Algoma Steel celebrates badass quarterly profit

Algoma Steel Inc. ladled an impressive $214.2 million in profit from its Sault operations during the fiscal quarter ended June 30, 2021, the company announced after financial markets closed Thursday.

The $214.2 million net income, considered roughly equivalent to a company's take-home pay after deducting things like cost of goods sold, expenses, depreciation, amortization, taxes and interest, was up from $114 million in the prior quarter and from a $42.7 million loss in the quarter ended June 30, 2020.

"The extended strength we see in the steel market positions us favourably for our pending return to public markets," said chief executive officer Michael McQuade, referring to the steelmaker's hopes of becoming a publicly traded company later this year.

"Last month’s announcement of the Government of Canada’s anticipated $420 million in support for our proposed transition to electric arc furnace (EAF) technology, together with up to US$306 million of new equity capital that may be provided by our merger with Legato Merger Corp., is expected to make our sustainability transformation possible,” McQuade said in a written statement.

Algoma is attributing its improved results to strong demand for steel, improved shipments and better selling prices.

Shipments for the most recent quarter totalled 610,000 tones, up 47 per cent to 610,000 tons from the same quarter last year.

In another disclosure made Thursday, Algoma Steel revealed measures it's taken to respond to the COVID-19 pandemic, including:

• mandatory self-attestation and restricted eligibility for work for employees that fall under a self-isolation or quarantine scenario
• mandatory mask use in all shared areas
• visitor restrictions and protocols
• contractor self-attestation and pre-screening
• heightened sanitation protocols, including rotating deep-cleaning measures
• immediate intensive sanitation of an area where a worker has displayed symptoms
• physical distancing protocols for employees and essential service providers, including truck drivers and couriers
• staggered shift starts, lunches and breaks to reduce congestion in welfare facilities and lunchrooms
• mandatory personal protective equipment, including respirator, disposable coveralls, safety glasses, masks, when working within two metres of another person
• on-site worker transportation limit of two persons per vehicle, with mask usage
• revised vendor delivery protocols to provide for contactless delivery and maintain social distancing
• transitioned paper processes online
• facilitated work-from-home arrangements
• redesigned work station layout to provide for adequate spacing and limited pulpit occupancy
• directed teams to hold meetings via teleconference and video conference
• online training delivery
• an employee hotline where employees can call 24 hours a day with any questions or concerns

The company also made the following statements about some of the future risks it faces:

Protracted global recession or depression

The downturn in the global economy experienced during the second half of 2009 and the first half of 2010, and again in the first half of 2020, caused a sharp reduction in worldwide demand for steel. A protracted global recession or depression will have a material adverse effect on the steel industry and therefore the company.

The company’s activities and results are affected by international, national and regional economic conditions. The downturn in the global economy in 2009 sparked by uncertainty in credit markets and deteriorating consumer confidence, sharply reduced demand for steel products. This had a pronounced negative effect on the company and results of operations...

The COVID-19 pandemic which began during the first quarter of calendar year 2020 has since had a profound impact on economies worldwide. The manufacture of steel has been deemed to be an essential service by the government of Ontario, and the company has continued to operate.

However, at the onset of the pandemic and as the pandemic spread, slowdowns and disruptions in the operations of our customers led to a reduction in demand. Throughout the last six months of the year ended March 31, 2021 and continuing through the first three months ended June 30, 2021, demand and steel prices have increased.

However as the pandemic is ongoing, it is uncertain how the company will be impacted by the COVID-19 pandemic in the future. Disruptions in the company’s business activities, and costs incurred by the company in response to changing conditions and regulations and reduction in demand for the steel products the company manufactures could have a material adverse impact on our business, operating results and financial condition.

A significant and prolonged recession or depression in the United States and Europe, or significantly slower growth or the spread of recessionary conditions to emerging economies that are substantial consumers of steel (such as China, Brazil, Russia and India, as well as emerging Asian markets, the Middle East and the CIS regions) would exact a heavy toll on the steel industry.

Continued financial weakness among substantial consumers of steel products, such as the automotive industry and the construction industry, or the bankruptcy of any large companies in such industries, would have a negative impact in market conditions.

Protracted declines in steel consumption caused by poor economic conditions in North America or by the deterioration of the financial condition of our key customers would have a material adverse effect on demand for the Company’s products and hence on its results.

Steel companies have significant fixed costs, which are difficult to reduce in times of reduced demand. However, the company could implement a variety of measures in response to a market downturn and a decline in demand for steel products.

