Algoma Steel Group, Inc. Q2 FY2027 earnings call

• Transition Milestones: The company successfully restored full generating capability at the Lake Superior Power plant on September 30 and achieved its first commercial heat from the new EAF Unit 2 on October 9. EAF Unit 2 is now part of the regular production schedule.
• Power Reliability Enhancements: Following an unplanned turbine outage in August, Algoma commissioned a replacement turbine and exercised an option to lease a third turbine. This adds redundancy, strengthens power system reliability, and ensures no interruption to steelmaking operations during repairs.
• Operational Discipline: Despite the power disruption, teams restarted the melt shop, completed tie-in work for EAF Unit 2, and advanced commissioning activities. The company views Q3 as the low point of the transition, with both EAF units now operational.
• Market Position & Strategy: As Canada’s only producer of discrete plate, the company maintains a strong position in domestic markets. The strategy remains 'Canada-centric plate-first,' supported by favorable government policies such as 'Buy Canadian' and 'Buy Ontario' procurement rules.
• Cost Structure: While unit costs were higher due to lower volumes and fixed cost absorption, underlying performance improved for the second consecutive quarter. The company expects structural cost advantages once fully ramped.

The company reported consolidated revenue of $249.4 million, with steel revenue comprising $218.2 million. Average net sales realization for steel was $1,510 per ton, representing an 11% increase from the second quarter and a 33.7% increase year-over-year. Total shipments were approximately 144,000 to 145,000 tons. Plate products accounted for approximately 105,000 tons, or roughly 73% of total shipments, driven by strong demand in infrastructure, construction, and defense sectors. Coil production remains a smaller portion of the mix as the company focuses on ramping up electric arc furnace (EAF) capacity.

• Volume Growth: Management expects fourth-quarter shipments to increase by approximately 25% to 35% compared to the third quarter, driven by the ramp-up of EAF Unit 2 and volume weighting toward November and December.
• EBITDA Improvement: A substantial improvement in underlying EBITDA (excluding capacity utilization adjustments) is anticipated in Q4 as volumes rise and transition costs are eliminated.
• Long-term Capacity Targets: By the end of 2027, management targets an average annual production run rate of 1.5 to 1.6 million tons, with potential upside to 1.8–1.9 million tons if the learning curve accelerates and demand supports it.
• Cost Trajectory: Current per-ton costs are elevated due to the ramp-up phase; however, costs are expected to decrease significantly in 2028 when additional power capacity comes online, aligning closer to original targets of scrap plus $220–$225.

• Operational Execution Risk: The transition to EAF steelmaking involves a steep learning curve, particularly in managing two furnaces with alternating arcing capabilities. Any delays in this learning process could impact efficiency and output.
• Power System Vulnerability: Although mitigated by recent investments, the previous turbine failure highlighted critical dependencies on internal power generation. Future outages, though unlikely given new redundancies, remain a risk.
• Market and Tariff Exposure: US Section 32 tariffs continue to impact export sales, causing an 83% decline in US-bound shipments. Changes in trade policies or tariff enforcement could affect profitability.
• Working Capital Fluctuations: Exogenous factors such as income tax refunds and legal settlements create volatility in working capital movements. Additionally, building raw material inventory to support ramp-up may temporarily strain cash flows.
• Regulatory and Policy Dependence: The company’s growth strategy relies heavily on government support, including the joint steel action fund and procurement policies. Delays or changes in these initiatives could slow diversification efforts.

Q: BMO asked about the volume ramp trajectory for next year and whether increased sheet production would pressure pricing. / A: Rajat Marwah stated that while the exit run rate for 2027 is targeted at 1.5–1.6 million tons, the average for the year may be around 1.2 million tons due to the ongoing learning curve of running two EAFs. Regarding pricing, he noted that market dynamics are influenced by multiple factors including government trade measures and TRQs. He emphasized that most historical sheet shipments went to the US, which has declined sharply, and that Algoma is disciplined in growing into existing customer relationships rather than flooding the market.

Q: Stifel inquired about the utilization of new government diversification funds and tangible evidence of demand from infrastructure projects. / A: Marwah confirmed that the company is actively engaging with the government to identify suitable programs for its beam mill (BMEL) diversification strategy, though specific project details remain confidential. On demand, he highlighted encouraging movement in orders from infrastructure and defense sectors. He attributed this growth partly to 'Buy Canadian' policies, which are expanding the customer base beyond traditional buyers and increasing order frequency.

Q: Stifel also questioned whether supply chain issues, specifically scrap procurement, were hindering the EAF ramp-up and what the upper limit of capacity flexibility might be. / A: Marwah clarified that scrap procurement has not been an issue; the primary constraint is the operational learning curve associated with alternating arcs between two furnaces. He noted that EAF Unit 2 is ramping faster than Unit 1 due to lessons learned. Regarding capacity, he suggested that while current expectations are conservative, the platform could theoretically reach 1.8–1.9 million tons if the ramp accelerates, though this timeline is uncertain.

Q: RBC Capital Markets sought clarity on the long-term cost structure at higher production volumes and the status of capacity utilization charges. / A: CFO Michael Moraca explained that the 'scrap plus $220–$225' cost target is achievable early in 2028 when new power capacity arrives. For 2027, costs will remain directionally higher due to the ramp-up phase. Regarding utilization charges, he confirmed there would be no add-back to EBITDA in Q4, as the company is driving down these costs despite still being on the ramp-up curve. Lower costs are expected as volume increases and productivity improves.

Q: Jefferies asked about the timing of maintenance deferrals post-outage and the expected working capital impacts from tax refunds and legal settlements. / A: Moraca indicated that significant tie-in work was completed during the August outage, preventing major maintenance deferrals. He noted that while raw material inventory will build slightly in Q4 to support ramp-up, exogenous inflows from finalizing the $35 million tax refund balance and the SunCoke settlement will offset some working capital pressures. He declined to specify the exact timing or amount of the SunCoke settlement outflow.