Feb. 9, 2006 — Algoma Steel Inc. reported net income of $55.0 million on revenues of $477.6 million for the three months ended December 31, 2005.
Fourth Quarter Results—The $55 million net income ($1.38 per common share) compares to net income of $30.8 million in the third quarter and $122.2 million in the fourth quarter of 2004. EBITDA was $77.6 million compared to $62.8 million in the third quarter and $191.2 million in the fourth quarter of 2004. The increase is attributed primarily to higher steel prices, while the decline from the fourth quarter of 2004 was due mainly to lower steel prices and higher raw material and energy costs.
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Capital Expenditure Plans
Algoma plans on shutting down its blast furnace in the second half of 2006 for a period of 15 days to perform remedial work. Capital expenditures related to this outage are currently estimated at $11 million and related
expenses are estimated at $7 million.
Capital expenditures are projected to increase to $80 million in 2006 from $56.5 million in 2005. The increase is due, in part, to underspending in the previous five years, but also includes the effect of the blast furnace outage and capital spending on the Business Systems Renewal Project.
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Revenue was $477.6 million, an increase of $31.2 million versus the previous quarter and a decline of $12.2 million versus the comparable period in 2004. The increase from the previous quarter was the result of higher average steel prices and an improvement in mix due mainly to an increase in plate shipments. The decrease over the fourth quarter of 2004 was mainly the result of lower steel prices, offset in part by higher steel shipments and non-steel sales.
Steel prices averaged $751 per ton, as compared to $695 per ton in the previous quarter and $878 per ton in the fourth quarter of 2004. Steel shipments totaled 582,400 tons, which was 5,700 tons lower than the third quarter of 2005 and 58,500 tons higher than the fourth quarter of 2004. Steel inventories increased 38,000 tons during the quarter mainly due to the acquisition of slabs late in the quarter.
EBITDA was $77.6 million compared to $62.8 million for the previous quarter and $191.2 million for the fourth quarter of 2004. The improvement from the previous quarter was mainly due to higher average steel selling prices and an improvement in product mix (higher plate shipments), offset in part by higher administrative and selling expenses. The decline from the comparable quarter in 2004 was mainly attributable to lower steel selling prices, higher production costs and higher administrative and selling expenses, offset in part by higher steel shipments and lower employees' profit sharing.
Sales of coke in the fourth quarter of 2005 totaled 27,200 tons (25,500 tons in the third quarter) and generated approximately $7.9 million of EBITDA which was $0.8 million higher than the previous quarter. Coke sales in the fourth quarter of 2004 totaled 13,100 tons and contributed $4.9 million to EBITDA.
Raw steel production totaled 671,000 tons versus 628,000 tons for the previous quarter and 648,000 tons for the fourth quarter of 2004. The company's Direct Strip Production Complex (DSPC) set new records for both monthly and quarterly production levels. Raw steel production for the year totaled 2,577,000 tons, an increase of 45,000 tons over 2004.
Administrative and selling expenses totaled $25.6 million as compared to $15.3 million for the three months ended September 30, 2005 and $14.5 million for the comparable period in 2004. The main reasons for the increase over the third quarter was a $4.5 million accrual for management bonuses, the recognition of a $4.0 million donation to the local hospital, and an accrual for consulting costs related to research and development tax credits of $1.3 million.
Cash and short-term investments decreased by $18.3 million primarily due to an additional $50.0 million of pension funding in the quarter.
Management Comments—Denis Turcotte, President and CEO, commented, "Our employees have remained focused on the core business objectives which contributed to a strong quarter, including a significant production record on the Direct Strip Production Complex. Our cash and securities balance decreased by a relatively small amount despite the prepayment of a significant portion of our 2006 pension funding obligation and several other working capital payments. The company is now debt-free following the redemption of the 11% Notes on January 3, 2006. We continue to actively explore a number of opportunities, including possible mergers, a sale of the Company, and other business combinations."
