Algoma Steel Group Inc 6-K, filed Feb 7, 2024
Algoma Steel Group Inc. (ASTL)
About this 6-K
Algoma Steel Group Inc filed this 6-K on February 7, 2024.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of February 2024
Commission File Number 001-40924
ALGOMA STEEL GROUP INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
105 West Street
Sault Ste. Marie, Ontario
P6A 7B4, Canada
(705) 945-2351
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F ☐ Form 40-F ☒
EXHIBIT INDEX
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Algoma Steel Group Inc. | ||||||
| Date: February 6, 2024 | By: | /s/ John Naccarato | ||||
| Name: John Naccarato | ||||||
| Title: Vice President Strategy and Chief Legal Officer | ||||||
4
Exhibit 99.1
MEDIA RELEASE
February 6, 2024
Algoma Steel Group Reports Fiscal Third Quarter 2024 Financial
Results
Steel Shipments and Adjusted EBITDA In-line with Previously Announced Expectations
Delivered Year-over-year Improvement Across Nearly All Metrics
Provides Further Update on Coke-Making Utilities Structure Collapse
Reiterated Outlook on Transformative EAF Project with $509.9 Million Invested to Date and
86% of Anticipated Costs Under Contract
SAULT STE. MARIE, ONTARIO (February 6, 2024) – Algoma Steel Group Inc. (NASDAQ: ASTL; TSX: ASTL) (“Algoma” or “the Company”), a leading Canadian producer of hot and cold rolled steel sheet and plate products, today announced results for its fiscal third quarter ended December 31, 2023.
Unless otherwise specified, all amounts are in Canadian dollars.
Business Highlights and Fiscal 2024 to Fiscal 2023 Third Quarter Comparisons
| • | Consolidated revenue of $615.4 million, compared to $567.8 million in the prior-year quarter. |
| • | Consolidated loss from operations of $36.9 million, compared to a loss from operations of $65.7 million in the prior-year quarter. |
| • | Net loss of $84.8 million, compared to a net loss of $69.8 million in the prior-year quarter. |
| • | Adjusted EBITDA of $(1.0) million and Adjusted EBITDA margin of (0.2)%, compared to $(35.9) million and (6.3)% in the prior-year quarter (See “Non-IFRS Measures” below). |
| • | Cash flows used in operations of $47.4 million, compared to cash flows used in operations of $128.6 million in the prior-year quarter. |
| • | Shipments of 516,068 tons, compared to 458,341 tons in the prior-year quarter. |
| • | Completed extensive planned seasonal maintenance on time and within budget. |
| • | Paid quarterly dividend of US$0.05/share. |
In addition, subsequent to the quarter end, the Company restored partial coke-making capabilities and completed necessary repairs at the blast furnace, following operational challenges related to the unexpected collapse of a structure supporting utilities piping at the coke-making plant on January 20, 2024.
Michael Garcia, the Company’s Chief Executive Officer, commented, “We delivered results in the fiscal third quarter that were consistent with our previously disclosed outlook, accomplished against a challenging backdrop that included the remaining impact of the UAW strike and a heavy seasonal maintenance quarter. Improved market fundamentals coupled with the settlement of the strike in October led to a rebound in pricing which based on the lagging nature of our order book is expected to positively impact pricing realizations beginning in our fiscal fourth quarter.”
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
2
Mr. Garcia added, “As an update to our January 20th and January 23rd announcements regarding the collapse of a structure supporting utilities piping at our coke-making plant corridor, limited coke making operations continue and, as we develop our revised production plan, we will continue to evaluate our requirement for purchased coke to supplement our current inventories. We’ve finished all of the necessary repairs at the blast furnace following the related operational outage and have begun gradually restarting the furnace, increasing energy input as conditions permit. Based on our current assessment, we anticipate producing usable hot metal within the next seven days. We aim to return to full production within the next two weeks. The outage at the blast furnace and limited coke production are collectively expected to negatively impact shipments, costs and profitability in the fourth fiscal quarter.”
“Our transformative EAF project continues to advance in line with our expectations with commissioning expected to start by late 2024. As of December 31, 2023, we had invested a total of $509.9 million in its development, which represents approximately 60% of the anticipated total project cost. Importantly, project commitments to date total approximately $750 million with approximately 7% tied to time and material contracts, while the balance is fixed price in nature. We expect to contract the majority of the remaining costs by the end of the current quarter. We look forward to what promises to be an important and exciting year in the story of Algoma.”
Third Quarter Fiscal 2024 Financial Results
Third quarter revenue totaled $615.4 million, compared to $567.8 million in the prior year quarter. As compared with the prior year quarter, steel revenue was $556.9 million, compared to $512.0 million, and revenue per ton of steel sold was $1,192, compared to $1,239. Loss from operations was $36.9 million, compared to a loss of $65.7 million in the prior-year quarter.
The year over year improvement was primarily due to increased steel shipment volumes as a result of improved market conditions and resolving the temporary downstream finishing constraints for plate that occurred during the three-month period ended December 31, 2022. Further, higher cost of steel revenue as a result of increased shipment volumes was partially offset by a decrease in pricing for natural gas, purchased coke, alloys and power.
Net loss in the third quarter was $84.8 million, compared to a loss of $69.8 million in the prior-year quarter. The increase was primarily due to the change in fair value of warrant liabilities, share-based compensation liabilities, and earnout liabilities, a decrease in income tax recovery, an increase in foreign exchange losses, and an increase in financing charges, which more than offset the improvements in loss from operations.
Adjusted EBITDA in the third quarter was $(1.0) million, compared with $(35.9) million for the prior-year quarter. This resulted in an Adjusted EBITDA margin of (0.2)%. Average realized price of steel net of freight and non-steel revenue was $1,079 per ton, compared to $1,116 per ton in the prior-year quarter. Cost per ton of steel products sold was $1,027, compared to $1,157 in the prior-year quarter. Shipments for the third quarter increased by 12.6% to 516,068 tons, compared to 458,341 tons in the prior-year quarter due primarily to the reasons mentioned above. See “Non-IFRS Measures” below for an explanation of Adjusted EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA.
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
3
Coke-making Plant Utilities Structure Update
As previously disclosed, on January 20, 2024, there was a collapse of a structure supporting utilities piping at the Company’s coke-making plant. No injuries occurred during the event. Additionally, for safety reasons, blast furnace operations were suspended at the time of the incident. The blast furnace experienced operational challenges upon initial restart due to unforeseen impacts related to the piping collapse.
Limited production of coke resumed at three coke-production units on January 23, which, when combined with inventories on hand and the availability of third-party coke supplies, is currently expected to fulfill the Company’s requirements for normal steelmaking production while the repair plan is developed. All necessary repairs to the blast furnace have been completed, and the furnace is now undergoing a gradual restart process. Additional energy will be added to the furnace as conditions permit. Based on current information, usable hot metal is expected to be produced within the next seven days, with a return to full production anticipated within the next two weeks. Algoma has standard insurance coverage that is intended to address circumstances such as these, including business interruption insurance. The Company is in the process of submitting claims under its insurance policies for covered losses.
Mr. Garcia commented, “Thanks to the fast response and hard work of our entire team, we were able to quickly resume limited coke-making capacity, and as of today we have restarted the blast furnace and continue ramping to normal production levels. The outage at the blast furnace and limited coke production are, however, collectively expected to negatively impact shipments, costs and profitability in the fiscal fourth quarter.”
Electric Arc Furnace
The Company has made substantial progress on the construction of two new state-of-the-art electric arc furnaces (“EAF”) to replace its existing blast furnace and basic oxygen steelmaking operations. The anticipated project timing and budget remain consistent with the outlook provided in the fiscal fourth quarter 2023 earnings release. As of December 31, 2023, the cumulative investment was approximately $509.9 million of the total projected cost of $825 million to $875 million. Project commitments to date total approximately $750 million with approximately 7% tied to time and material contracts, while the balance is fixed price in nature. We believe that we remain on track for commissioning late in calendar 2024. Following the transformation to EAF steelmaking, Algoma’s facility is expected to reach an annual raw steel production capacity of approximately 3.7 million tons, matching its downstream finishing capacity, and to generate an approximate 70% reduction in the Company’s annual carbon emissions.
Quarterly Dividend
The Board has declared a regular quarterly dividend in the amount of US$0.05 on each common share outstanding, payable on March 29, 2024, to holders of record of common shares of the Company as of the close of business on February 29, 2024. This dividend is designated as an “eligible dividend” for Canadian income tax purposes.
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
4
Conference Call and Webcast Details
A webcast and conference call will be held on Wednesday, February 7, 2024 at 11:00 a.m. EDT to review the Company’s fiscal third quarter results, discuss recent events, and conduct a question-and-answer session.
The live webcast and archived replay of the conference call can be accessed on the Investors section of the Company’s website at www.algoma.com. For those unable to access the webcast, the conference call will be accessible domestically or internationally by dialing 877-425-9470 or 201-389-0878, respectively. Upon dialing in, please request to join the Algoma Steel Third Quarter Conference Call. To access the replay of the call, dial 844-512-2921 (domestic) or 412-317-6671 (international) with passcode 13743566.
Consolidated Financial Statements and Management’s Discussion and Analysis
The Company’s unaudited condensed interim consolidated financial statements for the three and nine months ended December 31, 2023, and Management’s Discussion & Analysis thereon are available under the Company’s profile on the U.S. Securities and Exchange Commission’s (“SEC”) EDGAR website at www.sec.gov and under the Company’s profile on SEDAR+ at www.sedarplus.ca.
Cautionary Statement Regarding Forward-Looking Statements
This news release contains “forward-looking information” under applicable Canadian securities legislation and “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking statements”), including statements regarding trends in the pricing of steel, price realizations and other key inputs in the steelmaking process, the restart of coke making operations, the anticipated timing to restart the blast furnace, produce usable hot metal and return to full production, Algoma’s expectation to continue to pay a quarterly dividend, Algoma’s transition to EAF steelmaking, including the progress, costs and timing of completion of the Company’s EAF project, Algoma’s future as a leading producer of green steel, Algoma’s modernization of its plate mill facilities and the status and timing thereof, transformation journey, ability to deliver greater and long-term value, ability to offer North America a secure steel supply and a sustainable future, and investment in its people, and processes, statements regarding the Company’s intended use of cash on hand, cash from operations and proceeds from the Company’s credit facilities, and the Company’s strategy, plans or future financial or operating performance. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “design,” “pipeline,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are predictions, projections and other statements about future events that are based on current expectations and assumptions. Many factors could cause actual future events to differ materially from the forward-looking statements in this document. Readers should also consider the other risks and uncertainties set forth in the section entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Information” in Algoma’s Annual Information Form, filed by Algoma with applicable Canadian securities regulatory authorities (available under the company’s SEDAR+ profile at www.sedarplus.ca) and with the SEC, as part of Algoma’s Annual Report on Form 40-F (available at www.sec.gov), as well as in Algoma’s current reports with the Canadian securities regulatory authorities and SEC. Forward-looking statements speak only as of the date they are made. Readers are cautioned not to put undue reliance on forward-looking statements, and Algoma assumes no obligation and does not intend to update or revise these forward-looking statements, whether as a result of new information, future events, or otherwise.
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
5
Non-IFRS Financial Measures
To supplement our financial statements, which are prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), we use certain non-IFRS measures to evaluate the performance of Algoma. These terms do not have any standardized meaning prescribed within IFRS and, therefore, may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing a further understanding of our financial performance from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.
Adjusted EBITDA, as we define it, refers to net income (loss) before amortization of property, plant, equipment and amortization of intangible assets, finance costs, interest on pension and other post-employment benefit obligations, income taxes, foreign exchange loss (gain), finance income, carbon tax, changes in fair value of warrant, earnout and share-based compensation liabilities, transaction costs, earnout and share-based compensation liabilities, transaction costs, listing expense, past service costs – pension, past service costs – post-employment benefits and share-based compensation related to Omnibus Long Term Incentive Plan. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue for the corresponding period. Adjusted EBITDA is not intended to represent cash flow from operations, as defined by IFRS, and should not be considered as alternatives to net profit (loss) from operations, or any other measure of performance prescribed by IFRS. Adjusted EBITDA, as we define and use it, may not be comparable to Adjusted EBITDA as defined and used by other companies. We consider Adjusted EBITDA to be a meaningful measure to assess our operating performance in addition to IFRS measures. It is included because we believe it can be useful in measuring our operating performance and our ability to expand our business and provide management and investors with additional information for comparison of our operating results across different time periods and to the operating results of other companies. Adjusted EBITDA is also used by analysts and our lenders as a measure of our financial performance. In addition, we consider Adjusted EBITDA margin to be a useful measure of our operating performance and profitability across different time periods that enhance the comparability of our results. However, these measures have limitations as analytical tools and should not be considered in isolation from, or as alternatives to, net income, cash flow from operations or other data prepared in accordance with IFRS. Because of these limitations, such measures should not be considered as measures of discretionary cash available to invest in business growth or to reduce indebtedness. We compensate for these limitations by relying primarily on our IFRS results using such measures only as supplements to such results. See the financial tables below for a reconciliation of net income (loss) to Adjusted EBITDA.
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
6
About Algoma Steel Group Inc.
Based in Sault Ste. Marie, Ontario, Canada, Algoma is a fully integrated producer of hot and cold rolled steel products including sheet and plate. Driven by a purpose to build better lives and a greener future, Algoma is positioned to deliver responsive, customer-driven product solutions to applications in the automotive, construction, energy, defense, and manufacturing sectors. Algoma is a key supplier of steel products to customers in North America and is the only producer of discrete plate products in Canada. Its state-of-the-art Direct Strip Production Complex (“DSPC”) is one of the lowest-cost producers of hot rolled sheet steel (HRC) in North America.
Algoma is on a transformation journey, modernizing its plate mill and adopting electric arc technology that builds on the strong principles of recycling and environmental stewardship to significantly lower carbon emissions. Today Algoma is investing in its people and processes, working safely, as a team to become one of North America’s leading producers of green steel.
As a founding industry in their community, Algoma is drawing on the best of its rich steelmaking tradition to deliver greater value, offering North America the comfort of a secure steel supply and a sustainable future as your partner in steel.
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
7
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited)
| As at, |
December 31, 2023 |
March 31, 2023 |
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| expressed in millions of Canadian dollars | ||||||||
| Assets |
||||||||
| Current |
||||||||
| Cash |
$ | 94.7 | $ | 247.4 | ||||
| Restricted cash |
3.9 | 3.9 | ||||||
| Taxes receivable |
23.3 | — | ||||||
| Accounts receivable, net |
278.7 | 291.2 | ||||||
| Inventories |
886.6 | 722.7 | ||||||
| Prepaid expenses and deposits |
49.7 | 94.4 | ||||||
| Other assets |
6.5 | 6.7 | ||||||
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| Total current assets |
$ | 1,343.4 | $ | 1,366.3 | ||||
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| Non-current |
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| Property, plant and equipment, net |
$ | 1,300.0 | $ | 1,081.3 | ||||
| Intangible assets, net |
0.8 | 0.9 | ||||||
| Other assets |
7.4 | 7.1 | ||||||
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| Total non-current assets |
$ | 1,308.2 | $ | 1,089.3 | ||||
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| Total assets |
$ | 2,651.6 | $ | 2,455.6 | ||||
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| Liabilities and Shareholders’ Equity |
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| Current |
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| Bank indebtedness |
$ | 5.4 | $ | 1.9 | ||||
| Accounts payable and accrued liabilities |
306.0 | 204.6 | ||||||
| Taxes payable and accrued taxes |
24.1 | 14.4 | ||||||
| Current portion of other long-term liabilities |
1.6 | 0.4 | ||||||
| Current portion of governmental loans |
14.4 | 10.0 | ||||||
| Current portion of environmental liabilities |
3.8 | 4.5 | ||||||
| Warrant liability |
58.8 | 57.3 | ||||||
| Earnout liability |
18.5 | 16.8 | ||||||
| Share-based payment compensation liability |
34.0 | 33.5 | ||||||
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| Total current liabilities |
$ | 466.6 | $ | 343.4 | ||||
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| Non-current |
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| Long-term governmental loans |
$ | 125.8 | $ | 110.4 | ||||
| Accrued pension liability |
232.8 | 184.0 | ||||||
| Accrued other post-employment benefit obligation |
237.7 | 222.9 | ||||||
| Other long-term liabilities |
16.7 | 3.7 | ||||||
| Environmental liabilities |
30.5 | 32.3 | ||||||
| Deferred income tax liabilities |
100.8 | 96.7 | ||||||
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| Total non-current liabilities |
$ | 744.3 | $ | 650.0 | ||||
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| Total liabilities |
$ | 1,210.9 | $ | 993.4 | ||||
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| Shareholders’ equity |
||||||||
| Capital stock |
$ | 963.2 | $ | 958.4 | ||||
| Accumulated other comprehensive income |
227.2 | 313.6 | ||||||
| Retained earnings |
267.7 | 211.6 | ||||||
| Contributed deficit |
(17.4 | ) | (21.4 | ) | ||||
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| Total shareholders’ equity |
$ | 1,440.7 | $ | 1,462.2 | ||||
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| Total liabilities and shareholders’ equity |
$ | 2,651.6 | $ | 2,455.6 | ||||
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Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
8
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Net (Loss) Income
(Unaudited)
| Three months ended December 31, |
Nine months ended December 31, |
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| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| expressed in millions of Canadian dollars, except for per share amounts | ||||||||||||||||
| Revenue |
$ | 615.4 | $ | 567.8 | $ | 2,175.2 | $ | 2,101.1 | ||||||||
| Operating expenses |
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| Cost of sales |
$ | 623.8 | $ | 611.8 | $ | 1,928.1 | $ | 1,758.0 | ||||||||
| Administrative and selling expenses |
28.5 | 21.7 | 82.9 | 74.3 | ||||||||||||
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| (Loss) income from operations |
($ | 36.9 | ) | ($ | 65.7 | ) | $ | 164.2 | $ | 268.8 | ||||||
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| Other (income) and expenses |
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| Finance income |
($ | 2.4 | ) | ($ | 3.9 | ) | ($ | 8.8 | ) | ($ | 10.4 | ) | ||||
| Finance costs |
5.4 | 4.0 | 15.9 | 13.0 | ||||||||||||
| Interest on pension and other post-employment benefit obligations |
4.8 | 5.0 | 14.4 | 12.4 | ||||||||||||
| Foreign exchange loss (gain) |
14.7 | 10.6 | 14.1 | (41.2 | ) | |||||||||||
| Change in fair value of warrant liability |
20.4 | 6.4 | 3.2 | (67.1 | ) | |||||||||||
| Change in fair value of earnout liability |
6.2 | (0.2 | ) | 3.5 | (9.4 | ) | ||||||||||
| Change in fair value of share-based compensation liability |
11.3 | (0.2 | ) | 6.0 | (19.6 | ) | ||||||||||
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| $ | 60.4 | $ | 21.7 | $ | 48.3 | ($ | 122.3 | ) | ||||||||
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| (Loss) income before income taxes |
($ | 97.3 | ) | ($ | 87.4 | ) | $ | 115.9 | $ | 391.1 | ||||||
| Income tax (recovery) expense |
(12.5 | ) | (17.6 | ) | 38.7 | 72.2 | ||||||||||
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| Net (loss) income |
($ | 84.8 | ) | ($ | 69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
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| Net (loss) income per common share |
||||||||||||||||
| Basic |
($ | 0.78 | ) | ($ | 0.64 | ) | $ | 0.71 | $ | 2.50 | ||||||
| Diluted |
($ | 0.78 | ) | ($ | 0.64 | ) | $ | 0.60 | $ | 1.66 | ||||||
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
9
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| expressed in millions of Canadian dollars | ||||||||||||||||
| Operating activities |
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| Net (loss) income |
($ | 84.8 | ) | ($ | 69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
| Items not affecting cash: |
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| Depreciation of property, plant and equipment and intangible assets |
31.6 | 24.7 | 80.2 | 69.7 | ||||||||||||
| Deferred income tax expense (recovery) |
17.3 | 4.9 | 6.4 | (11.2 | ) | |||||||||||
| Pension funding (in excess of) below expense |
(0.5 | ) | (0.5 | ) | 0.4 | 48.3 | ||||||||||
| Post-employment benefit funding in excess of expense |
(2.0 | ) | (2.3 | ) | (5.4 | ) | (2.6 | ) | ||||||||
| Unrealized foreign exchange loss (gain) on: |
||||||||||||||||
| accrued pension liability |
5.0 | 2.9 | 4.8 | (13.9 | ) | |||||||||||
| post-employment benefit obligations |
5.1 | 2.6 | 5.1 | (17.9 | ) | |||||||||||
| Finance costs |
5.4 | 4.0 | 15.9 | 13.0 | ||||||||||||
| Interest on pension and other post-employment benefit obligations |
4.8 | 5.0 | 14.4 | 12.4 | ||||||||||||
| Interest on finance lease |
0.1 | — | 0.1 | — | ||||||||||||
| Accretion of governmental loans and environmental liabilities |
4.0 | 3.4 | 11.4 | 9.7 | ||||||||||||
| Unrealized foreign exchange loss (gain) on government loan facilities |
3.2 | 1.3 | 2.7 | (8.0 | ) | |||||||||||
| Increase (decrease) in fair value of warrant liability |
20.4 | 6.4 | 3.2 | (67.1 | ) | |||||||||||
| Increase (decrease) in fair value of earnout liability |
6.2 | (0.2 | ) | 3.5 | (9.4 | ) | ||||||||||
| Increase (decrease) in fair value of share-based compensation liability |
11.3 | (0.2 | ) | 6.0 | (19.6 | ) | ||||||||||
| Other |
2.0 | 0.4 | 5.6 | (3.2 | ) | |||||||||||
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| $ | 29.1 | ($ | 17.4 | ) | $ | 231.5 | $ | 319.1 | ||||||||
| Net change in non-cash operating working capital |
(72.5 | ) | (109.9 | ) | (51.0 | ) | (231.0 | ) | ||||||||
| Share-based payment compensation and earnout units settled |
(2.5 | ) | — | (2.5 | ) | (4.6 | ) | |||||||||
| Environmental liabilities paid |
(1.5 | ) | (1.3 | ) | (4.3 | ) | (1.7 | ) | ||||||||
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| Cash (used in) generated by operating activities |
($ | 47.4 | ) | ($ | 128.6 | ) | $ | 173.7 | $ | 81.8 | ||||||
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| Investing activities |
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| Acquisition of property, plant and equipment |
($ | 96.5 | ) | ($ | 95.2 | ) | ($ | 369.7 | ) | ($ | 267.7 | ) | ||||
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| Cash used in investing activities |
($ | 96.5 | ) | ($ | 95.2 | ) | ($ | 369.7 | ) | ($ | 267.7 | ) | ||||
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| Financing activities |
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| Bank indebtedness advanced, net |
$ | 5.1 | 12.0 | $ | 3.4 | $ | 12.3 | |||||||||
| Transaction costs on bank indebtedness |
— | — | (1.7 | ) | — | |||||||||||
| Governmental loans received |
17.0 | 15.0 | 59.3 | 30.2 | ||||||||||||
| Repayment of governmental loans |
(2.5 | ) | (2.5 | ) | (7.5 | ) | (7.5 | ) | ||||||||
| Interest paid |
— | — | (0.2 | ) | (0.1 | ) | ||||||||||
| Dividends paid |
(6.9 | ) | (7.0 | ) | (20.8 | ) | (23.6 | ) | ||||||||
| Common shares repurchased and cancelled |
— | (6.5 | ) | — | (553.1 | ) | ||||||||||
| Other |
11.9 | (2.4 | ) | 11.6 | (2.7 | ) | ||||||||||
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| Cash generated by (used in) financing activities |
$ | 24.6 | $ | 8.6 | $ | 44.1 | ($ | 544.5 | ) | |||||||
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| Effect of exchange rate changes on cash |
$ | 0.4 | ($ | 5.0 | ) | ($ | 0.8 | ) | $ | 59.8 | ||||||
| Cash |
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| Decrease in cash |
(118.9 | ) | (220.2 | ) | (152.7 | ) | (670.6 | ) | ||||||||
| Opening balance |
213.6 | 464.9 | 247.4 | 915.3 | ||||||||||||
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| Ending balance |
$ | 94.7 | $ | 244.7 | $ | 94.7 | $ | 244.7 | ||||||||
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Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
10
Algoma Steel Group Inc.
