Nov. 2, 2006 — Algoma Steel Inc. reported net income of $59.5 million on revenue of $516.9 million for the three months ended September 30, 2006.

The $59.5 million net income ($1.61 per common share on a diluted basis) compares to net income of $79.2 million in the second quarter of 2006 and $30.8 million in the third quarter of 2005. EBITDA was $112.3 million, which compares to $124.1 million in the second quarter of 2006 and $62.8 million in the third quarter of 2005.

Algoma attributes the decrease in net income primarily to higher costs and a higher provision for income taxes, partially offset by higher prices. Higher costs were mainly due to higher coal costs ($5.0 million) and the effect of several adjustments, recorded in the second quarter, totaling approximately $11.4 million. The second quarter adjustments were related to research and development tax credits and a municipal tax refund totaling $8.4 million, and a $3.0-million retroactive decrease to the price of iron ore in 2006. The $341.4-million reduction from the cash balance at June 30, 2006 was due to the $200.0-million substantial issuer bid. The company generated $82.4 million cash from operations versus $90.1 million cash from operations for the second quarter. The company ended the period with a cash balance of $209.3 million as of September 30, 2006.

Comments—“Results were in line with our expectations as demand and pricing remained solid through the quarter,” commented Denis Turcotte, President and CEO. “Early indicators are that demand from service centers and the auto sector will continue to be soft through the fourth quarter as these customers try to work down their inventories. This will result in pressure on pricing and, as required, a corresponding reduction in our sales volumes as we maintain our focus on profitability. Although we are concerned that the current market weakness may extend into the new year, we continue to be optimistic about the mid- and longer-term dynamics of the industry.”

Income from operations and net income, on a per share basis, reflect the impact of share buybacks. In 2005, during August through October, the company purchased 1,590,100 shares under a normal course issuer bid. During 2006, the company has purchased 1,242,400 shares under a normal course issuer bid during May and June and purchased 5,479,452 shares under a substantial issuer bid in September 2006.

Third Quarter Results—Net income of $59.5 million compares to net income of $79.2 million for the second quarter of 2006 and net income of $30.8 million for the comparable quarter of 2005. The decrease in net income was mainly due to higher costs and a higher effective tax rate, partially offset by higher average selling prices. The increase in cost of sales was primarily due to the recognition in the second quarter of a total of $8.4 million related to the benefit of research and development tax credits and municipal tax refunds, a $3.0 million retroactive decrease to the price of iron ore, and approximately $5.0 million of increased coal costs. The increase in earnings versus the year-ago quarter was primarily due to higher selling prices, higher shipments, decreased cost of iron ore and decreased natural gas costs, partially offset by an increase in coal costs.

Revenue of $516.9 million is $12.1 million higher than the previous quarter and $70.5 million higher than the comparable period in 2005. The increase from the previous quarter was the result of higher average selling prices, offset by a slight decrease in volume. The increase over the third quarter of 2005 was the result of higher pricing, increased shipments, and a higher proportion of plate shipments that increased to 21.9% of shipments from 18.7% in the comparable quarter in 2005. Steel prices, which averaged $774 per ton, compare to prices of $753 per ton in the previous quarter and $695 per ton in the third quarter of 2005. Steel shipments totaled 622,000 tons, which was 3,000 tons lower than the second quarter of 2006 but 34,000 tons higher than the third quarter of 2005.

EBITDA was $112.3 million, which compares to EBITDA of $124.1 million for the previous quarter and EBITDA of $62.8 million for the third quarter of 2005. The decline from the previous quarter was mainly attributable to higher costs (primarily coal, alloys and labor) and the impact of $11.4 million in earnings adjustments in the second quarter, partially offset by higher pricing. The improvement from the year-ago quarter was mainly due to higher selling prices, the effect of higher shipments, and a decline in manufacturing costs resulting primarily from lower natural gas costs and iron ore, offset by higher coal costs.

Coke sales amounted to 10,500 tons, contributing $2.6 million to EBITDA versus coke sales of 10,900 tons in the second quarter that contributed $3.0 million to EBITDA. Coke sales in the third quarter of 2005 totaled 25,500 tons and contributed $7.1 million to EBITDA.

Cost of sales before employees' profit sharing was $378.4 million, which compares to $351.2 million for the second quarter of 2006 and $363.9 million for the third quarter of 2005. The increase over the second quarter of 2006 was mainly attributable to the recognition in the second quarter of the benefit of research and development tax credits and a municipal tax refund as noted above, and the retroactive settlement of 2006 iron ore pricing which resulted in an adjustment to second quarter cost of sales of approximately $3.0 million that related to iron ore consumption in the first quarter of 2006. Approximately $5.0 million higher costs for coal also contributed to the increase. The increase over the year-ago quarter was primarily due to higher shipments and higher coal costs, offset by lower costs for natural gas and iron ore.

Excluding employees' profit sharing expense, cost of sales per ton shipped for steel products was $556 per ton, which compares to $512 per ton for the previous quarter and $567 per ton for the comparable period in 2005. Variances from the previous quarter and the comparable period in 2005 were due mainly to the factors noted above.

