Executive Summary / Key Takeaways

• Algoma Steel Group Inc. is undergoing a transformative shift from traditional blast furnace steelmaking to Electric Arc Furnace (EAF) technology, poised to significantly enhance capacity, reduce costs, and establish the company as a leader in green steel production in North America.
• The company is strategically prioritizing high-margin plate production, leveraging its unique position as Canada's only discrete plate producer and recent modernization investments to capture market share and improve product mix.
• Despite recent market headwinds, including tariff uncertainty and soft demand, Algoma maintains a strong liquidity position, bolstered by recent financing and expected insurance recoveries, to fund its ambitious EAF project on schedule and within budget.
• The EAF project, with first steel expected in April 2025, is a critical differentiator that will reset Algoma's cost structure, improve operational efficiency, and provide long-term resilience against market volatility, positioning it more favorably against competitors.
• The successful execution of the EAF ramp-up and continued growth in plate shipments are key catalysts for unlocking substantial shareholder value, with management anticipating a significant re-rating of the company's valuation post-transformation.

Algoma Steel's Enduring Legacy and Strategic Pivot

Algoma Steel Group Inc., founded in 1901 and headquartered in Sault Ste. Marie, Canada, has a rich history rooted in traditional blast furnace steel production. The company's core business involves producing flat/sheet steel for sectors such as automotive, hollow structural products, light manufacturing, and transportation, alongside plate steel used in critical applications like railcars, buildings, bridges, off-highway equipment, storage tanks, ships, armored products for military use, large-diameter pipelines, and wind energy generation equipment. This dual focus positions Algoma as a vital supplier across diverse industrial segments in North America.

The North American steel industry operates within a dynamic landscape, characterized by global competition, fluctuating demand, and the persistent influence of tariffs. In this environment, Algoma's overarching strategy is a profound transformation: a pivot towards Electric Arc Furnace (EAF) steelmaking, a strategic prioritization of its high-margin plate market, and a commitment to green steel leadership. A foundational strength in this strategy is Algoma's unique position as Canada's only discrete plate producer, providing a distinct competitive edge. Broader industry trends, such as reshoring initiatives and the electrification of various sectors, are expected to drive increased demand for steel in infrastructure and manufacturing, creating a favorable backdrop for Algoma's strategic evolution.

The Electric Arc Furnace Revolution: A Technological Leap

At the heart of Algoma's transformation is its Electric Arc Furnace (EAF) project, representing a monumental technological leap from its legacy blast furnace operations, some of which are over 70 years old. This transition is not merely an upgrade but a fundamental shift in steelmaking methodology. Cold commissioning activities for the EAF began in the fourth calendar quarter of 2024 and are progressing into the first quarter of 2025, involving the installation, testing, and validation of critical equipment such as EAF charging cranes, fume treatment plants, and water treatment plants. This phased approach ensures thorough assessment before transitioning to hot commissioning. First steel production from the EAF is anticipated in April 2025, with the second furnace expected to come online by the end of the year.

The tangible and quantifiable benefits of this EAF technology are substantial. Upon full operation, the EAFs are expected to increase Algoma's throughput capacity by roughly a third, reaching approximately 3 million tons per year. Crucially, this transition is projected to lower carbon emissions by approximately 70%, positioning Algoma as one of North America's greenest steel producers. From a cost perspective, the EAF is anticipated to achieve a cost structure of "scrap plus $200 to $220 US for full conversion" for hot rolled coil, a significant improvement from the current blast furnace hot rolled coil cost of approximately $650. This shift is expected to improve operational efficiency by better matching steel production to downstream finishing capacity and will "reset our cost basis significantly" upon the eventual decommissioning of the blast furnace and coke ovens.

For investors, the EAF project creates a robust competitive moat through lower production costs, higher capacity, and environmental leadership. This technological advantage is expected to enhance financial performance through better margins and a stronger market position in an increasingly carbon-conscious global economy. The EAF project is the primary driver for Algoma's long-term growth strategy, enabling increased output and greater operational flexibility.

Strategic Growth in Plate and Product Mix Optimization

Complementing the EAF transformation, Algoma Steel has strategically focused on expanding its high-margin plate production. The company completed a significant modernization project at its plate mill in April 2024, which has substantially enhanced product quality, including surface finish, flatness, and dimensional tolerance. This upgrade is paving the way for higher plate shipments, with plate production expected to reach approximately 90,000 tons in the fiscal second quarter of 2025. The company is targeting an annual run rate capacity of over 650,000 net tons, with an intermediate goal of reaching 40,000 tons per month.

