Executive Summary / Key Takeaways

• The 50% US tariff implemented in June 2025 has effectively closed the American market to Algoma Steel, triggering a $503 million non-cash impairment and an $87 million adjusted EBITDA loss in Q3. This crisis, however, is accelerating the company's Electric Arc Furnace transformation by a full year, potentially completing it by early 2026.

• As Canada's only discrete plate producer, Algoma is pivoting from a cross-border commodity supplier to a domestic-focused, high-value steel provider, positioning to capture over 50% of Canada's 600,000-700,000 ton plate market while competitors remain locked out by tariffs.

• The $987 million EAF project, now 92% complete with first production achieved in July 2025, targets 70% carbon emissions reduction and scrap-plus-$220 per ton conversion costs, which would make Algoma one of North America's lowest-cost and most sustainable steel producers by 2026.

• Liquidity is secured through $500 million in government support and a $375 million asset-based lending facility, but execution risk remains paramount: the EAF ramp-up must deliver 1.0-1.2 million tons at near-breakeven EBITDA in a tariff-distorted market where Canadian coil prices trade 40% below CRU index.

• Trading at 1.05x book value with $337 million of liquidity, the stock prices in near-term distress, but successful EAF transition could re-rate Algoma as a domestic steel monopoly with sustainable cost advantages and ESG premiums that competitors cannot easily replicate.

Setting the Scene: A 120-Year-Old Steelmaker Forced to Reinvent Himself

Algoma Steel Group Inc., founded in 1901 and headquartered in Sault Ste. Marie, Ontario, has spent over a century building a reputation as a reliable supplier of plate and sheet steel to North American automotive, energy, defense, and construction markets. For decades, the company's business model relied on cross-border trade, with roughly half its volumes historically flowing to US customers. This model generated steady cash flows but left Algoma exposed to the whims of trade policy—a vulnerability that became catastrophic in June 2025 when the US imposed 50% tariffs on Canadian steel imports.

The tariff impact was immediate and severe. In Q3 2025, Algoma recorded $90 million in direct tariff expenses and estimated that Canadian sales prices fell approximately 40% due to oversupply, resulting in $32 million of lost revenue. Steel shipments declined 12.7% year-over-year to 419,000 net tons as the US market became effectively inaccessible. The company recognized two impairment indicators—its market capitalization falling below net asset value and the tariff impact—resulting in a $503 million non-cash impairment loss. This was not a gradual erosion of competitiveness; it was a sudden, existential shock that completely undermined Algoma's historically successful cross-border business model.

Why does this matter? Because the tariff crisis, while devastating in the short term, has forced management to accelerate strategic decisions that might otherwise have taken years to implement. The company is now executing a complete pivot to a Canadian-focused strategy, leveraging its unique position as the country's sole discrete plate producer. This is not a temporary adjustment but a permanent transformation of Algoma's identity from regional commodity supplier to domestic specialty champion. The Canadian plate market, at 600,000-700,000 tons annually, represents a protected moat where Algoma already captures roughly half of demand, primarily serving infrastructure, construction, renewable energy, and defense sectors aligned with Canada's nation-building agenda.

Technology and Strategic Differentiation: The EAF Transformation as a Lifeline

Algoma's pivot hinges on the Electric Arc Furnace project, a $987 million investment that represents the company's only path to long-term competitiveness. The EAF transition replaces traditional blast furnace steelmaking with a greener, more flexible production method using scrap metal as primary feedstock. Commissioning of EAF Unit 1 began in late 2024, with first steel production achieved in July 2025—progressing in line with expectations. When fully operational, the twin EAF units will increase throughput capacity by roughly one-third to 3 million tons annually while reducing carbon emissions by approximately 70%.

The strategic significance extends beyond environmental credentials. Management targets a scrap-plus-$220 per ton conversion cost for sheet products, which would position Algoma as one of North America's lowest-cost producers. Initially, while ramping at lower capacity, costs may run $220-250 per ton before settling at the $220 target once production reaches 2.0-2.5 million tons. This cost structure would be materially superior to integrated blast furnace competitors like Cleveland-Cliffs and US Steel , who face higher energy costs and legacy emissions constraints. The EAF technology also provides production flexibility, allowing Algoma to quickly adjust output to match domestic demand rather than running high-volume commodity campaigns for export.

