Algoma Steel Inc. reported net income of $121.6 million on revenues of $535.7 million for the third quarter ended September 30, 2004.

Third Quarter Results—Net income of $121.6 million (fully diluted income per common share of $3.00) compares to a net loss in the third quarter of 2003 of $12.3 million and net income in the second quarter of 2004 of $78.0 million. The improvement versus the second quarter was due mainly to higher selling
prices, partially offset by increased profit sharing accrual, higher raw material and labor costs, and lower coke sales.

Revenue was $535.7 million, an increase of $282.9 million versus the three months ended September 30, 2003 and $95.9 million versus the second quarter of 2004. The increase over both quarters was mainly the result of higher steel selling prices. Revenue included a $6.5 million adjustment retroactive to January 1, 2004 related to finalizing a customer contract.

Average steel revenue per ton increased to $895, which compares to $729 in the second quarter and $467 in the third quarter of 2003. Non-steel sales declined to $19.0 million versus $29.3 million in the second quarter due mainly to a reduction in coke sales.

Steel shipments totaled 558,100 tons, an increase of 55,500 tons from the third quarter of 2003 and 15,100 tons from the second quarter of 2004. The increase from 2003 was mainly due to higher production levels versus the same period last year.

The average cost of steel products per ton increased to $518 compared to $471 in the second quarter and $434 in the third quarter of 2003. The increase of $47 per ton versus the second quarter was due to a higher accrual for profit sharing ($17 per ton), higher costs for certain raw materials and higher labor costs.

EBITDA was $202.0 million, compared to $7.2 million for the same quarter of 2003 and $144.2 million for the second quarter of 2004. The significant improvement was mainly attributable to higher steel prices.

The balance sheet benefited from the strong earnings and cash flow with the cash and short-term investments increasing to $243.3 million in the quarter despite an additional one-time pension funding contribution of $40 million and a prepayment of a portion of the profit sharing entitlement to employees of $27.6 million. The 1% Notes were retired as of September 30 through a combination of conversion to common shares and cash redemptions.

Nine Month Results—Net income was $221.6 million ($5.77 per fully diluted share) versus a net loss of $1.7 million ($0.09 per diluted share) for the same period last year.

Sales totaled $1.3 billion, an increase of $442.8 million versus the same period last year. Average steel price per ton was $725, an improvement of $239 (49%) versus the comparable nine-month period in 2003. Steel shipments totaled 1,674,300 tons, an increase of 16,600 tons from the same period last year.

EBITDA was $406.0 million, an improvement of $367.8 million versus the same period last year. The significant improvement was mainly attributable to higher steel prices.

Comments—Denis Turcotte, President and CEO, said, "Increasing steel prices drove high levels of profitability and cash flow in the quarter. We expect relatively strong performance in the fourth quarter and a significant increase to the cash balance. However, selling prices have declined from the September peak and may result in lower average prices in the fourth quarter. In addition, lower shipments are projected mainly due to seasonal customer shutdowns in December. These factors may result in lower operating income in the fourth quarter. We will continue to focus the organization on improving our commercial and operating performance to ensure acceptable returns through the cycle. The company intends to allocate a greater proportion of management time over the next few quarters to the evaluation of value-maximizing alternatives for the utilization of excess cash balances."

Cost of sales for the three months ended September 30, 2004 was $319.9 million versus $235.0 million for the same period in 2003 and $283.8 million for the second quarter of 2004. The increase over both periods is mainly attributable to higher shipments, production costs and non-steel sales. The higher production costs reflect higher operating costs and an increase to the accrual for profit sharing.

Excluding the reserve for profit sharing, cost of sales per ton shipped for steel products was $479 for the three months ended September 30, 2004 versus $434 for the third quarter of 2003 and $449 for the second quarter of 2004. The $45 per ton increase over 2003 was mainly attributable to higher costs for natural gas and certain raw materials. The $30 per ton increase over the second quarter was mainly attributable to higher raw material and employment costs.

