424B3
Table of Contents

Filed Pursuant to Rule 424(b)(3)
Registration No. 333-260534

PROSPECTUS

ALGOMA STEEL GROUP INC.

129,836,439 Common Shares

604,000 Warrants to Purchase Common Shares

24,179,000 Common Shares Underlying Warrants

 

 

This prospectus relates to the offer and sale from time to time by the selling securityholders named in this prospectus (the “Selling Securityholders”) of (A) up to 10,000,000 of our Common Shares (“Common Shares”), purchased in a private placement (the “PIPE Investment”) in connection with our Merger (as defined below), (B) up to 6,732,036 Common Shares issued to the Founders (as defined below), EBC (as defined below) and/or their respective affiliates and designees, the majority of which are subject to the Lock-Up Agreement (as defined below), (C) up to 75,000,403 Common Shares (71,767,775 of which were distributed pursuant to the Parent Distribution (as defined below) and 3,232,628 of which are issuable upon exercise of Replacement LTIP Awards (as defined below)) and which are subject to the Lock-Up Agreement, and, in the case of Replacement LTIP Awards, the LTIP Exchange Restrictions (as defined below), (D) up to 37,500,000 Common Shares that may be issuable pursuant to the Earnout Rights (as described below) (including Earnout Rights granted in respect of the Replacement LTIP Awards which are subject to the LTIP Exchange Restrictions), (E) warrants to purchase up to 604,000 Common Shares held by the Founders, EBC and/or their respective affiliates and designees (the “Private Warrants”) following the consummation of the Merger as a result of the exchange of warrants to purchase Legato Common Stock (as defined below) for warrants to purchase Common Shares (the “Warrants”), which are subject to the Lock-Up Agreement and (F) up to 604,000 Common Shares issuable upon exercise of the Private Warrants, which are subject to the Lock-Up Agreement.

In addition, this prospectus relates to the issuance by us of up to (A) 23,575,000 Common Shares that are issuable by us upon the exercise of the Public Warrants, which were previously registered and (B) 604,000 Common Shares underlying Private Warrants (as defined below).

The Selling Securityholders may offer, sell or distribute all or a portion of the securities hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. We will not receive any of the proceeds from such sales of the Common Shares or Warrants, except with respect to amounts received by us upon the exercise of the Warrants. We will bear all costs, expenses and fees in connection with the registration of these securities, including with regard to compliance with state securities or “blue sky” laws. The Selling Securityholders will bear all commissions and discounts, if any, attributable to their sale of Common Shares or Warrants. See “Plan of Distribution.”

Our Common Shares and Warrants are listed on The Nasdaq Stock Market (“Nasdaq”) under the symbols “ASTL” and “ASTLW”, respectively, and on the Toronto Stock Exchange (the “TSX”) under the symbols “ASTL” and “ASTL.WT,” respectively. On November 4, 2021, the last reported sales prices of the Common Shares on Nasdaq and the TSX were $11.29 and C$14.22, respectively, and the last reported sales prices of the Warrants were $3.12 and C$3.75, respectively.

We are a “foreign private issuer” as defined in the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are exempt from certain rules under the Exchange Act that impose certain disclosure obligations and procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions under Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the U.S. Securities and Exchange Commission as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Additionally, Nasdaq rules allow foreign private issuers to follow home country practices in lieu of certain of Nasdaq’s corporate governance rules. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

Investing in our securities involves a high degree of risk. You should review carefully the risks and uncertainties described under the heading “Risk Factors” beginning on page 7 of this prospectus, and under similar headings in any amendment or supplements to this prospectus.

None of the Securities and Exchange Commission, any state securities commission or the securities commission of any Canadian province or territory has approved or disapproved of these securities, or determined if this prospectus is accurate or adequate. Any representation to the contrary is a criminal offense.

The date of this prospectus is November 5, 2021.


Table of Contents

TABLE OF CONTENTS

 

     Page  

PRESENTATION OF ALGOMA’S FINANCIAL INFORMATION

     ii  

EXCHANGE RATE INFORMATION

     iii  

NON-IFRS FINANCIAL MEASURES

     iii  

INDUSTRY AND MARKET DATA

     v  

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

     v  

FREQUENTLY USED TERMS

     vi  

FORWARD-LOOKING STATEMENTS

     viii  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     6  

RISK FACTORS

     7  

USE OF PROCEEDS

     33  

MARKET PRICE OF OUR SECURITIES AND DIVIDENDS

     33  

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION

     34  

BUSINESS

     47  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     77  

MANAGEMENT

     107  
     Page  

EXECUTIVE COMPENSATION

     119  

DESCRIPTION OF SECURITIES

     132  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     139  

COMMON SHARES ELIGIBLE FOR FUTURE SALE

     142  

PRIOR SALES

     144  

SELLING SECURITYHOLDERS

     145  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     150  

CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     152  

CERTAIN MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS

     163  

PLAN OF DISTRIBUTION

     165  

EXPENSES RELATED TO THE OFFERING

     167  

LEGAL MATTERS

     168  

EXPERTS

     168  

ENFORCEABILITY OF CIVIL LIABILITY

     168  

WHERE YOU CAN FIND MORE INFORMATION

     169  

INDEX TO FINANCIAL STATEMENTS

     F-1  
 

 

No one has been authorized to provide you with information that is different from that contained in this prospectus or any free writing prospectus filed by us. This prospectus is dated as of the date set forth on the cover hereof. You should not assume that the information contained in this prospectus is accurate as of any date other than that date.

Except as otherwise set forth in this prospectus, we have not taken any action to permit a public offering of these securities outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of these securities and the distribution of this prospectus outside the United States.

 

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PRESENTATION OF ALGOMA’S FINANCIAL INFORMATION

Algoma is the parent holding company of Algoma Steel Inc. Algoma Steel Inc. was incorporated in 2016 solely for the purpose of purchasing substantially all of the operating assets and liabilities of Essar Steel Algoma Inc. (“Old Steelco”) and its subsidiaries in connection with a restructuring under the Canadian Companies’ Creditors Arrangement Act (“CCAA”). The purchase transaction (the “Purchase Transaction”) was completed on November 30, 2018. Prior to November 30, 2018, Algoma Steel Inc. had no operations, and was capitalized with one common share with a nominal value. All references in this prospectus to “Old Steelco” means Essar Steel Algoma Inc. and its consolidated subsidiaries.

Algoma’s functional currency is the United States dollar and its presentation currency is the Canadian dollar. Old Steelco’s functional currency was the United States dollar and its presentation currency was the Canadian dollar.

All of Algoma’s financial information included in this prospectus is presented in Canadian dollars, except as otherwise indicated. Algoma’s financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). IFRS differs in certain material respects from U.S. generally accepted accounting principles (“U.S. GAAP”) and, as such, Algoma’s financial statements are not comparable to the financial statements of U.S. companies prepared in accordance with U.S. GAAP. This prospectus does not include any explanation of the principal differences or any reconciliation between IFRS and U.S. GAAP.

Unless otherwise indicated, the historical financial information of Algoma included in this prospectus derives from, and should be read together with the condensed interim consolidated financial statements of Algoma Steel Group Inc. as at June 30, 2021 and March 31, 2021 and for the three month periods ended June 30, 2021 and 2020 and the audited consolidated financial statements of Algoma Steel Group Inc. as at March 31, 2021 and 2020 and for the years ended March 31, 2021, 2020 and for the four-month period ended March 31, 2019 and for the eight-month period ended November 30, 2018 for Old Steelco.

 

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EXCHANGE RATE INFORMATION

In this prospectus, all dollar amounts referenced, unless otherwise indicated, are expressed in United States dollars and are referred to as “$” or “ US$”. Canadian dollars are referred to as “C$”. The high, low, closing and average exchange rates for Canadian dollars in terms of the United States dollar for each of the indicated periods, as quoted by the Bank of Canada, were as follows:

 

     Three
months ended
June 30,
2021
     Year ended
March 31,
2021
     Year ended
March 31,
2020
     Year ended
March 31,
2019
 
     (expressed in C$)  

High

     1.2653        1.2628        1.4346        1.3441  

Low

     1.2004        1.2540        1.4095        1.3343  

Closing

     1.2286        1.2621        1.4179        1.3431  

Average

     1.2282        1.2574        1.3953        1.3368  

On November 4, 2021 the daily average exchange rate for Canadian dollars in terms of the United States dollar, as quoted by the Bank of Canada, was US$1.00 = C$1.2449.

NON-IFRS FINANCIAL MEASURES

In this prospectus 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. As described in more detail, below, the terms “Adjusted EBITDA” and “Further Adjusted EBITDA” are financial measures utilized by Algoma in reporting its financial results that are not defined by IFRS. In addition, “Earnout Adjusted EBITDA” is a financial measure utilized by Algoma and Legato (as defined below) solely for the purposes of calculating whether the targets with respect to the Earnout Rights are met pursuant the Merger Agreement and for developing certain projections (see “Prospectus Summary”).

The terms “Net Sales Realization” and “Cost Per Ton of Steel Products Sold” are financial measures utilized by Algoma in reporting its financial results that are not defined by IFRS. Net Sales Realization, as defined by Algoma, refers to steel revenue less freight per steel tons shipped. Net Sales Realization is included because it allows management and investors to evaluate our selling prices per ton of steel products sold excluding the 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 Algoma, refers to cost of steel revenue less freight, amortization, carbon tax and exceptional items (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 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. For a reconciliation of each of Net Sales Realization and Cost Per Ton of Steel Products Sold to their most comparable IFRS financial measures see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Steel Revenue and Cost of Sales.”

Adjusted EBITDA, as defined by Algoma, refers to net (loss) income before amortization of property, plant, equipment and amortization of intangible assets, finance costs, interest on pension and other post-employment benefit obligations, income taxes, restructuring costs, impairment reserve, foreign exchange loss (gain), finance income, carbon tax, share based compensation related to performance share units and business combination adjustments. Further Adjusted EBITDA is defined as Adjusted EBITDA before tariff expense and capacity utilization adjustment. Further Adjusted EBITDA is not utilized by Algoma in reporting its financial results for the three month period ended June 30, 2021, because Algoma was not subject to tariff expenses nor did it record capacity utilization adjustments in

 

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the three month period ended June 30, 2021 or in the three month period ended June 30, 2020. Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by revenue for the corresponding period, and Further Adjusted EBITDA margin is calculated by dividing Further 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, and Further Adjusted EBITDA per ton is calculated by dividing Further Adjusted EBITDA by tons of steel products sold for the corresponding period. Earnout Adjusted EBITDA is defined as Further Adjusted EBITDA before non-cash adjustments and write-downs, loss (gain) on commodity hedging and loss (gain) associated with the Warrants. Earnout Adjusted EBITDA is calculated on a consolidated basis at the Algoma Steel Inc. level and does not include certain expenses of Algoma Steel Inc.’s parent companies such as equity incentives issued under the Algoma Steel Holdings Inc. Long-Term Incentive Plan. Adjusted EBITDA and Further Adjusted EBITDA are not intended to represent cash flow from operations, as defined by IFRS, and should not be considered as alternatives to net earnings, cash flow from operations, or any other measure of performance prescribed by IFRS. Adjusted EBITDA and Further Adjusted EBITDA, as defined and used by Algoma, may not be comparable to Adjusted EBITDA and Further Adjusted EBITDA as defined and used by other companies. We consider Adjusted EBITDA and Further Adjusted EBITDA to be meaningful measures to assess our operating performance in addition to IFRS measures. They are included because we believe they 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 and Further Adjusted EBITDA are also used by analysts and our lenders as a measure of our financial performance. In addition, we consider Adjusted EBITDA margin, Adjusted EBITDA per ton, Further Adjusted EBITDA margin and Further 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 and Further Adjusted EBITDA to their most comparable IFRS financial measures or to other non-IFRS financial measures see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Adjusted EBITDA.”

Adjusted EBITDA, Further Adjusted EBITDA, Adjusted EBITDA margin, Further Adjusted EBITDA margin, Adjusted EBITDA per ton, Further Adjusted EBITDA per ton, Earnout Adjusted EBITDA, 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:

 

   

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, and Adjusted EBITDA and Further Adjusted EBITDA do 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 this measure differently than as presented in by us, limiting their usefulness as a comparative measure.

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.

 

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INDUSTRY AND MARKET DATA

In this prospectus, we present industry data, information and statistics regarding the markets in which we compete as well as publicly available information, industry and general publications and research and studies conducted by third parties. This information is supplemented where necessary with our own internal estimates and information obtained from discussions with its customers, taking into account publicly available information about other industry participants and our management’s judgment where information is not publicly available. This information appears in “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” “Business” and other sections of this prospectus.

Industry publications, research, studies and forecasts generally state that the information they contain has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and uncertainties as the other forward-looking statements in this prospectus. These forecasts and forward-looking information are subject to uncertainty and risk due to a variety of factors, including those described under “Risk Factors.” These and other factors could cause results to differ materially from those expressed in any forecasts or estimates.

TRADEMARKS, TRADE NAMES AND SERVICE MARKS

Algoma owns or has rights to trademarks, trade names and service marks that we use in connection with the operation of our business. In addition, our name, logo and website name and address are our trademarks or service marks. Other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners. Solely for convenience, in some cases, the trademarks, trade names and service marks referred to in this prospectus are listed without the applicable ®, and SM symbols, but they will assert, to the fullest extent under applicable law, their rights to these trademarks, trade names and service marks.

 

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FREQUENTLY USED TERMS

Unless otherwise stated or unless the context otherwise requires, the terms “Algoma,” “Company,” “the registrant,” “we,” “us” and “our” refers to Algoma Steel Group Inc., a corporation organized under the laws of the Province of British Columbia, together with its subsidiaries.

In addition, in this prospectus:

“BCA” means Business Corporations Act (British Columbia).

“C$” means the legal currency of Canada.

