Algoma Steel Inc. reported net income of $30.8 million on revenue of $446.4 million for the three months ended September 30, 2005.

Third Quarter Results—The $30.8 million net income ($0.77 per common share) compares to net income of $64.7 million in the previous quarter (second quarter of 2005) and $121.6 million in the third quarter of 2004. EBITDA was $62.8 million compared to $119.1 million in the previous quarter and $202.0 million in the year-ago third quarter. The decline from the previous quarter was due mainly to lower steel prices. Cash and short-term investments decreased by $247.1 million to $453.1 million at September 30 due mainly to the payment of $238.2 million for a special dividend and the purchase of 1.2 million shares at a cost of $29.9 million.

Raw steel production totaled 628,000 tons versus 639,000 tons for the previous quarter and 650,000 tons for the third quarter of 2004. Market conditions resulted in the decision to shift maintenance activities planned for the fourth quarter to the third quarter.

Revenue of $446.4 million reflects a $48.2 million decrease compared to the three months ended June 30, 2005, and an $89.3 million decrease compared to the third quarter of 2004. The decrease from the previous quarter was the result of lower average steel prices and lower by-product sales, offset in part by higher steel shipments. The decrease over the third quarter of 2004 was mainly the result of lower steel prices, offset in part by higher steel shipments.

Steel prices averaged $695 per ton, which compares to $806 per ton in the previous quarter and $895 per ton in the third quarter of 2004. Steel shipments totaled 588,100 tons, which is 25,400 tons higher than the second quarter of 2005 and 30,000 tons higher than the third quarter of 2004. Steel inventories dropped 35,200 tons during the quarter.

EBITDA was $62.8 million compared to $119.1 million for the previous quarter and $202.0 million for the third quarter of 2004. The decline from the previous quarter was mainly due to lower steel selling prices. The decline from the comparable quarter in 2004 was mainly attributable to lower steel selling prices and higher production costs, offset in part by higher steel shipments and lower employees' profit sharing. Sales of coke totaled 25,500 tons (27,000 tons in the second quarter) and generated approximately $7 million of EBITDA which is little changed from the second quarter.

Cost of sales before employees' profit sharing was $363.9 million versus $352.0 million for the second quarter of 2005 and $299.4 million for the third quarter of 2004. The increase over the second quarter of 2005 was mainly attributable to higher shipments of steel products. The increase over the comparable period of 2004 was mainly attributable to higher unit costs and higher steel shipments.

Excluding employees' profit sharing expense, cost of sales per ton shipped for steel products was $567 for the three months, unchanged from the second quarter of 2005 and up $87 from the comparable period in 2004. Cost increases for iron ore in the quarter were offset due largely to a strengthening of the Canadian dollar versus the U.S. dollar. The increase over the third quarter of 2004 was mainly attributable to higher costs for iron ore and certain other raw materials, natural gas and higher maintenance costs.

Versus the third quarter of 2004, the Canadian dollar was 8.8% stronger on average versus the U.S. dollar which resulted in a mitigating effect on input costs that are U.S. sourced.

A $4.4 million ($7 per ton) expense for employees' profit sharing was recorded in the third quarter versus an $8.7 million expense ($15 per ton) in the second quarter and $21.7 million ($39 per ton) for the three months ended September 30, 2004. Administrative and selling expenses totaled $15.3 million as compared to $14.8 million for the three months ended June 30, 2005 and $12.6 million for the comparable period in 2004.

Nine Month Results—Net income for the nine months ended September 30, 2005 was $184.6 million as compared to $221.6 million for the comparable period in 2004. The drop in net income was mainly due to higher production costs, offset in part by higher steel prices, lower profit sharing expense and an increase in investment income. Raw steel production was up 21,000 tons versus the comparable period of 2004, totaling 1,906,000 tons.

