Algoma Steel Group (ASTL) Q3 2026 earnings call transcript

Good morning, everyone, and welcome to Algoma Steel Group Bank's third quarter 2026 earnings conference call. My name is Laura Devoney, Vice President of Human Resources and Corporate Affairs, and I will be moderating today's call. Leading the prepared remarks are Rajat Marwa, our Chief Executive Officer, and Mike Marocca, our Chief Financial Officer. As a reminder, this call is being recorded and will be made available for replay later today in the Investor Section of Algoma Sales Corporate Website at ir. algoma. com.

I would like to remind you that comments made on today's call may contain forward-looking statements within the meaning of applicable securities laws, which involve assumptions and inherent risks and uncertainties.

Actual results may differ materially from statements made today. In addition, our financial statements are prepared in accordance with IFRS, which differs from U. S. GAAP, and our discussion today includes references to certain non-IFRS financial measures. Reconciliations of these measures to the most direct comparable IFRS measures are included in our press release, MD&A, and earnings presentation. Last evening, we posted an earnings presentation to accompany today's prepared remarks.

The slides for today's call can be found in the Investors section of our corporate website. With that in mind, I would ask everyone on today's call to read the legal disclaimers on slide 2 of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in Algoma Steel's 3rd Quarter 2026 Management's discussion and analysis. Please note that our financial statements are prepared using the U. S. dollar as our functional currency and the Canadian dollar as our presentation currency.

Please also note that amounts referred to on today's call are in Canadian dollars unless otherwise noted. Following our prepared remarks, we will conduct a question and answer session. I will now turn the call over to our Chief Executive Officer, Rajat.

Thank you, Laura, and good morning, everyone. Thank you for joining us to discuss our third quarter 2026 results. As always, I want to begin with safety. This quarter asked a lot of our people.

In a matter of weeks, our teams restarted the melt shop after a power disruption, commissioned a replacement turbine at the Lake Superior power plant, and bought EF Unit 2 to First Sending every employee home safely every day is just as important to us as any of those milestones. I'm proud of the discipline our teams showed through our demanding quarter. Our results for the third quarter came in line with the guidance we provided earlier this month, and our underlining performance improved again. Volumes reached a low point of our transition as we completed the planned tie-in work for EF Unit 2 and worked through the outage at Lake Superior Power.

Before I get into the details, I want to highlight three key themes. First, our results. We shipped approximately 145,000 tons and delivered adjusted EBITDA within our guidance range at negative $14 million. dollars. Excluding the capacity utilization adjustment and last quarter's insurance settlement, adjusted EBITDA improved by approximately 19 million dollars from the second quarter, our second consecutive quarter of underlying improvement delivered on lower volume, which Mike will walk you through shortly.

Second, plate performance. We shipped 105,000 tons of plate, approximately 73% of total shipments, and more than we shipped in the third quarter of last year. Average net sales realization rose to $1,510 per ton, up 11% from the second quarter on high steel prices. As Canada's only producer of discrete plate, we continue to see healthy demand for infrastructure, construction, and defense customers. Plate volume moderated from our record 125,000 tons in the second quarter, reflecting the outage and planned plate mill maintenance.

Third, the transformation. We restored full generating capability at Lake Superior Power on September 30th. And prior to quarter end, we completed first car testing at EF Unit 2. On October 9th, we achieved our first commercial production of steel from the new EF, a major milestone for Algoma and the result of years of disciplined execution by our employees and contractors.

EF Unit 2 is now ramping. and part of our regular production schedule. Our focus now turns to ramping the combined EF platform to higher capacity.

Let me expand on the outage, because it shaped much of what we saw during the quarter. On August 17th, one of the two turbines at Lake Superior Power detected an abnormal condition and was automatically taken off. The remaining turbine was not affected. LSP supplies electricity to our men's shop, so we temporarily suspended EF production to address this.

We quickly worked with the independent electricity system operator on interim operating arrangements and restarted the EF on August 29th. Since the restart, those arrangements supported sustained production, including during planned work on the provincial electricity system. On September 30th, we commissioned a newly acquired replacement turbine for storing full generating capability at LSV. I want to thank the ISO and Hydro One for their support through this period.