“Closing” means the closing of the transactions contemplated by the Merger Agreement and the PIPE Subscription Agreements, and “Closing Date” means October 19, 2021, the date on which Closing was completed.

“Code” means the Internal Revenue Code of 1986, as amended.

“Common Shares” means the common shares, without par value, of Algoma.

“DGCL” means the Delaware General Corporation Law.

“DTC” means The Depository Trust Company.

“EBC” means EarlyBirdCapital, Inc., the representative of the underwriters of the IPO.

“Effective Time” means the effective time of the Merger pursuant to the Merger Agreement and the DGCL.

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

“Founder Shares” means the shares of common stock of Legato sold by Legato prior to the IPO (but not including the Representative Shares).

“Founders” means the holders of Founder Shares.

“Investor Rights Agreement” means the investor rights agreement among Algoma, the Founders and certain shareholders of Algoma Steel Parent S.C.A., dated as of October 19, 2021.

“IPO” means the initial public offering of Units of Legato, consummated on January 22, 2021.

“Legato” means Legato Merger Corp., a Delaware corporation and a direct, wholly-owned subsidiary of Algoma.

“Legato Common Stock” means shares of common stock in the Capital of Legato.

“Legato Warrant” means a warrant to purchase one share of Legato Common Stock at a price of $11.50 per share, which may be either a Public Warrant or a Private Warrant.

“Lock-Up Agreement” means the lock-up agreement entered into concurrently with the execution of the Merger Agreement by Algoma’s sole shareholder and the Founders, as such agreement may be amended from time to time.

“LTIP Awards” means equity incentives previously granted to certain directors, officers and other employees of the Company and/or its affiliates that were exchanged for Replacement LTIP Awards pursuant to the LTIP Exchange.

“LTIP Exchange” means the exchange of vested LTIP Awards for Replacement LTIP Awards, as contemplated by and subject to the terms and conditions of the Merger Agreement.

“LTIP Exchange Restrictions” means lock-up restrictions applicable to Replacement LTIP Awards in accordance with the LTIP Exchange and applicable to the Earnout Rights held by holders of Replacement LTIP Awards.

“Merger” means the merger of Merger Sub with and into Legato, with Legato surviving the merger and becoming a wholly-owned subsidiary of Algoma.

“Merger Agreement” means the Agreement and Plan of Merger, dated as of May 24, 2021, by and among Legato, Algoma and Merger Sub, as such agreement may be amended or otherwise modified from time to time in accordance with its terms.

 

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“Merger Sub” means Algoma Merger Sub, Inc.

“Nasdaq” means the Nasdaq Stock Market.

“PIPE Investment” means the purchases of PIPE Shares pursuant to the PIPE Subscription Agreements, that were consummated substantially concurrently with the consummation of the Merger.

“PIPE Investors” means certain U.S. and Canadian accredited investors within the meaning of applicable securities laws, including certain of the Founders and their affiliates.

“PIPE Shares” means an aggregate of 10,000,000 Common Shares and shares of Legato Common Stock subscribed for and purchased by the PIPE Investors pursuant to the PIPE Subscription Agreements on the Closing Date.

“PIPE Subscription Agreements” means the subscription agreements entered into by the PIPE Investors with Algoma and Legato, pursuant to which the PIPE Investors have committed to subscribe for and purchase the PIPE Shares at a purchase price per share of $10.00.

“Private Units” means the Units sold to the Founders and EBC and its affiliates in a private placement in connection with the IPO, such Units being comprised of one share of Legato Common Stock and one Private Warrant.

“Private Warrants” means Legato Warrants included in Private Units.

“Public Warrants” means Legato Warrants included in Units sold in the IPO.

“Representative Shares” means an aggregate of 234,286 shares of Legato Common Stock issued to EBC and its designees prior to the IPO.

“Restated Articles” means the restated articles of Algoma, adopted on September 7, 2021.

“SEC” means the U.S. Securities and Exchange Commission.

“Securities Act” means the U.S. Securities Act of 1933, as amended.

“TSX” means the Toronto Stock Exchange.

“Treasury” means the U.S. Department of the Treasury.

“Units” means Units issued in the IPO, each consisting of one share of Legato Common Stock and one Public Warrant.

“U.S.” means the United States of America.

“U.S. dollar,” “US$” and “$” mean the legal currency of the United States.

“U.S. GAAP” means generally accepted accounting principles in the United States.

“Warrants” means warrants that are exercisable for one Common Share for $11.50 per share, in accordance with the terms of the Warrant Agreement.

“Warrant Agreement” means that certain Warrant Agreement, dated as of January 19, 2021, between Legato and Continental Stock Transfer & Trust Company, as amended by that certain Amendment Agreement, dated as of October 19, 2021, among Algoma, Legato, Continental Stock Transfer & Trust Company and TSX Trust Company.

 

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FORWARD-LOOKING STATEMENTS

We make forward-looking statements in this prospectus 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 objectives. 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. The statements we make regarding the following matters are forward-looking by their nature:

 

   

the risk that the benefits of the Merger may not be realized;

 

   

foreign exchange rate;

 

   

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;

 

   

increased use of competitive products;

 

   

a protracted fall in steel prices;

 

   

excess capacity, resulting in part from expanded production in China and other developing economies;

 

   

low-priced steel imports and decreased trade regulation;

 

   

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;

 

   

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 our credit ratings or the debt markets;

 

   

the ability of Algoma to implement and realize its business plans, including Algoma’s ability to make investments in electric arc furnace (“EAF”) steelmaking;

 

   

the risk that the anticipated benefits of the Green Steel Funding will fail to materialize as planned or at all;

 

   

changes in general economic conditions, including as a result of the COVID-19 pandemic;

 

   

projected increases in capacity liquid steel as a result of the proposed transformation to EAF steelmaking;

 

   

projected cost savings associated with the proposed transformation to EAF steelmaking;

 

   

projected reduction in CO2 emissions associated with the proposed transformation to EAF steelmaking, including with respect to the impact of such reductions on the Green Steel Funding and carbon taxes payable;

 

   

our ability to enter into contracts to source scrap and the availability of scrap; and

 

   

the availability of alternative metallic supply.

 

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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 this prospectus.

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. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus, to conform these statements to actual results or to changes in our expectations.

 

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PROSPECTUS SUMMARY

This summary highlights selected information from this prospectus and does not contain all of the information that is important to you in making an investment decision. This summary is qualified in its entirety by the more detailed information included in this prospectus. Before making your investment decision with respect to our securities, you should carefully read this entire prospectus, including the information under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements included elsewhere in this prospectus.

Unless otherwise indicated or the context otherwise requires, references in this prospectus to “Company”, “we,” “our,” “us” and other similar terms refer to Algoma Steel Group Inc. and our consolidated subsidiaries.

General

Algoma, a corporation organized under the laws of the Province of British Columbia, is a fully integrated steel producer of hot and cold rolled steel products including sheet and plate. With a current production capacity of an estimated 2.8 million tons per year, Algoma’s size and diverse capabilities enable it to deliver responsive, customer-driven product solutions straight from the ladle to direct applications in the automotive, construction, energy, defense, and manufacturing sectors. Algoma was incorporated in March 2021 and is the parent holding company of Algoma Steel Inc., which was transferred to Algoma on March 29, 2021.

On May 24, 2021, Algoma entered into the Merger Agreement with Legato and Merger Sub. Pursuant to the Merger Agreement, Merger Sub merged with and into Legato, with Legato surviving the Merger. On October 19, 2021 (the “Closing Date”), the Merger was consummated with Legato becoming a direct, wholly-owned subsidiary of Algoma, and the securityholders of Legato becoming securityholders of Algoma. Following the consummation of the Merger on the Closing Date, Legato was dissolved and its assets and liabilities were distributed to Algoma.

On May 24, 2021, concurrently with the execution of the Merger Agreement, Algoma and Legato entered into Subscription Agreements (the “PIPE Subscription Agreements”) with certain investors (the “PIPE Investors”), pursuant to which the PIPE Investors agreed to purchase, and Algoma and Legato agreed to issue to the PIPE Investors, an aggregate of 10,000,000 Common Shares and shares of Legato Common Stock (together, the “PIPE Shares”), for the purchase price of $10.00 per share and at an aggregate purchase price of $100,000,000 (the “PIPE Investment”) on the Closing Date. Those PIPE Investors that subscribed for Legato Common Stock exchanged their PIPE Shares for Common Shares pursuant to the PIPE Subscription Agreements immediately prior to, rather than at the Effective Time of the Merger (the “Effective Time”). After giving effect to such exchange a total of 10,000,000 Common Shares were issued in the PIPE Investment, which closed substantially concurrently with Closing on the Closing Date.

In addition, pursuant to the Merger Agreement, prior to the Effective Time Algoma effected a reverse stock split (“Stock Split”), such that each outstanding common share in the capital of Algoma became such number of Common Shares, each valued at $10.00 per share, as determined by the Conversion Factor (as defined in the Merger Agreement) and such Common Shares were distributed to the equityholders of Algoma’s former ultimate parent company (the “Parent Distribution”), and (ii) each outstanding LTIP Award that has vested was exchanged for the right to acquire a number of Common Shares as determined by reference to the Conversion Factor (“Replacement LTIP Awards”), subject to the holder of such LTIP Award having executing an exchange agreement and joinder to the Lock-up Agreement.

As a result of the Merger, (i) each outstanding unit of Legato was separated immediately prior to the Effective Time into one share of common stock, par value $0.0001 per share, of Legato (“Legato Common Stock”) and one warrant exercisable for one share of Legato Common Stock (“Legato Warrant”), (ii) at the Effective Time each outstanding share of Legato Common Stock was converted into and exchanged for the right to receive one newly issued Common Share and (iii) at the Effective Time, pursuant to the Warrant Agreement, each Legato Warrant was converted into an equal number of Warrants, with each warrant exercisable for one Common Share for $11.50 per share, subject to adjustment, with the exercise period beginning on November 18, 2021, the date that is 30 days following the closing of the Merger.

 

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In addition, pursuant to the Merger Agreement, holders of Common Shares prior to the Transactions and each holder of Replacement LTIP Awards (collectively, the “Existing Algoma Investors”) were granted or issued the contingent right to receive their pro rata portion of up to 37.5 million Common Shares if certain targets based on Earnout Adjusted EBITDA and the trading price of the Common Shares are met (the “Earnout Rights”). See “Earnout Rights” below.

Following the closing of the PIPE Investment, and after giving effect to redemptions of shares by stockholders of Legato and the payment of transaction expenses, the transactions described above generated approximately $306 million for Algoma.

The mailing address for Algoma’s principal executive office is 105 West Street, Sault Ste. Marie, Ontario, P6A 7B4, Canada and its telephone number is (705) 945-2351.

Earnout Rights

The Earnout Rights granted or issued to Existing Algoma Investors will be converted into the following aggregate number of Common Shares upon the satisfaction of the following targets (each, an “Earnout Event”):

(i) 15,000,000 Common Shares if Earnout Adjusted EBITDA (as calculated by Algoma’s management and accepted by its board of directors, including a majority of disinterested directors), is equal to or greater than $674,000,000 (the “First Earnout Event”). Additionally, the Earnout Rights will entitle Existing Algoma Investors to acquire up to an additional 22,500,000 Common Shares in connection with the First Earnout Event if Earnout Adjusted EBITDA exceeds $674,000,000, as follows: (x) a percentage (not to exceed 100.0%) of 7,500,000 additional Common Shares based on the linear interpolation between Earnout Adjusted EBITDA of $674,000,000 and $750,000,000 (the “Second EBITDA Issuance”); (y) a percentage (not to exceed 100.0%) of 7,500,000 additional Common Shares based on the linear interpolation between Earnout Adjusted EBITDA of $750,000,000 and $825,000,000 (the “Third EBITDA Issuance”); and (z) a percentage (not to exceed 100.0%) of 7,500,000 additional Common Shares based on the linear interpolation between Earnout Adjusted EBITDA of $825,000,000 and $900,000,000 (the “Fourth EBITDA Issuance”).

(ii) 7,500,000 Common Shares, less the number of shares issued in connection with the Second EBITDA Issuance, if the volume weighted average price (“VWAP”) of Common Shares on Nasdaq or other primary stock exchange exceeds $12.00 per share (as adjusted appropriately in light of any stock dividend, share capitalization, reclassification, recapitalization, split, combination, consolidation or exchange of shares, or any similar event related thereto) for 20 consecutive trading dates at any time between the Closing and the five-year anniversary of the Closing (the “Second Earnout Event”).

(iii) 7,500,000 Common Shares, less the number of shares issued in connection with the Third EBITDA Issuance, if the VWAP exceeds $15.00 per share (as adjusted appropriately in light of any stock dividend, share capitalization, reclassification, recapitalization, split, combination, consolidation or exchange of shares, or any similar event related thereto) for 20 consecutive trading dates at any time between the Closing and the five-year anniversary of the Closing (the “Third Earnout Event”).

(iv) 7,500,000 Common Shares, less the number of shares issued in connection with the Fourth EBITDA Issuance, if the VWAP exceeds $18.00 per share (as adjusted appropriately in light of any stock dividend, share capitalization, reclassification, recapitalization, split, combination, consolidation or exchange of shares, or any similar event related thereto) for 20 consecutive trading dates at any time between the Closing and the five-year anniversary of the Closing (the “Fourth Earnout Event”).

Common Shares will be issuable in connection with each Earnout Event; provided, however, the maximum number of Common Shares issuable in connection with (i) the Second EBITDA Issuance and the Second Earnout Event, together, shall be 7,500,000, (ii) the Third EBITDA Issuance and the Third Earnout Event, together, shall be 7,500,000, and (iii) the Fourth EBITDA Issuance and the Fourth Earnout Event, together, shall be 7,500,000.