Full Year Results—Net income was $239.6 million as compared to $343.8 million for 2004. The drop in net income was mainly due to higher production costs and higher administrative and selling expenses, offset in part by higher average steel prices, higher shipments, lower profit sharing expense and an increase in investment income.
Revenue totaled $1,917.6 million as compared to $1,803.1 million for 2004. Steel prices averaged $776 per ton in 2005 as compared to $762 per ton in 2004. Steel shipments totaled 2,282,600 tons in 2005, an increase of 84,400 tons from last year.
Cost of sales per ton shipped for steel products, excluding employees' profit sharing expense, averaged $560 for the year ended December 31, 2005, $105 per ton higher than the comparable period in 2004. The increase was
mainly due to higher costs for iron ore, coal, alloys, natural gas, scrap and employment expenses. A stronger Canadian dollar versus the U.S. dollar (7.4%) resulted in a partial offset from higher input prices for most raw materials.
Employees' profit sharing expense for the year ended December 31, 2005 totaled $31.5 million ($14 per ton) as compared to $51.7 million ($24 per ton) in 2004.
Administrative and selling expenses totaled $69.9 million, $19.1 million higher than 2004. Expenditures for 2005 were higher than 2004 mainly due to higher consulting and legal fees associated with the company's strategic alternatives review, higher stock compensation expense and executive bonuses, non-capital expenditures associated with the business systems renewal project, and the recognition of a donation.
Outlook—Although general steel pricing levels have been relatively stable in recent months, the company anticipates that steel pricing realizations may decline slightly in the first quarter versus the fourth quarter due, in part, to the effects of a stronger Canadian dollar. The company does not expect any major changes to unit costs in the first quarter versus the fourth quarter. Although it notes that selling prices and costs are subject to a high degree of variability. Steel shipments are expected to exceed 600,000 tons in the first quarter. The company earned $7.9 million (pre-tax) from coke sales in the fourth quarter of 2005, but does not expect to ship any coke in the first quarter of 2006.
The company expects a price increase on iron ore in 2006 and is currently making payments to its ore supplier based on their estimate of an increase of 15%. The actual increase could vary significantly from this estimate depending on global pricing, but iron ore inventory from 2005 is expected to minimize the effect of any increase on production costs during the first quarter.
The company expects to pay its remaining 2005 income tax liability of approximately $54 million in late February and distribute the remaining $14.7 million of the profit sharing liability in March and April 2006. The company is obligated to make monthly income tax installments in 2006 relative to 2006 taxes. The redemption of the 11% Notes for $153 million and the payment of the 2005 income tax liability will result in a substantial reduction to the cash and short-term investments balance.
The prepayment of $44 million of the 2006 pension funding obligations is expected to eliminate pension funding for the first nine months of 2006. The absence of pension funding during this period is expected to increase the income tax provision rate due to the absence of the tax deduction.
Coal Requirements—Algoma has concluded contractual arrangements respecting approximately 85% of its coal requirements for 2006. Arrangements for the remaining 15% are expected to be concluded in the next few months. Algoma estimates its coal costs per ton in 2006 will be approximately 10% higher than 2005 costs. The delivered cost per ton of coal consumed in 2005 was approximately $97 per dry ton which includes the effect of purchased coal penalties incurred in 2005. The projected increase over 2005 is moderated by several factors which include the effect of lower-cost coal at previous contract pricing to be consumed in the first half of 2006, and the assumption that the current higher level of the Canadian dollar is maintained. Management cautions that actual coal costs are subject to many variables and could vary significantly from these estimates. These variables include the value of the Canadian dollar, shipment reliability against contracts, actual prices for the remaining 15% of coal purchases, the mix of coal used, and cokemaking production levels.
In 2005, 100% of coal inventories were carried by Algoma's primary coal supplier until the point of consumption. In 2006, approximately 66% of Algoma's coal requirements will be carried by the primary supplier in this fashion. The balance will be purchased from other suppliers at the point of delivery of the coal to Algoma. As a result, coal inventory levels are expected to increase over 2005 commencing in April 2006, peaking at about $25 million at year-end due to the normal seasonal build.