Stelco Inc. reported net earnings of $58 million on net sales revenue of $953 million in the third quarter ended September 30, 2004.

Third Quarter Results—Net earnings, $58 million ($0.57 per common share), compare with $42 million net earnings in the second quarter of 2004 and a net loss of $42 million ($0.44 per common share) in the third quarter of 2003. Net short-term debt improved by $10 million from the previous quarter.

Net sales revenues were $953 million compared with $650 million for the same period last year. The 47% increase in sales is primarily attributed to increased selling prices including surcharges, of which $16 million pertained to earlier quarters.

Factors which partially offset the positive effect of higher selling prices and surcharges in the third quarter 2004 included:

• A significant portion of the input costs incurred in that period in inventory and would have a negative impact on future periods. This high-cost inventory flowed through in the third quarter.
• Costs at the company’s mining properties were higher due to the strike at Wabush and the recording of certain pension liabilities associated with the closed Chisholm coal mine.

Shipments in the third quarter were 63,000 tons lower than the second quarter, primarily due to a shortage of steel inventory resulting from the June blast furnace outage at Lake Erie.

Operating earnings were $102 million in the third quarter 2004 compared with operating earnings of $73 million in the second quarter of 2004. Operating earnings improvement of $44 million in the Integrated Steel segment was offset by a decrease in the Minimill and Manufactured Products segments of $5 million and $10 million respectively. The Mini-mill segment was negatively impacted by higher scrap prices and lower shipments at Norambar partly offset by increased revenue per ton. The Manufactured Products segment was negatively impacted by lower production at Stelpipe, and lower shipments at Stelpipe, Stelwire and Stelfil.

Production was 1,385,000 semi-finished tons, up from the 1,244,000 tons produced during the same period in 2003. The August 2003 power outage and various September operational issues in the Integrated Steel segment impacted the year-earlier period.

Nine Month Results—Year-to-date net earnings of $64 million ($0.62 per common share) compare with a net loss of $169 million ($1.73 per common share) for the same period in 2003. Net short-term debt has deteriorated by $19 million since the beginning of the year. Sales amounted to $2,611 million, 28% higher than the $2,043 million achieved in the first nine months of 2003.

Liquidity—During the quarter, Stelco's net short-term debt position improved by $10 million from the previous quarter. Most of the cash flow generated from higher margins in the third quarter was required to finance higher working capital, primarily inventories.

At September 30, 2004, the corporation's consolidated net liquidity was $257 million compared with $242 million as at June 30, 2004. The net liquidity of the Applicants involved in proceedings under the Companies' Creditors Arrangement Act (CCAA) at September 30, 2004 was $199 million, compared with $189 million as at June 30, 2004.

Comments—Courtney Pratt, Stelco President and CEO, said, "Unprecedented high steel prices driven by strong demand and lack of steel availability have resulted in Stelco achieving positive earnings during the third quarter. We are making progress on our restructuring with the closing of the No. 2 Rod Mill in September 2004, reducing the workforce by over 500 people to date in 2004 through attrition, and by moving the Corporate office to available premises on Wilcox Street at Stelco Hamilton."

Capital Raising Process—On October 19, 2004, the Stelco Applicants received Court approval for a process designed to raise capital and to pursue the sale of non core assets. The process, among others, contemplates the following possible transactions:

• Raising a minimum of $200 million of new equity in the restructured Stelco either through an underwritten rights offering and/or an equity solicitation process.
• Sale of non-core subsidiaries including Stelpipe, Stelwire, Stelfil, AltaSteel, Norambar and the corporation's 40% interest in Camrose Pipe.
• Joint ventures involving Stelco.
• A combination of the above, including a sale of Stelco.

In order to implement the strategic plan, a significant capital expenditure program is required to upgrade Stelco's capabilities, replace obsolete facilities and lower production costs. The corporation believes that the capital expenditure program will cost between $360 and $465 million and will take 18 to 24 months to implement after the necessary capital has been raised. Stelco believes that raising this level of capital will only be possible if it restructures.

Mr. Pratt stated, "The corporation is continuing to pursue the capital raising and asset sale process that was approved by the Court on October 19, 2004. To ensure a positive outcome of the restructuring process and a significant reduction of our overall cost structure, the corporation will require an extension of the stay period beyond November 26, 2004. If the corporation loses Court protection before it can secure a positive outcome from the restructuring process, it currently does not have the financial resources to fund such a precipitous event."

Uncertainty remains as to whether existing common shares of the company will have value upon implementation of a restructuring plan. In the meantime, the capital raising process, which has been commenced, may provide a meaningful indication as to the value, if any, of such equity.

Stelco Inc. is a large, diversified steel producer involved in major segments of the steel industry through its integrated steel business, minimills, and manufactured products businesses.