Executive Summary / Key Takeaways

• Transformative EAF Project Nears Completion: Algoma Steel Group Inc. (NASDAQ: ASTL) is on the cusp of a monumental shift, transitioning from traditional blast furnace operations to state-of-the-art Electric Arc Furnaces (EAFs). This multi-year, ~$875 million project, now substantially contracted and de-risked, achieved its first steel production from Unit One in early July 2025, marking a critical milestone towards becoming a leading North American green steel producer.
• Strategic Pivot to High-Margin Plate Products: Concurrently with the EAF build, Algoma has completed a significant modernization of its plate mill and is exiting the wide coil market to prioritize higher-margin plate production. This strategic re-focus aims to capitalize on Canada's undersupplied plate market and Algoma's unique position as the country's only discrete plate producer, driving improved product mix and margin enhancement.
• Resilient Liquidity Amidst Market Headwinds: Despite challenging global steel market conditions, including tariff uncertainty and soft demand, Algoma maintains a strong balance sheet. The company recently upsized its asset-based revolving credit facility to US$375 million and expects significant working capital releases and insurance recoveries, providing ample liquidity to complete its EAF transformation.
• Enhanced Cost Structure and Environmental Leadership: The EAF transition is projected to reduce carbon emissions by approximately 70% and lower the all-in conversion cost for hot rolled coil to an estimated scrap plus $200-$220 (US) per ton. This technological leap is expected to strengthen Algoma's competitive cost structure and solidify its leadership in sustainable steel production.
• Outlook for Increased Capacity and Lower Cash Taxes: Management anticipates a steady ramp-up of EAF production through 2025, contributing to an overall annual shipment target of 2.1 to 2.2 million tons. Furthermore, accelerated depreciation benefits from the EAF capitalization are expected to significantly lower cash taxes over the next two to three years.

Algoma Steel's Enduring Legacy and Strategic Pivot

Algoma Steel Group Inc., with a history spanning over 120 years since its founding in 1901, has long been a foundational producer of flat/sheet and plate steel products in North America. The company's offerings, ranging from temper-rolled and cold-rolled sheet to specialized heat-treated plate, serve critical sectors including automotive, construction, railcars, and even military applications. This deep-rooted presence has established Algoma as a key player, but the evolving global steel landscape demands continuous adaptation.

In response to these dynamics, Algoma has embarked on a dual-pronged strategic transformation: a monumental Electric Arc Furnace (EAF) project and a comprehensive modernization of its plate mill. This strategic pivot is designed not only to enhance operational efficiency and expand capacity but also to fundamentally reshape Algoma's environmental footprint and cost structure. The company's overarching strategy is to transition from traditional blast furnace steelmaking to a more sustainable and technologically advanced EAF operation, positioning itself at the forefront of green steel production in North America.

Technological Edge: The Volta Transformation

At the heart of Algoma's strategic reorientation is the transformative EAF project, a technological leap that promises to redefine the company's capabilities and competitive standing. The EAF technology, which will replace the legacy blast furnace and basic oxygen steelmaking, is designed to significantly reduce Algoma's carbon emissions by approximately 70% when fully operational. This dramatic reduction is a key differentiator, allowing Algoma to market its steel as "Volta," a brand synonymous with greener production.

The tangible benefits of this technological shift are substantial and quantifiable. The EAFs are expected to increase Algoma's steady-state shipping capacity by approximately one-third, reaching about 3 million tons per year, a 35% increase over current production levels. This expanded output will be matched by the company's modernized downstream finishing capacity. From a cost perspective, as a full EAF operator, Algoma anticipates an all-in conversion cost for hot rolled coil of approximately scrap plus $200 to $220 (US) per ton. This improved cost structure is expected to strengthen Algoma's ability to navigate market uncertainties over the long term.