The company had inventory of 66,000 tons of purchased slabs at September 30, 2006 compared to 49,000 tons at June 30, 2006 and 5,000 tons at September 30, 2005. Approximately 70,000 tons of finished goods produced from purchased slabs were sold in the third quarter and these additional sales generated approximately an additional $4.4 million of operating income. This compares to approximately 40,000 tons of finished goods produced from purchased slabs in the second quarter generating approximately $3.0 million of operating income. On a year-to-date basis, approximately 145,000 tons of finished goods produced from purchased slabs have been sold generating approximately $10.4 million of operating income.

An $8.4 million ($14 per ton) expense for employees' profit sharing was recorded in the third quarter, which compares to a $10.7 million expense ($17 per ton) for the second quarter and $4.4 million ($7 per ton) for the three months ended September 30, 2005.

Raw steel production totaled 662,000 tons, which compares to 665,000 tons for the previous quarter and 628,000 tons for the third quarter of 2005. For the nine months ended September 30, 2006, raw steel production was 1,964,000 tons versus 1,906,000 tons for the same period in 2005.

Administrative and selling expenses totaled $17.8 million, which compares to $18.8 million expenses for the three months ended June 30, 2006 and $15.3 million for the comparable period in 2005. For the first nine months of 2006, administrative and selling expenses totaled $54.1 million, $9.8 million higher than the comparable period in 2005. Expenditures were higher than the comparable periods in 2005 mainly due to higher consulting and legal fees related to strategic activities, higher stock compensation expense and higher expenditures associated with the process re-engineering aspects of the company's business systems renewal project.

An additional $50.0 million pension contribution in the fourth quarter of 2005 resulted in the reduction of valuation allowances against future income tax assets and a reduction in the tax expense in the fourth quarter of 2005. This prepayment of a portion of the 2006 funding obligation eliminated normal pension funding in the first nine months of 2006 and has resulted in an increase to the income tax provision. The current portion of the income tax provision in the quarter, which will result in cash taxes payable, was $37.5 million versus $40.5 million in the second quarter of 2006 and $14.6 million for the third quarter of 2005. The effective tax rate for the third quarter of 2006 is higher than the company's statutory rate of 34% due mainly to a valuation allowance being taken against future tax assets arising in the period. The company will be reviewing the requirement for valuation allowances against future income tax assets in the fourth quarter. To the extent that it is determined that these allowances should be reduced, the fourth quarter income tax provision would be reduced accordingly.

Included in the current future tax asset at September 30, 2006 is a $2.3 million tax benefit relating to provincial minimum tax credits that is expected to be realized in the fourth quarter of 2006. The long-term future income tax liability of $123.3 million at September 30, 2006 primarily reflects cumulative tax depreciation deducted in excess of book amortization.

Cash provided by operating activities was $82.4 million, which compares to $35.4 million for the three months ended September 30, 2005. The increase was mainly due to higher income and lower pension funding in the third quarter of 2006 and the payment of $10 million of deferred compensation in the third quarter of 2005. Non-cash operating working capital increased by $14.2 million in the quarter as compared to an increase of $7.8 million for the third quarter of 2005. The increase in the quarter was mainly attributable to an increase in inventories and a decrease in accounts payable and accrued liabilities, offset by a decrease in prepaid expenses and an increase in income and other taxes payable.

Inventories increased $47.0 million in the quarter compared to an increase of $24.6 million in the third quarter of 2005. The increase was mainly due to higher quantities of internally-produced slabs, purchased slabs, coal, iron ore and scrap. Accounts payable and accrued liabilities decreased by $9.7 million compared to an increase of $5.3 million for the comparable period of 2005. The decrease in the quarter was primarily due to a decrease in payables related to timing of receipt of raw materials and payment terms, offset by an increase in the profit sharing accrual. The increase in 2005 was mainly due to the timing of payments.

Prepaid expenses decreased by $10.5 million compared to a decrease of $12.1 million in the third quarter of 2005. The decrease in 2006 was mainly due to the reduction of a prepayment for purchased slabs and a reduction in the amount of iron ore payments in excess of actual receipts of iron ore. The decrease in 2005 was mainly due to a lower prepayment for iron ore. Income and other taxes payable increased by $32.3 million compared to an increase of $12.4 million in the third quarter of 2005. The increase in both years related primarily to an increased accrual for current income taxes.

Unused availability under the revolving credit facility at September 30, 2006 declined to $179.3 million compared to $190.9 million at June 30, 2006 due to an increase in the outstanding letters of credit.

Outlook—Lower operating income is expected in the fourth quarter (as compared to the third quarter), driven primarily by lower steel pricing realizations and lower shipments. Selling prices and costs are subject to a high degree of variability.

With abnormally high service center inventories, reduced demand from the automotive sector, and continued high import levels, current market conditions indicate a decline in pricing. The company expects steel shipment levels to decline in the fourth quarter as it manages shipment levels in the context of pricing changes and, in part, due to seasonal factors. As a result, the company expects lower selling prices and shipments in the fourth quarter. Coke shipments for the fourth quarter are expected to be 10,500 tons.

Higher costs are expected in the fourth quarter due mainly to higher coal costs as the full effect of the new coal contract entered into earlier in 2006 is realized.

Algoma currently projects that it will shut down its blast furnace for approximately 25 days in mid-2007 to perform work related to extending the blast furnace reline to 2010 or later. The company continues to assess the scope and estimated costs related to this outage.