These measures might include: curtailing the purchase of raw materials; spreading raw material contracts over a longer period of time; reducing capital spending; negotiating reduced pricing for major inputs, reducing headcount through temporary layoffs, limiting overtime and reducing use of contractors; managing fixed costs with changes in production levels; improving operational practices to reduce lead time; and venturing into export markets in order to increase capacity utilization.

However, these initiatives may not prove sufficient, in terms of cost reduction or in realigning the company’s production levels with reduced demand, to achieve profitability and maintain cash flow necessary to pay for capital expenditures and other funding needs.

Labour interruptions and difficulties

The company has 2,696 full-time employees as of June 30, 2021, of which 2,569, representing 95 per cent of the company’s employees, are represented by two locals of the United Steelworkers of America (“USW”) under two collective bargaining agreements. On June 26, 2018, Local 2251 members and Local 2724 members voted to ratify new five-year collective bargaining agreements.

The agreements with Local 2251 and Local 2724 expire on July 31, 2022.

Our customers, or companies upon whom the company is dependent for raw materials, transportation or other services, could also be affected by labour difficulties. Any such activities, disruptions or difficulties could result in a significant loss of production and sales and could have a material adverse effect on the company’s financial condition or results of operations.

All the company’s operations are conducted at one facility and are subject to unexpected equipment failures and other business interruptions

The company’s manufacturing processes are dependent upon critical steelmaking equipment such as furnaces, continuous casters, rolling mills, and electrical equipment (such as transformers), and this equipment may incur downtime as a result of unanticipated failures. Old Steelco Inc. [Essar Steel Algoma Inc.] experienced plant shutdowns or periods of reduced production as a result of such equipment failures.

The company has insurance coverage for property damage and business interruption losses. Business interruption provides coverage for loss of gross profit resulting from the interruption of business operations.

During April 2019, Algoma experienced an unplanned outage that disrupted production in our #7 blast furnace. The resulting lost production led to a shipping volume reduction during the three-month period ended June 30, 2019, of over 100,000 tons.

During April 2019, the company recorded a capacity utilization adjustment of $32.7 million to cost of steel products sold. The outage was the result of operator error causing a chemistry imbalance of certain materials.

During fiscal year 2012, a substantial number of stack plate coolers were replaced and a leak detection system was installed at Blast Furnace #7. This program has continued into the current fiscal year. The purpose of these measures is to detect and prevent incidents of water into the furnace hearth.

On Jan. 21, 2011, Blast Furnace #7 experienced significant water leakage and this ultimately led to the chilling of the furnace. Production of raw steel was halted for 23 days with production returning to normal after 33 days.

Unexpected interruptions in production capabilities and unexpected failures in the company’s computer systems would adversely affect productivity and results of operations for the affected period.

No assurance can be given that a significant shutdown will not occur in the future or that such a shutdown will not have a material adverse effect on the company’s business, financial condition or results of operations.

We are dependent upon a small number of customers

The company’s top 10 customers for the three-month periods ended June 30, 2021 and June 30, 2020, accounted for approximately 49.7 per cent and 48.8 per cent, respectively, of sales.

Accordingly, a disruption of sales to certain of these customers could have a material adverse effect on the company’s results of operations and financial condition, particularly given the current economic environment.

Supply and cost of raw materials and energy could have negative impact on the company’s results of operations

Our operations require substantial amounts of raw materials and energy including coal, iron ore, alloys, scrap, oxygen, natural gas, electricity and other inputs.

The price and availability of such raw materials and inputs are subject to market forces and, in some cases, government regulations and accordingly, are subject to change.

The company’s results of operations could be adversely affected by supply interruptions. There can be no assurance that adequate supplies of oxygen, electricity, natural gas, coal, iron ore, alloys and scrap will be available in the future or that future increases in the cost of such materials will not adversely affect the company’s results from operations.

Any increases in annual funding obligations resulting from the company’s under-funded pension plans could have a material adverse effect

We have an under-funded defined benefit pension liability which could increase due to changes to the company’s collective bargaining agreements, a decline in interest rates, investment returns at less than the actuarial assumptions, or changes to the governmental regulations governing funding and other factors.

Although the Province of Ontario has amended regulations relating to company’s defined benefit pension plans which set out a maximum annual contribution amount in respect of special payments as disclosed in Note 22 to the March 31, 2021 audited consolidated financial statements, the company could be adversely affected by increases in annual funding obligations.