Supporting this transformation, Algoma formed Algoma Triple M (ATM), a joint venture with Triple M Metals to secure scrap supply—critical feedstock that represents the largest variable cost component. The company also benefits from a new 230-kilowatt transmission line authorized in August 2025, which will provide sufficient grid power for 3 million tons of EAF steel production without requiring capital contribution from Algoma. This infrastructure support, combined with eligibility for Ontario's Emissions Performance Program (which should reimburse carbon taxes paid since 2022), reduces both operating costs and net project investment.

The plate mill modernization, completed in April 2024 after a three-week outage, enhances product quality through improved flatness, surface quality, and dimensional tolerance. This upgrade enables Algoma to capture premium pricing in specialized applications like shipbuilding and defense, where quality certifications and customer service create switching costs. The company expects Q4 plate production to increase sequentially, building toward an annual run rate exceeding 650,000 net tons. In Q3, plate shipments held steady at approximately 97,000 tons despite a planned two-week outage, demonstrating operational stability.

Financial Performance: Damage Control and Liquidity Preservation

Algoma's Q3 2025 results reflect a company in transition. Adjusted EBITDA was a loss of $87.1 million, a dramatic reversal from prior profitability, driven by $90 million in tariff expenses and $32 million in lost revenue from depressed Canadian pricing. Net loss reached $485.1 million. Notably, this figure included a $503 million non-cash impairment, implying that without this one-time charge, the company would have reported a net income of approximately $17.9 million. Steel revenue declined 12.2% year-over-year to $473 million, while cost per ton sold surged 24.2% to $1,282—exacerbated by lower volumes and the shift to higher-cost plate production. Excluding tariff impacts, cost of sales rose only 3.6% despite 20% lower shipping volume, indicating underlying cost discipline.

The balance sheet tells a story of managed crisis. The company finished Q3 with $337 million of liquidity, but subsequently secured $500 million in government financing—$400 million from a federal tariff loan facility and $100 million from Ontario, structured as a $100 million third-lien secured tranche and a $400 million unsecured tranche with 6.77 million share purchase warrants at $11.08. Combined with an expanded $375 million ABL facility, Algoma has extended its liquidity runway through the EAF transition. Additionally, the company expects a working capital release of "north of $100 million, $150 million" over the next 12 months as inventory draws down during the EAF supply chain transition, plus over $100 million in tax refunds from net operating loss utilization and accelerated EAF depreciation.

Insurance recoveries from the January 2024 coke-making utility collapse provide further cushion. Algoma received $25 million in Q1 2025 and $32 million in Q2, with an additional $30-50 million expected as claims are adjudicated. While these proceeds offset only a fraction of the CAD 120-130 million EBITDA impact from the 150,000 tons of lost production, they demonstrate management's ability to extract value from risk mitigation programs.

These financial details are significant because they show Algoma has bought itself time, but not infinite time. The government support reflects recognition that domestic steel capacity is a strategic asset for Canada's nation-building agenda, but the company must now execute flawlessly on the EAF ramp to justify this public investment. The working capital release and tax refunds provide non-dilutive funding, but the underlying business remains cash-negative until the EAF achieves scale.

Outlook and Execution: The Path to Viability

Management's guidance for 2026 reveals a starkly different company. If the 50% tariff environment persists, Algoma expects to produce only 1.0-1.2 million tons, entirely focused on the Canadian market for plate and select coil products. This represents a 40-50% reduction from historical volumes but aligns with domestic demand realities. Rajat Marwah, who will succeed Michael Garcia as CEO on January 1, 2026, stated that once the EAF transition is fully complete—taking 3-6 months after blast furnace shutdown—the company should approach EBITDA breakeven at these volumes. Plate operations are expected to be profitable, while coil remains "stretched" due to 40% price discounts versus CRU index.

The EAF cost trajectory is critical. At scrap-plus-$220 per ton, Algoma would be cost-competitive with Nucor and Steel Dynamics , the US mini-mill leaders who operate at similar conversion costs but enjoy larger scale and domestic market access. The initial $220-250 range during low-capacity ramp reflects fixed cost absorption challenges, but management is confident costs will normalize at 2.0-2.5 million tons of production. This implies the company must quickly capture sufficient Canadian market share to reach this scale, likely requiring 70-80% penetration of the domestic plate market plus meaningful coil volumes.

The leadership transition adds execution risk. Michael Garcia's retirement after steering the company through the tariff crisis and EAF launch creates uncertainty, though Rajat Marwah's deep financial expertise as CFO provides continuity. The board also approved a fiscal year-end change to December 31, creating a nine-month transition period that may complicate performance tracking.