A $21.7 million ($39 per ton) reserve for profit sharing was accrued in the third quarter versus a $12.1 million reserve ($22 per ton) in the second quarter of 2004. For the nine months ended September 30, 2004, the $36.1 million reserve for profit sharing represents $22 per ton of steel shipments. While the assumptions underlying this provision reflect management's current best estimates, they are subject to a high degree of variability. There was no profit sharing in 2003.

For the nine months ended September 30, 2004, cost of sales was $867.6 million versus $796.4 million for the same period last year. The increase was mainly attributable to the profit sharing reserve, higher non-steel sales, higher steel shipments and an increase in production costs. Cost of sales per ton shipped for steel products for the nine months was $472, an increase of $29 versus the same period last year. Higher costs for natural gas and certain raw materials were offset, in part, by improvements in operating performance.

Raw steel production for the third quarter was 650,000 tons versus 570,000 tons for the same period in 2003 and 613,000 tons for the second quarter of 2004. Production levels in the third quarter of 2003 were adversely affected by power outages. For the nine months ended September 30, 2004, raw steel production was 1,885,000 tons, an increase of 62,000 tons from the same period last year.

Financial Resources and Liquidity—Cash used in operating activities was $69.8 million for the three months ended September 30, 2004 compared with cash provided by operating activities of $37.8 million for the three months ended September 30, 2003. Included in the third quarter was an advance on the 2004 profit sharing of $27.6 million. Operating working capital increased by $284.3 million in the quarter primarily due to an increase in accounts receivable because of higher selling prices and shipments and an increase in short-term investments of $190.4 million. For the nine months ended September 30, 2004, cash provided by operating activities was $61.0 million compared with $139.7 million for the nine months ended September 30, 2003. Operating working capital increased by $374.0 million primarily due to an increase in accounts receivable of $164.9 million because of higher selling prices and shipments and an increase in short-term investments of $190.4 million.

Capital expenditures for the three and nine-month periods ended September 30, 2004 were $14.4 million and $31.8 million, respectively. Expenditures in the corresponding periods of 2003 were $13.8 million and $27.4 million. The Company has realized $14.6 million of proceeds on the sale of capital assets for the nine months ended September 30, 2004 related to the sale of tube mill assets and surplus land.

Financing activities for the three months ended September 30, 2004 included a payment of $1.8 million to redeem the 1% convertible Notes that were not converted by September 29, 2004 and a one-time pension funding payment of $40.0 million. For the nine months ended September 30, 2004, financing activities also included proceeds of a common share issue of $81.5 million, a decrease in other long-term liabilities of $10.0 million and a decrease in bank indebtedness of $20.4 million. For the three months ended September 30, 2003, financing activities included a $9.0 million repayment of the term loan and a decrease in bank indebtedness of $12.4 million. For the nine months ended September 30, 2003, financing activities consisted of payments on the term loan of $29.0 million and a decrease in bank indebtedness of $80.6 million.

Unused availability under the revolving credit facility at September 30, 2004 was $173 million compared to $172 million at June 30, 2004. The Corporation is required to maintain a minimum availability of $25 million.

Outlook—Spot prices for sheet are expected to decline from the peak reached in September with a strengthening Canadian dollar contributing to the decline. This factor, combined with the normal seasonal decline in shipments, may result in lower operating income in the fourth quarter.

The company's primary supplier of coal has advised the company that it will be unable to meet its delivery requirements for 2004 due to production problems at its mine. In order to avoid reduced cokemaking production levels in the first quarter of 2005 and protect the fuel supply for the blast furnace, Algoma intends to purchase approximately 40,000 tons of coal and 40,000 tons of coke on the spot markets for delivery by early 2005. This will contribute to an increased working capital investment in the fourth quarter. Despite this factor, the company expects the cash balance to increase substantially in the fourth quarter.