Revenue totaled $1,440.0 million as compared to $1,313.3 million for the same period last year. Steel prices averaged $785 per ton, as compared to $725 per ton for the comparable period in 2004. Steel shipments totaled 1,700,200 tons, an increase of 25,900 tons from the nine-month period ended September 30, 2004.

Cost of sales per ton shipped for steel products (excluding employees' profit sharing expense) was $555, which was $104 per ton higher than the comparable period in 2004. The increase was mainly due to higher costs for iron ore, coal, alloys, scrap and employment expenses. A stronger Canadian dollar versus the U.S. dollar (8.5%) provided some relief from higher input prices for most raw materials.

Employees' profit sharing expense totaled $25.6 million ($15 per ton) as compared to $36.1 million ($22 per ton) for the comparable period in 2004. Administrative and selling expenses totaled $44.3 million, $8.1 million higher than the comparable period in 2004. Expenditures were higher than the comparable periods in 2004 mainly due to higher consulting and legal fees associated with the company's strategic alternatives review, higher stock compensation expense and expenditures associated with the business systems renewal project.

Comments—Denis Turcotte, President and CEO, commented, "Despite lower steel prices as a result of a softening market, we were able to generate positive cash flow and net income in the quarter. In addition, we were able to return a significant amount of capital to our shareholders and are positioned to redeem the 11% Notes in January 2006. We will continue to focus on cost reduction and developing market opportunities in order to mitigate the effects of continued escalation to the price of raw materials and energy."

Algoma's profitability is highly correlated with the level of steel prices. Raw material and energy costs have also emerged as significant factors in the past year. Industry pricing is largely dependent on global supply, the level of steel imports into North America and economic conditions in North America. Since U.S. markets establish pricing levels, the exchange rate of the Canadian dollar to the U.S. dollar significantly impacts pricing realizations for Canadian producers.

Pricing levels increased in the fourth quarter of 2003 and throughout the first three quarters of 2004 due to stronger global markets, particularly China, and improved steel demand in North America. Excess steel inventories at the end of 2004 and weaker North American demand from several market sectors contributed to lower prices in 2005, reaching a low in August 2005 as excess inventories were depleted. Higher contract prices partially offset the effect of declining spot prices in 2005. The company began selling coke in 2004 capitalizing on the strong demand for coke and an increase in cokemaking capacity.

The cost of raw materials and natural gas escalated in 2004 as input prices responded to the stronger demand. Iron ore and coal costs increased significantly in the first half of 2005. The company purchased 117,000 tons of coal late in 2004 and early 2005 at spot prices (which were up to 85% higher than 2004 contract prices) due to a temporary disruption in supply from the company's primary coal supplier. In addition, the company has estimated purchases of 232,000 tons of coal in the second half of 2005 with most of the related cost penalty expected during the fourth quarter.

The high level of operating income realized in 2004 and 2005 resulted in a profit sharing expense in each quarter. There was no profit sharing in 2003.

Outlook—Algoma notes that steel prices appear to have bottomed in August with higher steel prices expected in the fourth quarter, but expects that higher costs for natural gas and purchased coal will offset much of the benefit of higher selling prices.

The company had hedges for approximately 15% of its gas purchases for October, but is unhedged beyond that point. The price of gas reflected in cost of sales in the third quarter approximated $7.00 U.S. per MMBTU. To mitigate the increase in natural gas costs, the blast furnace was moved from a high natural gas fuel mix to a high coke fuel mix with less natural gas usage. The change in fuel mix is expected to reduce natural gas consumption from about 46,000 MMBTUs per day to approximately 37,000 MMBTUs per day. The increased coke usage is expected to result in a significant reduction to coke sales in 2006. The company has purchased approximately 232,000 tons of coal at an estimated cost penalty of $10 million versus the fixed price contract. Most of this higher cost of coal is expected to be absorbed through cost of sales in the fourth quarter.

The company expects to distribute approximately $17 million of the $25.6 million accrued for profit sharing as of September 30 to employees in the fourth quarter.