Reconciliation of Net (Loss) Income to Adjusted EBITDA
| Three months ended | Nine months ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net (loss) income |
($ | 84.8 | ) | ($ | 69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
| Depreciation of property, plant and equipment and amortization of intangible assets |
31.6 | 24.7 | 80.2 | 69.7 | ||||||||||||
| Finance costs |
5.4 | 4.0 | 15.9 | 13.0 | ||||||||||||
| Interest on pension and other post-employment benefit obligations |
4.8 | 5.0 | 14.4 | 12.4 | ||||||||||||
| Income taxes |
(12.5 | ) | (17.6 | ) | 38.7 | 72.2 | ||||||||||
| Foreign exchange loss (gain) |
14.7 | 10.6 | 14.1 | (41.2 | ) | |||||||||||
| Finance income |
(2.4 | ) | (3.9 | ) | (8.8 | ) | (10.4 | ) | ||||||||
| Inventory write-downs (depreciation on property, plant and equipment in inventory) |
(1.3 | ) | 3.2 | 3.4 | 5.0 | |||||||||||
| Carbon tax |
3.5 | 1.2 | 18.2 | 4.3 | ||||||||||||
| Increase (decrease) in fair value of warrant liability |
20.4 | 6.4 | 3.2 | (67.1 | ) | |||||||||||
| Increase (decrease) in fair value of earnout liability |
6.2 | (0.2 | ) | 3.5 | (9.4 | ) | ||||||||||
| Increase (decrease) in fair value of share-based payment compensation liability |
11.3 | (0.2 | ) | 6.0 | (19.6 | ) | ||||||||||
| Share-based compensation |
2.1 | 0.7 | 5.1 | 3.4 | ||||||||||||
| Past service costs - pension benefits |
— | — | — | 49.5 | ||||||||||||
| Past service costs - post-employment benefits |
— | — | — | 3.8 | ||||||||||||
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| Adjusted EBITDA (i) |
($ | 1.0 | ) | ($ | 35.9 | ) | $ | 271.1 | $ | 404.5 | ||||||
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| Net (loss) income Margin |
(13.8 | %) | (12.3 | %) | 3.5 | % | 15.2 | % | ||||||||
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| Net (loss) income / ton |
($ | 164.3 | ) | ($ | 152.3 | ) | $ | 47.2 | $ | 222.8 | ||||||
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| Adjusted EBITDA Margin (ii) |
(0.2 | %) | (6.3 | %) | 12.5 | % | 19.3 | % | ||||||||
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| Adjusted EBITDA / ton |
($ | 1.9 | ) | ($ | 78.3 | ) | $ | 165.9 | $ | 282.7 | ||||||
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| (i) | See “Non-IFRS Financial Measures” in this Press Release for information regarding the limitations of using Adjusted EBITDA. |
| (ii) | Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of revenue. |
For more information, please contact:
Michael Moraca
Treasurer & Investor Relations Officer
Algoma Steel Group Inc.
Phone: 705.945.3300
E-mail: IR@algoma.com
Algoma Steel Inc. | 105 West Street, Sault Ste. Marie, ON, Canada P6A 7B4 | T: 705-945-2351 F: 705-945-2203 | algoma.com
YOUR PARTNER IN STEEL. SINCE 1901
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following Management’s Discussion and Analysis (“MD&A”) contains information regarding the financial position and financial performance of Algoma Steel Group Inc. and its consolidated subsidiaries and unless the context otherwise requires, all references to “Algoma,” “the Company,”, “we,” “us,” or “our” refer to Algoma Steel Group Inc. and its consolidated subsidiaries.
We publish our condensed interim consolidated financial statements in Canadian dollars. In this MD&A, unless otherwise specified, all monetary amounts are in Canadian dollars, all references to “C$,” mean Canadian dollars and all references to “$” or “US$” and mean U.S. dollars.
The following MD&A provides the Company’s management perspective on the financial position and financial performance of the Company and its consolidated subsidiaries for the three and nine month periods ended December 31, 2023 and December 31, 2022. This MD&A provides information to assist readers of, and should be read in conjunction with, the Company’s December 31, 2023 condensed interim consolidated financial statements and the accompanying notes thereto and the March 31, 2023 audited consolidated financial statements and the accompanying notes thereto. The condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and the financial information included in this MD&A is derived from the condensed interim consolidated financial statements, except as otherwise noted.
This discussion of the Company’s business may include forward-looking information with respect to the Company, including its operations and strategies, as well as financial performance and conditions, which are subject to a variety of risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Information” below. Readers are directed to carefully review the sections entitled “Non-IFRS Financial Measures” included elsewhere in this MD&A. For a discussion of risks and uncertainties that may affect the Company and its financial position and results, refer to “Risk Factors” in the annual information form (the “Annual Information Form”) filed by the Company with the applicable Canadian securities regulatory authorities (available under the Company’s System for Electronic Document Analysis and Retrieval (“SEDAR+”) profile at www.sedarplus.ca) and filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) as part of the Company’s annual report on Form 40-F (available on the SEC’s EDGAR website at www.sec.gov), as well as in the other documents Algoma has filed with the OSC and the SEC.
This MD&A is dated as of February 6, 2024. This document has been approved and authorized for issue by the Board of Directors on February 6, 2024. Events occurring after this date could render the information contained herein inaccurate or misleading in a material respect.
Functional Currency
The Company’s functional currency is the US dollar, which reflects the Company’s operational exposure to the US dollar. The Company uses the Canadian dollar as its presentation currency. In accordance with IFRS, all amounts presented are translated to Canadian dollars using the current rate method whereby all revenues, expenses and cash flows are translated at the average rate that was in effect during the period or presented at their Canadian dollar transactional amounts and all assets and liabilities are translated at the prevailing closing rate in effect at the end of the period. Equity transactions have been translated at historical rates. The resulting net translation adjustment has been reflected in other comprehensive income or loss.
The currency exchange rates for the relevant periods of fiscal 2024 and fiscal 2023 are provided below:
1
| Average Rate | Period End Rate | |||||||||||||||
| FY2024 | FY2023 | FY2024 | FY2023 | |||||||||||||
| April 1 to June 30 |
1.3431 | 1.2628 | 1.3240 | 1.2886 | ||||||||||||
| July 1 to September 30 |
1.3412 | 1.3061 | 1.3520 | 1.3707 | ||||||||||||
| October 1 to December 31 |
1.3619 | 1.3580 | 1.3226 | 1.3544 | ||||||||||||
Cautionary Note Regarding Forward-Looking Information
This MD&A contains “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and “forward-looking information” under applicable Canadian securities legislation (collectively, “forward-looking statements”), that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, results of operations, liquidity, plans and strategic objectives, Algoma’s expectation to pay a quarterly dividend, the expected timing of the EAF (as defined below) transformation and the resulting increase in raw steel production capacity and reduction in carbon emissions. In some cases, you can identify forward-looking statements by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “pipeline,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” or the negative of these terms or other similar expressions. In addition, any statements that refer to expectations, intentions, projections or other characterizations of future events or circumstances contain forward-looking information. Statements containing forward-looking information are not historical facts but instead represent management’s expectations, estimates and projections regarding future events or circumstances. The statements we make regarding the following matters are forward-looking by their nature:
| • | future financial performance; |
| • | future cash flow and liquidity; |
| • | future capital investment; |
| • | our ability to operate our business, remain in compliance with debt covenants and make payments on our indebtedness, with a substantial amount of indebtedness; |
| • | significant domestic and international competition; |
| • | macroeconomic pressures in the markets in which we operate; |
| • | increased use of competitive products; |
| • | a protracted fall in steel prices resulting in the impairment of assets; |
| • | excess capacity, resulting in part from expanded production in China and other developing economies; |
| • | low-priced steel imports and decreased trade regulation, tariffs and other trade barriers; |
| • | protracted declines in steel consumption caused by poor economic conditions in North America or by the deterioration of the financial position of our key customers; |
| • | increases in annual funding obligations resulting from our under-funded pension plans; |
| • | supply and cost of raw materials and energy; |
| • | impact of a downgrade in credit rating and its impact on access to sources of liquidity; |
| • | currency fluctuations, including an increase in the value of the Canadian dollar against the U.S. dollar; |
| • | environmental compliance and remediation; |
| • | unexpected equipment failures and other business interruptions; |
| • | a protracted global recession or depression; |
| • | changes in or interpretation of royalty, tax, environmental, greenhouse gas, carbon, accounting and other laws or regulations, including potential environmental liabilities that are not covered by an effective indemnity or insurance; |
| • | risks associated with existing and potential lawsuits and regulatory actions made against us; |
| • | impact of disputes arising with our partners; |
| • | the ability of Algoma to implement and realize its business plans, including Algoma’s ability to complete its transition to EAF steelmaking on time and at its anticipated cost; |
| • | Algoma’s ability to operate the EAF; |
2
| • | the risks that higher cost of internally generated power and market pricing for electricity sourced from Algoma’s current grid in Northern Ontario could have an adverse impact on our production and financial performance; |
| • | access to an adequate supply of the various grades of steel scrap at competitive prices; |
| • | the risks associated with the steel industry generally; |
| • | economic, social and political conditions in North America and certain international markets; |
| • | changes in general economic conditions, including ongoing market uncertainty and global geopolitical instability; |
| • | risks associated with inflation rates; |
| • | risks inherent in the Corporation’s corporate guidance; |
| • | failure to achieve cost and efficiency initiatives; |
| • | risks inherent in marketing operations; |
| • | risks associated with technology, including electronic, cyber and physical security breaches; |
| • | projected increases in capacity liquid steel as a result of the transformation to EAF steelmaking; |
| • | projected cost savings associated with the transformation to EAF steelmaking; |
| • | projected reduction in carbon dioxide (“CO2”) emissions associated with the transformation to EAF steelmaking, including with respect to the impact of such reductions on the CIB Loan and carbon taxes payable; |
| • | construction projects are subject to risks, including delays and cost overruns; |
| • | our ability to enter into contracts to source scrap and the availability of scrap; |
| • | the availability of alternative metallic supply; |
| • | the restart of coke making operations, the anticipated timing to restart the blast furnace, produce usable hot metal and return to full production; |
| • | the Company’s expectation to declare and pay a quarterly dividend; and |
| • | business interruption or unexpected technical difficulties, including impact of weather; counterparty and credit risk; labour interruptions and difficulties. |
The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the risks provided under “Risk Factors” in the Annual Information Form.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward- looking statements are reasonable, we cannot guarantee that future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or will occur. Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the underlying assumptions will prove to be correct. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this MD&A, to conform these statements to actual results or to changes in our expectations.
3
Overview of the Business
Algoma Steel Group Inc., formerly known as 1295908 B.C. Ltd. (the “Company”), was incorporated on March 23, 2021 under the Business Corporations Act of British Columbia solely for the purpose of purchasing Algoma Steel Holdings Inc. On May 24, 2021, the Company entered into a Merger Agreement (the “Merger”), by and among the Company, a wholly-owned subsidiary of the Company and Legato Merger Corp. (“Legato”). On October 19, 2021, the Company completed its merger with Legato, listing its common shares and warrants under the symbol ‘ASTL’ and ASTLW’, respectively, on the Toronto Stock Exchange (TSX) and the Nasdaq Stock Market (Nasdaq). Algoma Steel Group Inc. is the ultimate parent holding company of Algoma Steel Inc. and does not conduct any business operations.
Algoma Steel Inc. (“ASI”), the operating company and a wholly-owned subsidiary of Algoma Steel Holdings Inc., was incorporated on May 19, 2016 under the Business Corporations Act of British Columbia. ASI is an integrated steel producer with its active operations located entirely in Sault Ste. Marie, Ontario, Canada. ASI produces sheet and plate products that are sold primarily in Canada and the United States.
Strategic Initiatives
Electric Arc Furnace (“EAF”)
On November 10, 2021, the Company’s Board of Directors authorized the Company’s transformation to electric arc steelmaking (EAF Transformation Project), including the construction of two state-of- the-art electric-arc-furnaces (EAF) to replace its existing No. 7 blast furnace steelmaking operations. The EAF Transformation Project is expected to reduce Algoma’s carbon emissions by approximately 70%.
EAF steelmaking is a method of producing steel by melting scrap metal and other metallic inputs using an electric arc. This process is widely used in modern steel production. The EAF steelmaking facility is being built on vacant land adjacent to the current steelmaking facility to mitigate disruption to current operations and will be integrated into existing downstream equipment and facilities, thereby reducing capital expenditure requirements.
The EAF Transformation Project is expected to improve product mix, reduce fixed costs, provide significant carbon tax savings, increase production capacity and decrease the Company’s environmental footprint. The Company anticipated a 30-month construction phase for the EAF facility, with construction having started in April 2022 and commencement of start-up activities to begin prior to calendar year-end 2024 and expects to transition away from its current blast furnace steelmaking thereafter as increased electric power from the provincial grid supplying the Company becomes available.
The following paragraphs outline key elements and milestones of the EAF Transformation Project:
Technology
On December 2, 2021, the Company announced that it has selected Danieli & C. Officine Meccaniche S.p.A. (“Danieli”) as the sole technology provider for the EAF steelmaking facility. In connection with this agreement, Danieli will supply its latest technology solutions including AC-Digimelter technology powered by Q-One digital power systems and Q-SYM automated scrap yard. Various EAF and power components have been received on the Company’s site ready for installation, including two EAF charging cranes with lifting capacity of 570 short tons each to facilitate further installation of the EAF components.
4
Construction and Environmental Permitting
The contract for the structural building housing the EAF Transformation was awarded on April 25, 2022, to Hamilton, Ontario-based Walters Group Inc. (“Walters”). Walters is responsible for fabricating and erecting the main building structure in addition to the necessary dust collection hoods. Pursuant to the fixed-price contract, Walters is using Algoma’s steel plate products in the fabrication of heavy structural components, and will work with local industrial contractor, SIS Manufacturing Inc., for the fabrication of these key elements. As of December 31, 2023, approximately 90% of the EAF building structural steel has been erected.
On March 13, 2023, the Company announced the appointment of EllisDon as Construction Manager for completion of the EAF Transformation Project. The Construction Manager role is central to the successful planning, execution, and completion of the various construction projects. Their responsibilities encompass various aspects of project management and oversight to ensure that construction projects are completed safely, on time, within budget, and to the required quality standards.
The Company is progressing its applications for environmental operational permits through the Province’s Ministry of Environment, Conservation and Parks.
Budget and Project Financing
As previously updated, the Company plans to invest approximately C$825-C$875 million in the EAF Transformation Project, funded with previously announced financing commitments below, proceeds from the Merger, and cash from operations.
The Company previously secured an agreement with the Government of Canada through the Ministry of Innovation, Science and Economic Development Canada (ISED), whereby the Company will receive up to C$200.0 million in the form of a loan to support the EAF Transformation Project. The loan is provided through the Net Zero Accelerator Initiative of the Federal Strategic Innovation Fund (the “Federal SIF”). The repayment period will commence upon the earlier of the Company having access to full power from the provincial electricity grid to operate the EAF independently, or January 1, 2030. The annual repayment is further dependent on the Company’s performance in reducing its greenhouse gas emissions. As of December 31, 2023, the Company has received C$124.4 million from the ISED loan.
In addition, the Company previously entered into an agreement (CIB Loan) with the Canada Infrastructure Bank (CIB) with access up to C$220 million in loan financing towards the EAF Transformation Project. Pursuant to the terms of the CIB Loan, as of December 31, 2023, the amount of credit available under the CIB Loan has been reduced to approximately C$18.2 million as a result of restricted payments in respect of dividends and share repurchases completed by the Company through normal course market purchases and Substantial Issuer Bid for the Company’s common shares completed in September 2022.
The EAF Transformation project has advanced through fiscal 2024, with approximately 86% of the budgeted project cost contracted and the remainder uncontracted as of December 31, 2023. The Company continues to expect that the completion of the EAF project will be funded with cash-on-hand, cash generated through operations, Federal SIF and available borrowings under the Company’s existing undrawn and recently upsized and extended ABL credit facility.
From the inception of the EAF Transformation Project through December 31, 2023, the Company invested a total of C$509.9 million (excluding the benefit of Government loans). As of December 31, 2023, the Company had C$93.8 million in total available Government financing including C$75.6 million loan under the Federal Strategic Innovation Fund and C$18.2 million under the CIB credit facility.
5
Access to Electricity
The Company upgraded its internal power generation asset known as Lake Superior Power (LSP Plant) with two LM6000PC aeroderivative gas turbines, multiple control systems, and a full rewind of the No. 2 generator to provide 110-115 MW towards the operation of the EAFs. The LSP Plant combined with current 115kV grid power are expected to provide sufficient power to run both electric arc furnaces in an alternating mode, thereby allowing the Company to produce the same volume of steel as produced today as it reduces output from its No. 7 Blast Furnace. In June 2023, the Company received conditional approval from the Independent Electricity System Operator (IESO) to connect the EAFs to the current 115kV electricity grid with the LSP Plant.
Together the IESO-approved connection and Algoma’s power upgrade are expected to provide sufficient power to run both electric arc furnaces in an alternating mode.
The Company is progressing its discussions with the Independent Electricity System Operator (“IESO”), Ontario independent electricity regulator, as well as with the Ministry of Energy in respect of securing more grid power to realize the full potential of the EAF Transformation Project. On September 28, 2023, the Company received conditional approval of the next phase of the Company’s EAF Connection Proposal (CAA ID: 2021-704), providing for connecting the EAF load facility with electricity supplied from the local 230kV transmission line to be constructed and operated by PUC Transmission LP.
Significant progress has continued on long term regional power access for Northeast and Eastern Ontario. On October 23, 2023, the Ontario provincial government announced that it has issued an Order-in-Council declaring three regional transmission line projects as priorities, which includes one new line in eastern Ontario and two new lines in northeastern Ontario. These lines are expected to enable economic growth activities including among other things the production of clean steel at Algoma. The Order-in-Council will streamline the Ontario Energy Board’s (OEB) regulatory approval process for these lines. The government has also directed the OEB to amend Hydro One Network Inc. (Hydro One)’s transmission license to designate it as the transmitter responsible for the development of the three lines.
Iron Ore Extension
On October 2, 2023, the company announced a two-year extension of its existing iron ore purchase contract with United States Steel Corporation (“U. S. Steel”) (NYSE: X), with an option to further extend for a third year solely at Algoma’s discretion. The extended purchase contract is anticipated to cover the expected volumes of iron ore required to complete Algoma’s transition from blast furnace to EAF steelmaking.
The extension with U. S. Steel represents another strategic milestone for Algoma as it continues on its transformative journey toward sustainable steel production through EAF steelmaking.
Plate Mill Modernization
In 2019, the Company started a plate mill modernization project (the “PMM Project”) which is to be completed in two phases and plans to invest a total of approximately C$135 million, which will be partly funded by government loan facilities totalling approximately C$50 million. This strategic initiative will enhance the capacity and quality of the Company’s discrete plate product line, which is a differentiated product capability and a key source of competitive advantage. The PMM Project will allow the Company to satisfy higher product quality requirements of its customers with respect to surface and flatness, increase high strength capability with availability of new grades, ensure reliability of plate production with direct ship capability and increase overall plate shipment capacity through debottlenecking and automation.
The modernization process is comprised of two phases: the first being a quality focus and the second phase a productivity focus. The first phase has been completed, and focused on quality, with installation and commissioning upgrades of a new primary slab de-scaler (to improve surface quality), automated surface inspection system (to detect and map surface quality), an in- line hot leveler (to improves flatness), and automation of the 166 inch plate mill (which expands the Company’s grade offering).
The second phase focuses on productivity enhancement and will be completed in two separate minor outages throughout 2024 to decrease commissioning risks and to provide for lesser impact to our customers. The Company has installed and is presently commissioning the inline dividing shear and plate piler. The first 20-day outage involves installation and commissioning upgrades of onboard descaling systems for the 2Hi and 4Hi roughing roll stands; mill alignment and work roll offset at the 4Hi mill; and new cooling beds coupling the plate mill and shear line, dividing shear, plate piler and automated marking machine. The second minor outage in 2024 involves installing and commissioning the new 4Hi DC drive.
6
Lime Production
In June, 2023, the Company completed a C$16 million refurbishment project of its lime kiln production plant that processes limestone and other calcium carbonate-rich materials to produce quicklime (calcium oxide, CaO) and dolomitic lime (a mixture of calcium and magnesium oxides). Lime is an essential component of the steelmaking process, as it is used in various stages to remove impurities, control the slag composition,
and adjust the chemical balance in the steelmaking process. The Company has a constant and growing demand for lime product as it progresses through its transformation to EAF steelmaking.
Key Leadership and Governance Announcements
Effective December 1, 2023, Chris Ford was appointed Vice President – Commercial succeeding Rory Brandow upon announcing his retirement.
Effective December 31, 2023, Andrew Schultz has retired from the Board of Directors.
Environmental Matters
Steel producers such as Algoma are subject to numerous environmental laws and regulations (“Environmental Law”), including federal and provincial, relating to the protection of the environment. The Company can incur regulatory liability as well as civil liability for contamination on-site (soil, groundwater, indoor air), contaminant migration and impacts off-site including in respect of groundwater, rivers, lakes, other waterways, and air emissions.
On June 9, 2022, the Company experienced an incident where an oil-based lubricant was released from our hot mill in Sault Ste. Marie. The oil entered our water treatment facility, and some quantity of the oil was discharged into the St. Mary’s River. Following the discharge, traffic on the river was temporarily halted, the local public health authority issued a water advisory and a nearby municipality issued a precautionary emergency declaration regarding its municipal water supply. We actively worked with our response partners deploying equipment and resources to contain and mitigate the effects on the waterway and neighboring communities and to clean up the released oil, while working with local, provincial, and federal regulatory authorities. The public health authorities lifted the water advisory on June 21, 2022 and the US Coast Guard did not see any impact to shoreline or marine wild life. The provincial and federal regulators (Ontario’s Ministry of the Environment, Conservation and Parks, and Environment and Climate Change Canada) are each currently investigating this incident, but have not laid any charges to date. If charges are laid, we may be subject to regulatory fines and other penalties and/or orders. We may also be subject to private actions in the future as a result of the incident. The financial and other impacts of this incident are currently unknown.
Fatal Incident Involving an Employee of a Contractor
The Company reported on June 16, 2023 a fatal incident involving an employee of a contractor, retained to perform specialized maintenance work cleaning an out-of-service gas line. We are actively investigating the fatal accident internally, and providing full cooperation with provincial authorities as they investigate.
Environmental, Social and Governance (“ESG”) Report
On September 12th, 2023 Algoma published its inaugural ESG report, marking a significant milestone in our journey towards sustainable and responsible business practices. At Algoma, we firmly acknowledge that ESG factors encompass a broad spectrum of risks and opportunities, impacting not only our organization but also our valued stakeholders, including investors, customers, suppliers, employees, governments, and the communities where we operate. Our unwavering commitment is to conduct our business activities with careful and conscientious consideration of these ESG factors.
7
Our vision extends beyond mere corporate responsibility; we aspire to play a pivotal role in shaping a sustainable and environmentally responsible future for Canadian steel production. Algoma is embarking on a transformative investment in EAF steelmaking, a significant step towards reducing our environmental footprint. We pledge to continually innovate and incorporate eco-friendly practices throughout our production processes. Simultaneously, we remain steadfast in our dedication to the health and safety of our workforce, the prosperity of communities we operate in, and the cultivation of a diverse, inclusive, and equitable workforce.
In development of our inaugural ESG report, we have conducted a comprehensive ESG materiality assessment. This rigorous assessment has enabled us to pinpoint and prioritize the ESG factors with the greatest potential to affect our business, ensuring that we generate lasting value for our investors while upholding our commitment to long-term sustainability. This foundational work forms the bedrock of our overarching ESG strategy.
Transparency and accountability are integral to our ESG journey. Our reporting aligns with the Sustainability Accounting Standards Board (SASB) Standards and adheres to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) to the greatest extent feasible. We are actively engaged in ongoing efforts to further harmonize our practices with these frameworks. This report provides comprehensive insights into our ESG strategy, outlines our approach to mitigating ESG risks, and underscores our commitment to harnessing ESG opportunities.