 

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Based on the current estimates of Algoma’s Earnout Adjusted EBITDA, it is currently expected that the Existing Algoma Investors will acquire all of the 37.5 million Common Shares issuable under the Earnout Rights. However, we cannot assure you that any or all of the Earnout Events will occur.

The Earnout Rights that were granted in respect of the Replacement LTIP Awards will be subject to the LTIP Exchange Restrictions. See “Common Shares Eligible for Future Sale – LTIP Exchange.

Implications of Being a Foreign Private Issuer

We are a “foreign private issuer” under SEC rules. Consequently, we are subject to the reporting requirements under the Exchange Act applicable to foreign private issuers.

Based on our foreign private issuer status, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as a U.S. company whose securities are registered under the Exchange Act and we also are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements. We are also not required to comply with Regulation FD, which addresses certain restrictions on the selective disclosure of material information. In addition, among other matters, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Common Shares. Additionally, Nasdaq rules allow foreign private issuers to follow home country practices in lieu of certain of Nasdaq’s corporate governance rules and we have elected to do so in certain regards. As a result, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

Summary Risk Factors

Investing in our securities involves risks. You should carefully consider the risks described in “Risk Factors” before making a decision to invest in our Common Shares. If any of these risks actually occurs, our business, financial condition and results of operations would likely be materially adversely affected. In such case, the trading price of our securities would likely decline, and you may lose all or part of your investment. Set forth below is a summary of some of the principal risks we face:

 

   

Market and industry volatility could have a material adverse effect on our results.

 

   

We have a recent history of losses and may not return to or sustain profitability in the future.

 

   

Our cost and operational improvements plan may not continue to be effective.

 

   

We face significant domestic and international competition, and there is a possibility that increased use of competitive products could cause our sales to decline.

 

   

Increased imports of low-priced steel products into North America and decreased trade regulation could impact the North American steel market, resulting in a loss of sales volume and decreased pricing that could adversely impact our operating results and financial position.

 

   

Tariffs and other trade barriers may restrict our ability to compete internationally.

 

   

All of our operations are conducted at one facility using one blast furnace and are subject to unexpected equipment failures and other business interruptions.

 

   

The North American steel industry and certain industries we serve, such as the automotive, construction, appliance, machinery and equipment, and transportation industries, are cyclical, and prolonged economic declines would have a material adverse effect on our business.

 

   

Our operations could be materially affected by labor interruptions and difficulties.

 

   

Our operations, production levels, sales, financial results and cash flows could be adversely affected by transportation, raw material or energy supply disruptions, or poor quality of raw materials, particularly coal and iron ore.


 

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Our ability to generate revenue is dependent on our ability to maintain our customer base and certain key customers.

 

   

Currency fluctuations, including a significant increase in the value of the Canadian dollar, could have a materially adverse effect on our financial performance and financial position.

 

   

We depend on third parties to supply sophisticated and complex machinery for our plants and we are exposed to risks relating to the timing or quality of their services, equipment and supplies.

 

   

We depend on third parties for transportation services, and increases in costs or the availability of transportation may adversely affect our business and operations.

 

   

Any increases in annual funding obligations resulting from our under-funded pension plans could have a material adverse effect on our financial position.

 

   

Environmental compliance and site remediation obligations could result in substantially increased costs and could materially adversely affect our competitive position.

 

   

Increased regulation associated with climate change and greenhouse gas emissions could impose significant additional costs compliance costs on our operations.

 

   

The Warrants are accounted for as liabilities and the changes in value of the Warrants could have a material effect on our financial results.

 

   

Algoma may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on its financial condition, results of operations and the price of its securities, which could cause you to lose some or all of your investment.

Recent Developments

Government Funding

On July 5, 2021, Algoma announced that the Government of Canada has, subject to final documentation, committed up to C$420 million in financial support for Algoma’s proposed EAF transformation. The C$420 million of financial support consists of (i) a loan of up to C$200 million from the Innovation Science and Economic Development Canada’s Strategic Innovation Fund (the “SIF Funding”) and (ii) a loan of up to C$220 million from the Canada Infrastructure Bank (the “CIB Funding” and together with the SIF Funding, the “Green Steel Funding”). It is currently expected that the CIB Funding will be a low-interest loan on commercial terms. Annual repayment of the SIF Funding will be scalable based on Algoma’s greenhouse gas emission (“GHG”) performance. The CIB Funding is subject to, and contingent on, the negotiation of definitive documentation. On September 20, 2021, Algoma, Algoma Steel Inc. and the Government of Canada entered into an agreement with respect to the SIF Funding. Algoma’s rights and obligations under the agreement with respect to the SIF Funding, including the availability of borrowings thereunder, are subject to and contingent on Algoma demonstrating its ability to fully fund the EAF transformation, the remainder of which is expected to be funded by the CIB Funding, if available, as well as by the proceeds from Merger and the PIPE Investment.

CEO Succession Plan

Our current Chief Executive Officer, Michael McQuade, joined the board of directors of Algoma Steel Inc. following the restructuring of the company under CCAA. Mr. McQuade became Chief Executive of Algoma Steel Inc. in March 2019 following the termination of the previous Chief Executive Officer. Mr. McQuade has informed the Algoma Steel Inc. board of directors that, while he is pleased to continue serving as a director of Algoma, he is considering retiring from the Chief Executive Officer position in the next 12 months. Mr. McQuade has committed to remain as Chief Executive Officer until a successor is identified, and will remain as Chief Executive Officer of Algoma to commence the EAF transformation process, and thereafter it is expected that he will continue to serve as a director of Algoma. The Algoma board of directors has retained an internationally recognized search firm to assist the board in hiring a successor to Mr. McQuade with a current intention that a new CEO candidate will be identified by the end of 2021.


 

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Metals Sourcing Joint Venture with Triple M Metal

On October 27, 2021, Algoma announced that it has entered into a joint venture with Triple M Metal LP, establishing a new metallic sourcing company. The new entity is expected to source prime scrap steel and other iron units to meet Algoma’s business needs, including in connection with its potential transformation to EAF steelmaking.

Retirement of Chief Commercial Officer

On October 27, 2021, Algoma announced that its Chief Commercial Officer, Robert Dionisi, will be retiring effective May 1, 2022. Algoma has identified Rory Brandow, Algoma’s current Director of Regional Sales, to succeed Robert as Vice President of Sales.


 

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THE OFFERING

 

Securities offered by the Selling Securityholders

We are registering the resale by the Selling Securityholders named in this prospectus, or their permitted transferees, of an aggregate of 129,836,439 Common Shares and Warrants to purchase 604,000 Common Shares. In addition, we are registering up to (i) 23,575,000 Common Shares that are issuable upon the exercise of the Public Warrants, which were previously registered and (ii) 604,000 Common Shares underlying Private Warrants.

 

Terms of the Offering

The Selling Securityholders will determine when and how they will dispose of the Common Shares and Warrants registered under this prospectus for resale.

 

Shares outstanding prior to the offering

As of October 19, 2021, we had 112,074,095 Common Shares issued and outstanding. The number of Common Shares outstanding prior to this offering excludes up to (i) 24,179,000 Common Shares issuable upon the exercise of Warrants with an exercise price of $11.50 per share, (ii) 3,232,628 Common Shares which are issuable upon exercise of Replacement LTIP Awards and (iii) 37,500,000 Common Shares that may be issuable pursuant to the Earnout Rights (including Earnout Rights granted in respect of the Replacement LTIP Awards).

 

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RISK FACTORS

Unless the context otherwise requires, all references in this section to “we,” “us,” or “our” refer to Algoma and its subsidiaries prior to the consummation of the Merger. Stockholders should carefully consider the following risk factors, together with all of the other information included in this prospectus, before they decide whether to vote or instruct their vote to be cast to approve the proposals described in this prospectus. This prospectus also contains forward-looking statements that involve risks and uncertainties and actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this prospectus.

Risks Related to our Business

The outbreak of COVID-19 and the downturn in the global economy caused a sharp reduction in worldwide demand for steel. A protracted global recession or depression will have a material adverse effect on the steel industry and therefore our business and operations.

Our activities and financial performance are affected by international, national and regional economic conditions. The COVID-19 pandemic, which began during the first quarter of calendar year 2020, has had a profound impact on economies world-wide, with various levels of governments implementing border closings, travel restrictions, mandatory stay-at-home and work-from-home orders, mandatory business closures, cessation of certain construction activities, public gathering limitations and prolonged quarantines. These efforts and other governmental and individual reactions to the pandemic have led to lower consumer demand for goods and services and general uncertainty regarding the near-term and long-term impact of the COVID-19 pandemic on the domestic and international economy and on public health.

The manufacture of steel has been deemed to be an essential service by the government of Ontario, and we have continued to operate during the COVID-19 pandemic, in part with funds we received from government assistance programs. In spite of our continued operations, as the pandemic spread, slowdowns and disruptions in the operations of our customers led to a reduction in demand that had a negative impact on our business and operations. It is uncertain how the COVID-19 pandemic, or any other similar epidemic or pandemic, will impact our business and operations in the future. There is no assurance that the continued spread of COVID-19 and efforts to contain the virus (including, but not limited to, voluntary and mandatory quarantines, vaccines, restrictions on travel, limiting gatherings of people, and reduced operations and extended closures of many businesses and institutions) will not materially impact our business, financial performance and financial position. Disruptions in our business activities, and costs incurred by us in response to changing conditions and regulations and reduction in demand for the steel products that we manufacture, could have a material adverse impact on our business, operating results and financial position. To the extent the COVID-19 pandemic, or any other similar epidemic or pandemic, adversely affects our businesses, it may also have the effect of exacerbating many of the other risks described in this prospectus, any of which could have a material adverse effect on our business and operations.

A significant and prolonged recession or depression in the United States, Canada or Europe, or significantly slower growth or the spread of recessionary conditions in emerging economies that are substantial consumers of steel (such as China, Brazil, Russia and India, as well as emerging Asian markets, the Middle East and the Commonwealth of Independent States) would exact a heavy toll on the steel industry. Financial weakness among substantial consumers of steel products, such as the automotive industry and the construction industry, or the bankruptcy of any large companies in such industries, would have a negative impact in market conditions. 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 would have a material adverse effect on demand for our products and our operational and financial results.

Steel companies have significant fixed costs, which are difficult to reduce in response to reduced demand. However, we could implement a variety of measures in response to a market downturn and a decline in demand for steel products. These measures might include: curtailing the purchase of raw materials; spreading raw material contracts over a longer period of time; reducing capital spending; negotiating reduced pricing for major inputs, reducing headcount through temporary layoffs, limiting overtime and reducing use of contractors; managing fixed costs with changes in production levels; improving operational practices to reduce lead time; and venturing into export

 

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markets in order to increase capacity utilization. However, these initiatives may not prove sufficient, in terms of cost reduction or in realigning our production levels with reduced demand, to achieve profitability and maintain cash flow necessary to pay for capital expenditures and other funding needs.

Failure to complete, or delays in completing, our proposed EAF transformation could adversely affect our business and prospects. There are significant risks and uncertainties associated with, and we may fail to realize the anticipated benefits of, the proposed EAF transformation.

One of our reasons for undertaking the Merger was to provide us with access to capital to partially fund our proposed transformation to EAF steelmaking. The proposed EAF transformation may never be completed or may only be completed after significant delays. Failure to complete, or delays in completing, the proposed EAF transformation, could have a material adverse effect on our business, financial position, financial performance or prospects.

In addition, the proposed EAF transformation will require significant capital expenditures and divert the attention of management from our business. The EAF transformation will also require a number of permits, including environmental compliance approvals in respect of sewage works and air/noise, as well as indigenous consultations and the adoption of site specific standards under the Canadian Environmental Protection Act, 1999 (“CEPA”), none of which are guaranteed to be granted or adopted. If we are not successful at integrating the EAF and related technology and equipment into our business, our cost of production relative to our competitors may increase and we may cease to be profitable or competitive. The proposed EAF transformation may be more costly than expected to complete and entails additional risks as to whether the EAF and related technology and equipment will reduce our cost of production sufficiently to justify the capital expenditure to obtain them. Additionally, there is no guarantee that the proposed EAF transformation will allow us to achieve our emissions targets. If such risks were to materialize, the anticipated benefits of the proposed EAF transformation may not be fully realized, or realized at all.

Our exposure to the higher cost of internally generated power and market pricing for electricity sourced from the current grid in Northern Ontario may have an adverse impact on our production and financial performance if we are able to complete the proposed EAF transformation.

Electricity is a significant input required in EAF steelmaking, and competitor EAF producers typically enter into fixed-price electricity contracts. Our exposure to the higher cost of internally generated of power and market pricing for electricity sourced from the current grid in Northern Ontario may have an adverse impact on our production and financial performance if we are able to complete the proposed EAF transformation. We have limited access to power from the current grid in Northern Ontario. As a result, we are planning to upgrade our internal natural gas power plant in order to supply sufficient power in combination with the available grid power to operate EAF furnaces. Delays in acquiring the specialized power equipment and associated specialty services may impact on our timing to complete the proposed EAF transformation. Furthermore, operating an internal power plant subjects us to planned and unplanned outages to maintain and/or repair the equipment, which would result in an associated outage of the steelmaking production.

The Ontario provincial regulator, Independent Electricity System Operator (“IESO”) plans for the resources needed to meet Ontario’s future electricity needs. This includes accounting for Ontario’s forecasted electricity requirements, and carrying out integrated resource planning for energy efficiency, generation and transmission infrastructure to meet those requirements. This process is not within our control. We will need to operate our internal natural gas power plant until regional power system upgrades are determined and recommended by the IESO for installation. In the long-term, in order to operate EAF furnaces from grid power alone, we will require regional power system upgrades, with new transmission wires outside the city providing for more power to Sault Ste. Marie. These regional power system upgrades may not be completed until 2029 or later.