Our actions now leave us in a stronger position. We have exercised our option under our existing service agreement with GE to bring our lease turbine into service while the affected turbine is repaired. We expect installation to be completed in the fourth quarter, and we do not expect it to interrupt steelmaking operations. Once the lease turbine is in place, the newly acquired turbine will serve as a ready spare, adding equipment redundancy and strengthening the reliability of our power system.

After repairs to the factory turbine are complete, we expect the additional generating equipment to give us further operational flexibility and the potential to expand power generating capacity in the future. We use the downtime to pull forward planned maintenance and to advance commissioning work of our second EF. On the broader market environment, steel prices moved in our favor in this quarter for both plate and coil products.

Plate remains the core of our mix, where we hold a unique market position. Canadian coil pricing has also improved, and we expect to increase our coil sales through the fourth quarter and into 2027 as we ramp EF production and as market opportunities allow. Direct tariff costs fell to $18 million in the quarter, drowned from $90 million a year ago, as U. S. shipment volumes declined by 83% from the prior year quarter. The 50% U. S. Section 232 tariff on steel imports from Canada remains in place.

These conditions continue to reinforce our Canada-centric, plate-first strategy, and we are running the business for the market as it stands today.

On the policy front, I want to recognize the federal and the Ontario governments for last week's announcement to protect Canada and Ontario's steel industry. The measure creates a new joint steel action fund to help the industry diversify production towards the steel products Canada will need Prioritize Canadian steel and public procurement through the Buy Canada and Buy Ontario policies strengthen enforcement against unfair traded imports and establish a joint Canada-Ontario steel task force.

Diversification is central to our own strategy. Our transition to electric arc furnace steelmaking and a Canada-centric plate-first mix are about supplying more of the steel Canada needs from Canadian metals. Together, they strengthen the domestic market our plate-first strategy depends on, particularly in infrastructure and defense. We look forward to continuing work with both levels of government on our diversification initiatives.

We are thankful for that continued support as we finish this transition and build a stronger, more sustainable Canadian steel industry.

I will now turn the call over to Mike for a closer look at the financials. Mike?

Thanks, Rajat. Good morning, everyone. As a reminder, all numbers are expressed in Canadian dollars unless otherwise noted. I'll start out with a brief note on currency. The Canadian dollar ended the quarter at approximately 1.42 per U. S. dollar, essentially unchanged from June 30th. Our foreign exchange loss in the quarter of $10 million reflects exchange rate movements within the quarter on our Canadian dollar-denominated monetary assets and liabilities. Comparisons between the third quarter of 2026 and the third quarter of 2025 were significantly impacted by our transition to EAF steelmaking. In the prior year quarter, the company was producing steel through its legacy blast furnace operations, which were permanently halted on January 18, 2026.

In the third quarter of 2026, all liquid steel production was sourced from Unit 1 of our EAF, with production paused from August 17 to August 29 during the LSP outage. In addition, the prior year quarter included a non-cash impairment loss of $503.4 million.

Now on to the results. We shipped approximately 144,500 tons compared to 419,000 tons in the prior year quarter and 181,000 tons in the second quarter. Volumes moved lower, reflecting the accelerated transition to EAF-only steelmaking due to the impact of U. S. Section 232 tariffs on export sales and the LSP outage. Shipments were in line with our October 1st guidance of approximately 145,000 tons.

Consolidated revenue was $249.4 million compared to $523.9 million in the prior year quarter, with steel revenue of $218.2 million. Average net sales realizations were $1,510 per tonne, up 33.7% from $1,129 per tonne in the prior year quarter, and up from $1,361 per tonne in the second quarter, reflecting higher steel prices and a greater share of plate in our mix, partly offset by lower proportion of our premium plate grades during the outage. Cost per tonne of steel products sold was $1,492 per tonne, compared to $1,282 per tonne in the prior year quarter, and $1,411 per tonne in the second quarter, primarily reflecting lower fixed cost absorption at reduced production volumes and a higher proportion of plate in our shipments.