Algoma is strategically exiting the wide coil market over the balance of the fiscal year to prioritize plate production and sales. This move leverages its unique position as Canada's only discrete plate producer and is expected to drive "meaningful margin enhancement" through a more favorable product mix. Plate pricing consistently commands a significant premium relative to hot rolled coil, with both plate and coil prices reportedly up 30% to 35% since inauguration day. The company has demonstrated its ability to grow market share in plate even amidst soft market conditions. Opportunities in the Canadian market are particularly promising due to recently imposed Canadian tariffs on U.S. steel, which previously accounted for approximately 3.5 million tons in the Canadian market over the last twelve months. Furthermore, potential defense spending and shipbuilding initiatives, including two announced Canadian icebreaker ships, present significant opportunities for plate sales, especially if a "buy Canadian requirement" is implemented. This strategic focus on plate production is expected to yield higher margins, resilient demand, and significant revenue growth from increased capacity and market share capture.

Financial Performance and Liquidity: Funding the Transformation

Algoma Steel's recent financial performance reflects a period of significant investment and market volatility. In calendar Q4 2024, the company reported an adjusted EBITDA loss of $60.3 million on shipments of 549,000 tons, with net sales realization averaging $976 per ton and costs at $1,032 per ton. For the full calendar year 2024, adjusted EBITDA was $22.3 million, representing a slim 0.9% margin, on revenues of $2.2 billion and shipments of 2 million tons. The fiscal Q2 2025 saw adjusted EBITDA of $4 million (0.6% margin), which included $28 million in insurance proceeds. Steel revenue for that quarter was $539 million on 520,000 tons shipped. These results were impacted by challenging market conditions, including lower realized prices and higher costs, which more than offset higher shipments. A significant operational challenge in January 2024, a coke-making utility corridor collapse and subsequent blast furnace outage, led to an estimated 150,000 tons of lost production and a CAD120-130 million reduction in adjusted EBITDA.

Despite these headwinds, Algoma has maintained a robust liquidity position crucial for funding its transformation. As of calendar Q4 2024, the company held over $267 million in cash and $630 million in total liquidity.

This strong position was bolstered by a USD 350 million notes offering in April 2024, which enhanced the company's balance sheet and reflected investor confidence in its strategic direction.

The company expects to release approximately $100 million in working capital by March 2025, with further reductions anticipated as the EAF transition reduces reliance on iron ore and coal inventories. Algoma also anticipates receiving approximately $100 million in total insurance payouts related to the January 2024 outage, with $32 million already received and an additional $20-25 million expected in the near term. Furthermore, the EAF project is eligible for carbon tax reimbursements under Ontario's Emissions Performance Program for taxes paid since 2022, which is expected to "drive down the net cash cost of the EAF project." These financial maneuvers and expected recoveries underscore the company's commitment to funding its transformative projects while maintaining financial stability.

Competitive Landscape: Differentiating in a Challenging Market

Algoma Steel operates as a regional player in North America, with a specialized focus on certain steel products. While it holds a unique position as Canada's only discrete plate producer, it generally lags in overall market share compared to larger, more diversified rivals such as Nucor Corporation (NUE), Steel Dynamics Inc. (STLD), ArcelorMittal (MT), and Cleveland-Cliffs Inc. (CLF). Its growth trajectory has historically been slower than the market average and that of its key competitors.

Nucor, a leader in EAF technology, often demonstrates superior operational efficiency and generally higher operating margins. Algoma's EAF transition is a direct response to this competitive benchmark, aiming to close the efficiency gap and leverage its regional focus for enhanced supply chain reliability. Steel Dynamics benefits from faster innovation cycles and aggressive expansion, leading to stronger revenue trends and higher margins from operational efficiencies. While Algoma's specialized plate products offer a differentiator, it has historically lagged in overall financial health and strategic adaptability compared to STLD. ArcelorMittal's global reach and scale provide broader market positioning and economies of scale, whereas Algoma's focus on North American niche markets offers reliability in regional supply. Cleveland-Cliffs, with its vertical integration, often achieves lower cost structures, a challenge Algoma addresses through its EAF-driven cost reset and historical expertise in Canadian markets fostering customer loyalty.