Due to our limited access to power from the current grid in Northern Ontario, our plan is to adapt our number 7 blast furnace (“Blast Furnace No. 7”) to run at a lower rate in order to feed liquid iron into the EAFs to reduce our power requirements and to balance the amount of power expected to be available from internal generation and available grid power. Operating the blast furnace at a reduced rate subjects us to planned and unplanned outages in order to maintain and/or repair the equipment, which would result in associated outages in steelmaking production.

Operating the blast furnace together with EAF steelmaking while using internal power generation from natural gas (“Hybrid Mode”) presents both an operating risk and a market risk, as we would be running the facilities at suboptimal

 

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levels and are subject to outages with internal power generation. Furthermore, the presence of ice and/or snow in steel scrap materials as they are introduced to EAF steelmaking could result in explosions which may result in further unplanned outages and/or health and safety consequences.    

We are pursuing a local electricity transmission infrastructure upgrade and technical contingency solution to allow us to access more power sooner from the current grid into Sault Ste. Marie. Delays in designing, approving, and installing these local infrastructure upgrades may result in a delay or inability to access more power from the grid. This may result in a disruption to our steelmaking operations and/or failure to grow our business.

In connection with the proposed EAF transformation, our access to an adequate supply of the various grades of steel scrap at competitive prices may result in a disruption to our operations and/or financial performance.

The principal raw material of our proposed transformation to EAF steelmaking operations will be scrap metal derived from internal operations within our steel mills and industrial scrap generated as a by-product of manufacturing; obsolete scrap recovered from end-of-life manufactured goods such as automobiles, appliances, and machinery; and demolition scrap recovered from obsolete structures, containers and machines. Scrap is a global commodity influenced by economic conditions in a number of industrialized and emerging markets throughout Asia, Europe and North America.

The markets for scrap metals are highly competitive, both in the purchase of raw or unprocessed scrap, and processed scrap. As a result, we will need to compete with other steel mills in attempting to secure scrap supply through direct purchasing from scrap suppliers. Any failure to secure access to an adequate supply of the various grades of steel scrap at competitive prices may result in a disruption to our operations and/or financial performance.    

We will also need to supplement our proposed EAF operations with higher-purity substitutes for ferrous scrap which may be sourced from higher-quality-lower-residual prime scrap, or iron units such as pig iron, pelletized iron, hot briquetted iron, direct reduced iron, and other forms of processed iron. Any failure to secure access to an adequate supply of the substitutes for ferrous scrap at competitive prices may result in a disruption to our operations and/or financial performance. Furthermore, we may not be able to source competitive modes of freight transportation for inbound scrap and other materials.

Many variables can impact ferrous scrap prices, including the level of domestic steel production, the level of exports of scrap from the United States and Canada, and the amount of obsolete scrap production. Domestic ferrous scrap prices generally have a strong correlation and spread to global pig iron pricing. Generally, as domestic steel demand increases, so does scrap demand and resulting scrap prices. The reverse is also typically true with scrap prices following steel prices downward when supply exceeds demand, but this is not always the case. When scrap prices greatly accelerate, this can challenge one of the principal elements of an EAF based steel mill’s traditional lower cost structure – the cost of its metallic raw material.

Even if we are able to complete the proposed EAF transformation, we may fail to achieve the anticipated benefits due to reduced product qualities.

Even if we are to complete the proposed EAF transformation, we may fail to achieve the anticipated benefits. For example, as a result of residual chemistry attributes of steel from the EAF processing of scrap, we may be limited in our ability to produce a full range of product types and qualities. This may result in an inferior product or a more limited range of products we are able to produce, either of which could result in reduced sales and have a material adverse effect on our results of operations and/or adversely affect our reputation with existing and potential customers.

Market and industry volatility could have a material adverse effect on our results. A protracted fall in steel prices, or any significant and sustained increase in the price of raw materials in the absence of corresponding steel price increases, would have a material adverse effect on our results.

The steel market is a cyclical commodity business with significant volatility in prices in response to various factors, including market demand, supply chain inventory levels, and imports. Factors specific to our business include a prolonged cyclical downturn in the steel industry, macroeconomic trends such as global or regional recessions and trends in credit and capital markets more generally. Market price volatility results in a high level of cash flow volatility

 

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with prolonged periods of negative cash flow. Steel prices are volatile and the global steel industry has historically been cyclical. During 2015, hot rolled coil prices fell sharply by approximately $200/ton to $354/ton in the North American market, as a result of a significant increase in imports, driven primarily by the strengthening of the U.S. dollar against other currencies. In 2018, hot rolled coil prices rose to over $900/ton over a short period then fell to under $500/ton in the fall of 2019. Hot rolled coil prices recovered slightly, but fell to under $500/ton once again as a result of the COVID-19 pandemic and the related global economic slowdown; however, since that low in 2020, hot rolled coil prices have risen to an all-time high of over $1,600/ton in 2021 (CRU U.S. Midwest Hot-Rolled Coil). These significant market price fluctuations affect our bottom line. Protracted pricing or volume declines in the future would adversely affect our cash flow and ability to pay for our fixed costs, capital expenditures and other funding obligations.

Steel production also requires the use of large volumes of bulk raw materials and energy, in particular iron ore and coal, as well as energy, alloys, scrap, oxygen, natural gas, electricity and other inputs, the prices of which can be subject to significant fluctuation. The prices of iron ore and coal can vary greatly from period to period and our results have historically been impacted by movements in coal and iron ore prices. Iron ore and coal prices have been volatile in recent years. In addition, to the extent that we have quoted prices to our customers and accepted customer orders for our products prior to purchasing necessary raw materials, we may be unable to raise the price of our products to cover all or part of the increased cost of the raw materials. Alternatively, we may be faced with having agreed to purchase raw materials and energy at prices that are above the then current market price or in greater volumes than required. There can be no assurance that adequate supplies of electricity, natural gas, coal, iron ore, alloys, scrap and other inputs will be available in the future or that future increases in the cost of such materials will not adversely affect our financial performance.

Our largest input cost in the steel-making process is iron ore, which we purchase under our supply contracts with Cliffs Natural Resources (“Cliffs”) and United States Steel Corporation (“U.S. Steel”). We believe that our long-term agreements with Cliffs and U.S. Steel ensure supply of iron ore pellets through to the close of the 2024 shipping season, but there can be no assurances that they will meet our needs or that we will be able to retain such long term contracts.

We have a recent history of losses and may not return to or sustain profitability in the future.

We have incurred net losses in recent reporting periods and for the fiscal year ended March 31, 2021, we had a net loss of approximately C$62.0 million. This history of our business incurring significant losses, among other things, led predecessor operators of our business to seek creditor protection and/or to complete corporate restructuring proceedings. See “ – Predecessor operators of our business have sought creditor protection and completed corporate restructurings on a number of occasions.” We may not maintain profitability in future periods, our earnings could decline or grow more slowly than we expect and we may incur significant losses in the future for a number of reasons, including the risks described in this prospectus.

Our cost and operational improvements plan may not continue to be effective.

Our cost and operational improvements strategy has resulted in reduced costs. However, there can be no assurance that we will continue to achieve such savings in the future or that we will realize the estimated future benefits of these plans. Moreover, our continued implementation of these plans may disrupt our operations and performance. Additionally, our estimated cost savings for these plans are based on several assumptions that may prove to be inaccurate and, as a result, there can be no assurance that we will realize these cost savings.

Our utilization rates may decline as a result of increased global steel production and imports.

In addition to economic conditions and prices, the steel industry is affected by other factors such as worldwide production capacity and fluctuations in steel imports/exports and tariffs. Historically, the steel industry has suffered from substantial overcapacity. If demand for steel products was to rapidly decline, it is possible that global production levels will fail to adjust fully. If production increases outstrip demand increases in the market, an extended period of depressed prices and market weakness may result.

China is now the largest worldwide steel producing country by a significant margin and has significant unused capacity. In the future, any significant excess capacity utilization in China and increased exports by Chinese steel companies would depress steel prices in many markets.

 

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We expect that consolidation in the steel sector in recent years should, as a general matter, help producers to maintain more consistent performance through the down cycles by preventing fewer duplicate investments and increasing producers’ utilization and therefore efficiency and economies of scale. However, overcapacity in the industry may re-emerge. Although certain U.S. producers temporarily shut down production capacity during the COVID-19 pandemic, a restart of previously idled capacity and the development of new capacity by producers has subsequently occurred.

We face significant domestic and international competition, and there is a possibility that increased use of competitive products could cause our sales to decline.

We compete with numerous foreign and domestic steel producers. Significant global steel capacity growth through new and expanded production in recent years has caused and may continue to cause capacity to exceed global demand, which has resulted and may result in lower prices and steel shipments. Some of our competitors have greater financial and capital resources than we do and continue to invest heavily to achieve increased production efficiencies and improved product quality. We primarily compete with other steel producers based on the delivered price of finished products to our customers. Our costs are generally higher than many foreign producers; however, freight costs for steel can often make it uneconomical for distant steel producers to compete with us. Foreign producers may be able to successfully compete if their higher shipping costs are offset by lower cost of sales.

Although we are continually striving to improve our operating costs, we may not be successful in achieving cost improvements or gaining operating efficiencies that may be necessary to remain competitive on a global scale.

The North American steel industry has, in the past, experienced lengthy periods of difficult markets due to increased foreign imports. Due to unfavorable foreign economic conditions, excess foreign capacity and a stronger U.S. dollar compared to global currencies, imports of steel products to U.S. and Canadian markets have occasionally reached high levels.

In addition, in the case of certain product applications, steel competes with a number of other materials such as plastic, aluminum, and composite materials. Improvements in the technology, production, pricing or acceptance of these competitive materials relative to steel or other changes in the industries for these competitive materials could cause our net sales to decline. There is ongoing research and technological developments with respect to the various processes associated with steel production which have the potential to reduce costs and improve quality and operational efficiency. Such research and technological developments could substantially impair our competitive position if other companies implement new technology that we elect not to implement or are unable to implement.

A number of steel producers have completed successful restructurings, through which they have made production improvements, achieved lower operating costs and been relieved of legacy obligations, including environmental and pension and retiree obligations. As a result, these entities may be able to operate with lower costs and cause us to face increased competition.

There has been a significant increase in new EAF steelmaking capacity commissioned in North America. EAF producers typically require lower capital expenditures for construction and maintenance of facilities, and may have lower total employment costs. In addition the market pricing for our hot rolled steel is more correlated to scrap steel as the main material for EAF producers. While we have plans to transform to EAF steelmaking, the proposed EAF transformation may never be completed or may only be completed after significant delays or at a substantially greater cost than anticipated. Failure to complete, or delays and/or cost overruns in completing the proposed EAF transformation could adversely affect our results of operations and ability to compete in our industry.

Increased imports of low-priced steel products into North America and decreased trade regulation could impact the North American steel market, resulting in a loss of sales volume and decreased pricing that could adversely impact our operating results and financial position.

Imports of flat-rolled steel to the U.S. accounted for approximately 14% of the U.S. market for flat-rolled steel products in 2020. Imports of flat-rolled steel to Canada accounted for approximately 35% of the Canadian market for flat-rolled steel products in 2020 (Statistics Canada, American Iron and Steel Institute, Phoenix SPI). Increases in future levels of imported steel to North America could reduce future market prices and demand levels for steel products produced in those markets and reduce our profitability.

 

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In addition, our business has historically been affected by “dumping” – the selling of steel into Canadian or U.S. markets at prices below cost or below the price prevailing in a foreign company’s domestic market. Dumping may result in injury to steel producers in Canada or the U.S. in the form of suppressed prices, lost sales, lower profits and reductions in production, employment levels and the ability to raise capital. Some foreign steel producers are owned, controlled or subsidized by foreign governments. Decisions by these foreign producers to continue production at marginal facilities may be influenced to a greater degree by political and economic policy considerations than by prevailing market conditions and may further contribute to excess global capacity. Although trade legislation to limit dumping has had some success, it may be inadequate to prevent future unfair import pricing practices which individually or collectively could materially adversely affect our business. If Canadian or U.S. trade laws are weakened, an increase in the market share of imports into the U.S. and Canada may occur, which would have a material adverse effect on our business and financial performance.

The Canadian steel industry has worked with the Canadian government to modernize the Canadian trade remedy system to provide the appropriate tools to respond to unfair trade. These changes came into force in 2017 and again in 2019 through a number of amendments to the Special Import Measures Act and related trade remedy regulations to strengthen the trade remedy system, while remaining aligned with international trade rules. Although the Government of Canada continues to work with industry to respond to unfair trade practices, there can be no assurance that such measures will sufficiently offset any resulting loss caused to us by such unfair practices, and there can be no assurance that the protective measures put in place by the Government of Canada and/or the Canadian International Trade Tribunal will be kept in place and, as a result, such unfair trade practices may have a material adverse effect on our business, financial position, results or operations and cash flow.

Tariffs and other trade barriers may restrict our ability to compete internationally.

We have a significant number of customers located in the United States. For the three month period ended June 30, 2021, 60.7% of our revenue was from customers located in the United States. For the year ended March 31, 2021, 57.1% of our revenue was from customers located in the United States. Our ability to sell to these customers and compete with producers located in the United States could be negatively affected by tariffs and/or trade restrictions imposed on our products.

On April 20, 2017, the United States issued an executive order directing the United States Department of Commerce to investigate whether imports of foreign steel are harming U.S. national security. The directive falls under Section 232 of the Trade Expansion Act of 1962, which allows the U.S. president to restrict trade of a good if such trade is determined to be harmful to U.S. national security. On February 16, 2018, the United States Department of Commerce released its report regarding the Section 232 investigation. The recommendations in that report include options regarding tariffs and/or quotas that are intended to adjust the level of steel imports into the United States as it has been determined that those imports are an impairment to national security. Subsequently, the United States announced tariffs of 25% by presidential proclamation dated March 8, 2018 on steel and aluminum imports. Canada, Mexico and certain other countries were granted temporary exemptions, which expired on May 31, 2018. As a result, Canadian steel producers became subject to 25% tariffs on all steel revenues earned on shipments made to the United States effective as of June 1, 2018. Effective on July 1, 2018, Canada began imposing a series of counter tariffs on certain U.S. goods, including steel products. The Canadian government has also announced various relief measures aimed to helping companies affected by the tariffs and counter tariffs on goods imported from the United States.