I want to highlight that this metric excludes $53.1 million related to capacity utilization costs. Direct tariff costs for the quarter were $18.1 million, down from $89.7 million in the prior year quarter, reflecting the substantial decline in U. S. -bound shipments. Adjusted EBITDA for the quarter was a loss of $13.9 million, representing an adjusted EBITDA margin of negative 5.6%. This compares to an adjusted EBITDA loss of $87.1 million in the prior year quarter, which represented a margin of negative 16.6%, an improvement of $73.2 million.

Second quarter adjusted EBITDA of $13.8 million included a $45 million insurance settlement, which we'll come back to. Excluding the capacity utilization adjustment, adjusted EBITDA was a loss of approximately $67 million. dollars, an improvement of approximately 20 million dollars versus the prior year quarter on about one-third of the volume. When comparing to the prior quarter, when you exclude the capacity utilization adjustment from each quarter and the 45 million dollar insurance settlement from the second quarter, results improved by approximately 19 million dollars on approximately 20 percent lower volume. This is the second consecutive quarter of underlying improvement and is consistent with what we communicated in July.

Turning to cash flow and liquidity, operating activities generated $78.6 million of cash in the quarter compared to a cash used of $79.4 million in the second quarter. The improvement largely came from a significant release of working capital. That included $163.9 million of income tax refunds and a further reduction in inventories. Subsequent to quarter end, we received an additional $35 million of income tax recovery, representing the balance of the refunds from carrying back our 2025 losses.

We also received the outstanding $45 million in insurance proceeds that finalized and closed the claim from the 2024 utility corridor collapse. Capital expenditures were $67.7 million, which includes construction spending on EAF Unit 2 and the down payment on the replacement turbine, for which we are pursuing financing over a four-year term.

During the quarter, we received $124.5 million of advances under the LETL facilities, and we used cash proceeds mentioned above to pay down our revolving credit facility, which was essentially undrawn at quarter end. We ended the quarter with $152.4 million of cash, $232.5 million of unused availability under a revolving credit facility, and $43.5 million available to draw under the LETL facilities.

Total available liquidity at quarter end was approximately $428 million. Looking ahead at the fourth quarter, from a volume perspective, we expect that the third quarter was the low point of the transition. With power restored and both EAF units now in our production schedule, we expect fourth quarter shipments to increase by approximately 25% to 35% versus the third quarter, with volumes weighted towards November and December as we ramp our second EF unit.

We expect a substantial improvement in our underlying EBITDA performance, excluding any benefit of the capacity utilization adjustment. Finally, on legal matters, subsequent to quarter end, we reached a negotiated settlement with Haverhill Coke, resolving the dispute related to historical Coke supply arrangements. The terms of the settlement are confidential. As previously disclosed, we are continuing to respond to other legal proceedings in connection with certain supply agreements affected by the extraordinary and unforeseen tariff environment. We're not in a position to comment further on this at this time.

I'd now like to turn the call back over to Rajat for closing comments.

Thanks, Mike. The third quarter tested this team and the team delivered. With power restored and both EF units now in our production schedule, we believe the toughest part of our transition is behind us. I want to leave you with three takeaways.

First, our underlying results improved for a second consecutive quarter, and we delivered that improvement on lower volume. Plate remained the core of our mix, and pricing moved in our favor.

Second, full generating capability at LSD is restored. and EF Unit 2 is now ramping and part of our regular production schedule. Our focus now is ramping both units and eliminating the remaining transition costs. We enter the fourth quarter with a strong price environment and more production capacity coming online.

Third, our position remains clear as Canada is only producer of discrete plate. Demand across infrastructure, construction, and defense and market is healthy. we believe that once fully ramped, our EF platform will give us a structural cost and carbon advantage across market cycles I want to thank our employees for their work through a demanding quarter our customers for their trust and the federal and the Ontario government for their continued partnership We look forward to updating you on the ramp up of the EAFs when we report a fourth quarter and full-year results.