Our ESG approach is firmly underpinned by robust governance structures that empower us to effectively oversee and manage ESG-related risks and opportunities. Our Board of Directors assumes ultimate accountability for ESG factors, including those related to climate change. The Nominating and Corporate Governance Committee plays a pivotal role in supporting the Board by overseeing Algoma’s ESG framework, collaborating with other Board Committees, and reporting on ESG matters to the full Board.
At Algoma, our journey towards a sustainable and responsible future is not just a commitment; it’s a critical component of our strategy. We recognize that ESG excellence is integral to our continued success, and we remain resolute in our pursuit of a brighter, more sustainable future for all.
Subsequent Event
On January 20, 2024, an incident occurred involving the structural collapse of a key support structure that carries various utilities crucial for our operations including the Company’s coke-making plant. The incident is currently under investigation by third parties to determine its origin and cause and the scene remains controlled for safety reasons. The unforeseen structural collapse, coupled with attendant fires and explosions, did not result in any injuries but has had a significant effect on our operations.
The incident has resulted in significant disruptions to various utilities that are essential for our coke-making and ironmaking operations. These disruptions have, unfortunately, adversely affected and curtailed other critical utilities as well. Among other things, for safety reasons, blast furnace operations were suspended at the time of the incident. The blast furnace experienced operational challenges upon initial restart due to unforeseen impacts related to the piping collapse.
Limited production of coke resumed at three coke-production units on January 23, which, when combined with inventories on hand and the availability of third-party coke supplies, is currently expected to fulfill the Company’s requirements for normal steelmaking production while the repair plan is developed. All necessary repairs to the blast furnace have been completed, and the furnace is now undergoing a gradual restart process. Additional energy will be added to the furnace as conditions permit. Based on current information, usable hot metal is expected to be produced within the next seven days, with a return to full production anticipated within the next two weeks. Algoma has standard insurance coverage that is intended to address circumstances such as these, including business interruption insurance. The Company is in the process of submitting claims under its insurance policies for covered losses.
The extent of the damages and the full scope of the incident are still being assessed and we are actively working to restore normalcy as swiftly as possible.
We are making every effort to expedite the investigation, address the aftermath, and resume normal operations at the earliest possible time. The outage at the blast furnace and limited coke production are, however, collectively expected to negatively impact shipments, costs and profitability.
Factors Affecting Financial Performance
The Company’s costs are primarily driven by commodity prices, including the price of iron ore, coal, electricity and natural gas, and inflation or other fluctuations in the prices of key raw materials and other inputs essential to our operations can have a substantial impact on our profitability and overall financial performance. Inflationary pressures on commodity raw material inputs can arise from various factors, including global supply and demand dynamics, geopolitical events, natural disasters, trade policies, and currency exchange rate fluctuations. These factors are often beyond our control and can lead to substantial price increases in raw materials, as well as challenges in managing our supply chain and inventory affecting our ability to secure adequate raw material supplies in a timely and cost-effective manner. Increased costs of raw materials can directly erode our profit margins, making it challenging to maintain competitive pricing in the market.
8
North American steel pricing is largely dependent on global supply and demand, the level of steel imports into North America, economic conditions in North America, global steelmaking overcapacity, and increased raw material prices. North American steel producers compete with many foreign producers, including those in Europe, China and other Asian countries. Competition from foreign producers is periodically intensified by weakening regional economies of their surrounding countries, and resultant decisions by these foreign producers with respect to export volumes and pricing possibly more influenced by political and economic policy considerations than by prevailing market conditions.
Global steel production decreased 1.1% in the first half of calendar 2023 compared to the first half of calendar 2022 to 943.9 million metric tonnes. China represents approximately 57% of global crude steel production. (source: Worldsteel Association “June 2023 crude steel production” July 25, 2023). According to the Organization for Economic Cooperation and Development (OECD) global steelmaking capacity continues to increase at a rapid pace in a period of weakening steel market conditions. A total of 329 steel investment projects are either currently underway or in the planning stages around the world. Excess capacity is a structural issue that continues to dampen prospects for the global steel industry. OECD reported that global capacity utilization was 74.3% in 2022, with excess capacity of approximately 632 million metric tonnes in 2022, which is up from 2021 levels and is the equivalent to approximately 40 times the size of the Canadian steel industry.
Overall Results
Net (Loss) Income
The Company’s net loss for the three month period ended December 31, 2023 was C$84.8 million compared to net loss of C$69.8 million for the three month period ended December 31, 2022, resulting in a C$15.0 million increase of net loss. The increase is primarily due to the change in fair value of the warrant liability (C$14.0 million), the change in fair value of the share-based compensation liability (C$11.5 million), the change in fair value of the earnout liability (C$6.4 million), the decrease in income tax recovery (C$5.1 million), the increase in foreign exchange loss (C$4.1 million) and the increase in finance costs (C$1.4 million). This was offset, in part, due to the decrease in loss from operations (C$28.8 million), for reasons described below.
The Company’s net income for the nine month period ended December 31, 2023 was C$77.2 million compared to net income of C$318.9 million for the nine month period ended December 31, 2022, resulting in a C$241.7 million decrease of net income. The decrease is primarily due to a decrease in income from operations (C$104.6 million), for reasons described below, the change in fair value of the warrant liability (C$70.3 million), the increase in foreign exchange loss (C$55.3 million), the change in fair value of the share-based compensation liability (C$25.6 million) and the change in fair value of the earnout liability (C$12.9 million). This was offset, in part, due to the decrease in income tax expense (C$33.5 million).
Income (Loss) from Operations
The Company’s loss from operations for the three month period ended December 31, 2023 was C$36.9 million compared to loss from operations of C$65.7 million for the three month period ended December 31, 2022, a decrease of C$28.8 million. The decrease is primarily due to increased steel shipment volumes as a result of improved market conditions and resolving the temporary downstream finishing constraints for plate that occurred during the three month period ended December 31, 2022. Further, higher cost of steel revenue as a result of increased shipment volumes was partially offset by a decrease in pricing for natural gas, purchased coke, alloys and power in the three month period ended December 31, 2023.
The Company’s income from operations for the nine month period ended December 31, 2023 was C$164.2 million compared to income from operations of C$268.8 million for the nine month period ended December 31, 2022, a decrease of C$104.6 million. The decrease is primarily due to increased cost of sales (C$170.1 million), which is a result of increased shipment volumes and an increase in the purchase price of key inputs such as coal and ore pellets at the beginning of the year. In addition, the decrease in income from operations was affected by continued softening in steel pricing. This was offset, in part, by increased pension and post-employment benefit expenses through ratifying the collective bargaining agreements (C$53.3 million) in the nine month period ended December 31, 2022.
9
Non-IFRS Financial Measures
In this MD&A, we use certain non-IFRS measures to evaluate the performance of the Company. These terms do not have any standardized meaning prescribed within IFRS and, therefore, may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing a further understanding of our financial performance from management’s perspective. Accordingly, they should not be considered in isolation nor as a substitute for analysis of our financial information reported in accordance with IFRS. As described below, the term “Adjusted EBITDA” is a financial measure utilized by the Company in reporting its financial results that is not defined by IFRS. The terms “Average Net Sales Realization” (“NSR”) and “Cost Per Ton of Steel Products Sold” are financial measures utilized by the Company in reporting its financial results that are not defined by IFRS. Average Net Sales Realization, as defined the Company, refers to steel revenue less freight revenue per steel tons shipped. Average Net Sales Realization is included because it allows management and investors to evaluate our selling prices per ton of steel products sold, excluding geographic impact of freight charges, in order to enhance comparability when comparing our sales performance to that of our competitors. Cost Per Ton of Steel Products Sold, as defined by the Company, refers to cost of steel revenue less freight, depreciation, carbon tax and past service costs for pension and post-employment benefit adjustments (included in cost of steel revenue) per steel tons shipped. Cost Per Ton of Steel Products Sold allows management and investors to evaluate the Company’s cost of steel products sold on a per ton basis, excluding the items that we exclude when calculating Adjusted EBITDA, to evaluate our operating performance and to enhance the comparability of our costs over different time periods. We consider each of Average Net Sales Realization and Cost Per Ton of Steel Products Sold to be meaningful measures to assess our operating performance in addition to IFRS measures. A reconciliation of each of Average Net Sales Realization and Cost Per Ton of Steel Products Sold to their most comparable IFRS financial measures are contained in this MD&A.
Adjusted EBITDA, as defined by the Company, refers to net income or loss before depreciation of property, plant, equipment and amortization of intangible assets, finance costs, interest on pension and other post-employment benefit obligations, income taxes, foreign exchange loss (gain), finance income, carbon tax, changes in fair value of warrant, earnout and share-based compensation liabilities, transaction costs, listing expense, past service costs – pension, past service costs – post-employment benefits and share-based compensation related to Omnibus Long Term Incentive Plan. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue for the corresponding period. Adjusted EBITDA per ton is calculated by dividing Adjusted EBITDA by tons of steel products sold for the corresponding period. Adjusted EBITDA is not intended to represent cash flow from operations, as defined by IFRS, and should not be considered as alternatives to income from operations, or any other measure of performance prescribed by IFRS. Adjusted EBITDA, as defined and used by the Company, may not be comparable to Adjusted EBITDA as defined and used by other companies. We consider Adjusted EBITDA to be a meaningful measure to assess our operating performance in addition to IFRS measures. These measures are included because we believe it can be useful in measuring our operating performance and our ability to expand our business and provide management and investors with additional information for comparison of our operating results across different time periods and to the operating results of other companies. Adjusted EBITDA is also used by analysts and our lenders as measures of our financial performance. In addition, we consider Adjusted EBITDA margin and Adjusted EBITDA per ton, to be useful measures of our operating performance and profitability across different time periods that enhance the comparability of our results. For a reconciliation of Adjusted EBITDA to its most comparable IFRS financial measures, see “Adjusted EBITDA” presented in this MD&A.
Adjusted EBITDA, Average Net Sales Realization and Cost Per Ton of Steel Products Sold have limitations as analytical tools and should not be considered in isolation from, or as alternatives to, net income, cash flow from operations or other data prepared in accordance with IFRS. Some of these limitations are:
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| • | they do not reflect cash outlays for capital expenditures or contractual commitments; |
| • | they do not reflect changes in, or cash requirements for, working capital; |
| • | they do not reflect the finance costs, or the cash requirements necessary to service interest or principal payments on indebtedness; |
| • | they do not reflect income tax expense or the cash necessary to pay income taxes; |
| • | they do not reflect interest on pension and other post-employment benefit obligations; |
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, as such Adjusted EBITDA does not reflect cash requirements for such replacements; |
| • | they do not reflect the impact of earnings or charges resulting from matters we believe not to be indicative of our ongoing operations; and |
| • | other companies, including other companies in our industry, may calculate these measure differently than as presented by us, limiting their usefulness as a comparative measure. |
Steel Revenue and Cost of Sales
| Three months ended December 31, |
Nine months ended December 31, |
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| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| tons |
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| Steel Shipments |
h | 12.6 | % | 516,068 | 458,341 | h | 14.2 | % | 1,634,499 | 1,431,068 | ||||||||||||||||||||||
| millions of dollars | ||||||||||||||||||||||||||||||||
| Revenue |
h | 8.4 | % | C$ | 615.4 | C$ | 567.8 | h | 3.5 | % | C$ | 2,175.2 | C$ | 2,101.1 | ||||||||||||||||||
| Less: |
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| Freight included in revenue |
(48.1 | ) | (43.7 | ) | (150.7 | ) | (128.3 | ) | ||||||||||||||||||||||||
| Non-steel revenue |
(10.4 | ) | (12.1 | ) | (47.3 | ) | (31.9 | ) | ||||||||||||||||||||||||
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| Steel revenue |
h | 8.8 | % | $ | 556.9 | $ | 512.0 | h | 1.9 | % | C$ | 1,977.2 | C$ | 1,940.9 | ||||||||||||||||||
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| Cost of steel revenue |
h | 1.7 | % | C$ | 565.3 | C$ | 556.0 | h | 8.3 | % | C$ | 1,730.1 | C$ | 1,597.8 | ||||||||||||||||||
| Depreciation included in cost of steel revenue |
(31.7 | ) | (24.6 | ) | (80.1 | ) | (69.4 | ) | ||||||||||||||||||||||||
| Carbon tax included in cost of steel revenue |
(3.5 | ) | (1.2 | ) | (18.2 | ) | (4.3 | ) | ||||||||||||||||||||||||
| Past service costs - pension benefits |
— | — | — | (44.5 | ) | |||||||||||||||||||||||||||
| Past service costs - post-employment benefits |
— | — | — | (3.4 | ) | |||||||||||||||||||||||||||
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| Cost of steel products sold |
i | 0.0 | % | C$ | 530.1 | C$ | 530.2 | h | 10.5 | % | C$ | 1,631.8 | C$ | 1,476.2 | ||||||||||||||||||
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| dollars per ton | ||||||||||||||||||||||||||||||||
| Revenue per ton of steel sold |
i | 3.8 | % | C$ | 1,192 | C$ | 1,239 | i | 9.3 | % | C$ | 1,331 | C$ | 1,468 | ||||||||||||||||||
| Cost of steel revenue per ton of steel sold |
i | 9.7 | % | C$ | 1,095 | C$ | 1,213 | i | 5.3 | % | C$ | 1,058 | C$ | 1,117 | ||||||||||||||||||
| Average net sales realization on steel sales (i) |
i | 3.3 | % | C$ | 1,079 | C$ | 1,116 | i | 10.8 | % | C$ | 1,210 | C$ | 1,356 | ||||||||||||||||||
| Cost per ton of steel products sold |
i | 11.2 | % | C$ | 1,027 | C$ | 1,157 | i | 3.3 | % | C$ | 998 | C$ | 1,032 | ||||||||||||||||||
| (i) | Represents Steel revenue (being Revenue less (a) Freight included in revenue and (b) Non-steel revenue) divided by the number of tons of Steel Shipments during the applicable period. |
Revenue and steel revenue increased by 8.4% and 8.8%, respectively, and steel shipment volumes increased by 12.6% during the three month period ended December 31, 2023 as compared to the three month period ended December 31, 2022. The Company’s average NSR on steel sales per ton shipped was C$1,079 for the three month period ended December 31, 2023 (December 31, 2022 - C$1,116), a decrease of 3.3%. The overall increase in revenue and steel revenue is mainly due to increased steel shipment volumes as a result of improved market conditions and resolving the temporary downstream finishing constraints for plate that occurred during the three month period ended December 31, 2022.
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Revenue and steel revenue increased by 3.5% and 1.9%, respectively, and steel shipment volumes increased by 14.2% during the nine month period ended December 31, 2023 as compared to the nine month period ended December 31, 2022. The Company’s average NSR on steel sales per ton shipped was C$1,210 for the nine month period ended December 31, 2023 (December 31, 2022 - C$1,356), a decrease of 10.8%. The overall increase in revenue is mainly due to reasons as discussed above, offset, in part, by softening steel prices.
For the three month period ended December 31, 2023, the Company’s cost of steel revenue increased by 1.7% to C$565.3 million (December 31, 2022 - C$556.0 million), while cost of steel products sold decreased to C$530.1 million (December 31, 2022 – C$530.2 million). The overall increase in cost of steel revenue is mainly due to increased shipment volumes, offset, in part, by a decrease in pricing for natural gas, purchased coke, alloys and power.
For the nine month period ended December 31, 2023, the Company’s cost of steel revenue and cost of steel products sold increased by 8.3% to C$1,730.1 million (December 31, 2022 - C$1,597.8 million) and 10.5% to C$1,631.8 million (December 31, 2022 – C$1,476.2 million), respectively, for reasons as discussed above and higher purchase prices for coal and ore pellets at the beginning of the year.
Non-steel Revenue
The Company’s non-steel revenue for the three month period ended December 31, 2023 was C$10.4 million (December 31, 2022 – C$12.1 million). The decrease of C$1.7 million was mainly due to decreased revenue on braize and kish products. This was offset, in part, by increase in tar sales.
The Company’s non-steel revenue for the nine month period ended December 31, 2023 was C$47.3 million (December 31, 2022 – C$31.9 million). The increase of C$15.4 million was mainly due to increased revenue on braize, tar, scrap and ore fines.
Administrative and Selling Expenses
| Three months ended December 31, |
Nine months ended December 31, |
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| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Personnel expenses |
C$ | 12.8 | C$ | 7.8 | C$ | 35.1 | C$ | 33.0 | ||||||||
| Professional, consulting, legal and other fees |
4.3 | 4.5 | 14.5 | 14.8 | ||||||||||||
| Insurance |
6.5 | 5.2 | 19.2 | 16.4 | ||||||||||||
| Software licenses |
1.4 | 1.5 | 3.8 | 3.5 | ||||||||||||
| Amortization of intangible assets and non-production assets |
— | 0.1 | 0.2 | 0.3 | ||||||||||||
| Other administrative and selling |
3.5 | 2.6 | 10.1 | 6.3 | ||||||||||||
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| C$ | 28.5 | C$ | 21.7 | C$ | 82.9 | C$ | 74.3 | |||||||||
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As illustrated in the table above, the Company’s administrative and selling expenses for the three month period ended December 31, 2023, were C$28.5 million (December 31, 2022 - C$21.7 million). The increase in administrative and selling expenses of C$6.8 million is mainly due to an increase in personnel expenses (C$5.0 million), insurance (C$1.3 million) and other administrative and selling (C$0.9 million). This was offset, in part, by a decrease in professional, consulting, legal and other fees (C$0.2 million).
For the nine month period ended December 31, 2023, the Company’s administrative and selling expenses were C$82.9 million (December 31, 2022 - C$74.3 million). The increase in administrative and selling expenses of C$8.6 million is mainly due to an increase in insurance (C$2.8 million), other administrative and selling (C$3.8 million), and personnel expenses (C$2.1 million).
12
Finance Costs, Finance Income, Interest on Pension and Other Post-employment Benefit Obligations, and Foreign Exchange Gains and Losses
The Company’s finance costs represent interest cost on the Company’s Revolving Credit Facility described in the section entitled “Capital Resources - Financial Position and Liquidity” included elsewhere in this MD&A. Finance costs also include the amortization of transaction costs related to the Company’s debt facilities and the accretion of the benefits in respect of the Company’s governmental loan facilities in respect of the interest free loan issued by, and the grant given by the Canadian federal government as well as the low interest rate loan issued from the Ontario provincial government, all of which are discussed below (Financial Resources and Liquidity - Cash Flow Used in Investing Activities) and the unwinding of discounts on the Company’s environmental liabilities.
| Three months ended December 31, |
Nine months ended December 31, |
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| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Interest on the following facilities |
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| Revolving Credit Facility |
C$ | — | C$ | 0.1 | C$ | — | C$ | 0.1 | ||||||||
| Revolving Credit Facility fees |
0.7 | 0.5 | 1.9 | 1.8 | ||||||||||||
| Unwinding of issuance costs of debt facilities and discounts on environmental liabilities, and accretion of governmental loan benefits |
4.0 | 3.7 | 12.3 | 10.7 | ||||||||||||
| Other interest expense (recovery) |
0.7 | (0.3 | ) | 1.7 | 0.4 | |||||||||||
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| C$ | 5.4 | C$ | 4.0 | C$ | 15.9 | C$ | 13.0 | |||||||||
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As illustrated in the table above, the Company’s finance costs for the three month period ended December 31, 2023 were C$5.4 million (December 31, 2022 - C$4.0 million). The increase of C$1.4 million in finance costs is due to an increase in other interest expense (C$1.0 million), a result of updating the interest rate that is used to calculate the present value for the provincial loan every November. Furthermore, there was an increase in accretion of government loan benefits (C$0.4 million).
For the nine month period ended December 31, 2023, the Company’s finance costs were C$15.9 million (December 31, 2022 - C$13.0 million). The increase of C$2.9 million in finance costs is primarily attributable to increased accretion of government loan benefits (C$1.5 million) and an increase in other interest expense (C$1.3 million), for reasons mentioned above.
The Company’s finance income for the three month period ended December 31, 2023, was C$2.4 million (December 31, 2022 – C$3.9 million). The decrease of C$1.5 million in finance income is primarily due to a reduction in deposits.
The Company’s finance income for the nine month period ended December 31, 2023, was C$8.8 million (December 31, 2022 – C$10.4 million). The decrease of C$1.6 million in finance income is primarily due to a reduction in deposits, offset in part by higher interest rates.
The Company’s interest on pension and other post-employment benefit obligations for the three and nine month periods ended December 31, 2023 was C$4.8 million and C$14.4 million, respectively, compared to C$5.0 million and C$12.4 million, respectfully, for the three and nine month periods ended December 31, 2022, due to an increase in discount rates as at March 31, 2023 that was used to determine the 2024 fiscal year pension benefit expense and the impact of the signing of the Collective Bargaining Agreement (“CBA”) on August 1, 2022 that increased the obligations.
The Company’s foreign exchange loss for the three month period ended December 31, 2023 was C$14.7 million (December 31, 2022 - $10.6 million). The foreign exchange loss for the nine month period ended December 31, 2023 was C$14.1 million (December 31, 2022 – loss of C$41.2 million). These foreign exchange movements reflect the effect of US dollar exchange rate fluctuations on the Company’s Canadian dollar denominated monetary assets and liabilities.
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Pension and Post-Employment Benefits
| Three months ended December 31, |
Nine months ended December 31, |
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| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Recognized in (loss) income before income taxes: |
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| Pension benefits expense |
C$ | 6.3 | C$ | 6.5 | C$ | 18.9 | C$ | 67.1 | ||||||||
| Post-employment benefits expense |
3.4 | 3.2 | 10.2 | 13.4 | ||||||||||||
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| C$ | 9.7 | C$ | 9.7 | C$ | 29.1 | C$ | 80.5 | |||||||||
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| Recognized in other comprehensive (loss) income (pre-tax): |
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| Pension benefits loss (gain) |
C$ | 27.1 | C$ | (31.3 | ) | C$ | 41.9 | C$ | 42.9 | |||||||
| Post-employment benefits loss (gain) |
26.5 | (4.4 | ) | 12.1 | (28.6 | ) | ||||||||||
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| C$ | 53.6 | C$ | (35.7 | ) | C$ | 54.0 | C$ | 14.3 | ||||||||
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| C$ | 63.3 | C$ | (26.0 | ) | C$ | 83.1 | C$ | 94.8 | ||||||||
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As illustrated in the table above, the Company’s pension expense for the three month periods ended December 31, 2023 and December 31, 2022 were C$6.3 million and C$6.5 million, respectively, representing a decrease of C$0.2 million. The Company’s post-employment benefit expense for the three month periods ended December 31, 2023 and December 31, 2022 were C$3.4 million and C$3.2 million, respectively, representing an increase of C$0.2 million.
For the nine month periods ended December 31, 2023 and December 31, 2022, the Company’s pension expense was C$18.9 million and C$67.1 million, respectively, representing a decrease of C$48.2 million. The Company’s post-employment benefit expense for the nine month periods ended December 31, 2023 and December 31, 2022 were C$10.2 million and C$13.4 million, respectively, representing a decrease of C$3.2 million. The decrease in pension expense and post-employment benefit expense are due to ratifying the CBA in August 2022 that extended indexation to July 1, 2027 that resulted in a past service cost of C$49.5 million and C$3.8 million, respectively. In addition, the change is also a result of an increase in discount rates as at March 31, 2023 that were used to determine the 2024 fiscal year pension expense and post-employment benefit expense.
As disclosed in Note 3 to the March 31, 2023 consolidated financial statements, all actuarial gains and losses that arise in calculating the present value of the defined benefit pension obligation net of assets and the defined benefit obligation in respect of other post-employment benefits, including the re-measurement components, are recognized immediately in other comprehensive income or loss. In accordance with IFRS, the Company makes an assessment at each reporting period-end as to whether the accrued pension liability and the accrued other post-employment benefit obligation have been significantly impacted by changes in market discount rates, curtailments, settlements, actual returns on defined benefit pension plan assets or other one-off events.
14
For the three month period ended December 31, 2023, the Company recorded an actuarially determined loss to the accrued defined pension liability and accrued other post-employment benefit obligation in other comprehensive income of C$53.6 million (December 31, 2022 – gain of C$35.7 million), a difference of C$89.3 million. The change is primarily due to a decrease in discount rates, slightly offset by higher asset returns.