The United States lifted these tariffs as they relate to Canadian imports effective May 2019, subject to a mutual understanding with Canada on maintaining certain trade levels into the United States. The Canadian government subsequently lifted counter tariffs on goods imported from the United States. As the trade agreement is between countries, there is no assurance that the Canadian domestic steel industry will maintain adherence to the trade level guidelines set out in the agreement. As a result, there can be no assurance that the United States will not once again levy tariffs on our products shipped to customers in the United States.

 

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All of our operations are conducted at one facility using one blast furnace and are subject to unexpected equipment failures and other business interruptions.

Our manufacturing processes are dependent upon critical steelmaking equipment such as furnaces, continuous casters, rolling mills and electrical equipment (such as transformers), and this equipment may incur downtime as a result of unanticipated failures. In particular, as a single blast furnace operation, any unplanned or prolonged outage in the operation of the blast furnace may have a material adverse effect on our ability to produce steel and satisfy pending and new orders, which will materially impact our revenues, cash flows and profitability. We have insurance coverage for property damage and business interruption losses. Our business interruption insurance, which is subject to specific retentions, provides coverage for loss of gross profit resulting from the interruption of business operations.

Our predecessor, Old Steelco, experienced plant shutdowns or periods of reduced production as a result of such equipment failures.

On January 21, 2011, Blast Furnace No. 7 experienced significant water leakage and this ultimately led to the chilling of the furnace. Production of raw steel was halted for 23 days with production returning to normal after 33 days.

During fiscal year 2012, a substantial number of stack plate coolers were replaced and a leak detection system was installed at Blast Furnace No. 7. This program has continued into the current fiscal year. The purpose of these measures is to detect and prevent incidents of water into the furnace hearth.

During April 2019, we experienced an unplanned outage that disrupted production in our Blast Furnace No. 7 as a result of an operator error causing a chemistry imbalance of certain materials. The resulting lost production led to a shipping volume reduction during the three-month period ended June 30, 2019, of over 100,000 tons. During April 2019, we recorded a capacity utilization adjustment of C$32.7 million to cost of steel products sold.

On October 18, 2019, there was a rupture of a steam drain line which was located below an electrical room in our cokemaking by-products plant (“BP”), which resulted in a loss of power to the BP. In accordance with our emergency procedures, the coke oven gas bleeders were lit to flare the coke oven gas. Additionally, the loss of power caused the cokemaking south raw liquor tank and the tar running tanks to overflow. Raw liquor was conveyed to the main water filter plant (“MWFP”) via a sewer located in the BP. This resulted in effluent exceedances at the MWFP for phenol, ammonia and total cyanide and a toxicity failure for rainbow trout. The incident remains under investigation by MECP.

As a single blast furnace operation, our ability to curtail our operating configuration in response to declining market conditions is very limited.

Unexpected interruptions in production capabilities and unexpected failures in our computer systems would adversely affect productivity and financial performance for the affected period. No assurance can be given that a significant shutdown will not occur in the future or that such a shutdown will not have a material adverse effect on our business, financial position or financial performance.

It is also possible that operations may be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, pandemics, states of emergency declared by governmental agencies, environmental incidents, accidents, severe weather conditions and cyberattacks. To the extent that lost production could not be compensated for at unaffected facilities and depending on the length of the outage, our sales and our unit production costs could be adversely affected.

We could incur significant cash expenses for temporary and potential permanent idling of facilities.

We perform strategic reviews of our business, which may include evaluating each of our plants and operating units to assess their viability and strategic benefits. As part of these reviews, we may idle, whether temporarily or permanently, certain of our existing facilities in order to reduce participation in markets where we determine that our returns are not acceptable. If we decide to permanently idle any facility or assets, we are likely to incur significant cash expenses, including those relating to labor benefit obligations, take-or-pay supply agreements and accelerated environmental remediation costs, as well as substantial non-cash charges for impairment of those assets. If we elect to permanently idle material facilities or assets, it could adversely affect our operations, financial results and cash flows. In the past, certain of our facilities have been idled as a result of poor profitability.

For any temporarily idled facilities, we may not be able to respond in an efficient manner when restarting these to fully realize the benefits from changing market conditions that are favorable to integrated steel producers. When we

 

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restart idled facilities, we incur certain costs to replenish raw material inventories, prepare the previously idled facilities for operation, perform the required repair and maintenance activities and prepare employees to return to work safely and resume production responsibilities. The amount of any such costs can be material, depending on a variety of factors, such as the period of time during which the facilities remained idle, necessary repairs and available employees, and is difficult to project.

The North American steel industry and certain industries we serve, such as the automotive, construction, appliance, machinery and equipment, and transportation industries, are cyclical, and prolonged economic declines would have a material adverse effect on our business.

The North American steel industry is cyclical in nature and sensitive to general economic conditions, including the current COVID-19 pandemic. The financial position and financial performance of companies in the steel industry are generally affected by macroeconomic fluctuations in the Canadian, U.S. and global economies. Due mainly to our product mix, we have a higher exposure to spot markets than most of our North American competitors. We are therefore subject to more volatility in selling prices. In addition, steel prices are sensitive to trends in cyclical industries such as the North American automotive, construction, appliance, machinery and equipment, and transportation industries, which are significant markets for our products. Recent economic situations resulting from the COVID-19 pandemic have negatively impacted our performance.

In addition, many of our customers are also affected by economic downturns, including as a result of the current COVID-19 pandemic, which may in the future result in defaults in the payment of accounts receivable owing to us and a resulting negative impact on our financial results and cash flows.

There can be no assurance that economic or market conditions will be favorable to the steel industry or any of the end-use industries that we intend to serve in the future. Economic downturns, a stagnant economy or otherwise unfavorable economic or market conditions may adversely affect our business, financial performance and financial position.

The lag between the time an order is placed and when it is fulfilled can have a material impact on our financial results, which could be adverse.

As we have a substantial portion of spot-based sales, orders are priced at current prices, subject to discounts, incentives and other negotiated terms, for production and delivery in the future. Generally, there is a lag of approximately six to eight weeks between when an order is booked and ultimately delivered. At certain times, particularly in rapidly increasing price environments, lead times could grow even longer based on increased customer demand and orders. As a result, our financial performance generally lags changes in market price, both positive and negative. Furthermore, in the circumstances where market prices are falling, our customers may seek to cancel orders or seek to renegotiate more favorable pricing to reflect the changes in market price. Our financial position and financial performance could be materially adversely affected in such circumstances.

Predecessor operators of our business have sought creditor protection and completed corporate restructurings on a number of occasions.

Old Steelco’s predecessor company initiated a bankruptcy proceeding in 1990 and subsequently emerged from bankruptcy protection by way of a C$60 million bridge loan from the Government of Ontario. As a result of business, operational and financial challenges, Old Steelco’s predecessor company later filed for protection under the CCAA in April 2001 and emerged from creditor protection in 2002 following the completion of a corporate restructuring.

In 2014, as a result of depressed steel prices, a legacy iron ore supply contract that contained above-market pricing terms, substantial pension funding obligations and a significant amount of debt and related interest expense, all of which negatively impacted Old Steelco’s operations, financial position and liquidity, Old Steelco implemented an arrangement under section 192 of the Canada Business Corporations Act (“CBCA”). The CBCA proceedings enabled Old Steelco to restructure its unsecured notes, refinance its secured debt and obtain a significant capital infusion. Old Steelco also commenced a recognition proceeding in the United States under Chapter 15 of the United States Bankruptcy Code, in order to recognize and enforce the arrangement in the United States. On September 15, 2014, the Canadian court issued a final order approving the arrangement, which order was recognized by the U.S. court on September 24, 2014. The arrangement was completed in November 2014.

 

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On November 9, 2015, Old Steelco sought and obtained CCAA protection as a result of, among other things, a dispute with a critical supplier of iron ore, a significant decrease in steel prices, an inability to comply with payment and other obligations under its credit agreements, and operational cost issues. Old Steelco carried out a sale and investment solicitation process that ultimately resulted in our acquisition of substantially all of the operating assets of Old Steelco on November 30, 2018. The transaction resulted in a significant capital structure deleveraging and negotiated arrangements with a number of labor, pension, and governmental stakeholders. The CCAA proceedings and our acquisition of the business were given effect in the United States pursuant to a recognition proceeding under Chapter 15 of the United States Bankruptcy Code.

There can be no assurance that we will not experience serious financial difficulties in the future that would necessitate the commencement of restructuring proceedings, which could have a material adverse effect on our business, financial position, financial performance and prospects and the legal and economic entitlements of our stakeholders.

We are reliant on information technology systems, including cyber security systems, and any failure or breach of such systems could disrupt our operations.

We are reliant on the continuous and uninterrupted operation of our Information Technology (“IT”) systems. User access and security of all sites and corporate IT systems can be critical elements to our operations. Protection against cyber security incidents, cloud security and security of all of our IT systems are critical to our operations. Any IT failure pertaining to availability, access or system security could result in disruption for personnel and could adversely affect our reputation, operations or financial performance.

We may fall victim to successful cyber-attacks and may incur substantial costs and suffer other negative consequences as a result, which may include, but are not limited to, a material disruption in our ability to produce and/or ship steel products, excessive remediation costs that may include liability for stolen assets or information, repairing system damage that may have been caused, and potentially making ransom payments in connection with a cyber-attack. We and our business partners maintain significant amounts of data electronically in locations on and off our site. This data relates to all aspects of our business, including current and future products, and also contains certain customer, consumer, supplier, partner and employee data. We maintain systems and processes designed to protect this data, including operating in the Cloud and contracting with third-party system security providers, but notwithstanding such protective measures, there is a risk of intrusion, cyber-attacks or tampering that could compromise the integrity and privacy of this data. In addition, we provide confidential and proprietary information to our third-party business partners in certain cases where doing so is necessary to conduct our business. While we obtain assurances from those parties that they have systems and processes in place to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data. Any compromise of the confidential data of our customers, consumers, suppliers, partners, employees or ourselves, or failure to prevent or mitigate the loss of or damage to this data through breach of our information technology systems or other means could substantially disrupt our operations, including production delays or downtimes, harm our customers, consumers, employees and other business partners, damage our reputation, violate applicable laws and regulations, subject us to potentially significant costs and liabilities and result in a loss of business that could be material.

Increased global information technology security requirements, vulnerabilities, threats and a rise in sophisticated and targeted cybercrime pose a risk to the security of our systems, our information networks, and to the confidentiality, availability and integrity of our data, as well as to the functionality of our automated and electronically controlled manufacturing operating systems and data collection and analytics capabilities, which our management believes are important and are expected to contribute to our ability to efficiently operate and compete. Although we have adopted procedures and controls, including operating in the Cloud and contracting with third-party system security providers, to protect our information and operating technology, including sensitive proprietary information and confidential and personal data, there can be no assurance that a system or network failure, or security breach, will not occur. This could lead to system interruption, production delays or downtimes and operational disruptions and/or the disclosure, modification or destruction of proprietary and other key information, which could have an adverse effect on our reputation, financial results and financial performance.

 

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Changes to global data privacy laws and cross-border transfer requirements could adversely affect our business and operations.

Our business depends on the transfer of data between our affiliated entities, to and from our business partners, and with third-party service providers, which may be subject to global data privacy laws and cross-border transfer restrictions. While we take steps to comply with these legal requirements, changes to the applicability of those laws may impact our ability to effectively transfer data across borders in support of our business operations.

Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results or financial position.

IFRS and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to revenue recognition, impairment of goodwill and intangible assets, inventory, income taxes and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our financial performance or financial position in accordance with IFRS.

Our products may not benefit from intellectual property protection and we must respect intellectual property rights of others.

Some information about our products including product chemistries and methods and processes of production are publicly known. Thus, other facilities could produce competitive products using such information. As a result, we may not be able to distinguish our products from competitors that use the same publicly known chemistries, methods and processes that we use. Other information related to our products including product chemistries and methods and processes used to make them are proprietary to third parties who hold intellectual property rights such as patents or trade secrets therein. Our commercial success depends on our ability to operate without infringing the patents and other proprietary rights of third parties, and there can be no assurance that our operations, product chemistries and methods and processes of production do not or will not infringe the patents or proprietary rights of others. Further, if our competitors use their own proprietary intellectual property rights in their products that we do not have access to, such competitors may have an advantage over us which could have an adverse effect on our business.

Our operations could be materially affected by labor interruptions and difficulties.

We had 2,696 full-time employees as of June 30, 2021, of which approximately 95% are represented by two locals of the United Steelworkers of Canada (“USW”) under two collective bargaining agreements. On June 26, 2018, Local 2251 members and Local 2724 members voted to ratify new collective bargaining agreements. These agreements were conditional upon closing of the sale transaction discussed above pursuant to which we acquired substantially all of the operating assets of Old Steelco. The agreements with Local 2251 and Local 2724 expire on July 31, 2022.

Our customers, or companies upon whom we are dependent for raw materials, transportation or other services, could also be affected by labor difficulties. Any such activities, disruptions or difficulties could result in a significant loss of production and sales and could have a material adverse effect on our financial position or financial performance.

Our operations, production levels, sales, financial results and cash flows could be adversely affected by transportation, raw material or energy supply disruptions, or poor quality of raw materials, particularly coal and iron ore.

