Algoma Steel Inc. reported net income of $89.1 million on revenues of $499.0 million for the three months ended March 31, 2005.

The $89.1 million net income ($2.20 per common share) compares to net income of $22.1 million for the first quarter of 2004 and net income of $122.2 million in the fourth quarter of 2004. Algoma says the decline in net income from the previous quarter was mainly due to higher production costs. EBITDA was $157.8 million compared to $59.9 million for the same quarter of 2004 and $191.2 million for the fourth quarter of 2004. Algoma attributes the significant improvement over the first quarter of 2004 to higher steel prices, partially offset by higher production costs and profit sharing expense, while the decline from the fourth quarter of 2004 was due mainly to higher costs related to raw material prices, energy, and pension and post-employment expense. Cash and short-term investments increased by $148.8 million, reaching $602.0 million at March 31, 2005 (approximately $15 per share).

Revenue of $499.0 million represents an increase of $161.2 million versus the three months ended March 31, 2004 and $9.2 million versus the fourth quarter of 2004. Algoma says the increase over the first quarter of 2004 was mainly the result of higher steel selling prices, whereas the increase over the previous quarter was due mainly to higher shipments. Average steel price per ton was $859 — $303 higher than the first quarter of 2004. Higher prices were realized on contract sales, but lower pricing for spot sales resulted in a decline of $19 per ton from the fourth quarter of 2004, although a higher percentage of non-prime sales accounted for most of the variance.

Steel shipments totaled 549,300 tons, up 25,400 tons from the previous quarter but down 23,800 tons from the first quarter of 2004. Excess steel inventories at the end of 2004 and weaker North American demand from several market sectors negatively impacted shipments in the first quarter of 2005, whereas demand was generally strong and growing during the first quarter of 2004.

Cost of sales was $327.0 million versus $263.9 million for the year-ago first quarter and $282.7 million for the fourth quarter of 2004. Algoma says the increase over the first quarter of 2004 was mainly attributable to higher unit costs and profit sharing expense, offset in part by lower shipments. The increase in cost of sales from the previous quarter was mainly attributable to higher unit costs and higher shipments.

Excluding profit sharing expense, cost of sales per ton shipped for steel products was $529 versus $423 for the first quarter of 2004 and $462 for the previous quarter. Algoma attributes the $106 per ton increase over the first quarter of 2004 to higher costs for iron ore, coal, alloys, employment expense and natural gas, while the $67 per ton increase over the three months ended December 31, 2004 was mainly attributable to higher costs for iron ore, coal, energy and employment expense. The increase in coal costs versus both quarters was attributable to the consumption of coal purchased at spot prices late in 2004 and early 2005 due to a temporary disruption in supply from the company's primary coal supplier. The incremental costs to the first quarter of 2005 associated with this coal approximate $15 per ton. The effect on first quarter earnings of an increase in iron ore prices of approximately 85% versus 2004 was minimized due to the consumption of inventory purchased at 2004 pricing. The estimated effect of the iron ore increase on first quarter earnings was approximately $10 per ton or $5 million with the full impact of the price increase to be reflected in cost of sales by the third quarter. Higher energy costs were due mainly to higher consumption patterns in the winter months. Higher employment expense in the first quarter of 2005 was mainly attributable to higher costs for pension and post-employment expense.

A $12.5 million ($23 per ton) expense for profit sharing was recorded in the first quarter versus a $2.3 million expense ($4 per ton) for the comparable period in 2004 and $15.6 million ($30 per ton) for the three months ended December 31, 2004.

Raw steel production totaled 638,000 tons versus 622,000 tons for the first quarter of 2004 and 648,000 tons for the previous quarter.

Administrative and selling expenses totaled $14.2 million as compared to $14.0 million for the first quarter of 2004 and $15.9 million for the previous quarter. The fourth quarter of 2004 included a reserve for executive and management bonuses of $1.5 million. Depreciation and amortization was $12.6 million for the quarter versus $14.0 million for the comparable period in 2004 and $10.9 million for the previous quarter. Additional expenses include a foreign exchange gain of $0.6 million, mainly attributable to long-term debt denominated in U.S. funds; and interest expense, net of interest income, of $1.3 million.

Algoma’s provision for income taxes was $56.0 million (38.6%) compared to $60.8 million (33.2%) in the fourth quarter of 2004 and $18.8 million (46.0%) in the first quarter of 2004. The variation in the effective tax rate from the statutory rate of 34% is primarily due to valuation allowances taken against future tax assets arising in periods after the application of fresh start accounting. The current portion of the provision in the quarter, which will result in cash taxes payable, was $13.5 million versus $0.9 million in the fourth quarter of 2004 and $0.5 million for the first quarter of 2004. Current federal taxes represent $10.3 million of the $13.5 million current provision and it is expected that the current federal tax liability for 2005 will accrue at the rate of approximately 22% of taxable income. The company had unutilized provincial non-capital loss carry-forwards of $130 million at March 31, 2005.