Thank you for your continued interest in Algoma Steel. At this point, we are happy to take your questions. Operator, please provide the instructions for the Q&A session.

The ramp has started and the ramp is going well. And when you're running both the furnaces, you have to learn how to run with both of them as we're not arcing simultaneously. It's being arced alternatively. So that learning is happening right now. Our expectation is that next year we'll continue the ramp and our production by end of the year should be at an average of anywhere from 1.5 to 1.6 million tons by end of the year. But for the average for the year, we are expecting, as we see it today, because we are still ramping and seeing how it goes, it could be around 1.2 million. and then with you know prices in Canada on the sheet side have improved but I guess in part because there was not a lot of shipment from your side so are there concerns that with you ramping up that that could impact pricing or is the market strong enough to support the incremental sheet that is coming to the market?

The market pricing changes that's been happening have various factors affecting it. Definitely there is production that's – the capacity utilization at different mills have been different, the trade between U. S. and Canada that's happening, the measures that the government have taken on Buy Canada and the restriction on imports coming in based based on TRQs put in place. So there are various factors that are coming into play, and the market pricing really depends on how the demand supply works. We've been quite disciplined as we grow. We have our customers here. We've been working with for a long time, and we'll be getting into those markets. And the other thing I'll point out is that we've been, you know, most of the production that we've, most of the shipments that we've had on the sheet side was primarily in the U. S. , which has substantially, substantially come down.

So we expect the market to balance out as it balances out, and we've been quite mindful of it and quite disciplined.

Thank you.

Morning, Ian. I wanted to start with the Canadian government response from last week and the dollars being provided. I was hoping you could maybe spend a bit of time outlining the projects where you think funds would be a good fit and how you think funds coming into your business would fit well within the capital stack because there's so many different types of debt in there right now. Hi, Ian. So the government have been announcing a lot of support for some time, and the last one that they've announced, which is pretty positive for the steel industry, is focused on diversification, on products that can be produced, which Canada needs.

And, you know, we've been looking into diversification ourselves. our beam mill the economics and the rationale around the beam mill has not changed and we are working with them actively to find out the right program under which it makes sense for us for Algoma, for all its stakeholders so I can share that much as of now there's a lot of discussions that's happening on that front and we are working through it Okay. Maybe switching gears on the demand side, I mean, you've noted nation building, infrastructure-related projects. Have you seen much in the way of tangible contracts or like are you bidding into much work at this point that would suggest they are following this Buy Canada procedure?

Because it is a bit newer and we're still just looking for signals on that. Yeah, you're right. It's newer. It's taking its time to get through the organizations. But we've seen movement that's happening. And we've seen orders that are coming in. And when you say substantial, from plate perspective, there are various projects that run from infrastructure and defense perspective. And we see us being participating in a lot of them. And we are also seeing along with the demand that's coming here, the Buy Canada policies are helping a lot as well. We're seeing customers who have not usually bought from us are buying and even customers who have bought from us are buying more. So we are seeing that activity happening from that front.

And I think it will continue. it will grow as more and more of these procurement contracts come to an end where they can be awarded. So we are seeing activities, and that's increasing, and it's encouraging as well.

Okay. And following on the last set of questions in and around the ramp of the EAAF, is it all due to learning and figuring out the facilities, or is there any issues, or have you had any issues yet to date in scrap procurement to get the facility up to a higher utilization rate?

No, scrap has been good. Procurement has not been issues. I think it's the learning curve that you have when you're ramping up. And the last outage that happened because of the power issue did not help while we are ramping up because it creates a lot of other issues around it. So it's only learning. The equipment has performed well. The second EF unit that came online has been ramping way, way faster because we learned a lot on the first unit, which took us longer.

And the second one is, I mean, tremendously, tremendously better. So it will help. And then comes the learning curve where you are learning how to flip between the two when you're near arcing. And it's just that learning curve that helps you to grow. So we've not seen any significant issues as such from equipment or supply perspective. Okay. And then I suppose the follow-on is if there's a demand signal next year that would require you to produce more than the 1.2 to 1.3 that you mentioned, do you think you have enough flexibility embedded in the system that you could meet that? I know it's a lot to ask, but just curious on that front.

