, we expect further recovery in steel demand and pricing," Garcia said.

The following are excerpts from the company's announcement after the markets closed on Thursday:

Algoma Steel Group reports fiscal second quarter 2024 financial results

Algoma Steel Group Inc. (NASDAQ: ASTL; TSX: ASTL), a leading Canadian producer of hot and cold rolled steel sheet and plate products, today announced results for its fiscal second quarter ended September 30, 2023.

Unless otherwise specified, all amounts are in Canadian dollars.

Business highlights and fiscal 2024 to fiscal 2023 second-quarter comparisons:

  • revenue of $732.6 million, compared to $599.2 million in the prior-year quarter
  • consolidated income from operations of $36.8 million, compared to $5.6 million in the prior-year quarter
  • net income of $31.1 million, compared to $87.2 million in the prior-year quarter
  • adjusted EBITDA of $81 million and adjustrd EBITDA margin of 11.1 per cent compared to $82.7 million and 13.8 per cent in the prior-year quarter
  • cash flows generated from operations of $57.2 million, compared to cash flows used in operations of $66.1 million in the prior-year quarter
  • shipments of 548,998 tons, compared to 435,202 tons in the prior-year quarter
  • paid quarterly dividend of US$0.05/share.

Michael Garcia, the company's chief executive officer, commented: "During the last quarter, we initiated the commissioning phase of our inline heavy gauge shear, a critical component of our plate mill modernization project. This marks a significant step towards achieving increased production by the end of the current calendar year.

"We also made significant progress in our transformative electric arc furnace, or EAF project, including achieving two important milestones in securing the necessary power supply for our EAFs.

First, Ontario’s Independent Electricity System Operator provided further positive indication on connecting our EAFs to the grid. This means we will have access to the power required to operate the EAFs at our current run rate annual business plan range of 2.2 - 2.4 million shippable tons without relying on hot metal.

Additionally, the Ontario Government issued an order in council to accelerate regional power infrastructure upgrades, which provides further comfort that the necessary infrastructure will be in place to meet the long-term power requirements of our EAF project, allowing for increased future EAF production capacity.”

Mr. Garcia then shared financial insights on the EAF project: "As of September 30, 2023, we have invested a total of $455.7 million in the development of the EAF project, which represents approximately 54 per cent of the anticipated project cost.

"Importantly, we have already secured contracts for approximately 80 per cent of the forecasted total project expenses, with approximately 95 per cent of these contracts being fixed-price agreements. We anticipate finalizing contracts for the remaining forecast project expenses by end of the fiscal year.”

He elaborated on the funding strategy, saying: "We expect that funding for the project's completion will be sourced from a combination of our existing cash reserves, available funds under our federal Strategic Innovation Fund (SIF) loan, utilization of excess working capital, and anticipated cash flows from our operations.

"Our strong balance sheet provides stability throughout market cycles as we progress towards the commissioning of the EAFs in late 2024.”

Second quarter fiscal 2024 financial reports

Second quarter revenue totaled $732.6 million, compared to $599.2 million in the prior year quarter. As compared with the prior year quarter, steel revenue was $665.8 million, compared to $551.5 million, and revenue per ton of steel sold was $1,334, compared to $1,377.

Income from operations was $36.8 million, compared to $5.6 million in the prior-year quarter. The year-over-year increase was primarily due to improved steel shipment volumes and the absence of impacts in the year ago quarter of pension and post-employment benefit expenses associated with ratifying collective bargaining agreements, which more than offset lower realized steel pricing.

Net income in the second quarter was $31.1 million, compared to net income of $87.2 million in the prior-year quarter.

Adjusted EBITDA in the second quarter was $81.0 million, compared with $82.7 million for the prior-year quarter. This resulted in an adjusted EBITDA margin of 11.1 per cent.

Average realized price of steel net of freight and non-steel revenue was $1,213 per ton, compared to $1,267 per ton in the prior-year quarter.

Cost per ton of steel products sold was $1,089, compared to $1,199 in the prior-year quarter.

Shipments for the second quarter increased by 26.1 per cent to 548,998 tons, compared to 435,202 tons in the prior-year quarter.

Electric arc furnace

The company has made substantial progress on the construction of two new state-of-the-art electric arc furnaces (“EAF”) to replace its existing blast furnace and basic oxygen steelmaking operations.

The project timing and budget remain consistent with the outlook provided in the fiscal fourth quarter 2023 earnings release. As of September 30, 2023, the cumulative investment was approximately $455.7 million of the total projected cost of $825 million to $875 million.

Of the total project expenditure to date, only $33 million is tied to time and material contracts, while the balance is fixed price in nature. Furthermore, expected chip shortages that have previously impacted the project timeline have eased, and a late calendar 2024 commissioning remains on track.

Following the transformation to EAF steelmaking, Algoma’s facility is expected to reach an annual raw steel production capacity of approximately 3.7 million tons, matching its downstream finishing capacity, and to generate an approximate 70 per cent reduction in the company's annual carbon emissions.

Quarterly dividend

The board has declared a regular quarterly dividend in the amount of US$0.05 on each common share outstanding, payable on Dec. 29, 2023, to holders of record of common shares of the Corporation as of the close of business on November 30, 2023.

This dividend is designated as an “eligible dividend” for Canadian income tax purposes.