The tax benefit of losses from previous years and minimum tax credits totaling $19.8 million have been classified as a current asset as they are expected to reduce taxable income in the remainder of 2005. A future long-term tax liability of $139.6 million reflects cumulative tax depreciation deducted in excess of book amortization.

Cash provided by operating activities was $160.1 million compared to $9.1 million for the three months ended March 31, 2004. Non-cash operating working capital decreased by $4.5 million as compared to an increase of $48.9 million for the first quarter of 2004, with the decrease reflecting higher inventories and prepaid expenses, offset by increased amounts of accounts payable and taxes payable.

Inventories increased $34.4 million in the first quarter mainly due to rising iron ore prices and finished steel production costs and increases in iron ore and coke inventory levels. During the comparable period in 2004, inventories decreased by $14.5 million mainly due to a reduction in steel inventories. Steel shipments in the first quarter of 2004 were 23,800 tons higher than the first quarter of 2005.

Accounts receivable decreased $3.5 million, which compares to an increase of $63.7 million in the comparable period of 2004. Strong steel shipments and rising steel prices accounted for the significant increase last year.

Accounts payable and accrued liabilities increased $34.6 million as compared to an increase of $13.6 million for the comparable period in 2004. The increase includes $15.2 million due to an accrual for higher iron ore costs, representing the difference between the actual price increase of 85% and interim payments that are based on a 25% increase.

The increase in income and other taxes payable of $14.8 million was mainly attributable to two events. First, it reflects the fact that the company returned to a cash taxable position and is accruing current federal taxes payable. This liability will increase throughout 2005 as the payment will not occur until the first quarter of 2006. Second, there was a significant increase in payroll withholding taxes at the quarter-end associated with the payment of the balance owing on the 2004 profit sharing.

Investing activities included an increase in short-term investments of $114.1 million due to significant positive cash flow from operations. Capital expenditures were $11.9 million compared to $9.1 million for the same period in 2004. The company committed to a business systems renewal initiative in the first quarter that will likely span three to four years and cost approximately $33 million. Proceeds from the sale of capital assets in the quarter were $0.8 million resulting from the sale of surplus land. Proceeds on the sale of capital assets for the year-ago first quarter were $14.2 million related to the sale of tube mill assets and surplus land.

Unused availability under the revolving credit facility at March 31, 2005 increased to $176.1 million compared to $159.2 million at December 31, 2004 due to a reduction in the outstanding letters of credit. The company is required to maintain a minimum availability of $25 million.

Strategic Alternatives Review—Algoma is actively engaged in a review of strategic alternatives to maximize shareholder value. The review involves the evaluation and consideration of a full range of strategic alternatives, including capital spending alternatives, business combinations, acquisitions, sale, and other alternatives that may be in the best interest of Algoma shareholders, including maintaining the status quo. As part of this process, Algoma has initiated discussions with, and provided information to, a number of potential purchasers to gauge interest in a purchase of Algoma.

Algoma's Board of Directors has established a Special Committee of directors, composed of Ben Duster (as Chair), Patrick Lavelle and Jim Lawson, to oversee the strategic alternatives review, and has retained BMO Nesbitt Burns Inc. to assist in the process as financial advisor. Messrs. Duster, Lavelle and Lawson are all independent directors.

No decision on any particular strategic alternative has been reached at this time, and there can be no assurance that the review process will result in any change to Algoma's business strategy or in the consummation of any agreement or transaction.

Outlook—Lower earnings are expected in the second quarter due mainly to higher iron ore costs and a decline in steel prices. The cost of pellets purchased in 2005 is projected to increase by 85% over 2004 prices. The effect of the 85% cost increase for iron ore is dependent on a number of factors, but the current estimate indicates a cost increase in the second quarter of approximately $27 million versus the first quarter with a further increase of $8 million in the third quarter. The Company is accruing a liability for the difference between interim payments based on a 25% increase and the final cost increase of 85%. This liability is being accrued as ore is received with the related payment estimated at $47 million U.S. expected in the third quarter.

Selling prices for spot sales have declined each month to date in 2005, which will give rise to lower selling prices in the second quarter. Although excess inventories have been reduced in recent months, surplus inventories held by service centers continue to pressure steel prices. There are a number of factors such as lower imports into North America and some production cutbacks which may contribute to a stabilization of prices in coming months.

A significant increase to the amount of cash and short-term investments is expected in the second quarter, although the increase is anticipated to be less than experienced in the first quarter. Pension funding is expected to increase to $17.5 million in the second quarter from $7.6 million in the first quarter due mainly to a non-recurring payment of $7.0 million as a result of the recent filing of new actuarial valuations as at September 2004.