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Stelco Continues to Struggle Through Restructuring Issues

May 25, 2004 — Ernst & Young Inc. has released its Fourth Report of the Monitor on Stelco Inc.’s Court-supervised restructuring under the Companies' Creditors Arrangement Act.

In its update, the Monitor reported that Stelco has initiated or continued discussions with representatives of a number of stakeholders including Active Salaried Employees; Retired Salaried Employees; Locals of the USWA; banks; bondholders; and the governments of Hamilton, Ontario and Canada.

Stelco advised the Monitor that it would like to provide representatives of the USWA Locals with its Stakeholder Presentation if appropriate confidentiality arrangements are entered into. Stelco has offered to meet with these representatives to review the presentation and discuss which segments would need to be covered by a confidentiality agreement, however, the Monitor is advised that this issue has not been resolved. The Monitor also reports that although Stelco has also offered to meet with the representatives of the Locals and to provide them with the non-confidential elements of a Pension Plan Presentation, no such meeting has occurred.

Other significant issues addressed in the report, as outlined below, included the collective bargaining situation at Lake Erie Works; rising steel prices and rising costs; production, shipments and cash flow forecasts; Welland Pipe; and the sale of CHT real property.

Lake Erie collective bargaining agreement—The Monitor reports that USWA Local 8782 has indicated that it desires to bargain for a new collective bargaining agreement. The Monitor understands that Stelco has advised the Local of the view that, in light of Stelco's circumstances, it would be more practical and appropriate to discuss the Lake Erie bargaining agreement in the context of the broader discussions the company wishes to have with all stakeholders, including the other USWA Locals, as part of the restructuring process. The Monitor understands that Local 8782 does not wish to proceed with collective bargaining discussions within that wider context, and has submitted a request for the appointment of a Conciliation Officer. The Monitor notes that Stelco has taken the position that the request is stayed pursuant of the terms of the Initial Order issued by the Court on January 29, 2004. The Ontario Ministry of Labour has yet to respond to the request.

Although Stelco and the USWA Locals have made some progress in having preliminary discussions regarding the restructuring process, the Report states that "...the Monitor is concerned with the lack of tangible progress that has been made." The Report also adds that "The potential expiry of the Lake Erie collective bargaining agreement must be addressed forthwith," noting that, "In all likelihood, a strike of any length would result in the liquidation of Stelco."

The Monitor agrees with the Ontario Government that the appointment of a neutral third party mediator would be a positive step in assisting Stelco and the USWA Locals to commence meaningful dialogue with respect to the restructuring. However, the Report notes the Monitor's concern that the other stakeholders must ultimately be involved in the restructuring process once the discussions between Stelco and the USWA Locals have reached a point where the participation of the other stakeholders is warranted.

Other parties including automotive customers have expressed concern about the uncertainty at Lake Erie, the nature of the discussions that should be held, and continuity of supply. In addition, the Monitor has had discussion with Counsel to a group representing a portion of the holders of Stelco’s senior unsecured debentures. That Counsel has expressed the belief that if restructuring discussions are to be successful they must provide for the involvement of all significant stakeholders.

Rising steel prices, rising costs—The Monitor reports that customers and suppliers have continued to support and maintain business relations with Stelco. Revenues continued to improve in April due to price increases in an environment marked by strong customer demand for steel products. The Monitor notes that it is not clear how long these conditions will prevail given the volatile nature of worldwide steel markets. The Report adds that revenues also rose due to surcharges invoiced to customers in order to recover increased production costs.

The Monitor reports that Stelco continues to incur substantially higher costs, driven in part by unprecedented cost increases for such raw materials as scrap and coke. Production costs remain high relative to other North American producers against whom the company must compete.

The Report notes that, since December 2003, Stelco has increased the use of its credit facilities despite the strong market conditions and improved production levels.

Production and shipments—The Monitor reports that semi-finished steel production for Stelco's integrated steel operations (Hamilton and Lake Erie) during the month of April totaled 369,293 net tons. Production for the first four months of 2004 totaled 1,501,663 net tons, compared to 1,471,812 net tons produced during the same period in 2003. Shipments in April stood at 354,129 net tons. Shipments for the first four months of this year totaled 1,395,578 net tons, compared to 1,351,469 net tons shipped during the same period last year.

Cash flow forecasts—The Monitor reports the company's forecast that the total facility utilization of the Existing Stelco Financing Agreement will increase by $20.6 million during the period starting May 15, 2004 and ending September 30, 2004, and will peak at $295.6 million during the same period. This figure could vary substantially depending upon the timing of working capital fluctuations during this period. Based on Stelco's current cash flow projections, the company forecasts that it will not need to draw on the DIP Facility through the period ending September 30, 2004.

Sale of Welland Pipe assets—The Report notes that due to the lack of market demand in North America for very large diameter pipe, the decision to close the operations of Welland Pipe, located in Welland, Ont., was announced in March 2003. Since that time, Stelco has worked to find a buyer for both of Welland Pipe's steel fabricating mills - the Spiral Pipe Mill and the U&O Mill. The Monitor reports that Welland Pipe is currently negotiating with a potential buyer of the Spiral Pipe Mill and hopes to be in a position to seek the Court's approval of a sale transaction on May 27, 2004. The Report adds that it is anticipated that a formal sale process for the sale of the U&O Mill will be implemented in the near future.

Sale of CHT real property—Facilities of this subsidiary specializing in the heat-treating of steel Plate have been idled and will not reopen. Further to a previously announced decision, the Monitor reports that the company has recently listed CHT's real property for sale with a listing price of $3.25 million. Seven offers have been received, none of which are acceptable to CHT. The Monitor is advised that further negotiations are continuing with interested parties.

Stelco Inc. is a large and diversified Canadian steel producer. It is involved in all major segments of the steel industry through its integrated steel business, mini-mills, and manufactured products businesses. Consolidated net sales in 2003 were $2.7 billion.

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