Competitive dynamics will determine success. US producers like Nucor and Steel Dynamics , with 19% and 10% market share respectively, are expanding domestic capacity and cannot access the Canadian market due to retaliatory tariffs. This creates a protected moat for Algoma but also limits total addressable market. Cleveland-Cliffs and US Steel (X), with 18% and 9% US market share, face similar export constraints but have more diversified product mixes and stronger balance sheets to weather prolonged trade disputes.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is EAF ramp-up execution. While first production was achieved in July 2025, scaling to 2.0-2.5 million tons requires flawless operational performance. Any delays would extend cash burn and strain liquidity, potentially forcing dilutive equity raises despite government support. The fact that 8-10% of EAF project work remains on time-and-materials contracts introduces cost overrun risk, though management considers this immaterial to the total $987 million budget.

Tariff policy remains a binary variable. If US-Canada trade relations improve and tariffs are reduced, Algoma could regain access to its historical US market, potentially doubling addressable volume. Michael Garcia noted this would "put wind in the sails of everything," lifting margins across both markets. However, management is clear they would not return to the old commodity model, instead prioritizing strategic Canadian supply. This disciplined approach may limit upside if trade normalizes.

Canadian market size constraints pose a structural challenge. At 1.0-1.2 million tons, Algoma would operate at just one-third of its 3 million ton EAF capacity, leaving significant stranded asset risk. The company must either capture dramatically more domestic share—difficult given existing customer relationships—or develop new export markets beyond North America, where its green steel credentials may command premiums.

Competitive response could erode the plate monopoly. While Algoma is currently Canada's only discrete plate producer, nothing prevents US competitors from establishing Canadian processing facilities if tariffs persist long-term. Nucor's financial strength ($38 billion market cap, $42 billion enterprise value) and Steel Dynamics' operational excellence ($25 billion market cap) give them resources to circumvent trade barriers through local investment.

Valuation Context: Pricing in Distress, Not Recovery

At $4.61 per share, Algoma Steel trades at a $484 million market capitalization and $1.02 billion enterprise value, representing 1.05x book value and 0.57x TTM revenue. These multiples reflect a market pricing in near-term bankruptcy risk rather than transformation potential. By comparison, Nucor (NUE) trades at 1.84x book and 1.32x revenue, Steel Dynamics (STLD) at 2.81x book and 1.61x revenue, while even struggling Cleveland-Cliffs (CLF) trades at 1.21x book.

The valuation metrics must be interpreted through a transformation lens. Current negative margins—gross margin of -18.3%, operating margin of -26.9%, profit margin of -34.8%—are not indicative of steady-state operations but rather the cost of simultaneously absorbing tariffs, funding EAF construction, and restructuring the business model.

The 2.29x current ratio and 0.85x debt-to-equity ratio show adequate near-term liquidity, particularly with the recent government financing.

What matters for valuation is the path to normalized earnings power. If management achieves scrap-plus-$220 conversion costs on 1.5 million tons of sales at $1,100 per ton, EBITDA could approach $225 million (assuming $150/ton contribution margin). At a 6x EV/EBITDA multiple appropriate for cyclical steel producers, this would support a $1.35 billion enterprise value, representing a significant upside from the current level. The asymmetry is clear: successful execution would likely re-rate the stock toward peer multiples, while failure would exhaust liquidity within 18-24 months.

The government warrants at $11.08 per share, issued as part of the $400 million unsecured tranche, provide a benchmark for what public stakeholders believe is fair value—more than double the current price. This is not a guarantee but a signal that strategic investors see value in the EAF transformation and domestic market positioning.

Conclusion: A Binary Bet on Execution

Algoma Steel's investment thesis distills to a single question: Can management execute the EAF transition fast enough to achieve breakeven before liquidity runs dry? The 50% US tariffs created an existential crisis, but they also eliminated the primary barrier to focusing on Canada's protected plate market. With $500 million in government support, a modernized plate mill, and first EAF production achieved, Algoma has the tools to become a domestic steel monopoly with sustainable cost and environmental advantages.

The stock at $4.61 prices in a high probability of failure, reflecting Q3's $485 million loss and the uncertain timeline to profitability. However, the potential reward is substantial: successful EAF ramp-up to 1.0-1.2 million tons could generate $150+ million in EBITDA, supporting a valuation multiple times higher than current levels. The key variables to monitor are EAF production rates in Q1-Q2 2026, Canadian plate market share gains, and any thaw in US trade relations. For investors willing to accept the execution risk, Algoma represents a rare opportunity to buy a strategic domestic asset at distressed prices while it completes a transformation that larger, more bureaucratic competitors cannot easily replicate.