Algoma's competitive advantages stem from its established Canadian operations, providing access to local resources and a stable supply chain, alongside its long history in specialized steel production. These factors contribute to stronger customer loyalty in North American markets and potentially enhanced pricing power in local segments. However, Algoma's competitive disadvantages have included a dependence on global steel prices and, prior to the EAF, less advanced technology compared to some peers, making it vulnerable to price competition. The EAF project directly addresses this technological gap, aiming to significantly improve Algoma's cost efficiency and environmental footprint, thereby enhancing its competitive standing. Indirect competitors, such as aluminum manufacturers and producers of composite materials, pose a long-term threat by offering lighter and more energy-efficient alternatives, which could impact steel demand in key sectors. However, recent Canadian tariffs on Chinese and U.S. steel imports are creating opportunities for Algoma in the Canadian market, and discussions with the government regarding support for affected industries are ongoing.

Outlook and Guidance: A Transformative Future

Algoma Steel's outlook is firmly anchored in the successful execution and ramp-up of its EAF project and the continued expansion of its plate production. First steel production from the EAF is slated for April 2025, with the second furnace expected to commence operations by the end of the year. For the remaining nine months of 2025, Algoma plans for just over 200,000 tons of EAF production, with a relatively steep ramp-up towards the latter half of the year. Once fully operational, the EAFs are projected to achieve a shipping capacity of 3 million tons per year, a 35% increase over current levels. Power is already secured to produce 2.4 million tons of EAF steel without augmenting hot iron from blast furnaces. Further infrastructure, including a local power line by 2027, will enable 3 million tons of production, with subsequent grid upgrades potentially allowing this output without running the captive power plant, further lowering costs and emissions.

Plate production is expected to see a "directionally higher ramp up in the quarters to come," targeting 40,000 tons per month and an annual run rate of 650,000 net tons. Overall shipments for calendar year 2025 are projected to be between 2 million and 2.2 million tons. While the calendar Q1 2025 (fiscal Q4 2024) saw sequentially lower shipments and adjusted EBITDA due to weak demand and a blast furnace outage, management anticipates that recent improvements in steel pricing will be reflected in subsequent quarters' results. Cost per ton is expected to trend slightly lower next year as EAF production stabilizes, and cash taxes are projected to be lower due to accelerated depreciation benefits in Canada. Fiscal 2025 capital expenditure is estimated at CAD100-120 million for maintenance and CAD250-270 million for the EAF project, with additional coke oven-related CapEx expected to be offset by insurance recoveries. This clear roadmap for growth and efficiency underscores the EAF project as the primary driver for long-term value, supported by strategic plate expansion and an anticipated improvement in market conditions post-election.

Risks and Challenges: Managing the Transition

While Algoma Steel's transformative journey presents significant opportunities, it is not without risks and challenges. The North American steel market remains susceptible to volatility, with steel pricing influenced by U.S. election uncertainty, interest rate concerns, soft demand, and tariff tensions. The company's lagging contract order book can create headwinds during periods of declining spot prices. Tariff uncertainty, particularly regarding U.S.-Canada trade relations, introduces additional market unpredictability, and the Canadian coil market has recently experienced oversupply.

Operational risks are also present, as highlighted by the January 2024 utility corridor collapse and blast furnace outage, which underscored the challenges of operating aging facilities. Although the EAF project has been substantially de-risked, the execution of time and material contracts, representing less than 10% of the total budget, carries some inherent risk of cost overruns. Furthermore, the eventual decommissioning of the blast furnace and coke ovens will entail a headcount reduction of close to 1,000 employees, with associated costs outlined in collective bargaining agreements. While these risks are notable, the EAF transition is strategically designed to mitigate operational vulnerabilities from aging assets and strengthen Algoma's cost structure, enhancing its long-term resilience against market uncertainties.

Conclusion

Algoma Steel Group Inc. is at a pivotal juncture, undergoing a profound transformation that promises to redefine its operational capabilities and market standing. The core investment thesis is firmly rooted in the successful execution of its Electric Arc Furnace project, which is set to establish Algoma as a leader in green steel production in North America. This technological leap will not only significantly increase capacity and reduce carbon emissions by approximately 70% but also fundamentally reset the company's cost structure, providing a crucial competitive advantage in a challenging global market.

Coupled with a strategic focus on high-margin plate production, leveraging its unique Canadian market position and recent modernization, Algoma is building a more resilient and profitable business model. Despite navigating market volatility and operational challenges, the company's strong liquidity and clear guidance for EAF ramp-up and plate growth underscore a compelling path to value creation. As the EAF comes online and plate shipments expand, Algoma Steel is poised to emerge as a more efficient, environmentally responsible, and competitively robust entity, offering a compelling investment opportunity for those looking to participate in the future of North American steelmaking.