Due to our location on Lake Superior, we are dependent on seasonally available waterways for the delivery of substantial amounts of raw materials, including coal and iron ore. The waterways close from approximately mid-January to the end of March each year. Extreme cold weather conditions in the United States and Canada impact shipping on the Great Lakes and could disrupt the delivery of iron ore to us and/or increase our costs related to iron ore. Failure to have adequate coal and iron ore on site prior to the closure of the waterways would adversely affect our ability to operate during such closure and could have a material adverse effect on our production levels, business, financial position, financial performance and prospects. For example, during the period from January through April

 

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2014, the upper Great Lakes suffered a severe freeze-over, which resulted in the waterways being generally inaccessible for shipping until early May 2014. As a result, raw material supply was depleted and production was therefore reduced. In addition, extreme weather conditions may limit the availability of railcars or otherwise affect our capacity to receive inbound raw materials, and/or ship products to our customers, which may have a material impact on increasing our costs and /or realizing our revenues. Finally, such disruptions or quality issues, whether the result of severe financial hardships or bankruptcies of suppliers, natural or man-made disasters or other adverse weather events, or other unforeseen circumstances or events, could reduce production or increase costs at our plants and potentially adversely affect customers or markets to which we sell our products. Any resulting financial impact could constrain our ability to fund additional capital investments and maintain adequate levels of liquidity and working capital.

Our business requires substantial capital investment, capital commitments and maintenance expenditures, which we may have difficulty in meeting and will cause us to incur operating costs.

Our operations are capital intensive. We expect to make ongoing capital and maintenance expenditures to achieve and maintain competitive levels of capacity, cost, productivity and product quality. We may not generate sufficient future operating cash flow and external financing sources may not be available in an amount sufficient to enable us to make anticipated capital expenditures, service or refinance our indebtedness, or fund other liquidity needs. Failure to make sufficient capital investment, capital commitments and maintenance expenditures could have a material adverse effect on our business, financial position, financial performance and prospects.

Our Blast Furnace No. 7 was last relined in 2007 which resulted in a downtime of 52 days and capital expenditure of C$72 million. Relines generally last for 20 years. We monitor the health of our furnace. We will expect Blast Furnace No. 7 to require a future reline, which we anticipate occurring no sooner than 2024, which will result in downtime and capital expenditure, which could have a material adverse effect on our business, financial position, financial performance or prospects.

In addition, our profitability and competitiveness are, in large part, dependent upon our ability to maintain low production costs for products with prices that fluctuate based on factors beyond our control. Through our participation in the Canadian Steel Producers Association, we have committed to pursue the aspirational goal of carbon neutrality by 2050. We continue to evaluate strategies to both meet this goal and maintain our competitiveness, including through the modernization of our existing facilities and/or the adoption of other technologies such as less carbon-intensive iron making or EAF steel-making. Unless we continue to invest in newer technologies and equipment such as modernized plants and information technology systems and are successful at integrating such newer technologies and equipment to make our operations more efficient, our cost of production relative to our competitors may increase and we may cease to be profitable or competitive. However, newer technologies and equipment are expensive and the necessary investments may be substantial. Moreover, such investments entail additional risks as to whether the newer technologies and equipment will reduce our cost of production sufficiently to justify the capital expenditures to obtain them. Any failure to make sufficient or appropriate investments in newer technologies and equipment or in integrating such newer technologies and equipment in our operations could have a material adverse effect on our business, financial position, financial performance or prospects.

Our ability to generate revenue is dependent on our customer base and certain key customers.

We serve more than 200 customers across multiple sectors in North America. For the three month period ended June 30, 2021, our top ten customers accounted for approximately 52% of our revenue, and no single customer represented more than 11% of our revenue. For the fiscal year ended March 31, 2021, our top ten customers accounted for approximately 52% of our revenue, and no single customer represented more than 11% of revenue. The average tenure for our top ten customers is more than 20 years. The composition and concentration of our customer base could change over time.

While we benefit from diverse end market exposure with limited customer concentration, we rely on certain key customers for a material portion of our revenues. These customers may not consistently purchase our products at a particular rate over any subsequent period. The loss of one or more significant customers, or a decline in steel demand for customers operating in particular industries as a result of macroeconomic or industry-specific factors, could have a material adverse effect on our revenues, financial performance and financial position, particularly if we are unable to replace such lost business with new customer orders. In addition, certain of our top customers may be able to exert pricing and other influences on us, requiring us to produce, market, deliver and promote our products in a manner that may be more costly to us.

 

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The closing or relocation of customer facilities could adversely affect us.

Our ability to meet delivery requirements and the overall cost of our products as delivered to customer facilities are important competitive factors. If customers close or move their production facilities further away from our production facility, it could have an adverse effect on our ability to meet competitive conditions, which could result in the loss of sales. Likewise, if customers move their production facilities outside North America, it could result in the loss of potential sales for us.

We depend on third parties to supply sophisticated and complex machinery for our plants and we are exposed to risks relating to the timing or quality of their services, equipment and supplies.

We have purchased in the past, and propose to purchase going forward, equipment, machinery and services from third parties in relation to our plant. Given that we do not have any direct control over these third parties, we rely on them to provide goods and services in a timely manner and in accordance with our specifications. In addition, we require continued and timely support of certain original equipment manufacturers to supply necessary services and parts to maintain our plants at reasonable cost. If we are unable to procure the required services or parts from these manufacturers for any reason (including the closure of operations or bankruptcy of such manufacturers), if the cost of these services or parts exceeds our budget or if the services or parts provided are deficient or sub-standard, there may be an adverse effect on our business, financial position, financial performance, cash flows and prospects.

We depend on third parties for transportation services, and increases in costs or the availability of transportation may adversely affect our business and operations.

Our business depends on the transportation of a large number of products, both domestically and internationally. We rely primarily on third parties for transportation of the products we manufacture as well as delivery of our raw materials. Any increase in the cost of the transportation of our raw materials or products, as a result of increases in fuel or labor costs, higher demand for logistics services, consolidation in the transportation industry or otherwise, may adversely affect our financial performance as we may not be able to pass such cost increases on to our customers.

If any of these providers were to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture and deliver our products in response to customer demand. In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them at a reasonable cost.

In addition, such failure of a third-party transportation provider could harm our reputation, negatively affect our customer relationships and have a material adverse effect on our financial position and financial performance.

Parties with whom we do business may be subject to insolvency risks or may otherwise become unable or unwilling to perform their obligations to us.

We are a party to business relationships, transactions and contracts with various third parties, pursuant to which such third parties have performance, payment and other obligations to us. If any of these third parties were to become subject to bankruptcy, receivership or similar proceedings, our rights and benefits in relation to our business relationships, contracts and transactions with such third parties could be terminated, modified in a manner adverse to us, or otherwise impaired. We cannot make any assurances that we would be able to arrange for alternate or replacement business relationships, transactions or contracts on terms as favorable as our existing business relationships, transactions or contracts if at all. Any inability on our part to do so could have a material adverse effect on our business and financial performance.

We are dependent on the operation of our port facility to receive raw materials and deliver steel shipments.

In the three month period ended June 30, 2021, we received approximately 69% of our raw material inputs and shipped approximately 25% of our total steel shipments and approximately 99% of our by-products through our captive port facility located on-site at our steel plant in Sault Ste. Marie, Canada. In the fiscal year ended March 31, 2021, we received approximately 75% of our raw material inputs and shipped approximately 20% of our total steel shipments and approximately 90% of our by-products through our captive port facility. Any material or prolonged disruption in our ability to receive or send shipments through the port facility would have a material adverse effect on our business and financial performance.

 

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Any increases in annual funding obligations resulting from our under-funded pension plans could have a material adverse effect on us.

We are the sponsor of Old Steelco’s defined benefit pension plan for hourly employees (the “Hourly Plan”) and its defined benefit pension plan for salaried employees (the “Salaried Plan”) (collectively, the “DB Pension Plans”), which we assumed in connection with the Purchase Transaction. The latest actuarial valuations of the DB Pension Plans as of April 1, 2020 indicate that the DB Pension Plans are underfunded. The actual valuations indicate that the Hourly Plan had a solvency ratio of 71% and that the Salaried Plan had a solvency ratio of 69% as of April 1, 2020. The low solvency position of our DB Pension Plans as of April 1, 2020 was a result of a sharp decline in markets resulting from COVID-19. Markets have since rebounded and the solvency position of the DB Pension Plans has improved. In connection with the Purchase Transaction, Ontario Regulation 484/18: Essar Steel Algoma Inc. Pension Plans for Salaried Employees and Hourly Employees, as filed on November 30, 2018 (the “2018 Pension Regulations”) was implemented to provide a funding framework for the DB Pension Plans. Current service costs and provisions for adverse deviations are to be determined pursuant to the general regulations applicable to all Ontario registered pensions (the “General Regulations”). Under the 2018 Pension Regulations, among other things, the aggregate going concern and solvency special payments to the DB Pension Plans equal C$31 million per annum until the solvency ratio of each of the DB Pension Plans is at least 85%.

As of March 1, 2021, both DB Pension Plans have obtained an 85% solvency ratio. As a result, the General Regulations apply, but with some restrictions including a cap of C$31 million on the aggregate of the special payments for the DB Pension Plans. In addition, benefits from the DB Pension Plans are now subject to the Ontario Pension Benefit Guarantee Fund (the “PBGF”), which requires us to make annual assessment payments to the PBGF determined based on a formula that includes, among other factors, the funding status and number of members of the pension plan. The 2018 Pension Regulations provide that subsection 57(4) of the Ontario Pension Benefits Act (the “PBA”) does not apply to the DB Pension Plans and that subsection 57(3) of the PBA does not apply to us in respect of contributions due and not paid into the DB Pension Plans before the 2018 Pension Regulations came into force. The C$31 million minimum funding and cap will cease to apply on the earlier of the year in which we elect to have the funding rules in the General Regulations apply or in 2039.

We are also the sponsor of closed defined benefit pension plan for pensioners who retired prior to January 1, 2002 (the “Wrap Plan”) that provides a pension benefit in excess of the limits provided by the PBGF. We assumed the Wrap Plan in connection with the completion of the Purchase Transaction, subject to transitional provisions pending the implementation of regulatory measures. Ontario Regulation 2017/19 as filed on June 20, 2019 (the “Wrap Regulations”) was implemented to provide a funding framework for the Wrap Plan. The Wrap Regulations require us to make monthly contributions to the Wrap Plan equal to the lesser of C$416,667 and the amount of the prior month’s benefit payments from the Wrap Plan fund until the Wrap Plan’s solvency ratio is 100%. This funding requirement supersedes the normal funding requirements under the PBA and the General Regulations. The Wrap Regulations provide that subsection 57(4) of the PBA does not apply to the Wrap Plan and that subsection 57(3) of the PBA does not apply to us in respect of contributions due and not paid into the Wrap Plan before the Wrap Regulations came into force.

While our near-term funding obligations in respect of the DB Pension Plans and the Wrap Plan are determined in large part based on the 2018 Pension Regulations and the Wrap Regulations, changes to our collective bargaining agreements, the cost of pension benefits paid to plan members, the impact of market outcomes (including interest rates and investment returns), the occurrence of any adverse deviations or changes to governmental regulations affecting the DB Pension Plans or the Wrap Plan, among other things, could affect the funding status of such pension plans and/or the contributions that we are required to make to the pension plans. We could be adversely impacted by any adverse changes to the funding status of the pension plans or increases in our annual funding obligations.

Post-employment benefits owed to our retirees could increase and obligate us to make greater payments.

We provide certain post-employment benefits to our retirees. These benefits include drug, life insurance and hospitalization coverage. We do not pre-fund these obligations. Our obligations for these benefits could increase in the future due to a number of factors including changes in interest rates, changes to collective bargaining agreements, increasing costs for these benefits, particularly drugs, and any transfer of costs currently borne by the Canadian government to us.

 

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Currency fluctuations, including a significant increase in the value of the Canadian dollar, could have a materially adverse effect on our financial performance and financial position.

For the three month period ended June 30, 2021, 60.7% of our revenue was from customers located in the United States and for the year ended March 31, 2021, 57.1% of our revenue was from customers located in the United States. Increases in the value of the Canadian dollar relative to the U.S. dollar make Canadian steel products less competitive in U.S. markets and also encourage steel imports from the United States into Canada. Our revenue is driven by U.S. dollar-based indices. 70% of our cost is based on U.S. dollar-indices and 30% of our cost is in Canadian dollars, which is impacted by exchange rate fluctuation. The increase in the value of the Canadian dollar relative to the U.S. dollar will also have a negative impact on expenditures in Canadian dollars. Therefore, a significant increase in the value of the Canadian dollar could adversely affect our financial performance and financial position.

Limited availability of raw materials and energy may constrain operating levels and reduce profit margins.

We and other steel producers have periodically been faced with problems in obtaining sufficient raw materials and energy in a timely manner due to delays, defaults or force majeure events by suppliers, shortages or transportation problems (such as shortages of barges, vessels, rail cars or trucks, or disruption of rail lines, waterways or natural gas transmission lines), resulting in production curtailments. For example, we faced an increase in the price of natural gas throughout the fourth quarter of our 2014 fiscal year, due to disruptions in supply as a result of extreme weather conditions, including the bursting of the pipeline that supplies the region in which we are located. We may be exposed to additional risks concerning pricing and availability of raw materials from third parties. Any curtailments and escalated costs may further reduce profit margins. Specifically, if demand is such that our blast furnaces are at full production capacity, we may become dependent upon outside purchased coke, especially if some of our existing coke facilities produce at less than capacity.

Environmental compliance and site remediation obligations could result in substantially increased costs and could materially adversely affect our competitive position.

We are required to comply with an evolving body of Canadian federal, provincial and local environmental, health and safety laws concerned with, among other things, GHG, other emissions into the air, discharges to surface and ground water, the investigation and remediation of contaminated property, noise control, waste management and disposal, mine closure and rehabilitation, and the generation, handling, storage, transportation, presence and disposal or, or exposure to hazardous substances. Significant expenditures could be required for compliance with any laws or regulations relating to environmental protection and remediation, which may have an adverse effect on our financial performance and financial position.