You're right. It's a lot at this time we are ramping up. I feel that if the ramp up proceeds and the learning curve quickens there is definitely possibilities of getting higher When you look at the capacity perspective with the power that we have available and alternate arcing we could be as high as 1 1.9 million tons run rate. And we are working through it. And it's a little too early to say whether we will be there next year and how soon we'll be there next year. I know we will be there probably by end of next year, but it's difficult to say right now how soon we'll be there as we are ramping up. And I'll provide more color in the next call, definitely, on how we are doing it.

Understood. Thanks very much. I'll turn it back over.

Yeah, the exit was, you know, at 1.5, 1.6. That's the exit for next year, end of 20. Okay, appreciate that. And can you just give us an update on how you're thinking about your cost base in terms of that level of production? I know you initially talked about, you know, cost or scrap plus 225, but within that level of production, how would you be thinking about your cost base, you know, 1.5, 1.6 million tons of production per year?

I think when you look at the cost side, the scrap plus number that you were referencing was when we have greater capacity, which we expect to have early 28 with the additional power that will be available to our site. Next year, through the ramp up, we expect to have that directionally higher from 220 or 225 at this point.

Yeah, I mean, the volume is really the biggest driver. So as we increase volume, even from where we're at now, the cost structure is going to improve, and that's what we're really focused here is driving down the costs, improving the productivity at the units.

Yeah, I think that in quarter three, we still had, you know, higher than we would have expected with the outage we had. But our view on this is unchanged. We do not expect to have an add back to EBITDA in Q4. We're driving that down. That said, we're still on the ramp-up curve, and the costs that are in the business today support much higher volumes, which is why we're very focused on the improvement on the ramp-up curve. So we don't expect to have an add-back to EBITDA, albeit we're still on the ramp-up curve, and we expect to improve our cost structure as more volumes produced.

Yeah, sure. Look, the outage at Lake Superior was unplanned. We had a premature failure of one of our turbines. You know, we have the ability also to hopefully get some insurance proceeds because of that failure. So we'll be working on those as we adjudicate through the process. We really think that bringing the third turbine is the right move here from a redundancy perspective. It also mitigated further downtime that we might have had at the LSP outage during the previous quarter.

And bringing that third turbine into the mix provides us not only additional redundancy, but opportunities in the future if we can generate more power, depending on the market conditions in the power environment here in Ontario. So we think it's a prudent move. These are not losing value. The turbines are very, very hard to get. We were fortuitous to be able to have access to this turbine. And we're excited that we have that redundancy now. From the monetary perspective, in the quarter Q3, the down payment flowed through capital, which you would see in the capital line. That's about 25% of the cost of the turbine. and the all-in cost for the turbine is approximately $35 million USD, which we are expecting the balance to be financed over a four-year period.

Hey, Albert.

Yeah, we were able to do quite a bit of the tie-in work during that outage over the 17th to 29th, where we were down in August. We were able to get some additional shipments out through the quarter as well, which flexes through our inventory, which is supporting the shipment number in the quarter versus the full expectation of that outage. So we'll have slightly higher production as well in Q4, which will support some of the inventory that we have. But that was how we managed the quarter.

Yeah, sure. I think I won't comment specifically on the amount, although, you know, their view of working capital obviously is different than how the impact of this may flow through. For us, we do have the balance of the income tax receipts that have come in post-quarter, and we will have, you know, some impact from the settlement, which will flow in the quarter as well.

So those are really the exogenous items that are on cash flow. From a working capital perspective, we will build a little bit of raw material working capital as we get closer to the end of the calendar year to support the ramp up at the EAF.

Thanks, Albert.

Thank you again for your participation in our third quarter 2026 earnings conference call and your continued interest in Algoma Steel. We look forward to updating you on our results in progress when we report our fourth quarter and full year results.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.