The EAF project, with a cumulative investment reaching $823.6 million as of March 31, 2025, is now substantially contracted, with over 90% tied to fixed-price agreements, significantly de-risking its budget. Cold commissioning activities began in calendar Q4 2024 and progressed into Q1 2025, involving the installation, testing, and validation of critical equipment. A significant milestone was achieved in early July 2025 with the first steel production from EAF Unit One. The second EAF is slated for full operation by the end of calendar 2025. Power infrastructure is secured to produce 2.4 million tons of EAF steel using 100% scrap. Further enhancements, including a new 230-kilowatt transmission line in Sault Ste. Marie by 2027, will enable 3 million tons of EAF steel production, leveraging both grid power and Algoma's Lake Superior power plant. This technological roadmap underscores Algoma's commitment to efficiency, sustainability, and long-term value creation.

Operational Evolution and Product Mix Optimization

Beyond the EAF, Algoma has strategically enhanced its operational capabilities through a comprehensive plate mill modernization project, substantially completed by fiscal Q1 2025. This upgrade has yielded significant improvements in product quality, including surface quality, flatness, and dimensional tolerance, strengthening the commercial team's selling proposition. As Canada's only discrete producer of plate products, Algoma is uniquely positioned to capitalize on the Canadian market, which is currently undersupplied with plate.

The company is actively adjusting its product mix, exiting the wide coil market during fiscal 2025 to prioritize higher-margin plate production and sales. This shift is expected to drive meaningful margin enhancement. Plate shipments reached approximately 82,000 tons in calendar Q4 2024, up from 73,000 tons in calendar Q3 2024. For the balance of calendar 2025, plate shipments are projected to average 35,000 to 40,000 tons per month, contributing to an expected annual run rate capacity of over 650,000 net tons. Management sees significant opportunity in the Canadian market, particularly with new Canadian tariffs on U.S. steel and potential "buy Canadian" requirements for defense spending and shipbuilding, which could allow Algoma to capture greater market share.

Financial Performance Amidst Headwinds

Algoma's recent financial performance reflects the challenging conditions prevalent in global steel markets, alongside the significant capital investment in its EAF transformation. For calendar Q4 2024, the company reported an adjusted EBITDA loss of $60.3 million and cash used in operating activities of $76.9 million. Net sales realization averaged $976 per ton, a decrease from $1,079 per ton in the prior year period, primarily due to weakening market conditions, despite an improvement in value-added product mix. The cost per ton of steel products sold averaged $1,032, similar to the prior year, but impacted by higher variable costs from increased purchased coke consumption and lower shipment volume.

Full calendar year 2024 saw adjusted EBITDA plummet to $22.3 million (0.9% margin) from $319 million (11.2% margin) in calendar 2023, largely attributable to lower shipments, reduced price realization, and higher costs. More recently, for calendar Q2 2025 (ended June 30, 2025), Algoma reported consolidated revenue of $589.7 million, a net loss of $110.6 million, and an adjusted EBITDA loss of $32.4 million. These results underscore the impact of U.S. election uncertainty, interest rate concerns, soft demand, and tariff tensions on customer buying behavior.

Despite these headwinds, Algoma's liquidity position remains robust. As of December 31, 2024, the company held over $267 million in cash and total liquidity of $630 million. This was further bolstered by a USD 350 million notes offering in April 2025 and the recent upsizing of its asset-based revolving credit facility from US$300 million to US$375 million in September 2025. The company anticipates a release of at least $100 million in working capital by March 2025 and expects to receive approximately $100 million in insurance payouts related to the January 2024 utility corridor collapse and blast furnace outage, with an advance of $20-$25 million in the near term. Additionally, Algoma is eligible for reimbursement of carbon taxes paid since 2022 under Ontario's Emissions Performance Program, with an initial payment of $7 to $7.5 million expected this year, further reducing the net cash cost of the EAF project.

Competitive Landscape: Forging a Differentiated Path

Algoma Steel operates within a highly competitive North American steel market, contending with major players such as Nucor Corporation , Steel Dynamics Inc. , ArcelorMittal (MT), and Cleveland-Cliffs Inc. (CLF). While these competitors often boast larger scale and diversified product portfolios, Algoma carves out its niche through specialized product offerings and a strategic regional focus.

Algoma's position as Canada's only discrete producer of plate products provides a distinct competitive advantage, particularly in a Canadian market that has recently been undersupplied with plate. This allows Algoma to differentiate itself through product quality, improved delivery performance, and tailored solutions for North American customers. The recent imposition of Canadian tariffs on U.S. steel imports, which previously accounted for approximately 3.5 million tons in the Canadian market over the last twelve months, presents a significant opportunity for Algoma to capture increased market share in both coil and, more notably, plate products. This contrasts with the Canadian coil market, which has experienced oversupply.