For the nine month period ended December 31, 2023, the Company recorded actuarially determined loss to the combined accrued defined pension liability and accrued other post-employment benefit obligation in other comprehensive loss of C$54.0 million (December 31, 2022 – loss of C$14.3 million), a difference of C$39.7 million, for reasons mentioned above.
These adjustments are required by IFRS when the accrued liability is significantly impacted by changes in market discount rates, curtailments, settlements, actual returns on defined benefit pension plan assets or other one-off events.
Carbon Taxes
On June 28, 2019, the Company became subject to the Federal Greenhouse Gas Pollution Pricing Act (the “Carbon Tax Act”). The Carbon Tax Act was enacted with retroactive effect to January 1, 2019. The Company has chosen to remove the costs associated with the Carbon Tax Act from Adjusted EBITDA to facilitate comparison with the results of its competitors in jurisdictions not subject to the Carbon Tax Act. Since the introduction of the Carbon Tax Act, Ontario’s Emissions Performance Standards (EPS) program was developed to regulate greenhouse gas (GHG) emissions from large industrial facilities by setting emissions limits that are the basis for the compliance obligations of those facilities. The program was developed as an alternative to the federal output-based pricing system (OBPS). The EPS program came into full effect on January 1, 2022 and Algoma is now subject to compliance under the EPS.
For the three month period ended December 31, 2023, total Carbon Tax recognized in cost of sales was C$3.5 million (December 31, 2022 - C$1.2 million). The change is mainly due to an increase in carbon tax per ton and a true-up of the estimated cost in the three month period ended December 31, 2023. Carbon Tax is primarily a function of the volume of our production.
For the nine month period ended December 31, 2023, total Carbon Tax recognized in cost of sales was C$18.2 million (December 31, 2022 – C$4.3 million). The change in carbon tax is due to an increase in carbon tax per ton and a true-up of the estimated cost in the nine month period ended December 31, 2023.
Income Taxes
For the three month period ended December 31, 2023, the Company’s deferred income tax expense and current income tax recovery were C$17.3 million and (C$29.8) million, respectively, compared to deferred income tax expense and current income tax recovery of C$4.9 million and (C$22.5) million, respectively, for the three month period ended December 31, 2022 due to net loss before tax of (C$97.3) million for the three month period ended December 31, 2023, compared to net loss before tax of (C$87.4) million for the three month period ended December 31, 2022.
For the nine month period ended December 31, 2023, the Company’s deferred income tax expense and current income tax expense were C$6.4 million and C$32.3 million, respectively, compared to deferred income tax recovery and current income tax expense of (C$11.2) million and C$83.4 million, respectively, for the nine month period ended December 31, 2022 due to net income before tax of C$115.9 million for the nine month period ended December 31, 2023, compared to income before tax of C$391.1 million for the nine month period ended December 31, 2022.
Share Capital
The authorized share capital of the Company consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value issuable in series.
15
As at December 31, 2023, there were 104,038,495 common shares issued and outstanding, and no preferred shares issued and outstanding.
Warrants
As at December 31, 2023, 24,179,000 Warrants remain outstanding with an estimated fair value of $1.84 per Warrant based on the market price of the Warrants, for which the Company recognized a liability of C$58.8 million ($44.5 million) (March 31, 2023 - C$57.3 million; $42.3 million) in warrant liability on the condensed interim consolidated statements of financial position. For the three month period ended December 31, 2023, a loss of C$20.4 million (December 31, 2022 – C$6.4 million) on change in the fair value of the warrant liability is presented in the condensed interim consolidated statements of net (loss) income. For the nine month period ended December 31, 2023, a loss of C$3.2 million (December 31, 2022 – gain of C$67.1 million) on change in the fair value of the warrant liability is presented in the condensed interim consolidated statements of net (loss) income. The Warrants will expire on the fifth anniversary of the merger transaction which was completed on October 19, 2021, or earlier upon redemption or liquidation of the Trust Account.
Earnout
As at December 31, 2023, 1,391,632 earnout rights remain outstanding with an estimated fair value of $10.03 per unit based on the market price of the Company’s common shares, for which an earnout liability of C$18.5 million ($14.0 million) (March 31, 2023 - C$16.8 million; $12.4 million) was recognized on the condensed interim consolidated statements of financial position. In addition, 168,807 rights were exercised as of December 31, 2023. Loss on change in the fair value of the earnout liability for the three and nine month periods ended December 31, 2023 of C$6.2 million and C$3.5 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income. Gain on change in the fair value of the earnout liability for the three and nine month periods ended December 31, 2022 of C$0.2 million and C$9.4 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income.
Replacement Long Term Incentive Plan (“LTIP”)
As at December 31, 2023, 2,565,827 Replacement LTIP Awards remain outstanding with an estimated fair value of $10.03 per unit based on the market price of the Company’s common shares, for which the Company recognized a liability of C$34.0 million ($25.7 million) (March 31, 2023 - C$33.5 million; $24.7 million) in share-based payment compensation liability on the condensed interim consolidated statements of financial position. In addition, 537,618 units were exercised as of December 31, 2023. Loss on change in the fair value of the share-based payment compensation liability for the three and nine month periods ended December 31, 2023 of C$11.3 million and C$6.0 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income. Gain on change in the fair value of the share-based payment compensation liability for the three and nine month periods ended December 31, 2022 of C$0.2 million and C$19.6 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income.
Omnibus Long Term Incentive Plan (“LTIP”)
Deferred share units (“DSUs”)
For the three and nine month periods ended December 31, 2023, the Company granted 53,371 and 146,087 DSUs, respectively, under the Omnibus Plan to certain directors of the Company, with a grant date fair value based on the market price of the Company’s common shares on the day of the grant. Further, for the nine month period ended December 31, 2023, the Company converted 35,379 DSUs to capital stock upon the resignation of a director. On June 30, 2022, 75,192 DSUs under the Omnibus Plan were granted to certain Directors of the Company, with a grant date fair value based on the market price of the Company’s common shares on the day of grant.
For the three and nine month periods ended December 31, 2023, the Company recorded a share-based payment compensation expense of C$0.7 million and C$1.7 million, respectively, in administrative and selling expense on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position. For the three and nine month periods ended
16
December 31, 2022, the Company recorded a share-based payment compensation expense of C$0.4 million and C$1.3 million, respectively, in administrative and selling expense on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position.
As at December 31, 2023, a total of 326,335 DSUs were outstanding. No cancellations or forfeiture of DSUs have been recorded to date.
Restricted share units (“RSU”) and performance share units (“PSU”) FY2023 Plan
At December 31, 2023, 131,224 and 149,087 units of RSUs and PSUs, respectively, net of cancellations and forfeitures, remain outstanding for recognition over the remainder of the vesting period. Further, for the three and nine month periods ended December 31, 2023, the Company recorded share-based payment compensation expense of C$0.2 million and C$0.5 million, respectively, in administrative and selling expenses on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position. For the three and nine month periods ended December 31, 2022, the Company recorded share-based payment compensation income of C$0.2 million and expense of C$2.1 million, respectively, in administrative and selling expenses on the condensed interim consolidated statements of net (loss) income and contributed deficit. No exercises of RSUs and PSUs have been recorded to date.
Restricted share units (“RSU”) and performance share units (“PSU”) FY2024 Plan
On March 31, 2023 the Board of Directors approved a grant of 457,935 and 404,211 restricted share units and performance share units, respectively, to various employees of the Company under the Omnibus Plan for the fiscal year ended March 31, 2024. At December 31, 2023, 459,797 and 409,932 units of RSUs and PSUs, respectively, remain outstanding for recognition over the remainder of the vesting period. Further, for the three and nine month periods ended December 31, 2023, the Company recorded share-based payment compensation expense of C$0.7 million and C$2.2 million, respectively (December 31, 2022 – nil for the three and nine month periods) in administrative and selling expenses on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position. No exercises, cancellation or forfeiture of RSUs and PSUs have been recorded to date.
17
Adjusted EBITDA
The following table shows the reconciliation of Adjusted EBITDA to net income for the periods indicated:
| Three months ended December 31, |
Nine months ended December 31, |
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| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Net (loss) income |
C$ | (84.8 | ) | C$ | (69.8 | ) | C$ | 77.2 | C$ | 318.9 | ||||||
| Depreciation of property, plant and equipment and amortization of intangible assets |
31.6 | 24.7 | 80.2 | 69.7 | ||||||||||||
| Finance costs |
5.4 | 4.0 | 15.9 | 13.0 | ||||||||||||
| Interest on pension and other post-employment benefit obligations |
4.8 | 5.0 | 14.4 | 12.4 | ||||||||||||
| Income taxes |
(12.5 | ) | (17.6 | ) | 38.7 | 72.2 | ||||||||||
| Foreign exchange loss (gain) |
14.7 | 10.6 | 14.1 | (41.2 | ) | |||||||||||
| Finance income |
(2.4 | ) | (3.9 | ) | (8.8 | ) | (10.4 | ) | ||||||||
| Inventory write-downs (depreciation on property, plant and equipment in inventory) |
(1.3 | ) | 3.2 | 3.4 | 5.0 | |||||||||||
| Carbon tax |
3.5 | 1.2 | 18.2 | 4.3 | ||||||||||||
| Increase (decrease) in fair value of warrant liability |
20.4 | 6.4 | 3.2 | (67.1 | ) | |||||||||||
| Increase (decrease) in fair value of earnout liability |
6.2 | (0.2 | ) | 3.5 | (9.4 | ) | ||||||||||
| Increase (decrease) in fair value of share-based payment compensation liability |
11.3 | (0.2 | ) | 6.0 | (19.6 | ) | ||||||||||
| Share-based compensation |
2.1 | 0.7 | 5.1 | 3.4 | ||||||||||||
| Past service costs - pension benefits |
— | — | — | 49.5 | ||||||||||||
| Past service costs - post-employment benefits |
— | — | — | 3.8 | ||||||||||||
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| Adjusted EBITDA (i) |
C$ | (1.0 | ) | C$ | (35.9 | ) | C$ | 271.1 | C$ | 404.5 | ||||||
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| Net (Loss) income Margin |
(13.8 | %) | (12.3 | %) | 3.5 | % | 15.2 | % | ||||||||
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| Net (Loss) income / ton |
C$ | (164.3 | ) | C$ | (152.3 | ) | C$ | 47.2 | C$ | 222.8 | ||||||
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| Adjusted EBITDA Margin (ii) |
(0.2 | %) | (6.3 | %) | 12.5 | % | 19.3 | % | ||||||||
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| Adjusted EBITDA / ton |
C$ | (1.9 | ) | C$ | (78.3 | ) | C$ | 165.9 | C$ | 282.7 | ||||||
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| (i) | See “Non-IFRS Measures” for information regarding the limitations of using Adjusted EBITDA. |
| (ii) | Adjusted EBITDA Margin is Adjusted EBITDA as a percentage of revenue. |
18
Adjusted EBITDA for the three month period ended December 31, 2023 was (C$1.0) million, compared to (C$35.9) million for the three month period ended December 31, 2022, resulting in an increase of C$34.9 million. The Adjusted EBITDA margin for the three month periods ended December 31, 2023 and December 31, 2022 was (0.2%) and (6.3%), respectively. The Adjusted EBITDA per ton for the three month period ended December 31, 2023 was (C$1.9) and (C$78.3) for the three month period ended December 31, 2022. The increase in Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per ton for the three month period ended December 31, 2023 compared to the three month period ended December 31, 2022 was due mainly to an increase in steel revenue (C$44.9 million), primarily as a result of increased steel shipments. This was offset, in part, by an increase in administrative and selling expenses (C$6.8 million) due to the same reasons mentioned above.
Adjusted EBITDA for the nine month period ended December 31, 2023 was C$271.1 million, compared to C$404.5 million for the nine month period ended December 31, 2022, resulting in a decrease of C$133.4 million. The Adjusted EBITDA margin for the nine month periods ended December 31, 2023 and December 31, 2022 was 12.5% and 19.3%, respectively. The Adjusted EBITDA per ton for the nine month period ended December 31, 2023 was C$165.9 and C$282.7 for the nine month period ended December 31, 2022. The decrease in Adjusted EBITDA, Adjusted EBITDA Margin and Adjusted EBITDA per ton for the nine month period ended December 31, 2023 compared to the nine month period ended December 31, 2022 was due primarily to an increase in the cost of steel products sold (C$155.6 million) and an increase administrative and selling expenses (C$8.6 million) due to the same reasons mentioned above. This was offset, in part, by an increase in steel revenue (C$36.3 million) for the same reasons mentioned above.
Financial Resources and Liquidity
Summary of Cash Flows
| Three months ended December 31, |
Nine months ended December 31, |
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| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Cash, beginning of period |
C$ | 213.6 | C$ | 464.9 | C$ | 247.4 | C$ | 915.3 | ||||||||
| Cash generated by (used in): |
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| Operating activities |
(47.4 | ) | (128.6 | ) | 173.7 | 81.8 | ||||||||||
| Investing activities |
(96.5 | ) | (95.2 | ) | (369.7 | ) | (267.7 | ) | ||||||||
| Financing activities |
24.6 | 8.6 | 44.1 | (544.5 | ) | |||||||||||
| Effect of exchange rate changes on cash |
0.4 | (5.0 | ) | (0.8 | ) | 59.8 | ||||||||||
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| Decrease in cash |
C$ | (118.9 | ) | C$ | (220.2 | ) | C$ | (152.7 | ) | C$ | (670.6 | ) | ||||
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| Cash, end of period |
C$ | 94.7 | C$ | 244.7 | C$ | 94.7 | C$ | 244.7 | ||||||||
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As illustrated in the table above, the use of cash for the three month period ended December 31, 2023 was C$118.9 million (December 31, 2022 – C$220.2 million). The decrease in the use of cash for the three month period ended December 31, 2023, as compared to the three month period ended December 31, 2022, was C$101.3 million, and is primarily the result of the decrease in cash used in operating activities (decreased by C$81.2 million) and the increase in cash generated by financing activities (increased by C$16.0 million), for reasons described below. This was offset, in part, by the increase in cash used by investing activities (increased by C$1.3 million), for reasons described below.
For the nine month period ended December 31, 2023, the use of cash was C$152.7 million (December 31, 2022 – C$670.6 million). The decrease in the use of cash for the nine month period ended December 31, 2023, as compared to the nine month period ended December 31, 2022, was C$517.9 million, and is primarily the result of the decrease in cash used in financing activities (decreased by C$588.6 million) and the increase in cash generated by operating activities (increased by C$91.9 million), for reasons described below. This was offset, in part, by the increase in cash used by investing activities (increased by C$102.0 million), for reasons described below.
19
Cash Flow Generated by Operating Activities
For the three month period ended December 31, 2023, the cash used in operating activities was C$47.4 million (December 31, 2022 – C$128.6 million). The decrease in cash used in operating activities for the three month period ended December 31, 2023 was due primarily to the net change in non-cash working capital (decreased by C$37.4 million), for reasons described below, and increased income from operations (increased by $28.8 million), for reasons described above.
For the nine month period ended December 31, 2023, the cash generated by operating activities was C$173.7 million (December 31, 2022 – C$81.8 million). The increase in cash generated in operating activities for the nine month period ended December 31, 2023 was due primarily to the net change in non-cash working capital (decreased by C$180.0 million). This was offset, in part, by the decrease in income from operations (decreased by C$104.6 million), for reasons described above.
Further impacting cash used in operating activities is the net effect from changes in non-cash working capital as presented below:
| Three months ended December 31, |
Nine months ended December 31, |
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| millions of dollars |
2023 | 2022 | 2023 | 2022 | ||||||||||||
| Accounts receivable |
C$ | 19.7 | C$ | 15.0 | C$ | 6.7 | C$ | 162.0 | ||||||||
| Inventories |
(82.3 | ) | (57.0 | ) | (180.2 | ) | (374.3 | ) | ||||||||
| Prepaid expenses, deposits and other current assets |
14.1 | 17.4 | 43.5 | 24.2 | ||||||||||||
| Accounts payable and accrued liabilities |
23.5 | (36.3 | ) | 92.8 | (53.2 | ) | ||||||||||
| Taxes payable and accrued taxes |
(47.5 | ) | (43.0 | ) | (13.8 | ) | (0.5 | ) | ||||||||
| Derivative financial instruments (net) |
— | (6.0 | ) | — | 10.8 | |||||||||||
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| Total |
C$ | (72.5 | ) | C$ | (109.9 | ) | C$ | (51.0 | ) | C$ | (231.0 | ) | ||||
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Cash Flow Used In Investing Activities
For the three and nine month period ended December 31, 2023, cash used in investing activities was C$96.5 million and C$369.7 million, respectively (December 31, 2022 – C$95.2 million and C$267.7 million, respectively).
For the three month period ended December 31, 2023, property, plant and equipment were acquired at a total cost of C$96.5 million (December 31, 2022 - C$95.2 million).
For the nine month period ended December 31, 2023, property, plant and equipment were acquired at a total cost of C$369.7 million (December 31, 2022 - C$267.7 million).
For the three and nine month periods ended December 31, 2023, the Company had additions to property under construction for the EAF project of C$55.1 million and C$204.8 million, respectively (December 31, 2022 – C$67.3 million and C$185.2 million, respectively), excluding the benefits from government loans; in addition, the Company has issued $72.1 million in letters of credit related to equipment fabrication and delivery of which $47.0 million has been released in accordance with the terms. As at December 31, 2023, since inception of the project the Company had additions to property under construction for the EAF project of C$509.9 million, excluding government loans received.
For the three and nine month periods ended December 31, 2023, the Company had additions to property under construction for the plate mill modernization project of C$1.5 million and C$60.1 million, respectively (December 31, 2022 – C$8.4 million and C$25.1 million, respectively). As at December 31, 2023, since inception of the project the Company had additions for the plate mill modernization project of C$132.2 million.
20
Cash Flow Used In Financing Activities
For the three month period ended December 31, 2023, cash generated by financing activities was C$24.6 million (December 31, 2022 – C$8.6 million). The increase in cash generated in financing activities of C$16.0 million is primarily due to proceeds from a financing arrangement (C$11.7 million) and the common shares repurchased and cancelled in the three month period ending December 31, 2022 (C$6.5 million).
For the nine month period ended December 31, 2023, cash generated by financing activities was C$44.1 million (December 31, 2022 – cash used C$544.5 million). The increase in cash generated in financing activities of C$588.6 million is primarily due the common shares repurchased and cancelled in the nine month period ending December 31, 2022 (C$553.1 million) and by an increase in governmental loans received (C$29.1 million).
Capital Resources - Financial Position and Liquidity
The Company anticipates making approximately C$100 million of capital expenditures annually in order to sustain existing production facilities. Furthermore, supported by its agreements with the federal and provincial governments and using the cash received as a result of the Merger, the Company anticipates making significant capital expenditures relating to its modernization and expansion program over the next five years, including substantial investment in EAF steelmaking.
The below capital sources and future cash flows from operating activities are expected to avail the Company of substantial financial resources to complete its proposed expansion plans. The Company’s business generates significant cash flow and the Company does not anticipate any issues with generating sufficient cash and cash equivalents, both in the short term and the long term to meet its planned growth or to fund development activities.
As at December 31, 2023, the Company had cash of C$94.7 million (March 31, 2023 - C$247.4 million), and had unused availability under its Revolving Credit Facility of C$331.9 million ($250.9 million) after taking into account C$59.5 million ($45.0 million) of outstanding letters of credit. At March 31, 2023, the Company had drawn C$1.9 million ($1.4 million), and there was C$279.2 million ($206.3 million) of unused availability after taking into account C$57.3 million ($42.3 million) of outstanding letters of credit.
The Revolving Credit Facility is governed by a conventional borrowing base calculation comprised of eligible accounts receivable plus eligible inventory plus cash. At December 31, 2023, there was C$5.4 million ($4.1 million) drawn on this facility. The Company is required to maintain a calculated borrowing base. Any shortfall in the borrowing base will trigger a mandatory loan repayment in the amount of the shortfall, subject to certain cure rights including the deposit of cash into an account controlled by the agent. As at December 31, 2023, the Company has complied with these requirements.
On November 30, 2018, the Company secured the following debt financing:
| • | $250.0 million in the form of a traditional asset-based revolving credit facility, with a maturity date of November 30, 2023 subsequently increased to $300.0 million in May 2023, with maturity date of May 2028 (the “Revolving Credit Facility”). The interest rate is based on Secured Overnight Financing Rate (“SOFR”) plus a credit spread adjustment of 10 basis points plus an applicable margin, which will vary depending on usage; |
| • | a C$60.0 million interest free loan from the Federal Economic Development Agency of the Government of Canada, through the Advanced Manufacturing Fund (the “Federal AMF Loan”). The Company will repay the loan in equal monthly installments beginning on April 1, 2022 with the final installment payable on March 1, 2028; and |
| • | a C$60.0 million low interest loan from the Ministry of Energy, Northern Development and Mines of the Province of Ontario (the “Provincial MENDM Loan”). The Company will repay the loan in monthly blended payments of principal and interest beginning on December 31, 2024 and ending on November 30, 2028. |
21
On March 29, 2019, the Company secured an agreement with the Minister of Industry of the Government of Canada, whereby the Company will receive C$15.0 million in the form of a grant and C$15.0 million in the form of an interest free loan through the Federal SIF. The Company will repay the interest free loan portion of this funding in equal annual payments beginning on April 30, 2024 and ending on April 30, 2031.
The Revolving Credit Facility, the Federal AMF Loan, the Provincial MENDM Loan and the Federal SIF are expected to service the Company’s principal liquidity needs (to finance working capital, fund capital expenditures and for other general corporate purposes) until the maturity of these facilities.
On September 20, 2021, the Company, together with the Government of Canada, entered into an agreement of which a benefit of up to C$420.0 million would flow to the Company in the form of a loan up to C$200.0 million from the SIF and a loan up to C$220.0 million from the CIB. Under the terms of the Federal SIF agreement, the Company will be reimbursed for certain defined capital expenditures incurred to transition from blast furnace steel production to EAF steel production between March 3, 2021 and June 30, 2025. Annual repayments of the Federal SIF loan will be scalable based on the Company’s greenhouse gas emission performance.
Under the terms of the CIB agreement (“CIB Facility”), the Company may draw on a non-revolving construction credit facility. Following the completion of the project, quarterly payments including interest at a rate per annum equal to the base rate from the date of borrowing until November 27, 2031, then at a base rate plus 150 basis points until maturity of the loan are required prior to the loan maturity date, November 26, 2046. Pursuant to the terms of the CIB Facility, the amount of credit available is reduced by one-third of any restricted payments or distributions to shareholders, including dividends, and share repurchases. As of December 31, 2023, the amount available under the CIB Facility has been reduced to C$18.2 million as a result of restricted payments made.
During the three and nine month periods ended December 31, 2023, the Company declared ordinary dividends to common shareholders in the aggregate amount of C$6.9 million and C$20.8 million, respectively (December 31, 2022 - C$7.0 million and C$23.6 million, respectively), which were paid and recorded as a distribution through retained earnings.
Normal Course Issuer Bid
On March 3, 2022, the Company commenced a normal course issuer bid (the “NCIB”) after receiving regulatory approval from the Toronto Stock Exchange. Pursuant to the NCIB, the Company was authorized to acquire up to a maximum of 7,397,889 of its shares, or 5% of its 147,957,790 issued and outstanding shares as of February 18, 2022, subject to a daily maximum of 16,586 shares. The common shares were available for purchase and cancellation commencing on March 3, 2022 until June 14, 2022 at which time the NCIB was suspended with the launch of the Substantial Issuer Bid (“SIB”). The NCIB resumed after the completion of the SIB and the Company was permitted to acquire shares thereunder until March 2, 2023 under the same terms and conditions.
As at December 31, 2022, the Company purchased and cancelled 3,363,662 common shares at a weighted average book value of C$9.25 ($7.30) per share for a total purchase price of approximately C$37.1 million ($28.6 million). The excess of the purchase price paid over the carrying value of the common shares purchased totalling C$5.7 million, was recognized as an increase to retained earnings.
The Company renewed its NCIB to acquire a maximum of 5,178,394 of its shares, or approximately 5% of its 103,567,884 issued and outstanding shares as of February 28, 2023, subject to a daily maximum of 50,984 shares. The NCIB commenced March 6, 2023 and will terminate on the earlier of March 5, 2024, or such earlier time as the Company completes its purchases pursuant to the NCIB or provides notice of termination. As at December 31, 2023 and March 31, 2023, the Company has not made any purchases under its renewed NCIB.