We are subject to current and new environmental compliance measures pertaining to the integrated blast furnace coke oven steelmaking operations, including coke oven gas desulfurization and slag granulation, among others. In the event we do not receive exemptions or other accommodations from the relevant regulatory authorities, we may need to invest significant capital in these compliance measures while they remain in operation.

By January 1, 2026, we will be required to implement plans and measures to reduce the amount of sulphur dioxide emitted from the combustion of coke oven gas by-product by implementing coke oven gas desulphurization technology. This requirement arises under a notice (the “Notice”) issued under subsection 56(1) of CEPA which requires prescribed persons to prepare and implement pollution prevention plans in respect of specified toxic substances released from the iron and steel sector. The Notice applies to all steel mills, including ours. Facilities subject to the Notice are required, among other things, to prepare a pollution prevention plan that will achieve prescribed baseline emission targets by the specified date, and submit certain written declarations and progress reports. We currently estimate that it will cost approximately C$60 million to comply with the Notice. If our estimate is inaccurate or we discover additional changes or requirements that we are required to comply with under the Notice, depending on the magnitude of such increased costs, such increased costs could adversely impact our financial results.

In the United States and Canada, certain environmental laws and regulations impose joint and several liabilities on certain classes of persons for the costs of investigation, management and remediation of contaminated properties and for the management of emissions into the environment. Liability may attach regardless of fault or the legality of the release or disposal of the substance or waste at the time it occurred. Some of our present and former facilities have

 

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been in operation for many years and, over such time, have used substances and disposed of wastes that may require management, investigation, mitigation and remediation. We could be liable for the costs of such investigations and remediation. Costs for any investigation, management, mitigation and remediation of contamination, on or off site, whether known or not yet discovered, or to address other issues relating to pollution and waste disposal, emissions into the air or water, or the storage or handling of materials, could be substantial and could have an adverse effect on our financial performance. In addition, while we are subject to GHG emissions tax liability in Canada, we need to compete alongside foreign competitors in Canada and the United States that may not be similarly subject to such carbon tax liabilities, resulting in our reduced competitiveness in the market which may affect revenues and profitability.

In connection with the proposed EAF transformation, we may incur a higher carbon tax liabilities unless we develop a facility-specific GHG emissions performance standard in connection with operations in the Hybrid Mode. Algoma has received comfort letters from MECP committing to work together on a pathway to address the support sought. Furthermore, the dust generated during the EAF steel scrap melting process may contain a significant amount of zinc, and is considered a hazardous waste, the disposal of which is expensive and regulated.

Our Environmental Department regularly reviews and audits our operating practices to monitor compliance with our environmental policies and legal requirements. Our environmental management system is ISO 14001-2015 registered.

No assurance can be given that unforeseen changes, such as new laws or stricter enforcement policies, including in respect of carbon pricing, or an incident at one of our properties or operations, will not have a material adverse effect on our business, estimated capital or operating costs, financial position, or financial performance. Our operations are required to have governmental permits and approvals. Any of these permits or approvals may be subject to denial, revocation, expiry or modification under various circumstances. Failure to obtain or comply with the conditions and terms of permits or approvals may adversely affect our operations and may subject us to regulatory orders, penalties and fines. In addition, if environmental laws are amended or are interpreted or enforced differently, or if new environmental legislation is enacted, we may be required to obtain additional permits or approvals and incur additional costs. There can be no assurance that we will be able to meet all applicable regulatory requirements. In addition, we may be subject to regulatory orders, penalties, fines or other liabilities arising from our actions imposed under environmental laws, including as a result of actions or other proceedings commenced by third parties, such as neighbors or government regulators, including with respect to an emissions incident at our cokemaking by-products plant.

Increased regulation associated with climate change and greenhouse gas emissions could impose significant additional costs on our operations.

The effects of government policy, legislation or regulation enacted to address climate change may adversely impact our operations as well as those of our suppliers and our customers, and including the transportation of the associated raw materials and products. In addition, government action to address climate change may, among other things, reduce the demand for our products. Although we have made efforts to mitigate the effects of government action related to climate change on our business, there can be no assurance that these efforts will be effective or that the effects of climate change policies will not adversely impact our operations, business and financial results.

On July 3, 2018, Ontario revoked Ontario Regulation 144/16, The Cap and Trade Program under the Climate Change Mitigation and Low-carbon Economy Act, 2016, effectively ceasing Ontario’s cap and trade program which had been in effect since May 18, 2016. The revocation regulation also prohibits registered participants in the former cap and trade program from purchasing, selling, trading or otherwise dealing with emission allowances and credits. Without a cap and trade system or carbon tax in place in Ontario that meets minimum federal requirements for GHG emissions, regulated entities in Ontario are subject to the federal Greenhouse Gas Pollution Pricing Act (generally referred to as the “Federal Backstop”).

On January 1, 2019, the federal government’s Output-Based Pricing System (the “OBPS Program”) under the Federal Backstop came into effect in Ontario. The OBPS Program includes registration, monitoring, reporting and payment obligations for GHG emitters subject to the Federal Backstop.

On July 4, 2019, Ontario’s Emissions Performance Program (the “EPS Program”) under Ontario Regulation 241/19 came into effect. The EPS Program requires all large industrial emitters in the province to comply with capped

 

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emission levels tied to their level of output or production and the program may include compliance flexibility mechanisms such as offset credits and/or payment of an amount to achieve compliance. On September 20, 2020, the EPS Program was accepted by the federal government as an alternative to the federal OBPS Program. The federal and Ontario governments are currently in the process of planning the transition from the OBPS Program to the EPS Program for GHG emitters in Ontario. Until that transition is completed, both the OBPS Program and the EPS Program remain in effect in Ontario. The EPS Program is expected to be implemented in stages to give Ontario industries time to meet their obligations thereunder.

The EPS Program is part of the Made-in-Ontario Environment Plan (the “Provincial Plan”) which was released in November 2018. The Provincial Plan also includes the Ontario Carbon Trust, which will use financing techniques and market development tools in partnership with the private sector to speed up the deployment of low-carbon solutions, as well as a commitment by the Ontario government to encourage private investments in clean technologies and green infrastructure projects.

Prior to the federal government’s acceptance of the EPS Program, Ontario and a number of other provinces commenced legal challenges to the Federal Backstop. On March 25, 2021, the Supreme Court of Canada rendered a decision upholding the constitutionality of the Federal Backstop. While, at this point, we cannot definitively predict the full effect of the EPS Program on us when the federal OBPS Program is phased out, our financial position, operations (including any plans to increase production) and ability to compete with companies in foreign jurisdictions may be materially affected by the new regime. The absence of similar requirements in other jurisdictions could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in those jurisdictions.

On December 11, 2020, the federal government announced its new climate plan entitled “A Healthy Environment and a Healthy Economy”. For the 2020 compliance year, the carbon tax payable under the OPBS Program by large industrial emitters if emissions at their facilities exceed a set level is set at C$30 per tonne of carbon dioxide equivalent (“CO2e”) and is scheduled to increase by C$10 per tonne annually until it reaches C$50 per tonne in 2022. The “A Healthy Environment and a Healthy Economy” plan, if implemented into law, would increase the carbon tax by C$15 per tonne per year starting in 2023 until the tax becomes C$170 per tonne CO2e in 2030.

Any additional regulatory or other changes that are adopted in the future to address climate change and GHG emissions could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such requirements. Taken together, these regulatory changes could have a material adverse effect on our business, financial performance or financial results.

Pursuant to an Environmental Compliance Approval issued by the Ontario Ministry of Environment and Climate Change, we are required to install certain equipment in our number 6 blast furnace (“Blast Furnace No. 6”) to reduce casthouse emissions. The cost of this equipment and its installation is currently estimated at approximately C$18.0 million. The actual cost of the equipment and its installation could vary significantly due to cost escalation, design changes, regulatory policies or other factors. In addition, the tightening of air emissions standards in Ontario for our blast furnace and cokemaking operations could result in significant costs for additional pollution controls or other equipment or operational changes. The foregoing costs would not be incurred until Blast Furnace No. 6, which is currently idled, is restarted. There is no assurance that these costs may not be higher than as currently estimated.

Pursuant to an Environmental Compliance Approval issued by the Ontario Ministry of Environment and Climate Change, we are required to apply technology or process changes to mitigate noise levels from identified sources within its Sault Ste. Marie operations. It is estimated that the capital cost associated with the noise abatement plan is approximately C$4.0 million to be completed by 2023. There is no assurance that these costs may not be higher than currently estimated.

The U.S. government and various governmental agencies have introduced or are contemplating regulatory changes in response to the potential impact of climate change. International treaties or agreements may also result in increasing regulation of GHG emissions, including the introduction of carbon emissions trading mechanisms. Any such regulation regarding climate change and GHG emissions could impose significant costs on our steelmaking and metals recycling operations and on the operations of our customers and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs in order to comply with current or future laws or regulations and limitations imposed on our operations by virtue of climate change and GHG emissions laws and

 

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regulations. The potential costs of “allowances,” “offsets” or “credits” that may be part of potential cap-and-trade programs or similar future regulatory measures are still uncertain. Any adopted future climate change and GHG regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations. From a medium and long-term perspective, as a result of these regulatory initiatives, we may see an increase in costs relating to our assets that emit significant amounts of GHGs. These regulatory initiatives will be either voluntary or mandatory and may impact our operations directly or through our suppliers or customers. Until the timing, scope and extent of any future regulation becomes known, we cannot predict the effect on our business, financial performance or financial position, but such effect could be materially adverse to our business, financial performance and financial position.

Our industry could be subject to increased regulatory oversight or changes in government policies that could have adverse effects.

Our industry could be subject to increased regulatory oversight. Changing regulatory policies and other actions by governments and third parties may all have the effect of limiting our revenues and increasing our operating costs, which could have a material adverse effect on our business, financial position and financial performance. Due to regulatory restructuring initiatives at the federal, provincial and state levels, the steel industry has undergone changes over the past several years. Future government initiatives will further change the steel industry. Some of these initiatives may delay or reverse the movement towards competitive markets. We cannot predict the ultimate effect that on-going regulatory changes will have on our business prospects, financial position and financial performance.

Impairment in the carrying value of long-lived assets could negatively affect our operating results and reduce our earnings.

We have a significant amount of long-lived assets on our consolidated balance sheets. Under IFRS, we periodically evaluate long-lived assets for potential impairment whenever events or changes in circumstances have occurred that indicate that impairment may exist, or the carrying amount of the long-lived asset may not be recoverable. An impairment loss is recognized if the carrying amount of a long-lived asset is not recoverable based on its estimated future discounted cash flows. Events and conditions that could result in impairment in the value of our long-lived assets include cash flow or operating losses, other negative events or long-term outlook, cost factors that have negative effect on earnings and cash flows, changes in business conditions or strategy, as well as significantly deteriorating industry, market, and general economic conditions. Impairment in the carrying value of long-lived assets could negatively affect our operating results and reduce our earnings.

We face increased competition from alternative materials, which could impact the price of steel and adversely affect our profitability and cash flow.

As a result of increasingly stringent regulatory requirements, designers, engineers and industrial manufacturers, especially those in the automotive industry, are increasing their use of lighter weight and alternative materials, such as aluminum, composites, plastics and carbon fiber in their products. Increased government incentives and requirements for the use of such materials to meet regulatory requirements could reduce the demand for steel products, which could potentially reduce our profitability and cash flows.

Pending or threatened litigation or claims could negatively affect our profitability and cash flow in a particular period.

We are subject to litigation arising in the normal course of business and may be involved in legal disputes or matters with other parties, including governments and their agencies, regulators and members of our workforce, which may result in litigation. The causes of potential litigation cannot be known and may arise from, among other things, business activities, employment matters, including compensation issues, or grievances under our collective bargaining agreements, environmental, health and safety laws and regulations, tax matters and securities matters. The timing of resolutions to such matters, should they arise, is uncertain and we may incur expenses in defending them and the possible outcomes or resolutions could include adverse judgments, orders or settlements or require us to implement corrective measures any of which could require substantial payments and adversely affect our reputation and operations, and may also negatively affect our profitability and cash flow in a particular period.

 

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Failure to maintain our current senior management or inability to attract additional senior management could have an adverse effect on our operations.

Our operations and prospects depend, in large part, on the performance of our senior management team. We cannot assure that such individuals will remain as employees. In addition, we can make no assurance that we would be able to find qualified replacements for any of these individuals if their services were no longer available. The loss of the services of one or more members of senior management or difficulty in attracting, retaining and maintaining additional senior management personnel could have a material adverse effect on our business, financial position and financial performance.

A failure to maintain adequate insurance could have a materially adverse effect on our operations.

To date, we have been able to obtain liability insurance for the operation of our business. However, there can be no assurance that our existing liability insurance will be adequate, or that it will be able to be maintained, or that all possible claims that may be asserted against us will be covered by insurance. The occurrence of a significant adverse event that causes losses in excess of limits specified under the relevant policy or losses arising from events not covered by insurance policies, could materially adversely affect our business, financial position, financial performance and prospects.

Our income tax filing positions may be subject to challenge by tax authorities, which could subject us to increased tax liabilities.

We file tax returns that may contain interpretations of tax law and estimates. Positions taken and estimates utilized by us may be challenged by applicable tax authorities. Rulings that alter filed tax returns may have an adverse impact on income. In addition, we are involved in and potentially subject to regular audits from Canadian federal and provincial tax authorities relating to income, capital and commodity taxes and, as a result of these audits, may receive assessments and reassessments. For example, we were notified in June 2021 that the Canada Revenue Agency (the “CRA”) is currently conducting an audit of Algoma Steel Inc.’s 2018 and 2019 January to December taxation years. The audit is in its preliminary stages and we have not been informed of any issues by the CRA. In the event that the CRA successfully challenges the manner in which we have filed our tax returns and reported income, it could potentially result in additional income taxes, penalties and interest, which could have a material adverse effect on our business.