Financially, Algoma's current profitability metrics, such as its negative gross profit margin of -9.19% and EBITDA margin of -9.81% (TTM), lag behind more established EAF operators like Nucor Corporation (NUE) and Steel Dynamics Inc. (STLD), which typically exhibit stronger margins due to their operational efficiencies and scale. For instance, Nucor's P/E ratio is 24.29, and Steel Dynamics' is 19.45, indicating market confidence in their profitability, while Algoma's P/E is currently negative. However, Algoma's EAF transformation is designed to address this gap, with the expected $200-$220 (US) per ton conversion cost for EAF steel aiming to reset its cost basis and enhance future profitability. The company's historical expertise in specialized plate applications for rail, shipbuilding, and military uses further strengthens its competitive moat in these high-value segments.

Outlook and Value Creation

Algoma Steel's outlook is firmly centered on the successful commissioning and ramp-up of its EAF project, which is expected to be the primary driver of future value creation. Management projects EAF production for the remaining nine months of calendar 2025 to be just over 200,000 tons, with a relatively steep ramp towards the latter half of the year. Overall shipments for calendar 2025 are anticipated to range from 2.1 million to 2.2 million tons. During this transition, the existing blast furnace will continue to operate at normal production levels to maintain shipment volumes.

The company anticipates a significant reduction in cash taxes over the next two to three years due to accelerated depreciation benefits from the EAF capitalization. This, coupled with the expected $100 million working capital release and insurance recoveries, will further bolster financial flexibility. Management believes the company's current valuation is low, asserting that it will increase as the EAF project is completed and the company achieves its target of becoming a 3 million-plus finished goods steel company of plate and Direct Strip Production Complex (DSPC) products. The EAF, combined with the modernized plate mill, is expected to unlock substantial shareholder value by enhancing capacity, improving cost structure, and solidifying Algoma's leadership in green steel.

Key Risks and Mitigation

Despite the promising outlook, Algoma Steel faces several pertinent risks. Tariff uncertainty, particularly regarding Canadian steel and aluminum imports into the U.S., continues to introduce volatility into the North American steel market. Steel pricing remains susceptible to broader economic factors, including U.S. election uncertainty, interest rate concerns, and soft demand. Operational challenges, as highlighted by the January 2024 utility corridor collapse and a brief February 2025 blast furnace outage, underscore the inherent risks of operating legacy assets. Furthermore, a small portion (under 8%) of the EAF project work is still being executed on a time and materials basis, carrying a theoretical risk of budget overruns if time or material consumption exceeds assumptions.

Algoma is actively mitigating these risks. The EAF transition itself is the primary lever to strengthen the company's cost structure and enhance its ability to navigate market uncertainties over the long term. Management is focused on aggressive cost reduction plans, which are an ongoing priority. The company is also engaging in direct discussions with provincial and federal government officials regarding potential support for industries affected by tariffs, seeking mechanisms to protect Canadian workers and the industry. The strategic shift to higher-margin plate products and the ability to dynamically adjust product mix provide operational flexibility in a volatile market.

Conclusion

Algoma Steel Group Inc. stands at a pivotal juncture, poised to redefine its future through the successful completion of its transformative Electric Arc Furnace project and strategic plate mill modernization. This dual initiative is not merely an upgrade but a fundamental re-engineering of its business model, aiming for a significant reduction in carbon emissions, a substantial increase in production capacity, and a more competitive cost structure. While the company has weathered recent market headwinds and operational challenges, its robust liquidity, strategic focus on high-margin plate products, and the imminent operationalization of its EAF technology underscore a compelling investment thesis.

The transition to green steel production, coupled with a disciplined approach to capital allocation and risk management, positions Algoma to unlock considerable long-term value for its stakeholders. As the EAF ramps up and the company fully leverages its modernized plate capabilities, Algoma is set to emerge as a more efficient, environmentally responsible, and strategically agile leader in the North American steel industry, offering a differentiated value proposition in a dynamic market.