22
Substantial Issuer Bid
On June 21, 2022, the Company commenced a substantial issuer bid in Canada (collectively the “Offer”) to purchase for cancellation up to $400 million of its common shares. The Offer expired on July 27, 2022, and proceeded by way of a “modified Dutch auction”, whereby, shareholders who chose to participate in the Offer could individually select the price, within a price range of not less than $8.75 and not more than $10.25 per share (in increments of $0.10 per share), at which they tender their shares to the Offer. Upon expiry of the Offer, the Company determined the lowest purchase price that allowed it to purchase the maximum number of shares properly tendered to the Offer, and not properly withdrawn, having an aggregate purchase price not exceeding $400 million.
On July 27, 2022, 41,025,641 common shares at a weighted average book value of C$9.11 ($7.33) per share were purchased for cancellation at $9.75 per share, for an aggregate amount of $400 million. As a result, the Company subsequently adjusted the number of common shares and the reduction to retained earnings to actual. The excess of the purchase price over the carrying value of the shares purchased totalling C$127.4 million ($99.3 million) was recognized as a reduction to retained earnings. The Company incurred transaction costs of C$1.1 million related to the SIB which were recorded within capital stock.
Contractual Obligations and Off Balance Sheet Arrangements
The following table presents, at December 31, 2023, the Company’s undiscounted obligations and commitments to make future payments under contracts and contingent commitments. The following figures assume that the December 31, 2023, Canadian/US dollar exchange rate of $1.00 = C$0.7561 remains constant throughout the periods indicated.
| millions of dollars |
Total | Less than 1 year |
Year 2 | Years 3-5 | More than 5 years |
|||||||||||||||
| Bank indebtedness |
C$ | 5.4 | C$ | 5.4 | C$ | — | C$ | — | C$ | — | ||||||||||
| Governmental loans |
241.2 | 14.4 | 26.9 | 69.8 | 130.1 | |||||||||||||||
| Financing arrangement |
11.7 | 1.0 | 1.0 | 9.7 | — | |||||||||||||||
| Purchase obligations - non-capital |
741.8 | 741.8 | — | — | — | |||||||||||||||
| Purchase obligations - capital |
182.2 | 182.2 | — | — | — | |||||||||||||||
| Environmental liabilities |
67.3 | 3.8 | 4.3 | 12.9 | 46.3 | |||||||||||||||
| Lease obligations |
10.4 | 2.2 | 2.1 | 6.1 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
C$ | 1,260.0 | C$ | 950.8 | C$ | 34.3 | C$ | 98.5 | C$ | 176.4 | ||||||||||
|
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|
|
|
|
|
|
|
|
|
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Purchase obligations - non-capital, which represent the Company’s most significant contractual obligations across the periods indicated above, are comprised of contracts to purchase the raw materials required to manufacture the Company’s products and therefore contribute directly to the Company’s ability to generate revenue. The Company enters into such contracts on an ongoing basis based on its production requirements to secure favorable raw material pricing and consistency of supply. Most of the Company’s purchase obligations mature in less than one year and are contracted based on the Company’s anticipated production, and the revenue generated from such production is applied to satisfy such purchase obligations. Purchase obligations – capital, represent the Company’s contractual obligations across the periods indicated above for the Electric Arc Furnace and Plate Mill Modernization capital projects.
Off balance sheet arrangements include letters of credit, and operating lease obligations as disclosed above. At December 31, 2023, the Company had C$59.5 million ($45.0 million) (March 31, 2023 - C$57.3 million ($42.3 million)) of outstanding letters of credit.
As discussed above, the Company maintains defined benefit pension plans and other post-employment benefit plans. At December 31, 2023, the Company’s net obligation in respect of its defined benefit pension plans was C$232.8 million (March 31, 2023 - C$184.0 million) and the Company’s obligation in respect of its other post-employment benefits plans was C$237.7 million (March 31, 2023 – C$222.9 million).
The Company’s obligations, commitments and future payments under contract are expected to be financed through cash flow from operations and funds from the Company’s Revolving Credit Facility. Any default in the Company’s ability to meet such commitments and future payments could have a material and adverse effect on the Company.
23
Related Party Transactions
As at December 31, 2023, there were no transactions, ongoing contractual or other commitments with related parties, except for remuneration of the Company’s key management personnel.
Financial Instruments
The Company’s financial assets and liabilities (financial instruments) include cash, restricted cash, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, warrant liability, earnout liability, long-term governmental loans and other financing arrangements.
Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument or non-financial derivative contract. Financial instruments are disclosed in Notes 24 to the December 31, 2023 condensed interim consolidated financial statements.
Financial Risk Management
The Company’s activities expose it to a variety of financial risks including credit risk, liquidity risk, interest rate risk and market risk. The Company may use derivative financial instruments to hedge certain of these risk exposures. The use of derivatives is based on established practices and parameters, which are subject to the oversight of the Board of Directors. The Company does not utilize derivative financial instruments for trading or speculative purposes.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises primarily from the Company’s receivables from customers. The Company has an established credit policy under which each new customer is analyzed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes a review of the potential customer’s financial information, external credit ratings and bank and supplier references. Credit limits are established for each new customer and customers that fail to meet the Company’s credit requirements may transact with the Company only on a prepayment basis.
The maximum credit exposure at December 31, 2023 is the carrying amount of accounts receivable of C$278.7 million (March 31, 2023—C$291.2 million). At December 31, 2023 and December 31, 2022, there was one customer account greater than 10% of the carrying amount of accounts receivable. As at December 31, 2023, C$2.4 million, or 0.9% (March 31, 2023 - C$2.0 million, or 0.7%), of accounts receivable were more than 90 days old.
The Company establishes an allowance for doubtful accounts that represents its estimate of losses in respect of accounts receivable. The main components of this allowance are a specific provision that relates to individual exposures and a provision for expected losses that have been incurred but not yet identified. The allowance for doubtful accounts at December 31, 2023 was C$0.6 million (March 31, 2023 - C$0.5 million), as disclosed in Note 9 to the December 31, 2023 condensed interim consolidated financial statements.
The Company may be exposed to certain losses in the event of non-performance by counterparties to derivative financial instruments such as commodity price contracts and foreign exchange contracts. The Company mitigates this risk by entering into transactions with highly rated major financial institutions.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages liquidity risk by maintaining adequate cash balances. The Company continuously monitors and reviews actual and forecasted cash flows to ensure adequate liquidity and anticipate liquidity requirements. There have been no changes to the Company’s objectives and processes for capital management, including the management of long-term debt, as described in Note 5 to the March 31, 2023 consolidated financial statements.
24
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices, will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk. As disclosed in Note 16 to the December 31, 2023 condensed interim consolidated financial statements, during the three and nine month periods ended December 31, 2023, the Company was not a party to agreements to hedge the commodity price risk associated with the revenue on the sale of steel however was a party to agreements during the three and nine month periods ended December 31, 2022. These activities are carried out under the oversight of the Company’s Board of Directors.
Currency risk
The Company is exposed to currency risk on purchases, labour costs and pension and other post retirement employment benefits liabilities that are denominated in Canadian dollars. The prices for steel products sold in Canada are derived mainly from price levels in the US market in US dollars converted into Canadian dollars at the prevailing exchange rates. As a result, a stronger US dollar relative to the Canadian dollar increases the Company’s Canadian dollar selling prices for sales within Canada.
Interest rate risk
Interest rate risk is the risk that the value of the Company’s assets and liabilities will be affected by a change in interest rates. The Company’s interest rate risk mainly arises from the interest rate impact on its banking facilities and debt. The Company may manage interest rate risk through the periodic use of interest rate swaps.
For the three and nine month periods ended December 31, 2023 and December 31, 2022, a one percent increase (or decrease) in interest rates would have decreased (or increased) net income (loss) by approximately nil.
Commodity price risk
The Company is subject to price risk from fluctuations in the market prices of commodities, including natural gas, iron ore and coal. The Company enters into supply agreements for certain of these commodities as disclosed in Note 20 to the December 31, 2023 condensed interim consolidated financial statements. To manage risks associated with future variability in cash flows attributable to certain commodity purchases, the Company may use derivative instruments with maturities of 12 months or less as disclosed in Note 16 to the December 31, 2023 condensed interim consolidated financial statements to hedge the commodity price risk associated with the cost of natural gas and the revenue on the sale of steel.
At December 31, 2023, the Company had no commodity-based swap contracts. At December 31, 2022, the Company had commodity-based swap contracts with an aggregate notional quantity of 21,000 net tons outstanding, and a 10% increase in the price of hot-rolled coil (U.S. Midwest Domestic Hot-Rolled Coil Steel (CRU) Index), assuming foreign exchange remains unchanged, would result in approximately C$2.0 million decrease in the Company’s net income or loss.
Critical Accounting Estimates
As disclosed in Note 4 to the March 31, 2023 consolidated financial statements, the preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the years.
25
Significant items subject to such estimates and assumptions include the going concern assessment, allowance for doubtful accounts, carrying amount and useful life of property, plant and equipment and intangible assets, defined benefit retirement plans and income tax expense and scientific research and development investment tax credits. Further, Note 3 to the March 31, 2023 consolidated financial statements discloses the basis for determining the fair value of the warrant, earnout and share-based compensation liabilities. Actual results could differ from those estimates.
Allowance for doubtful accounts
Management analyzes accounts receivable to determine the allowance for doubtful accounts by assessing the collectability of receivables owing from each individual customer. This assessment takes into consideration certain factors including the age of outstanding receivable, customer-operating performance, historical payment patterns and current collection efforts, relevant forward-looking information and the Company’s security interests, if any.
Useful lives of property, plant and equipment and Intangible assets
The Company reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period, and whenever events or circumstances indicate a change in useful life. Estimated useful lives of items of property, plant and equipment and intangible assets are based on a best estimate and the actual useful lives may be different. As a result of the Company changing to EAF to replace the existing blast furnace and basic oxygen steelmaking operations, the Company has been reviewing the useful lives for those assets expected to be decommissioned once the EAF is operational. Effective October 1, 2023, there was sufficient evidence to support a change in the useful lives of machinery, equipment and buildings involved in blast furnace steelmaking operations. The remaining useful lives of this machinery, equipment and buildings have been adjusted to be fully depreciated by December 31, 2029. As a result of this change in estimate, depreciation for the three month period ended December 31, 2023 has increased by C$5.8 million. It is expected that the quarterly impact going forward will continue to be approximately C$6.0 million until December 31, 2029.
Impairment of property, plant and equipment and Intangible assets
Determining whether property, plant and equipment and intangible assets are impaired requires the Company to determine the recoverable amount of the Cash Generating Unit (“CGU”) to which the asset is allocated. To determine the recoverable amount of the CGU, management is required to estimate its fair value. To calculate the value of the CGU in use, management determines expected future cash flows, which involves, among other items, forecasted steel selling prices, forecasted tons shipped, costs and volume of production, growth rate, and the estimated selling costs, using an appropriate discount rate.
Defined Benefit Retirement Plans
The Company’s determination of employee benefit expense and obligations requires the use of assumptions such as the discount rate applied to determine the present value of all future cash flows expected in the plan. Since the determination of the cost and obligations associated with employee future benefits requires the use of various assumptions, there is measurement uncertainty inherent in the actuarial valuation process. Actual results could differ from estimated results which are based on assumptions.
Taxation
The Company computes and recognizes an income tax provision in each of the jurisdictions in which it operates. Actual amounts of income tax expense and scientific research and experimental development investment tax credits only become final upon filing and acceptance of the returns by the relevant authorities, which occur subsequent to the issuance of the consolidated financial statements.
26
Additionally, the estimation of income taxes includes evaluating the recoverability of deferred income tax assets based on an assessment of the ability to use the underlying future tax deductions before they expire against future taxable income. The assessment is based upon existing tax laws and estimates of future taxable income. To the extent estimates differ from the final tax return, net income will be affected in a subsequent period. The Company will file tax returns that may contain interpretations of tax law and estimates. Positions taken and estimates utilized by the Company may be challenged by the relevant tax authorities. Rulings that result in adjustments to tax returns filed will be recorded in the period where the ruling is made known to the Company.
Significant Accounting Policies
The Company’s condensed interim consolidated financial statements have been prepared using consistent accounting policies described in Note 3 to the Company’s annual consolidated financial statements for the years ended March 31, 2023 and 2022, except for the new IFRS standards adopted, as described below.
New IFRS Standards, Amendments and Interpretations adopted as of April 1, 2023 (effective January 1, 2023)
The Company adopted the following amendments which did not have a material impact on the condensed interim consolidated financial statements:
Amended Disclosure for Accounting Policies
IAS 1 “Presentation of Financial Statements” was amended with the intention to help companies provide useful accounting policy disclosures. The key amendments include the requirement to disclose material accounting policy information rather than significant accounting policies, clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company’s financial statements.
Amended Scope of Recognition
IAS 12 “Income Taxes” was amended to narrow the scope of recognition exemption in paragraphs 15 and 24 (recognition exemption) so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences.
Definition of Accounting Estimates
IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” was amended to introduce the definition of an accounting estimate and includes other amendments to assist entities to distinguish changes in accounting estimates from changes in accounting policies.
Disclosure Controls and Procedures and Internal Controls Over Financial Reporting
In compliance with the provisions of National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings, we have filed certificates signed by our Chief Executive Officer (“CEO”) and by our Chief Financial Officer (“CFO”) that, among other things, report on (i) their responsibility for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”) for the Company; and (ii) the design of DC&P and the design of ICFR.
Management, including our CEO and CFO, does not expect that the disclosure controls or internal controls over financial reporting of the Company will prevent or detect all errors and all fraud or will be effective under all potential future conditions. A control system is subject to inherent limitations and, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met.
27
Further, the design of a control system must reflect that there are resource constraints, and the benefits of controls must be considered relative to their costs. Inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of some persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The design of any control system is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Disclosure Controls and Procedures
The CEO and the CFO have designed DC&P, or have caused them to be designed under their supervision, in order to provide reasonable assurance that:
| • | material information relating to Algoma is made known to the CEO and CFO by others, particularly during the period in which the interim and annual filings are being prepared; and |
| • | information required to be disclosed by Algoma in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. |
Internal Controls Over Financial Reporting
The CEO and CFO have also designed ICFR, or have caused them to be designed under their supervision, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The control framework used to design our ICFR is based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework (2013 framework).
Changes in Internal Controls Over Financial Reporting
No changes were made to our ICFR during nine month period ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our ICFR.
28
Selected Quarterly Information
| (millions of dollars, except where otherwise noted) | 2024 | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| As at and for the three months ended1 |
Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | |||||||||||||||||||||||||||
| Financial results |
||||||||||||||||||||||||||||||||||||
| Total revenue |
C$ | 615.4 | C$ | 732.6 | C$ | 827.2 | C$ | 677.4 | C$ | 567.8 | C$ | 599.2 | C$ | 934.1 | C$ | 941.8 | C$ | 1,064.9 | ||||||||||||||||||
| Steel products |
556.9 | 665.8 | 754.5 | 609.2 | 512.0 | 551.5 | 877.4 | 879.9 | 1,009.5 | |||||||||||||||||||||||||||
| Non-steel products |
10.4 | 16.4 | 20.5 | 14.1 | 12.1 | 8.2 | 11.6 | 13.9 | 14.2 | |||||||||||||||||||||||||||
| Freight |
48.1 | 50.4 | 52.2 | 54.1 | 43.7 | 39.5 | 45.1 | 48.0 | 41.2 | |||||||||||||||||||||||||||
| Cost of sales |
623.8 | 664.8 | 639.5 | 630.7 | 611.8 | 569.4 | 576.8 | 603.2 | 599.9 | |||||||||||||||||||||||||||
| Administrative and selling expenses |
28.5 | 31.0 | 23.4 | 25.0 | 21.7 | 24.2 | 28.4 | 28.0 | 18.9 | |||||||||||||||||||||||||||
| Income (loss) from operations |
(36.9 | ) | 36.8 | 164.3 | 21.7 | (65.7 | ) | 5.6 | 328.9 | 310.6 | 446.1 | |||||||||||||||||||||||||
| Net income (loss) |
(84.8 | ) | 31.1 | 130.9 | (20.4 | ) | (69.8 | ) | 87.2 | 301.4 | 242.9 | 123.0 | ||||||||||||||||||||||||
| Adjusted EBITDA |
C$ | (1.0 | ) | C$ | 81.0 | C$ | 191.2 | C$ | 47.9 | C$ | (35.9 | ) | C$ | 82.7 | C$ | 357.7 | C$ | 334.4 | C$ | 457.3 | ||||||||||||||||
| Per common share (diluted)3 |
||||||||||||||||||||||||||||||||||||
| Net income (loss) |
C$ | (0.78 | ) | C$ | 0.24 | C$ | 0.85 | C$ | (0.2 | ) | C$ | (0.6 | ) | C$ | 0.36 | C$ | 1.49 | C$ | 1.45 | C$ | 0.92 | |||||||||||||||
| Financial position |
||||||||||||||||||||||||||||||||||||
| Total assets |
C$ | 2,651.6 | C$ | 2,713.1 | C$ | 2,627.8 | C$ | 2,455.6 | C$ | 2,549.0 | C$ | 2,716.0 | C$ | 3,070.5 | C$ | 2,693.6 | C$ | 2,520.7 | ||||||||||||||||||
| Total non-current liabilities |
744.3 | 660.1 | 665.0 | 650.0 | 663.4 | 693.3 | 618.0 | 573.5 | 640.1 | |||||||||||||||||||||||||||
| Operating results |
||||||||||||||||||||||||||||||||||||
| Average NSR |
C$ | 1,079 | C$ | 1,213 | C$ | 1,323 | C$ | 1,066 | C$ | 1,116 | C$ | 1,266 | C$ | 1,632 | C$ | 1,608 | C$ | 1,827 | ||||||||||||||||||
| Adjusted EBITDA per nt2 |
(1.9 | ) | 147.5 | 335.8 | 83.8 | (78.3 | ) | 189.9 | 665.4 | 611.1 | 827.6 | |||||||||||||||||||||||||
| Shipping volume (in thousands of nt) |
||||||||||||||||||||||||||||||||||||
| Sheet |
453 | 485 | 498 | 505 | 421 | 411 | 485 | 486 | 481 | |||||||||||||||||||||||||||
| Plate |
59 | 64 | 70 | 66 | 37 | 23 | 52 | 61 | 72 | |||||||||||||||||||||||||||
| Slab |
4 | — | 2 | 1 | 1 | — | — | — | — | |||||||||||||||||||||||||||
| 1 | - | Period end date refers to the following: “Q4” - March 31, “Q3” - December 31, “Q2” - September 30 and “Q1” - June 30. | ||
| 2 | - | The definition and reconciliation of these non-IFRS measures are included in the “Non-IFRS Financial Measures” section of this MD&A. | ||
| 3 | - | Pursuant to the Merger with Legato, on October 19, 2021, the Company effected a reverse stock split retroactively, such that each outstanding common share became such number of common shares, each valued at $10.00 per share, as determined by the conversion factor of 71.76775% (as defined in the Merger Agreement), with such common shares subsequently distributed to the equity holders of the Company’s former ultimate parent company. |
Further, on February 9, 2022, the Company issused 35,883,692 common shares in connection with the earnout rights granted to non-management shareholders that existed prior to the Merger.
On March 3, 2022, the Company commenced a normal course issuer bid for which the Company purchased and cancelled 3,364,262 common shares as at March 31, 2023.
On June 21, 2022, the Company commenced a substantial issuer bid in Canada and a Tender Offer (the “Offer”) in the United States. On July 27, 2022, the Offer was completed and 41,025,641 common shares were purchased for cancellation.
During Q-1 Fiscal 2024, the Company converted 35,379 DSUs to common shares. During Q-3 Fiscal 2024, Replacement LTIP and Earnout units were exercised resulting in the issuance of 435,232 common shares. At December 31, 2023, 104,038,495 common shares were outstanding.
Trend Analysis
The Company’s financial performance for the third quarter of fiscal year end 2024 (“Q3 2024”) decreased from the second quarter of fiscal year end 2024 (“Q2 2024”), primarily due to a decrease in Adjusted EBITDA per net ton (“nt”). The following discussion reflects the Company’s trend analysis in chronological order:
Revenue:
| • | decreased C$123.1 million or 12% from C$1,064.9 million in Q3 2022 to C$941.8 million in Q4 2022, a result of decreased steel revenue primarily due to lower selling prices of steel as average NSR per nt decreased by C$219 from C$1,827 per nt in Q3 2022 to C$1,608 per nt in Q4 2022. |
| • | decreased C$7.7 million or 1% from C$941.8 million in Q4 2022 to C$934.1 million in Q1 2023, a result of decreased steel revenue primarily due to lower shipments of steel as shipping volume decreased by 9,693 tons from 547,217 tons in Q4 2022 to 537,524 tons in Q4 2022. |
| • | decreased C$334.9 million or 36% from C$934.1 million in Q1 2023 to C$599.2 million in Q2 2023, a result of decreased steel revenue primarily due to lower selling prices of steel as average NSR per nt decreased by C$366 from C$1,632 per nt in Q1 2023 to C$1,266 per nt in Q2 2023. |
| • | decreased C$31.4 million or 5% from C$599.2 million in Q2 2023 to C$567.8 million in Q3 2023, a result of decreased steel revenue primarily due to lower selling prices of steel as average NSR per nt decreased by C$150 from C$1,266 per nt in Q2 2023 to C$1,116 per nt in Q3 2023. |
| • | increased C$109.6 million or 19% from C$567.8 million in Q3 2023 to C$677.4 million in Q4 2023, a result of increased steel revenue primarily due to increased shipments of steel as shipping volume increased by 113,306 tons from 458,341 tons in Q3 2023 to 571,647 tons in Q4 2023. |
29
| • | increased C$149.8 million or 22% from C$677.4 million in Q4 2023 to C$827.2 million in Q1 2024, a result of increased steel revenue primarily due to higher selling prices of steel as average NSR per nt increased by C$257 from C$1,066 per nt in Q4 2023 to C$1,323 per nt in Q1 2024. |
| • | decreased C$94.6 million or 11% from C$827.2 million in Q1 2024 to C$732.6 million in Q2 2024, a result of decreased steel revenue primarily due to lower selling prices of steel as average NSR per nt decreased by C$110 from C$1,323 per nt in Q1 2024 to C$1,213 per nt in Q2 2024. |
| • | decreased C$117.2 million or 16% from C$732.6 million in Q2 2024 to C$615.4 million in Q3 2024, a result of decreased steel revenue primarily due to lower selling prices of steel and lower shipment volumes. |
Net income (loss):
| • | of C$242.9 million in Q4 2022 increased compared to C$123.0 million in Q3 2022 mostly due to listing expense (C$235.6 million) as a result of the Merger in Q3 2022. This was offset in part by decreased revenue due primarily to lower selling price of steel. |
| • | of C$301.4 million in Q1 2023 increased compared to C$242.9 million in Q4 2022 mainly due to the changes in fair value of warrant liability (C$51.6 million) and changes in fair value of share-based compensation liability (C$12.3 million). |
| • | of C$87.2 million in Q2 2023 decreased compared to C$301.4 million in Q1 2023 primarily due to decreased revenue of C$334.9 million, a result of lower selling prices of steel with a lower decrease in cost of sales of C$55.2 million. In addition, pension and post-employment benefit expenses increased as a result of ratifying the collective bargaining agreements (C$53.3 million). This was offset in part by lower income tax expense of C$80.0 million due to lower income before income taxes. |
| • | of (C$69.8) million in Q3 2023 decreased compared to C$87.2 million in Q2 2023 primarily due to decreased revenue of C$31.4 million, a result of lower selling prices of steel, and due to an increase in cost of sales of C$42.4 million. In addition, the decrease was due in part to foreign exchange loss increasing as a result of fluctuating exchange rates (C$50.7 million) and the changes in fair value of warrant liability (C$41.5 million). |
| • | of (C$20.4) million in Q4 2023 increased compared to (C$69.8) million in Q3 2023 primarily due to increased revenue (C$109.6 million), a result of increased shipping volume. This was offset, in part, by an increase in cost of sales (C$18.9 million), the changes in fair value of the warrant liability (C$13.0 million), the fair value of the share-based payment compensation liability (C$7.1 million) and the fair value of earnout liability (C$3.7 million). |
| • | of C$130.9 million in Q1 2024 increased compared to (C$20.4) million in Q4 2023 primarily due to increased revenue (C$149.8 million), a result of higher selling prices of steel. This was offset, in part, by an increase in cost of sales (C$8.8 million) due to higher purchase price of key inputs such as ore pellets. |
| • | of C$31.1 million in Q2 2024 decreased compared to C$130.9 million in Q1 2024 mostly due to decreased revenue (C$94.6 million), a result of lower selling prices of steel, and by an increase in cost of sales (C$25.3 million), due mainly to higher purchased coke use and lower production volume. This was offset, in part, by lower income taxes (C$27.4 million) due to lower income from operations. |
| • | of (C$84.8) million in Q3 2024 decreased compared to C$31.1 million in Q2 2024 mostly due to decreased revenue (C$117.2 million), a result of lower selling prices of steel and shipment volumes, the changes in fair value of the warrant liability (C$20.1 million), the fair value of the share-based payment compensation liability (C$12.6 million) and the fair value of earnout liability (C$6.9 million). This was offset, in part, by lower cost of sales (C$41.0 million) primarily due to lower shipment volumes. |
30
Exhibit 99.3
Condensed Interim Consolidated Financial Statements
ALGOMA STEEL GROUP INC.
(Unaudited)
As at December 31, 2023 and March 31, 2023
and for the three and nine month periods ended
December 31, 2023 and 2022
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Net (Loss) Income
(Unaudited)
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| expressed in millions of Canadian dollars, except for per share amounts | ||||||||||||||||
| Revenue (Note 4) |
$ | 615.4 | $ | 567.8 | $ | 2,175.2 | $ | 2,101.1 | ||||||||
| Operating expenses |
||||||||||||||||
| Cost of sales (Note 5) |
$ | 623.8 | $ | 611.8 | $ | 1,928.1 | $ | 1,758.0 | ||||||||
| Administrative and selling expenses (Note 6) |
28.5 | 21.7 | 82.9 | 74.3 | ||||||||||||
|
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| (Loss) income from operations |
$ | (36.9 | ) | $ | (65.7 | ) | $ | 164.2 | $ | 268.8 | ||||||
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| Other (income) and expenses |
||||||||||||||||
| Finance income |
$ | (2.4 | ) | $ | (3.9 | ) | $ | (8.8 | ) | $ | (10.4 | ) | ||||
| Finance costs |
5.4 | 4.0 | 15.9 | 13.0 | ||||||||||||
| Interest on pension and other post-employment benefit obligations |
4.8 | 5.0 | 14.4 | 12.4 | ||||||||||||
| Foreign exchange loss (gain) |
14.7 | 10.6 | 14.1 | (41.2 | ) | |||||||||||
| Change in fair value of warrant liability (Note 25) |
20.4 | 6.4 | 3.2 | (67.1 | ) | |||||||||||
| Change in fair value of earnout liability (Note 26) |
6.2 | (0.2 | ) | 3.5 | (9.4 | ) | ||||||||||
| Change in fair value of share-based compensation liability (Note 27) |
11.3 | (0.2 | ) | 6.0 | (19.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 60.4 | $ | 21.7 | $ | 48.3 | $ | (122.3 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (Loss) income before income taxes |
$ | (97.3 | ) | $ | (87.4 | ) | $ | 115.9 | $ | 391.1 | ||||||
| Income tax (recovery) expense (Note 19) |
(12.5 | ) | (17.6 | ) | 38.7 | 72.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net (loss) income |
$ | (84.8 | ) | $ | (69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net (loss) income per common share |
||||||||||||||||
| Basic (Note 22) |
$ | (0.78 | ) | $ | (0.64 | ) | $ | 0.71 | $ | 2.50 | ||||||
| Diluted (Note 22) |
$ | (0.78 | ) | $ | (0.64 | ) | $ | 0.60 | $ | 1.66 | ||||||
See accompanying notes to the condensed interim consolidated financial statements
2
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| expressed in millions of Canadian dollars | ||||||||||||||||
| Net (loss) income |
$ | (84.8 | ) | $ | (69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
| Other comprehensive income, net of income tax, that will be reclassified subsequently to profit or loss |
||||||||||||||||
| Net unrealized income on cash flow hedges, net of tax expense nil for the three and nine months ended December 31, 2023, and tax expense of $2.3 million, respectively for the three and nine months ended December 31, 2022 (Note 16) |
$ | — | $ | (4.1 | ) | $ | — | $ | 31.0 | |||||||
| Other comprehensive income, net of income tax, that will not be reclassified subsequently to profit or loss |
||||||||||||||||
| Foreign exchange (loss) gain on translation to presentation currency |
$ | (31.8 | ) | $ | (18.6 | ) | $ | (32.4 | ) | $ | 125.0 | |||||
| Remeasurement of pension and other post-employment benefit obligations, net of tax nil, for the three and nine months ended December 31, 2023 and for the three and nine months ended December 31, 2022 (Notes 17, 18) |
$ | (53.6 | ) | $ | 35.7 | $ | (54.0 | ) | $ | (14.3 | ) | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | (85.4 | ) | $ | 13.0 | $ | (86.4 | ) | $ | 141.7 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total comprehensive (loss) income |
$ | (170.2 | ) | $ | (56.8 | ) | $ | (9.2 | ) | $ | 460.6 | |||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to the condensed interim consolidated financial statements
3
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Financial Position
(Unaudited)
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| expressed in millions of Canadian dollars | ||||||||
| Assets |
||||||||
| Current |
||||||||
| Cash (Note 7) |
$ | 94.7 | $ | 247.4 | ||||
| Restricted cash (Note 7) |
3.9 | 3.9 | ||||||
| Taxes receivable (Note 8) |
23.3 | — | ||||||
| Accounts receivable, net (Note 9) |
278.7 | 291.2 | ||||||
| Inventories (Note 10) |
886.6 | 722.7 | ||||||
| Prepaid expenses and deposits |
49.7 | 94.4 | ||||||
| Other assets |
6.5 | 6.7 | ||||||
|
|
|
|
|
|||||
| Total current assets |
$ | 1,343.4 | $ | 1,366.3 | ||||
|
|
|
|
|
|||||
| Non-current |
||||||||
| Property, plant and equipment, net (Note 11) |
$ | 1,300.0 | $ | 1,081.3 | ||||
| Intangible assets, net |
0.8 | 0.9 | ||||||
| Other assets |
7.4 | 7.1 | ||||||
|
|
|
|
|
|||||
| Total non-current assets |
$ | 1,308.2 | $ | 1,089.3 | ||||
|
|
|
|
|
|||||
| Total assets |
$ | 2,651.6 | $ | 2,455.6 | ||||
|
|
|
|
|
|||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current |
||||||||
| Bank indebtedness (Note 12) |
$ | 5.4 | $ | 1.9 | ||||
| Accounts payable and accrued liabilities (Note 13) |
306.0 | 204.6 | ||||||
| Taxes payable and accrued taxes (Note 14) |
24.1 | 14.4 | ||||||
| Current portion of other long-term liabilities |
1.6 | 0.4 | ||||||
| Current portion of governmental loans (Note 15) |
14.4 | 10.0 | ||||||
| Current portion of environmental liabilities |
3.8 | 4.5 | ||||||
| Warrant liability (Note 25) |
58.8 | 57.3 | ||||||
| Earnout liability (Note 26) |
18.5 | 16.8 | ||||||
| Share-based payment compensation liability (Note 27) |
34.0 | 33.5 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
$ | 466.6 | $ | 343.4 | ||||
|
|
|
|
|
|||||
| Non-current |
||||||||
| Long-term governmental loans (Note 15) |
$ | 125.8 | $ | 110.4 | ||||
| Accrued pension liability (Note 17) |
232.8 | 184.0 | ||||||
| Accrued other post-employment benefit obligation (Note 18) |
237.7 | 222.9 | ||||||
| Other long-term liabilities |
16.7 | 3.7 | ||||||
| Environmental liabilities |
30.5 | 32.3 | ||||||
| Deferred income tax liabilities |
100.8 | 96.7 | ||||||
|
|
|
|
|
|||||
| Total non-current liabilities |
$ | 744.3 | $ | 650.0 | ||||
|
|
|
|
|
|||||
| Total liabilities |
$ | 1,210.9 | $ | 993.4 | ||||
|
|
|
|
|
|||||
| Shareholders’ equity |
||||||||
| Capital stock (Note 21) |
$ | 963.2 | $ | 958.4 | ||||
| Accumulated other comprehensive income |
227.2 | 313.6 | ||||||
| Retained earnings |
267.7 | 211.6 | ||||||
| Contributed deficit |
(17.4 | ) | (21.4 | ) | ||||
|
|
|
|
|
|||||
| Total shareholders’ equity |
$ | 1,440.7 | $ | 1,462.2 | ||||
|
|
|
|
|
|||||
| Total liabilities and shareholders’ equity |
$ | 2,651.6 | $ | 2,455.6 | ||||
|
|
|
|
|
|||||
See accompanying notes to the condensed interim consolidated financial statements
4
Algoma Steel Group Inc.
Condensed Interim Consolidated Statement of Changes in Shareholders’ Equity
(Unaudited)
| expressed in millions of Canadian dollars |
Capital stock |
Contributed deficit |
Foreign exchange gain (loss) on translation to presentation currency |
Actuarial loss on pension and other post- employment benefit obligation |
Cash flow hedge reserve - unrealized gain (loss) (Note 16) |
Accumulated other compre- hensive income |
Retained earnings |
Total Shareholders’ equity |
||||||||||||||||||||||||
| Balance at March 31, 2023 |
$ | 958.4 | $ | (21.4 | ) | $ | 106.7 | $ | 206.9 | $ | — | $ | 313.6 | $ | 211.6 | $ | 1,462.2 | |||||||||||||||
| Net income |
— | — | — | — | — | — | 77.2 | 77.2 | ||||||||||||||||||||||||
| Other comprehensive loss |
— | — | (32.4 | ) | (54.0 | ) | — | (86.4 | ) | — | (86.4 | ) | ||||||||||||||||||||
| Issuance of performance and restricted share units (Note 29) |
— | 2.7 | — | — | — | — | — | 2.7 | ||||||||||||||||||||||||
| Issuance of deferred share units (Note 29) |
— | 1.7 | — | — | — | — | — | 1.7 | ||||||||||||||||||||||||
| Issuance of capital stock (Notes 21, 29) |
4.8 | (0.4 | ) | — | — | — | — | — | 4.4 | |||||||||||||||||||||||
| Dividend equivalent on earnout rights (Note 26) |
— | — | — | — | — | — | (0.3 | ) | (0.3 | ) | ||||||||||||||||||||||
| Dividends paid (Note 30) |
— | — | — | — | — | — | (20.8 | ) | (20.8 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2023 |
$ | 963.2 | $ | (17.4 | ) | $ | 74.3 | $ | 152.9 | $ | — | $ | 227.2 | $ | 267.7 | $ | 1,440.7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at March 31, 2022 |
1,378.0 | (25.2 | ) | (16.4 | ) | 193.1 | (24.7 | ) | 152.0 | 77.8 | 1,582.6 | |||||||||||||||||||||
| Net income |
— | — | — | — | — | — | 318.9 | 318.9 | ||||||||||||||||||||||||
| Other comprehensive income (loss) |
— | — | 125.0 | (14.3 | ) | 31.0 | 141.7 | — | 141.7 | |||||||||||||||||||||||
| Common shares repurchased and cancelled (Note 21) |
(419.6 | ) | — | — | — | — | — | (133.5 | ) | (553.1 | ) | |||||||||||||||||||||
| Issuance of performance and restricted share units (Note 29) |
— | 2.1 | — | — | — | — | — | 2.1 | ||||||||||||||||||||||||
| Issuance of deferred shared units (Note 29) |
— | 1.3 | — | — | — | — | — | 1.3 | ||||||||||||||||||||||||
| Dividends paid (Note 30) |
— | — | — | — | — | — | (23.6 | ) | (23.6 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance at December 31, 2022 |
$ | 958.4 | $ | (21.8 | ) | $ | 108.6 | $ | 178.8 | $ | 6.3 | $ | 293.7 | $ | 239.6 | $ | 1,469.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
See accompanying notes to the condensed interim consolidated financial statements
5
Algoma Steel Group Inc.
Condensed Interim Consolidated Statements of Cash Flows
(Unaudited)
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| expressed in millions of Canadian dollars | ||||||||||||||||
| Operating activities |
||||||||||||||||
| Net (loss) income |
$ | (84.8 | ) | $ | (69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
| Items not affecting cash: |
||||||||||||||||
| Depreciation of property, plant and equipment and intangible assets |
31.6 | 24.7 | 80.2 | 69.7 | ||||||||||||
| Deferred income tax expense (recovery) (Note 19) |
17.3 | 4.9 | 6.4 | (11.2 | ) | |||||||||||
| Pension funding (in excess of) below expense |
(0.5 | ) | (0.5 | ) | 0.4 | 48.3 | ||||||||||
| Post-employment benefit funding in excess of expense |
(2.0 | ) | (2.3 | ) | (5.4 | ) | (2.6 | ) | ||||||||
| Unrealized foreign exchange loss (gain) on: |
||||||||||||||||
| accrued pension liability |
5.0 | 2.9 | 4.8 | (13.9 | ) | |||||||||||
| post-employment benefit obligations |
5.1 | 2.6 | 5.1 | (17.9 | ) | |||||||||||
| Finance costs |
5.4 | 4.0 | 15.9 | 13.0 | ||||||||||||
| Interest on pension and other post-employment benefit obligations |
4.8 | 5.0 | 14.4 | 12.4 | ||||||||||||
| Interest on finance lease |
0.1 | — | 0.1 | — | ||||||||||||
| Accretion of governmental loans and environmental liabilities |
4.0 | 3.4 | 11.4 | 9.7 | ||||||||||||
| Unrealized foreign exchange loss (gain) on government loan facilities |
3.2 | 1.3 | 2.7 | (8.0 | ) | |||||||||||
| Increase (decrease) in fair value of warrant liability (Note 25) |
20.4 | 6.4 | 3.2 | (67.1 | ) | |||||||||||
| Increase (decrease) in fair value of earnout liability (Note 26) |
6.2 | (0.2 | ) | 3.5 | (9.4 | ) | ||||||||||
| Increase (decrease) in fair value of share-based payment compensation liability (Note 27) |
11.3 | (0.2 | ) | 6.0 | (19.6 | ) | ||||||||||
| Other |
2.0 | 0.4 | 5.6 | (3.2 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 29.1 | $ | (17.4 | ) | $ | 231.5 | $ | 319.1 | ||||||||
| Net change in non-cash operating working capital (Note 23) |
(72.5 | ) | (109.9 | ) | (51.0 | ) | (231.0 | ) | ||||||||
| Share-based payment compensation and earnout units settled |
(2.5 | ) | — | (2.5 | ) | (4.6 | ) | |||||||||
| Environmental liabilities paid |
(1.5 | ) | (1.3 | ) | (4.3 | ) | (1.7 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash (used in) generated by operating activities |
$ | (47.4 | ) | $ | (128.6 | ) | $ | 173.7 | $ | 81.8 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Investing activities |
||||||||||||||||
| Acquisition of property, plant and equipment (Note 11) |
$ | (96.5 | ) | $ | (95.2 | ) | $ | (369.7 | ) | $ | (267.7 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash used in investing activities |
$ | (96.5 | ) | $ | (95.2 | ) | $ | (369.7 | ) | $ | (267.7 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financing activities |
||||||||||||||||
| Bank indebtedness advanced, net (Note 12) |
$ | 5.1 | $ | 12.0 | $ | 3.4 | $ | 12.3 | ||||||||
| Transaction costs on bank indebtedness (Note 12) |
— | — | (1.7 | ) | — | |||||||||||
| Governmental loans received (Note 15) |
17.0 | 15.0 | 59.3 | 30.2 | ||||||||||||
| Repayment of governmental loans (Note 15) |
(2.5 | ) | (2.5 | ) | (7.5 | ) | (7.5 | ) | ||||||||
| Interest paid |
— | — | (0.2 | ) | (0.1 | ) | ||||||||||
| Dividends paid (Note 30) |
(6.9 | ) | (7.0 | ) | (20.8 | ) | (23.6 | ) | ||||||||
| Common shares repurchased and cancelled (Note 21) |
— | (6.5 | ) | — | (553.1 | ) | ||||||||||
| Other |
11.9 | (2.4 | ) | 11.6 | (2.7 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Cash generated by (used in) financing activities |
$ | 24.6 | $ | 8.6 | $ | 44.1 | $ | (544.5 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Effect of exchange rate changes on cash |
$ | 0.4 | $ | (5.0 | ) | $ | (0.8 | ) | $ | 59.8 | ||||||
| Cash |
||||||||||||||||
| Decrease in cash |
(118.9 | ) | (220.2 | ) | (152.7 | ) | (670.6 | ) | ||||||||
| Opening balance |
213.6 | 464.9 | 247.4 | 915.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Ending balance (Note 7) |
$ | 94.7 | $ | 244.7 | $ | 94.7 | $ | 244.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
See accompanying notes to the condensed interim consolidated financial statements
6
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 1. | GENERAL INFORMATION |
Algoma Steel Group Inc., formerly known as 1295908 B.C. Ltd. (the “Company”), was incorporated on March 23, 2021 under the Business Corporations Act of British Columbia solely for the purpose of purchasing Algoma Steel Holdings Inc. On May 24, 2021, the Company entered into a Merger Agreement (the “Merger”), by and among the Company, a wholly-owned subsidiary of the Company and Legato Merger Corp. (“Legato”). On October 19, 2021, the Company completed its merger with Legato, listing its common shares and warrants under the symbol ‘ASTL’ and ASTLW’, respectively, on the Toronto Stock Exchange (TSX) and the Nasdaq Stock Market (Nasdaq). Algoma Steel Group Inc. is the ultimate parent holding company of Algoma Steel Inc. and does not conduct any business operations.
Algoma Steel Inc. (“ASI”), the operating company and a wholly-owned subsidiary of Algoma Steel Holdings Inc. was incorporated on May 19, 2016 under the Business Corporations Act of British Columbia. ASI is an integrated steel producer with its active operations located entirely in Sault Ste. Marie, Ontario, Canada. ASI produces sheet and plate products that are sold primarily in Canada and the United States.
The registered address of the Company is 1055 West Hastings Street, Vancouver, British Columbia, Canada. The head office of the Company is located at 105 West Street, Sault Ste. Marie, Ontario, Canada.
The condensed interim consolidated financial statements of the Company as at December 31, 2023 and March 31, 2023 and for the three and nine month periods ended December 31, 2023 and 2022 are comprised of the Company and its wholly-owned subsidiaries as follows:
| • | Algoma Steel Holdings Inc. |
| • | Algoma Steel Intermediate Holdings Inc. |
| • | Algoma Steel Inc. |
| • | Algoma Steel Inc. USA |
| • | Algoma Docks GP Inc. |
| • | Algoma Docks Limited Partnership |
Algoma Steel Holdings Inc., Algoma Steel Intermediate Holdings Inc. and Algoma Docks GP Inc. are holding companies and do not conduct any business operations.
| 2. | BASIS OF PRESENTATION |
Statement of compliance
These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34 Interim Financial Reporting as issued by the International Accounting Standards Board (“IASB”).
Certain information and footnote disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the IASB, have been omitted or condensed. The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements have been set out in Notes 4 and 31 of the Company’s annual consolidated financial statements for the years ended March 31, 2023 and 2022. The accounting policies and accounting judgements used in the preparation of these condensed interim consolidated financial statements are consistent with those used in the Company’s annual consolidated financial statements.
7
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 2. | BASIS OF PRESENTATION (continued) |
These condensed interim consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the years ended March 31, 2023 and 2022.
These condensed interim consolidated financial statements have been approved by the Board of Directors, and authorized for issuance on February 6, 2024.
The condensed interim consolidated financial statements have been prepared on a going concern assumption using historical cost basis, except for certain financial instruments that are measured at fair value, as explained in the accounting policies disclosed in Note 3 to the Company’s annual consolidated financial statements for the years ended March 31, 2023 and 2022. Historical cost is generally based on the fair value of the consideration given in exchange for assets. The going concern assumption assumes the realization of assets and the discharge of liabilities in the normal course of business.
Functional and presentation currency
The Company and its subsidiaries’ functional currency is the United States dollar (“US dollar”). The US dollar is the currency of the primary economic environment in which the Company and its subsidiaries operate.
For reporting purposes, the condensed interim consolidated financial statements are presented in millions of Canadian dollars (“$C”). The assets and liabilities are translated into the reporting currency using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at average exchange rates for the reporting period. Exchange differences arising are recognized in other comprehensive income and accumulated in equity under the heading ‘Foreign exchange on translation to presentation currency’.
New IFRS Standards, Amendments and Interpretations adopted as of April 1, 2023 (effective January 1, 2023)
The Company adopted the following amendments which did not have a material impact on the condensed interim consolidated financial statements:
Amended Disclosure for Accounting Policies
IAS 1 “Presentation of Financial Statements” was amended with the intention to help companies provide useful accounting policy disclosures. The key amendments include the requirement to disclose material accounting policy information rather than significant accounting policies, clarifying that accounting policies related to immaterial transactions, other events or conditions are themselves immaterial and as such need not be disclosed; and clarifying that not all accounting policies that relate to material transactions, other events or conditions are themselves material to a company’s financial statements.
Amended Scope of Recognition
IAS 12 “Income Taxes” was amended to narrow the scope of recognition exemption in paragraphs 15 and 24 (recognition exemption) so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences.
8
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 2. | BASIS OF PRESENTATION (continued) |
Definition of Accounting Estimates
IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors” was amended to introduce the definition of an accounting estimate and includes other amendments to assist entities to distinguish changes in accounting estimates from changes in accounting policies.
| 3. | FUTURE ACCOUNTING CHANGES |
Standards and Interpretations issued and not yet adopted
Classification of Liabilities as Current or Non-current
In January 2020, the IASB issued an amendment to IAS 1, “Presentation of Financial Statements” to clarify its requirements for the presentation of liabilities in the statement of financial position. The limited scope amendment affected only the presentation of liabilities in the statement of financial position and not the amount or timing of its recognition. The amendment clarified that the classification of liabilities as current or non-current is based on rights that are in existence at the end of the reporting period and specified that classification is unaffected by expectations about whether an entity will exercise its right to defer settlement of a liability. It also introduced a definition of ‘settlement’ to make clear that settlement refers to the transfer to the counterparty of cash, equity instruments, other assets or services. On October 31, 2022, the IASB issued Non-Current Liabilities with Covenants (Amendments to IAS 1). These amendments specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or non-current at the reporting date. The application of these amendments are not expected to have a significant impact on the condensed interim consolidated statements of financial position or on the Company’s financial reporting. The amendment is effective for annual reporting periods beginning on or after January 1, 2024. Earlier application is permitted.
| 4. | REVENUE |
The Company is viewed as a single reportable segment involving steel production for purposes of internal performance measurement and resource allocation.
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total revenue is comprised of: |
||||||||||||||||
| Sheet & Strip |
$ | 442.4 | $ | 426.3 | $ | 1,585.9 | $ | 1,683.8 | ||||||||
| Plate |
112.4 | 85.4 | 388.0 | 256.2 | ||||||||||||
| Slabs |
2.1 | 0.3 | 3.3 | 0.9 | ||||||||||||
| Freight |
48.1 | 43.7 | 150.7 | 128.3 | ||||||||||||
| Non-steel revenue |
10.4 | 12.1 | 47.3 | 31.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 615.4 | $ | 567.8 | $ | 2,175.2 | $ | 2,101.1 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| The geographical distribution of total revenue is as follows: |
||||||||||||||||
| Sales to customers in Canada |
$ | 239.8 | $ | 200.9 | $ | 845.9 | $ | 746.5 | ||||||||
| Sales to customers in the United States |
368.8 | 359.8 | 1,299.7 | 1,328.3 | ||||||||||||
| Sales to customers in the rest of the world |
6.8 | 7.1 | 29.6 | 26.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 615.4 | $ | 567.8 | $ | 2,175.2 | $ | 2,101.1 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
9
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 4. | REVENUE (continued) |
For the three and nine month periods ended December 31, 2023, sales of $75.4 million and $285.7 million, respectively, to one customer represented greater than 10% of total revenue. For the three and nine month periods ended December 31, 2022, sales of $84.5 million and $268.4 million, respectively, to one customer represented greater than 10% of total revenue.
| 5. | COST OF SALES |
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Total cost of sales is comprised of: |
||||||||||||||||
| Cost of steel revenue |
$ | 565.3 | $ | 556.0 | $ | 1,730.1 | $ | 1,597.8 | ||||||||
| Cost of freight revenue |
48.1 | 43.7 | 150.7 | 128.3 | ||||||||||||
| Cost of non-steel revenue |
10.4 | 12.1 | 47.3 | 31.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 623.8 | $ | 611.8 | $ | 1,928.1 | $ | 1,758.0 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Inventories recognized as cost of sales: |
$ | 575.7 | $ | 568.1 | $ | 1,777.4 | $ | 1,629.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net inventory write-downs as a result of net realizable value lower than cost included in cost of sales: |
$ | — | $ | 19.2 | $ | 13.5 | $ | 23.0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Depreciation included in cost of steel revenue for the three and nine month periods ended December 31, 2023 was $31.6 million and $80.0 million, respectively. Depreciation included in cost of steel revenue for the three and nine month periods ended December 31, 2022 was $24.6 million and $69.4 million, respectively. Wages and benefits included in cost of steel revenue for the three and nine month periods ended December 31, 2023 was $95.9 million and $273.9 million, respectively. Wages and benefits included in cost of steel revenue for the three and nine month periods ended December 31, 2022 was $84.2 million and $290.4 million, respectively. Past service costs of $47.9 million, as described below, are included in cost of steel revenue for the nine month period ended December 31, 2022.
Federal Greenhouse Gas Pollution Pricing Act
During the three and nine month periods ended December 31, 2023, total Carbon Tax recognized in cost of sales as an expense was $3.5 million and $18.2 million, respectively. For the three and nine month periods ended December 31, 2022, total Carbon Tax recognized in cost of sales as an expense was $1.2 million and $4.3 million, respectively.
Past service cost recognition
The collective bargaining agreements with Local 2251 and Local 2724 were ratified in August 2022 and September 2022, respectively; and became effective as of August 1, 2022. The settlement resulted in a past service cost adjustment related to the defined benefit pension plan and other post-employment benefits totaling $44.5 million and $3.4 million respectively, of which $47.9 million was recorded in cost of steel revenue for the nine month period ended December 31, 2022.
10
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 6. | ADMINISTRATIVE AND SELLING EXPENSES |
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Administrative and selling expense is comprised of: |
||||||||||||||||
| Personnel expenses |
$ | 12.8 | $ | 7.8 | $ | 35.1 | $ | 33.0 | ||||||||
| Professional, consulting, legal and other fees |
4.3 | 4.5 | 14.5 | 14.8 | ||||||||||||
| Insurance |
6.5 | 5.2 | 19.2 | 16.4 | ||||||||||||
| Software licenses |
1.4 | 1.5 | 3.8 | 3.5 | ||||||||||||
| Amortization of intangible assets and non-producing assets |
— | 0.1 | 0.2 | 0.3 | ||||||||||||
| Other administrative and selling |
3.5 | 2.6 | 10.1 | 6.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 28.5 | $ | 21.7 | $ | 82.9 | $ | 74.3 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Past service cost recognition
The collective bargaining agreements with Local 2251 and Local 2724 were ratified in August 2022 and September 2022, respectively; and became effective as of August 1, 2022. The settlement resulted in a past service cost adjustment related to the defined benefit pension plan and other post-employment benefits of $5.0 million and $0.4 million respectively. For the nine month period ended December 31, 2022, $5.4 million was recorded in administrative and selling expenses.
| 7. | CASH AND RESTRICTED CASH |
At December 31, 2023, the Company had $94.7 million of cash (March 31, 2023 – $247.4 million) and restricted cash of $3.9 million (March 31, 2023 – $3.9 million). Restricted cash was held to provide collateral for letters of credit and other obligations of the Company at both December 31, 2023 and March 31, 2023.
| 8. | TAXES RECEIVABLE |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Sales taxes receivable |
$ | 22.2 | $ | — | ||||
| Income taxes receivable |
1.1 | — | ||||||
|
|
|
|
|
|||||
| $ | 23.3 | $ | — | |||||
|
|
|
|
|
|||||
11
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 9. | ACCOUNTS RECEIVABLE, NET |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Trade accounts receivable |
$ | 267.9 | $ | 277.3 | ||||
| Allowance for doubtful accounts |
(0.6 | ) | (0.5 | ) | ||||
| Governmental loan claims receivable |
||||||||
| Federal Ministry of Industry, Strategic Innovation Fund (“Federal SIF”) Agreement |
3.0 | 3.0 | ||||||
| Northern Industrial Electricity Rate program rebate receivable |
2.8 | 2.7 | ||||||
| Other accounts receivable |
5.6 | 8.7 | ||||||
|
|
|
|
|
|||||
| $ | 278.7 | $ | 291.2 | |||||
|
|
|
|
|
|||||
| Allowance for doubtful accounts |
||||
| Balance at March 31, 2022 |
$ | (2.4 | ) | |
| Remeasurement of loss allowance |
1.9 | |||
|
|
|
|||
| Balance at March 31, 2023 |
$ | (0.5 | ) | |
| Remeasurement of loss allowance |
(0.1 | ) | ||
|
|
|
|||
| Balance at December 31, 2023 |
$ | (0.6 | ) | |
|
|
|
|||
| 10. | INVENTORIES |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Raw materials and consumables |
$ | 641.0 | $ | 485.7 | ||||
| Work in progress |
166.3 | 168.1 | ||||||
| Finished goods |
79.3 | 68.9 | ||||||
|
|
|
|
|
|||||
| $ | 886.6 | $ | 722.7 | |||||
|
|
|
|
|
|||||
| 11. | PROPERTY, PLANT AND EQUIPMENT, NET |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Freehold land |
$ | 6.5 | $ | 6.6 | ||||
| Buildings |
51.8 | 39.2 | ||||||
| Machinery and equipment |
682.5 | 691.7 | ||||||
| Computer hardware |
1.8 | 1.9 | ||||||
| Right-of-use assets |
5.6 | 3.4 | ||||||
| Property under construction |
551.8 | 338.5 | ||||||
|
|
|
|
|
|||||
| $ | 1,300.0 | $ | 1,081.3 | |||||
|
|
|
|
|
|||||
12
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 11. | PROPERTY, PLANT AND EQUIPMENT, NET (continued) |
Useful lives of property, plant and equipment
The Company reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period, and whenever events or circumstances indicate a change in useful life. As a result of the Company changing to electric arc furnaces (“EAF”) to replace the existing blast furnace and basic oxygen steelmaking operations, the Company has been reviewing the useful lives for those assets expected to be decommissioned once the EAF is operational. Effective October 1, 2023, there was sufficient evidence to support a change in the useful lives of machinery, equipment and buildings involved in blast furnace steelmaking operations. The remaining useful lives of this machinery, equipment and buildings have been adjusted to be fully depreciated by December 31, 2029. As a result of this change in estimate, depreciation for the three month period ended December 31, 2023 has increased by $5.8 million. It is expected that the quarterly impact going forward will continue to be approximately $6.0 million until December 31, 2029.
Depreciation of property, plant and equipment
Depreciation of property, plant and equipment for the three and nine month periods ended December 31, 2023 was $34.0 million and $84.0 million, respectively. Depreciation of property, plant and equipment for the three and nine month periods ended December 31, 2022 was $24.0 million and $72.4 million, respectively. Depreciation included in inventories at December 31, 2023, amounted to $13.7 million (December 31, 2022 - $12.1 million).
Acquisitions and disposals
During the three month period ended December 31, 2023, property, plant and equipment were acquired at an aggregate net cost of $86.7 million (December 31, 2022 – $85.6 million); comprised of property, plant and equipment acquired with a total cost of $99.1 million (December 31, 2022 - $95.2 million), against which the Company recognized benefits totalling $12.4 million (December 31, 2022 – $9.6 million) in respect of the governmental loans discussed in Note 15.
During the nine month period ended December 31, 2023, property, plant and equipment were acquired at an aggregate net cost of $331.6 million (December 31, 2022 – $250.9 million); comprised of property, plant and equipment acquired with a total cost of $372.3 million (December 31, 2022 - $267.8 million), against which the Company recognized benefits totalling $40.7 million (December 31, 2022 – $16.9 million) in respect of the governmental loans discussed in Note 15.
During the three and nine month periods ended December 31, 2023, the Company had additions to property under construction for the EAF for an aggregate net cost of $42.8 million and $164.4 million, including benefits in respect of the governmental loans totalling $12.3 million and $40.4 million, respectively. During the three and nine month periods ended December 31, 2022, the Company had additions to property under construction for the electric arc furnace (“EAF”) for an aggregate net cost of $57.7 million and $168.4 million, including benefits in respect of the governmental loans totalling $9.6 million and $16.8 million, respectively.
During the three and nine month periods ended December 31, 2023, the Company had additions to property under construction for the plate mill modernization project for an aggregate net cost of $1.5 million and $60.1 million, respectively (December 31, 2022 – $8.4 million and $25.1 million, respectively). As at December 31, 2023, since inception of the project the Company had additions for the plate mill modernization project of $132.2 million.
At December 31, 2023, property under construction includes prepaid progress payments of $205.5 million for the transition from blast furnace steel production to EAF (March 31, 2023 – $188.7 million). At December 31, 2023, there was no prepaid expense pertaining to the plate mill modernization project (March 31, 2023 - $41.4 million).
13
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 11. | PROPERTY, PLANT AND EQUIPMENT, NET (continued) |
Financing arrangement
The Company completed a financing arrangement in December 2023 with the Bank of Montreal for total cash consideration of $11.7 million. The financing arrangement is secured by a gas turbine, which the Company uses in its power facility, bears interest at 7.5% with monthly payments of $0.2 million and matures in five years. Upon maturity, the Company has the option to extend the terms of the arrangement or make a balloon payment of $6.4 million. The outstanding amount of the financing arrangement is included in other long-term liabilities in the condensed interim consolidated statements of financial position.
| 12. | BANK INDEBTEDNESS |
On November 30, 2018, the Company obtained US $250.0 million in the form of a traditional asset-based revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility is secured by substantially all of the Company’s assets. Under the General Security Agreement, the Revolving Credit Facility has a priority claim on the accounts receivable and the inventories of the Company and a secondary claim on the rest of the Company’s assets. In May 2023, the Company increased its Revolving Credit Facility from US $250 million to US $300 million and extended the term to May, 2028. The interest rate on the Revolving Credit Facility is based on Secured Overnight Financing Rate (“SOFR”) plus a credit spread adjustment of 10 basis points plus an applicable margin, which varies depending on usage.
At December 31, 2023, the Company had drawn $5.4 million (US $4.1 million), and there was $331.9 million (US $250.9 million) of unused availability after taking into account $59.5 million (US $45.0 million) of outstanding letters of credit, and borrowing base reserves. At March 31, 2023, the Company had drawn $1.9 million (US $1.4 million), and there was $279.2 million (US $206.3 million) of unused availability after taking into account $57.3 million (US $42.3 million) of outstanding letters of credit and borrowing base reserves.
Initial transaction costs related to the Revolving Credit Facility obtained on November 30, 2018 amounted to $7.0 million, with additional transaction costs of $1.7 million incurred for the increase in the Revolving Credit Facility in May 2023. Transaction costs are disclosed as other non-current assets in the condensed interim consolidated statements of financial position, and have been amortized on a straight-line basis over the life of this facility, which has a maturity date of May 31, 2028. At December 31, 2023, the unamortized transaction costs related to the Revolving Credit Facility were $1.4 million (March 31, 2023—$0.9 million).
Reconciliation of liabilities arising from financing activities
The changes in the Company’s bank indebtedness for the nine month period ended December 31, 2023 arising from financing activities are presented below:
| Balance at March 31, 2023 |
$ | 1.9 | ||
| Revolving Credit Facility drawn |
47.7 | |||
| Repayment of Revolving Credit Facility |
(44.3 | ) | ||
| Effects of Foreign Exchange |
0.1 | |||
|
|
|
|||
| Balance at December 31, 2023 |
$ | 5.4 | ||
|
|
|
14
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 13. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Accounts payable |
$ | 136.1 | $ | 59.8 | ||||
| Accrued liabilities |
116.1 | 74.9 | ||||||
| Wages and accrued vacation payable |
53.8 | 69.9 | ||||||
|
|
|
|
|
|||||
| $ | 306.0 | $ | 204.6 | |||||
|
|
|
|
|
|||||
| 14. | TAXES PAYABLE AND ACCRUED TAXES |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Payroll taxes payable |
$ | 5.1 | $ | 4.3 | ||||
| Sales taxes payable |
2.0 | — | ||||||
| Carbon tax accrual |
17.0 | 8.4 | ||||||
| Income taxes payable |
— | 1.7 | ||||||
|
|
|
|
|
|||||
| $ | 24.1 | $ | 14.4 | |||||
|
|
|
|
|
|||||
| 15. | GOVERNMENTAL LOANS |
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| The carrying amount of: |
||||||||
| Long-term portion |
||||||||
| Federal AMF Loan, denominated in Canadian dollars, due March 1, 2028 |
$ | 23.3 | $ | 27.9 | ||||
| Provincial MENDM Loan, denominated in Canadian dollars, due November 30, 2028 |
45.6 | 45.4 | ||||||
| Federal SIF Agreement loan, denominated in Canadian dollars, due April 30, 2031 |
8.6 | 9.7 | ||||||
| Federal SIF EAF Agreement loan, denominated in Canadian dollars, due January 1, 2030 |
48.3 | 27.4 | ||||||
|
|
|
|
|
|||||
| $ | 125.8 | $ | 110.4 | |||||
|
|
|
|
|
|||||
| Current portion |
||||||||
| Federal AMF Loan, denominated in Canadian dollars |
$ | 10.0 | $ | 10.0 | ||||
| Federal SIF Loan, denominated in Canadian dollars |
1.9 | — | ||||||
| Provincial MENDM Loan, denominated in Canadian dollars |
2.5 | — | ||||||
|
|
|
|
|
|||||
| $ | 14.4 | $ | 10.0 | |||||
|
|
|
|
|
|||||
| $ | 140.2 | $ | 120.4 | |||||
|
|
|
|
|
|||||
15
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 15. | GOVERNMENTAL LOANS (continued) |
The changes in the Company’s governmental loan facilities arising from financing activities are presented below:
| Governmental Loan Issued (Repaid) |
Governmental loan benefit recognized immediately |
Accretion of governmental loan benefit |
Carrying value |
|||||||||||||
| Federal AMF Loan |
||||||||||||||||
| Balance at March 31, 2023 |
$ | 49.2 | $ | (26.5 | ) | $ | 15.0 | $ | 37.9 | |||||||
| Movement in the period |
(7.5 | ) | — | 2.9 | (4.6 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2023 |
$ | 41.7 | $ | (26.5 | ) | $ | 17.9 | $ | 33.3 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Provincial MENDM Loan |
||||||||||||||||
| Balance at March 31, 2023 |
$ | 60.0 | $ | (26.4 | ) | $ | 11.9 | $ | 45.4 | |||||||
| Movement in the period |
— | — | 2.7 | 2.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2023 |
$ | 60.0 | $ | (26.4 | ) | $ | 14.6 | $ | 48.1 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Federal SIF Loan |
||||||||||||||||
| Balance at March 31, 2023 |
$ | 15.0 | $ | (7.8 | ) | $ | 2.5 | $ | 9.7 | |||||||
| Movement in the period |
— | — | 0.8 | 0.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2023 |
$ | 15.0 | $ | (7.8 | ) | $ | 3.3 | $ | 10.5 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Federal SIF EAF Loan |
||||||||||||||||
| Balance at March 31, 2023 |
$ | 65.5 | $ | (38.7 | ) | $ | 0.6 | $ | 27.4 | |||||||
| Movement in the period |
58.9 | (40.4 | ) | 2.4 | 20.9 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2023 |
$ | 124.4 | $ | (79.1 | ) | $ | 3.0 | $ | 48.3 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total, Governmental Loans |
||||||||||||||||
| Balance at March 31, 2023 |
$ | 189.8 | $ | (99.4 | ) | $ | 30.0 | $ | 120.4 | |||||||
| Movement in the period |
51.4 | (40.4 | ) | 8.8 | 19.8 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Balance at December 31, 2023 |
$ | 241.2 | $ | (139.8 | ) | $ | 38.8 | $ | 140.2 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 16. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company is party to an International Swaps and Derivatives Association, Inc. (ISDA) 2002 master agreement with an investment and financial services company to hedge the commodity price risk associated with various commodities. For the three and nine month periods ended December 31, 2023, the Company had no outstanding hedging agreements. For the three and nine month periods ended December 31, 2022, steel hedge agreements for 24,000 tons and 69,000 tons respectively, expired. The credit support annex to the master agreement requires the Company to make margin payments to satisfy collateral requirements based on Mark-to-Market (MTM) exposure of the commodity contracts in excess of US $0.25 million. As of December 31, 2023 and March 31, 2023, no margin payments were made by the Company.
16
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 16. | DERIVATIVE FINANCIAL INSTRUMENTS(continued) |
The commodity contracts to hedge the NYMEX price of the hot rolled coil price of steel are derivatives, which are designated as cash flow hedges for which hedge effectiveness is measured for the duration of the agreements and therefore carried at fair value through other comprehensive income or loss. As of December 31, 2023 and March 31, 2023, the company had no outstanding steel derivative contracts and as a result, the fair value liability, respectively, was nil.
The cumulative amount of gains and losses on cash flow hedging instruments assessed as effective are presented in the cash flow hedge reserve through other comprehensive income or loss and is recognized in profit or loss only when the hedged transaction impacts the profit or loss, or is included directly in the initial cost or other carrying amount of the hedged non-financial items (basis adjustment).
During the nine month period ended December 31, 2023, unrealized and realized income resulting from steel hedges was nil. During the nine month period ended December 31, 2022, the unrealized income resulting from the steel hedge of $31.0 million, net of tax of $2.3 million was recognized in the cash flow hedge reserve in other comprehensive (loss) income. During the nine month period ended December 31, 2022, the realized loss from the steel hedge of $0.2 million, was subsequently reclassified from other comprehensive (loss) income and recognized in revenue.
The movements in the cash flow hedge reserve for the period as a component of accumulated other comprehensive (loss) income is as follows:
| For the periods ended | December 31, 2023 |
March 31, 2023 |
||||||
| Opening balance |
$ | — | $ | (24.7 | ) | |||
| Income arising on changes in fair value of cash flow hedges, net of tax expense of nil, respectively |
— | 34.0 | ||||||
| Loss reclassified to net income |
— | (9.3 | ) | |||||
|
|
|
|
|
|||||
| Income on cash flow hedges |
— | 24.7 | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | — | $ | — | ||||
|
|
|
|
|
|||||
17
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 17. | PENSION BENEFITS |
Defined benefit plans
The components of amounts recognized in the condensed interim consolidated statements of net (loss) income in respect of the defined benefit plans are presented below:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amounts recognized in net (loss) income were as follows: |
||||||||||||||||
| Current service cost |
$ | 4.2 | $ | 4.0 | $ | 12.6 | $ | 12.5 | ||||||||
| Past service cost |
— | — | — | 49.5 | ||||||||||||
| Net interest cost |
2.1 | 2.5 | 6.3 | 5.1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 6.3 | $ | 6.5 | $ | 18.9 | $ | 67.1 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Defined benefit costs recognized in: |
||||||||||||||||
| Cost of sales |
$ | 3.8 | $ | 3.6 | $ | 11.4 | $ | 55.8 | ||||||||
| Administrative and selling expense |
0.4 | 0.4 | 1.2 | 6.2 | ||||||||||||
| Interest on pension liability |
2.1 | 2.5 | 6.3 | 5.1 | ||||||||||||
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| $ | 6.3 | $ | 6.5 | $ | 18.9 | $ | 67.1 | |||||||||
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The amounts recognized in the condensed interim consolidated statements of other comprehensive (loss) income in respect of the defined benefit plans are presented below:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amounts recognized in other comprehensive (loss) income, were as follows: |
||||||||||||||||
| Actuarial loss (gain) on accrued pension liability |
$ | 27.1 | $ | (31.3 | ) | $ | 41.9 | $ | 42.9 | |||||||
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Past service cost recognition
The collective bargaining agreements with Local 2251 and Local 2724 were ratified in August 2022 and September 2022, respectively; and became effective as of August 1, 2022. The settlement resulted in a past service cost adjustment related to the defined benefit pension plan of $49.5 million, of which $44.5 million was recorded in the cost of steel revenue and $5.0 million was recorded in administrative and selling expense for the nine month period ended December 31, 2022.
18
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 18. | OTHER POST-EMPLOYMENT BENEFITS |
The components of amounts recognized in the condensed interim consolidated statements of net (loss) income in respect of the other post-employment benefit plans are presented below:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amounts recognized in net (loss) income were as follows: |
||||||||||||||||
| Current service cost |
$ | 0.7 | $ | 0.7 | $ | 2.1 | $ | 2.3 | ||||||||
| Past service cost |
— | — | — | 3.8 | ||||||||||||
| Net interest cost |
2.7 | 2.5 | 8.1 | 7.3 | ||||||||||||
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| $ | 3.4 | $ | 3.2 | $ | 10.2 | $ | 13.4 | |||||||||
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| Post employment benefit costs recognized in: |
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| Cost of sales |
$ | 0.6 | $ | 0.6 | $ | 1.8 | $ | 5.4 | ||||||||
| Administrative and selling expense |
0.1 | 0.1 | 0.3 | 0.7 | ||||||||||||
| Interest on pension liability |
2.7 | 2.5 | 8.1 | 7.3 | ||||||||||||
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| $ | 3.4 | $ | 3.2 | $ | 10.2 | $ | 13.4 | |||||||||
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The amounts recognized in the condensed interim consolidated statements of other comprehensive (loss) income in respect of these other post-employment benefit plans are presented below:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Amounts recognized in other comprehensive (loss) income, were as follows: |
||||||||||||||||
| Actuarial loss (gain) on accrued post-employment benefit liability |
$ | 26.5 | $ | (4.4 | ) | $ | 12.1 | $ | (28.6 | ) | ||||||
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Past service cost recognition
The collective bargaining agreements with Local 2251 and Local 2724 were ratified in August 2022 and September 2022, respectively; and became effective as of August 1, 2022. The settlement resulted in a past service cost adjustment related to the post-employment benefits of $3.8 million, of which $3.4 million was recorded in the cost of steel revenue and $0.4 million was recorded in administrative and selling expense for the nine month period ended December 31, 2022.
19
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 19. | INCOME TAX (RECOVERY) EXPENSE |
The components of income tax (recovery) expense for the three and nine month periods ended December 31, 2023 and December 31, 2022, are as follows:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Income tax (recovery) expense recognized in net (loss) income: |
||||||||||||||||
| Current tax (recovery) expense |
$ | (29.8 | ) | $ | (22.5 | ) | $ | 32.3 | $ | 83.4 | ||||||
| Deferred income tax expense (recovery) |
17.3 | 4.9 | 6.4 | (11.2 | ) | |||||||||||
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| $ | (12.5 | ) | $ | (17.6 | ) | $ | 38.7 | $ | 72.2 | |||||||
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| 20. | COMMITMENTS AND CONTINGENCIES |
Property, plant and equipment
In the normal course of business operations the Company has certain commitments for capital expenditures related to the maintenance and acquisition of property, plant and equipment.
Key inputs to production
The Company requires large quantities of iron ore, coal, oxygen, electricity and natural gas in order to satisfy the demands of the steel manufacturing operation. The Company makes most of its purchases of these principal raw materials at negotiated prices under annual and multi-year agreements. These agreements provide the Company with comfort that an adequate supply of these key raw materials will be available to the Company at a price acceptable to the Company.
Legal Matters
Additionally, from time to time, in the ordinary course of business, the Company is a defendant or party to a number of pending or threatened legal actions and proceedings. Although such matters cannot be predicted with certainty, management currently considers the Company’s exposure to such ordinary course claims and litigation, to the extent not covered by the Company’s insurance policies or otherwise provided for, not to have a material adverse effect on these condensed interim consolidated financial statements. In addition, the Company is involved in and potentially subject to regular audits from federal and provincial tax authorities relating to income, capital and commodity taxes and, as a result of these audits, may receive assessments and reassessments.
| 21. | CAPITAL STOCK |
| Number of shares issued and outstanding |
Stated capital value |
|||||||
| Balance at March 31, 2023 |
103,567,884 | $ | 958.4 | |||||
| Issuance of capital stock |
470,611 | 4.8 | ||||||
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| Balance at December 31, 2023 |
104,038,495 | $ | 963.2 | |||||
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20
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 21. | CAPITAL STOCK(continued) |
As at December 31, 2023, the Company converted 35,379 deferred share units (“DSUs”) to capital stock upon the resignation of a director. The Company issued 435,232 common shares upon exercise of earnout rights and Replacement LTIP units. See Note 26 and Note 27.
Normal Course Issuer Bid
On March 3, 2022, the Company commenced a normal course issuer bid (the “2022 NCIB”) after receiving regulatory approval from the Toronto Stock Exchange. Pursuant to the NCIB, the Company was authorized to acquire up to a maximum of 7,397,889 of its shares, or 5% of its 147,957,790 issued and outstanding shares as of February 18, 2022, subject to a daily maximum of 16,586 shares. The common shares were available for purchase and cancellation commencing on March 3, 2022 until June 14, 2022 at which time the NCIB was suspended with the launch of the Substantial Issuer Bid (“SIB”). The NCIB resumed after the completion of the SIB and the Company was permitted to acquire its shares until March 2, 2023 under the same terms and conditions.
As at December 31, 2022, the Company purchased and cancelled 3,363,662 common shares at a weighted average book value of $9.25 (US $7.30) per share for a total purchase price of approximately $37.1 million (US $28.6 million). The excess of the purchase price paid over the carrying value of the common shares purchased totaling $5.7 million, was recognized as an increase to retained earnings.
The Company renewed its NCIB to acquire a maximum of 5,178,394 of its shares, or approximately 5% of its 103,567,884 issued and outstanding shares as of February 28, 2023, subject to a daily maximum of 50,984 shares. The NCIB commenced March 6, 2023 and will terminate on the earlier of March 5, 2024, or such earlier time as the Company completes its purchases pursuant to the NCIB or provides notice of termination. As at December 31, 2023 and March 31, 2023, the Company has not made any purchases under its renewed NCIB.
Substantial Issuer Bid
On June 21, 2022, the Company commenced a substantial issuer bid in Canada and a Tender Offer in the United States (collectively the “Offer”) to purchase for cancellation up to US $400 million of its common shares. The Offer which expired on July 27, 2022, proceeded by way of a “modified Dutch auction”, whereby, shareholders who chose to participate in the Offer could individually select the price, within a price range of not less than US $8.75 and not more than US $10.25 per share (in increments of US $0.10 per share), at which they tender their shares to the Offer. Upon expiry of the Offer, the Company determined the lowest purchase price that allowed it to purchase the maximum number of shares properly tendered to the Offer, and not properly withdrawn, having an aggregate purchase price not exceeding US $400 million.
On July 27, 2022, 41,025,641 common shares at a weighted average book value of $9.11 (US $7.33) per share were purchased for cancellation at US $9.75 per share, for an aggregate amount of $514.9 million (US $400 million). As a result, the Company subsequently adjusted the number of common shares and the reduction to retained earnings to actual. The excess of the purchase price over the carrying value of the shares purchased totalling $127.4 million (US $99.3 million) was recognized as a reduction to retained earnings. The Company incurred transaction costs of $1.1 million related to the SIB which were recorded within capital stock.
21
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 22. | NET (LOSS) INCOME PER COMMON SHARE |
The following table sets forth the computation of basic and diluted net (loss) income per common share:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (in millions) | ||||||||||||||||
| Net (loss) income attributable to ordinary shareholders |
$ | (84.8 | ) | $ | (69.8 | ) | $ | 77.2 | $ | 318.9 | ||||||
| Loss (gain) on change in fair value of warrants(i) |
— | — | 3.2 | (67.1 | ) | |||||||||||
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|
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| Net (loss) income attributable to ordinary shareholders (diluted) |
$ | (84.8 | ) | $ | (69.8 | ) | $ | 80.4 | $ | 251.8 | ||||||
|
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| (in millions) | ||||||||||||||||
| Weighted average common shares outstanding(ii) |
108.3 | 108.4 | 108.4 | 127.4 | ||||||||||||
| Dilutive effect of warrants, restricted share units and performance share units (i) (ii) |
0.3 | — | 24.5 | 24.2 | ||||||||||||
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|
|
|
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|
|||||||||
| Dilutive weighted average common shares outstanding |
108.6 | 108.4 | 132.9 | 151.6 | ||||||||||||
|
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|
|||||||||
| Net (loss) income per common share: |
||||||||||||||||
| Basic |
$ | (0.78 | ) | $ | (0.64 | ) | $ | 0.71 | $ | 2.50 | ||||||
| Diluted |
$ | (0.78 | ) | $ | (0.64 | ) | $ | 0.60 | $ | 1.66 | ||||||
| (i) | As at December 31, 2023, 24,179,000 warrants remain outstanding. For the purposes of determining diluted net (loss) income per common share, net income for the nine month period ended December 31, 2023 was adjusted for the change in the fair value of the warrants in the amount of $3.2 million (US $2.2 million) as the warrants were determined to be dilutive. For the purposes of determining diluted net (loss) income per common share, net income for the nine month period ended December 31, 2022 was adjusted for the change in the fair value of the warrants in the amount of $67.1 million (US $51.6 million) as the warrants were determined to be dilutive. |
| (ii) | On May 17, 2022, the Board of Directors granted 141,203 and 556,348 restricted share units and performance share units, respectively, to various employees of the Company under the Omnibus Plan for the fiscal year ended March 31, 2023 (“FY2023 Plan”). Further, on March 31, 2023 the Board of Directors granted 457,935 and 404,211 restricted share units and performance share units, respectively, to various employees of the Company under the Omnibus Plan for the fiscal year ended March 31, 2024 (“FY2024 Plan”). For the purposes of determining diluted net (loss) income per share, the restricted share units and performance share units are considered contingently issuable potential ordinary shares. The treasury stock method is applied based on the number of units that vest based on achievement of various financial and nonfinancial targets. Based on the achievement of such targets and forfeiture of awards, the restricted share units and performance share units included in diluted net (loss) income per share for the three and nine month periods ended December 31, 2023 is 344,449 and 317,992, respectively. See Note 29. |
For the three and nine month periods ended December 31, 2023, the total weighted average common shares issued and outstanding is 103,898,216 and 103,687,772, respectively.
22
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 22. | NET (LOSS) INCOME PER COMMON SHARE (continued) |
The Company issued earnout rights and Replacement LTIP awards in connection with the Company’s merger transaction from fiscal 2022. For the three and nine month periods ended December 31, 2023, 1,397,137 and 1,495,745 weighted average earnout rights, respectively, have been included in the calculation of basic and diluted net (loss) income per common share. Replacement LTIP awards are included within the weighted average common shares outstanding, as the Replacement LTIP Awards are fully vested and exercisable for a nominal price. For the three and nine month periods ended December 31, 2023, 2,709,444 and 2,952,679 weighted average Replacement LTIP awards, respectively, have been included in the calculation of basic and diluted net (loss) income per common share. See Note 26 and Note 27.
The Company also routinely grants DSUs to Directors of the Company under its Omnibus Equity Incentive Plan (“Omnibus Plan”). DSUs as vested to various Directors of the Company in respect of their annual retainers. The DSUs recognized under the Omnibus Plan are included within the weighted average common shares outstanding, as the units are exercisable for no consideration. For the three and nine month periods ended December 31, 2023, 290,948 and 260,511 weighted average DSUs, respectively, have been included in the calculation of basic and diluted net (loss) income per common share. See Note 29.
| 23. | NET CHANGE IN NON-CASH OPERATING WORKING CAPITAL |
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Accounts receivable |
$ | 19.7 | $ | 15.0 | $ | 6.7 | $ | 162.0 | ||||||||
| Taxes payable and accrued taxes |
(47.5 | ) | (43.0 | ) | (13.8 | ) | (0.5 | ) | ||||||||
| Inventories |
(82.3 | ) | (57.0 | ) | (180.2 | ) | (374.3 | ) | ||||||||
| Prepaid expenses and other current assets |
14.1 | 17.4 | 43.5 | 24.2 | ||||||||||||
| Accounts payable and accrued liabilities |
23.5 | (36.3 | ) | 92.8 | (53.2 | ) | ||||||||||
| Derivative financial instruments |
— | (6.0 | ) | — | 10.8 | |||||||||||
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|
|
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| $ | (72.5 | ) | $ | (109.9 | ) | $ | (51.0 | ) | $ | (231.0 | ) | |||||
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| 24. | FINANCIAL INSTRUMENTS |
Fair value of financial instruments
The fair value of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities approximates their carrying value due to the short-term nature of these instruments. The fair value of the Revolving Credit Facility, disclosed in Note 12 approximates the respective carrying value due to variable interest rates.
The fair value of the financing arrangement included in other long-term liabilities approximates the carrying value due to prevailing interest rates and the risk characteristics of the instrument.
The fair value of the various government funding are classified as Level 2 and are estimated based on a discounted cash flow model applying current rates offered to the Company for financial instruments subject to similar risk and maturities. The carrying value of government funding generally approximate its fair value.
23
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 24. | FINANCIAL INSTRUMENTS (continued) |
The fair value of steel commodity swaps are classified as Level 2 and is calculated using the mark-to-market forward prices of NYMEX hot rolled coil steel based on the applicable settlement dates of the outstanding swap contracts.
The fair values of the warrant liability, earnout liability and the share-based payment compensation liability are classified as Level 1 and are calculated using the quoted market price of the Company’s common shares at the end of each reporting period.
Financial risk management
The Company’s activities expose it to a variety of financial risks including credit risk, liquidity risk, interest rate risk and market risk. The Company may use derivative financial instruments to hedge certain of these risk exposures. The use of derivatives is based on established practices and parameters, which are subject to the oversight of the Board of Directors. The Company does not utilize derivative financial instruments for trading or speculative purposes.
Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises primarily from the Company’s receivables from customers. The Company has an established credit policy under which each new customer is analyzed individually for creditworthiness before the Company’s standard payment and delivery terms and conditions are offered. The Company’s review includes a review of the potential customer’s financial information, external credit ratings and bank and supplier references. Credit limits are established for each new customer and customers that fail to meet the Company’s credit requirements may transact with the Company only on a prepayment basis.
The maximum credit exposure at December 31, 2023 is the carrying amount of accounts receivable of $278.7 million (March 31, 2023—$291.2 million). At December 31, 2023 and March 31, 2023, there was no customer account greater than 10% of the carrying amount of accounts receivable. As at December 31, 2023, $2.4 million, or 0.9% (March 31, 2023—$2.0 million, or 0.7%), of accounts receivable were more than 90 days old.
The Company establishes an allowance for doubtful accounts that represents its estimate of losses in respect of accounts receivable. The main components of this allowance are a specific provision that relates to individual exposures and a provision for expected losses that have been incurred but not yet identified. The allowance for doubtful accounts at December 31, 2023 was $0.6 million (March 31, 2023—$0.5 million), as disclosed in Note 9.
The Company may be exposed to certain losses in the event of non-performance by counterparties to derivative financial instruments such as commodity price contracts and foreign exchange contracts. The Company mitigates this risk by entering into transactions with highly rated major financial institutions.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. The Company manages liquidity risk by maintaining adequate cash balances. The Company continuously monitors and reviews actual and forecasted cash flows to ensure adequate liquidity and anticipate liquidity requirements. There have been no changes to the Company’s objectives and processes for capital management, including the management of long-term debt, as described in Note 5 to the March 31, 2023 consolidated financial statements.
24
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 24. | FINANCIAL INSTRUMENTS (continued) |
Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and commodity prices, will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk. As disclosed in Note 16, during the three and nine month periods ended December 31, 2023, the Company was not a party to agreements to hedge the commodity price risk associated with the revenue on the sale of steel however was a party to agreements during the three and nine month periods ended December 31, 2022. These activities are carried out under the oversight of the Company’s Board of Directors.
Currency risk
The Company is exposed to currency risk on purchases, labour costs and pension and other post retirement employment benefits liabilities that are denominated in Canadian dollars. The prices for steel products sold in Canada are derived mainly from price levels in the US market in US dollars converted into Canadian dollars at the prevailing exchange rates. As a result, a stronger US dollar relative to the Canadian dollar increases the Company’s Canadian dollar selling prices for sales within Canada.
The Company’s Canadian dollar denominated financial instruments as at December 31, 2023 and March 31, 2023, were as follows:
| As at, |
December 31, 2023 |
March 31, 2023 |
||||||
| Cash |
$ | 30.1 | $ | 51.2 | ||||
| Restricted cash |
3.9 | 3.9 | ||||||
| Accounts receivable |
126.3 | 127.1 | ||||||
| Bank indebtedness |
(5.0 | ) | — | |||||
| Accounts payable and accrued liabilities |
(140.9 | ) | (147.1 | ) | ||||
| Governmental loans |
(140.2 | ) | (120.4 | ) | ||||
| Other long-term liabilities |
(16.7 | ) | (3.3 | ) | ||||
|
|
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|
|
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| Net Canadian dollar denominated financial instruments |
$ | (142.5 | ) | $ | (88.6 | ) | ||
|
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|
|
|
|||||
A $0.01 decrease (or increase) in the US dollar relative to the Canadian dollar for the three and nine month periods ended December 31, 2023 would have decreased (or increased) income (loss) from operations by $0.2 million and $0.4 million, respectively. A $0.01 decrease (or increase) in the US dollar relative to the Canadian dollar for the three and nine month periods ended December 31, 2022 would have decreased (or increased) income (loss) from operations by $0.4 million, respectively.
Interest rate risk
Interest rate risk is the risk that the value of the Company’s assets and liabilities will be affected by a change in interest rates. The Company’s interest rate risk mainly arises from the interest rate impact on its banking facilities and debt. The Company may manage interest rate risk through the periodic use of interest rate swaps.
For the three and nine month periods ended December 31, 2023 and December 31, 2022, a one percent increase (or decrease) in interest rates would have decreased (or increased) net income (loss) by approximately nil.
25
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 24. | FINANCIAL INSTRUMENTS (continued) |
Commodity price risk
The Company is subject to price risk from fluctuations in the market prices of commodities, including natural gas, iron ore and coal. The Company enters into supply agreements for certain of these commodities as disclosed in Note 20. To manage risks associated with future variability in cash flows attributable to certain commodity purchases, the Company may use derivative instruments with maturities of 12 months or less as disclosed in Note 16 to hedge the commodity price risk associated with the revenue on the sale of steel.
At December 31, 2023, the Company had no commodity-based swap contracts. At December 31, 2022, the Company had commodity-based swap contracts with an aggregate notional quantity of 21,000 net tons outstanding, and a 10% increase in the price of hot-rolled coil (U.S. Midwest Domestic Hot-Rolled Coil Steel (CRU) Index), assuming foreign exchange remains unchanged, would result in approximately $2.0 million decrease in the Company’s net income or loss.
| 25. | WARRANT LIABILITY |
As at December 31, 2023, 24,179,000 Warrants remain outstanding with an estimated fair value of US $1.84 per Warrant based on the market price of the Warrants, for which the Company recognized a liability of $58.8 million (US $44.5 million) (March 31, 2023—$57.3 million; US $42.3 million) in warrant liability on the condensed interim consolidated statements of financial position. For the three month period ended December 31, 2023, a loss of $20.4 million (December 31, 2022 – $6.4 million) on change in the fair value of the warrant liability is presented in the condensed interim consolidated statements of net (loss) income. For the nine month period ended December 31, 2023, a loss of $3.2 million (December 31, 2022 – gain of $67.1 million) on change in the fair value of the warrant liability is presented in the condensed interim consolidated statements of net (loss) income. The Warrants will expire on the fifth anniversary of the merger transaction which was completed on October 19, 2021, or earlier upon redemption or liquidation of the Trust Account.
| 26. | EARNOUT LIABILITY |
As at December 31, 2023, 1,391,632 earnout rights remain outstanding with an estimated fair value of US $10.03 per unit based on the market price of the Company’s common shares, for which an earnout liability of $18.5 million (US $14.0 million) (March 31, 2023—$16.8 million; US $12.4 million) was recognized on the condensed interim consolidated statements of financial position. In addition, 168,807 rights were exercised as of December 31, 2023. Loss on change in the fair value of the earnout liability for the three and nine month periods ended December 31, 2023 of $6.2 million and $3.5 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income. Gain on change in the fair value of the earnout liability for the three and nine month periods ended December 31, 2022 of $0.2 million and $9.4 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income.
| 27. | SHARE-BASED PAYMENT COMPENSATION LIABILITY |
Replacement Long Term Incentive Plan (“LTIP”) Awards
As at December 31, 2023, 2,565,827 Replacement LTIP Awards remain outstanding with an estimated fair value of US $10.03 per unit based on the market price of the Company’s common shares, for which the Company recognized a liability of $34.0 million (US $25.7 million) (March 31, 2023—$33.5 million; US $24.7 million) in share-based payment compensation liability on the condensed interim consolidated statements of financial position. In addition, 537,618 units were exercised as of December 31, 2023. Loss on change in the fair value of the share-based payment
26
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 27. | SHARE-BASED PAYMENT COMPENSATION LIABILITY (continued) |
compensation liability for the three and nine month periods ended December 31, 2023 of $11.3 million and $6.0 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income. Gain on change in the fair value of the share-based payment compensation liability for the three and nine month periods ended December 31, 2022 of $0.2 million and $19.6 million, respectively, are presented in the condensed interim consolidated statements of net (loss) income.
| 28. | KEY MANAGEMENT PERSONNEL |
The Company’s key management personnel, and persons connected with them, are also considered to be related parties for disclosure purposes. Key management personnel are defined as those individuals having authority and responsibility for planning, directing and controlling the activities of the Company and include the executive leadership team (ELT) and the Board of Directors.
Remuneration of the Company’s Board of Directors and ELT for the respective periods are as follows:
| Three months ended December 31, |
Nine months ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Salaries and benefits |
$ | 1.3 | $ | 0.9 | $ | 4.6 | $ | 11.3 | ||||||||
| Director fees |
0.5 | 0.4 | 2.1 | 0.9 | ||||||||||||
| Share-based compensation (Note 29) |
0.7 | 0.2 | 2.4 | 1.3 | ||||||||||||
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| 29. | SHARE BASED COMPENSATION |
Long-term incentive plan
On October 19, 2021, the Company approved an Omnibus Equity Incentive Plan (“Omnibus Plan”) that would allow the Company to grant various awards to its employees. Under the terms of the Omnibus Plan, the maximum number of common shares that may be awarded is 8.8 million common shares. The awards issuable under the Plan consists of Restricted Share Units (“RSU”), DSUs, Performance Share Units (“PSU”) and stock options.
Deferred share units
Under the terms of the Omnibus Plan, DSUs may be issued to members of the Board of Directors as may be designated by the Board of Directors from time-to-time in satisfaction of all or a portion of Director fees. The number of DSUs to be issued in satisfaction of a payment of Director fees shall be equal to the amount of the Director fees divided by the given day volume weighted average price of the Company’s common shares preceding the grant date. DSUs are equity-settled share-based payments measured at fair value at the date of grant and expensed immediately as the underlying services have been rendered. The grant date fair value is approximated by the price of the Company’s common shares on the date of grant. DSUs do not have an exercise price and become exercisable for one common share of the Company upon the retirement of the Director, or in the event of incapacity.
For the three and nine month periods ended December 31, 2023, the Company granted 53,371 and 146,087 DSUs, respectively, under the Omnibus Plan to certain directors of the Company, with a grant date fair value based on the market price of the Company’s common shares on the day of the grant. Further, for the nine month period ended December 31, 2023, the Company converted 35,379 DSUs to capital stock upon the resignation of a director. For the three and nine month periods ended
27
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 29. | SHARE BASED COMPENSATION (continued) |
December 31, 2022, 50,334 and 125,526 DSUs under the Omnibus Plan were granted to certain Directors of the Company, with a grant date fair value based on the market price of the Company’s common shares on the day of grant.
For the three and nine month periods ended December 31, 2023, the Company recorded a share-based payment compensation expense of $0.7 million and $1.7 million, respectively, in administrative and selling expense on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position. For the three and nine month periods ended December 31, 2022, the Company recorded a share-based payment compensation expense of $0.4 million and $1.3 million, respectively, in administrative and selling expense on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position.
As at December 31, 2023, a total of 326,335 DSUs were outstanding. No cancellations or forfeiture of DSUs have been recorded to date.
Restricted share units and performance share units
Under the terms of the Omnibus Plan, RSUs and PSUs may be issued to employees of the Company as may be designed by the Board of Directors in order to retain and motivate employees. RSUs and PSUs are equity-settled share-based payments measured at fair value at the date of grant and expensed over the vesting period. The grant date fair value takes into account any non-vesting conditions. The subsequent recognition of the grant date fair value over the vesting period involves the Company’s estimation of the RSUs and PSUs that will eventually vest and adjusts for the likelihood of achieving service conditions and non-market performance conditions. RSUs and PSUs do not have an exercise price and become exercisable for one common share of the Company on the vesting date. Holders of RSUs and PSUs are also entitled to dividend equivalents when dividends are declared to common shareholders. The price of the Company’s common shares on the grant date is used to approximate the grant date fair value of each unit of RSUs and PSUs.
FY2023 Plan
At December 31, 2023, 131,224 and 149,087 units of RSUs and PSUs, respectively, net of cancellations and forfeitures, remain outstanding for recognition over the remainder of the vesting period. Further, for the three and nine month periods ended December 31, 2023, the Company recorded share-based payment compensation expense of $0.2 million and $0.5 million, respectively, in administrative and selling expenses on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position. For the three and nine month periods ended December 31, 2022, the Company recorded share-based payment compensation expense of $0.2 million and $2.1 million, respectively, in administrative and selling expenses on the condensed interim consolidated statements of net (loss) income and contributed deficit. No exercises of RSUs and PSUs have been recorded to date.
FY2024 Plan
On March 31, 2023 the Board of Directors approved a grant of 457,935 and 404,211 restricted share units and performance share units, respectively, to various employees of the Company under the Omnibus Plan for the fiscal year ended March 31, 2024. At December 31, 2023, 459,797 and 409,932 units of RSUs and PSUs, respectively, remain outstanding for recognition over the remainder of the vesting period. Further, for the three and nine month periods ended December 31, 2023, the Company recorded share-based payment compensation expense of $0.7 million and $2.2 million, respectively (December 31, 2022 – nil for the three and nine month periods) in administrative and
28
ALGOMA STEEL GROUP INC.
Notes to the Condensed Interim Consolidated Financial Statements (Unaudited)
Tabular amounts expressed in millions of Canadian dollars except for share and per share information
| 29. | SHARE BASED COMPENSATION (continued) |
selling expenses on the condensed interim consolidated statements of net (loss) income and contributed deficit on the condensed interim consolidated statements of financial position. No exercises, cancellation or forfeiture of RSUs and PSUs have been recorded to date.
| 30. | DIVIDENDS |
On November 2, 2023 the Board of Directors declared a dividend of US$0.05 per common share for shareholders of record at market close on November 30, 2023. A dividend of $6.9 million (US $5.2 million) was paid on December 29, 2023 and recorded as a distribution through retained earnings (December 31, 2022—$7.0 million, US $5.2 million). For the nine month period ended December 31, 2023, the Company paid dividends totalling $20.8 million (US $15.6 million) (December 31, 2022—$23.6 million, US $17.8 million).
| 31. | SUBSEQUENT EVENT |
On January 20, 2024, an incident occurred involving the structural collapse of a key support structure that carries various utilities crucial for the Company’s operations which resulted in significant disruptions to various utilities that are essential for coke-making and ironmaking operations. The extent of the damages and the full scope of the incident are still being assessed.
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