We may be subject to significant tax liabilities associated with a previously completed internal reorganization.

As described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” on March 29, 2021, Algoma Steel Intermediate S.A R.L. (“LuxSarl”) sold its equity holdings in the capital of Algoma Steel Holdings Inc. (the “Algoma Holdings Shares”) to Algoma in exchange for Common Shares. LuxSarl would have incurred an income tax liability on this sale if (i) at any time prior to the sale, the value of certain assets of Algoma Steel Holdings Inc. exceeded a particular threshold as a percentage of its total assets (the “Threshold”) and (ii) LuxSarl was not otherwise exempt from taxation under an applicable income tax treaty. If LuxSarl is determined to have such a tax liability, Algoma may be liable to pay an amount on behalf of LuxSarl, and may also be liable for related penalties and interest (the “Algoma Liability”). Our management estimates that the amount of the Algoma Liability, exclusive of interest, could exceed C$160 million.

We have obtained a valuation report from an internationally-recognized accounting firm (the “Valuation Report”), which supports our conclusion that the value of the relevant assets of Algoma Steel Holdings Inc. did not exceed the Threshold, such that the Algoma Liability does not arise. However, the Valuation Report is not binding on the relevant taxing authorities. In addition, the analysis set out in the Valuation Report is highly complex and involves many subjective assumptions, estimates and judgments, with which the relevant taxing authorities may not agree.

If the value of such assets were determined to have exceeded the Threshold, the current state of applicable law supports the conclusion that LuxSarl should be exempt from taxation under an applicable income tax treaty (the “Treaty Exemption”), such that the Algoma Liability should not arise. However, the availability of the Treaty Exemption in circumstances similar to the sale of the Algoma Holdings Shares is the subject of ongoing judicial proceedings, in which the relevant tax authorities are seeking to apply the Treaty Exemption in a manner that may no longer afford LuxSarl an exemption from taxation under the applicable treaty. The timing of a decision on this matter is uncertain, but is expected to be provided in the near future. As a result, LuxSarl may not be entitled to rely on the Treaty Exemption if challenged by the relevant taxing authorities.

 

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We are subject to risks related to shifting steel supplies.

As traditional steel-consuming markets are negatively impacted from reduced demand due to a variety of factors, including COVID-19, or other regulatory changes (such as, for instance, the revocation in January 2021 of the presidential permit necessary to construct and operate the Keystone oil pipeline at the international border of Canada and the United States), suppliers of steel products into these affected sectors will divert their sales efforts to markets where we traditionally participate, thereby creating pressure on lowering pricing in response to increased supply. The oil and gas industry is a significant end market for steel, and has experienced and continues to experience a significant amount of disruption and oversupply at a time of declining demand, resulting in more competition in other sectors of the economy.

Changes in our credit profile may affect our relationships with our suppliers, which could have a material adverse effect on our liquidity.

Changes in our credit profile may affect the way our suppliers view our ability to make payments and may induce them to shorten the payment terms of their invoices or require us to prepay, particularly given our high level of outstanding indebtedness. Given the large dollar amounts and volume of our purchases from suppliers, a change in payment terms may have a material adverse effect on our liquidity and our ability to make payments to our suppliers, and consequently may have a material adverse effect on our business, financial performance and financial position.

Some of our operations present significant risk of injury or death.

The industrial activities conducted at certain of our facilities present significant risk of serious injury or death to our employees, contractors, customers or other visitors to our operations. Notwithstanding our safety precautions, including our material compliance with federal and provincial employee health and safety regulations, we may be unable to avoid material liabilities for injuries or deaths. We maintain workers’ compensation insurance to address the risk of incurring material liabilities for injuries or deaths, but there can be no assurance that the insurance coverage will be adequate or will continue to be available on the terms acceptable to us, or at all, which could result in material liabilities to us for any injuries or deaths. We could also incur fines and other sanctions as a result of safety incidents.

Our cross-border operations require us to comply with anti-corruption laws and regulations of the U.S. government and various non-U.S. jurisdictions.

Doing business in multiple countries requires us and our subsidiaries to comply with Canadian and other laws and regulations governing corruption and bribery, including the Canadian Corruption of Foreign Public Officials Act. The laws generally prohibit companies and their officers, directors, employees and agents acting on their behalf from corruptly offering, promising, authorizing or providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. As a result, business dealings between our employees or our agents and any such public official could expose us to the risk of violating anti-corruption laws. Violations of these legal requirements are punishable by criminal fines and imprisonment, civil penalties, disgorgement of profits, injunctions, debarment from government contracts as well as other remedial measures. We have established policies and procedures designed to assist us and our personnel in complying with applicable laws and regulations; however, we cannot assure investors that these policies and procedures will completely eliminate the risk of a violation of these legal requirements. Any such violation (inadvertent or otherwise) could have a material adverse effect on our business prospects, financial position and financial performance.

Shortages of skilled labor, increased labor costs, or our failure to attract and retain other highly qualified personnel in the future could disrupt our operations and adversely affect our financial results.

We depend on skilled labor for the manufacture of our products. Our continued success depends on the active participation of our key employees. Shortages of some types of skilled labor could restrict our ability to maintain or increase production rates, lead to production inefficiencies and increase our labor costs. The competitive nature of the labor markets in which we operate, the cyclical nature of the steel industry and the resulting employment needs increase our risk of not being able to recruit, train and retain the employees we require at efficient costs and on reasonable terms, particularly when the economy expands, production rates are high or competition for such skilled labor increases. Many companies, including ours, have had employee lay-offs as a result of reduced business activities in an industry downturn. The loss of our key people or our inability to attract new key employees could adversely

 

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affect our operations. Additionally, layoffs or other adverse actions could result in an adverse relationship with our workforce. If we are unable to recruit, train and retain adequate numbers of qualified employees on a timely basis or at a reasonable cost or on reasonable terms, our business and financial performance could be adversely affected.

The expansion of social media platforms present new risks and challenges.

The expansion of social media platforms present new risks and challenges. The inappropriate use of certain social media vehicles could cause brand damage or information leakage or could lead to legal implications from the improper collection and/or dissemination of personally identifiable information or the improper dissemination of material information. In addition, negative posts or comments about us and/or any of our key personnel on any social networking web site could seriously damage our reputation. If our sensitive information is disclosed or if our reputation or that of our key personnel is seriously damaged through social media, it could have a material adverse effect on our business, financial position and financial performance.

Risks Related to Being a Public Company

Our management has limited experience operating a public company, and thus its success in such endeavors cannot be guaranteed.

Our executive officers have limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage our transition to a public company that is subject to significant regulatory oversight and reporting obligations under U.S. and Canadian securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities, which will result in less time being devoted to the management and growth of the company. We may not have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal control over financial reporting required of public companies in the United States and Canada. We are in the process of upgrading its finance and accounting systems to an enterprise system suitable for a public company, and a delay could impact our ability or prevent us from timely reporting our operating results, timely filing required reports with the SEC and applicable Canadian securities regulators and complying with Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The development and implementation of the standards and controls necessary for us to achieve the level of accounting standards required of a public company in the United States and Canada may require costs greater than expected. It is possible that we will be required to expand our employee base and hire additional employees to support our operations as a public company which will increase our operating costs in future periods.

If we are unable for any reason to meet the continued listing requirements of Nasdaq or the TSX, such action or inaction could result in a delisting of the Common Shares or Warrants.

If we fail to satisfy the continued listing requirements of Nasdaq or the TSX (for example, the Nasdaq corporate governance requirements or the Nasdaq minimum closing bid price requirement), such exchanges may take steps to delist the Common Shares or Warrants. Such a delisting would likely have a negative effect on the price of the Common Shares or Warrants and would impair your ability to sell or purchase the Common Shares or Warrants when you wish to do so. In the event of a delisting, we can provide no assurance that any action taken by us to restore compliance with listing requirements would allow the Common Shares or Warrants to become listed again, stabilize the market price or improve the liquidity of the Common Shares or Warrants, prevent such securities from dropping below any minimum bid price requirement or prevent future non-compliance with Nasdaq’s or the TSX’s listing requirements.

If securities and industry analysts do not publish research or reports about our business or publish negative reports about our business, our share price and trading volume may suffer.

The trading market for the Common Shares is and will be influenced by the research and reports that securities or industry analysts publish about us or our business. We do not have control over such analysts and cannot provide any assurance that analysts will continue to cover Algoma or provide favorable coverage. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of Algoma or fail to regularly publish reports on Algoma, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

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There is a risk that we will fail to maintain an effective system of internal controls and our ability to produce timely and accurate financial statements or comply with applicable regulations could be adversely affected. We may identify material weaknesses in our internal controls over financing reporting which we may not be able to remedy in a timely manner.

As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act, the regulations of Nasdaq and the TSX, the rules and regulations of the SEC and Canadian securities regulators, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. Prior to becoming a public company, we have never been required to test our internal controls within a specified period and, as a result, we may experience difficulty in meeting these reporting requirements in a timely manner.

We anticipate that the process of building our accounting and financial functions and infrastructure will require significant additional professional fees, internal costs and management efforts. We may need to enhance and/or implement a new internal system to combine and streamline the management of our financial, accounting, human resources and other functions. However, the enhancement and/or implementation of a system may result in substantial costs. Any disruptions or difficulties in implementing or using such a system could adversely affect our controls and harm our business. Moreover, such disruption or difficulties could result in unanticipated costs and diversion of management’s attention. In addition, we may discover additional weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.

If we are not able to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to maintain proper and effective internal controls, we may not be able to produce timely and accurate financial statements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial information and we could be subject to sanctions or investigations by Nasdaq, the TSX, the SEC, Canadian securities regulators or other regulatory authorities.

We have incurred and expect to continue to incur increased costs as a result of our operation as a public company, and our management is and will continue to be required to devote substantial time and resources to employing new compliance initiatives in order to comport with the regulatory requirements applicable to public companies.

We have incurred and expect to continue to incur significant legal, accounting and other expenses as a public company that we did not incur as a private company. As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules adopted, and to be adopted, by the SEC, Canadian securities regulators, Nasdaq and the TSX. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, we expect these rules and regulations to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. For example, these rules and regulations have and are expected to continue to make it more difficult and more expensive for us to obtain director and officer liability insurance and we have or may be forced to accept reduced policy limits or incur substantially higher costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Our Investor Rights Agreement provides certain IRA Parties the right to nominate up to four of our directors.

In connection with the consummation of the Merger, we entered into an Investor Rights Agreement pursuant to which, among other things, certain parties to the Investor Rights Agreement (“IRA Parties”) that previously had board

 

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designation rights with respect to Algoma Steel Holdings Inc. have the right to nominate, in the aggregate, four directors to our board for so long as they maintain approximately 7.36% of outstanding Common Shares (which percentage assumes that all of the Common Shares issuable pursuant to the Earnout Rights are issued). If such IRA Parties are able to exert significant influence over the our board as a result of their nomination rights pursuant to the Investor Rights Agreement, other holders of Common Shares may have limited ability to influence corporate matters and, as a result, we may take action that other holders of Common Shares do not view as beneficial.

Because we are a foreign private issuer and, as a result, are not be subject to U.S. proxy rules and are subject to Exchange Act reporting obligations that, to some extent, are more lenient and less frequent than those of a U.S. domestic public company.

We report under the Exchange Act as a non-U.S. company with foreign private issuer status. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies, including (1) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act, (2) the sections of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and liability for insiders who profit from trades made in a short period of time and (3) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, although we are subject to Canadian laws and regulations with regard to certain of these matters and intend to furnish comparable quarterly information on Form 6-K. In addition, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year and U.S. domestic issuers that are large accelerated filers are required to file their annual report on Form 10-K within 60 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation FD, which is intended to prevent issuers from making selective disclosures of material information. As a result of all of the above, you may not have the same protections afforded to shareholders of a company that is not a foreign private issuer.

We are a “foreign private issuer” and follow certain home country corporate governance practices, our shareholders may not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

As a foreign private issuer, we have the option to follow certain home country corporate governance practices rather than those of Nasdaq, provided that we disclose the requirements we are not following and describe the home country practices we are following. We rely on this “foreign private issuer exemption” with respect to the Nasdaq rules for shareholder meeting quorums and Nasdaq rules requiring shareholder approval. We may in the future elect to follow home country practices with regard to other matters. As a result, our shareholders will not have the same protections afforded to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

Algoma may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses.

As discussed above, Algoma is a foreign private issuer, and therefore is not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and may take advantage of certain exemptions to Nasdaq’s corporate governance rules. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter, and, accordingly, the next determination will be made with respect to Algoma on September 30, 2022. In the future, Algoma would lose its foreign private issuer status if (1) more than 50% of its outstanding voting securities are owned by U.S. residents and (2) a majority of its directors or executive officers are U.S. citizens or residents, or it fails to meet additional requirements necessary to avoid loss of foreign private issuer status. If Algoma loses its foreign private issuer status, it will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. Algoma would also have to mandatorily comply with U.S. federal proxy requirements, and its officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, it would lose its ability to rely upon exemptions from certain corporate governance requirements under the listing rules of Nasdaq. As a U.S. listed public company that is not a foreign private issuer, Algoma would incur significant additional legal, accounting and other expenses that it will not incur as a foreign private issuer.

 

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We may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition, results of operations and the price of the Common Shares, which could cause you to lose some or all of your investment.

For a variety of potential factors, which are currently unforeseen, we may be forced to write-down or write-off assets, restructure its operations, or incur impairment or other charges that could result in us reporting losses. Even though these charges may be non-cash items and would not have an immediate impact on Algoma’s liquidity, the fact that Algoma would report charges of this nature could contribute to negative market perceptions of Algoma or its securities. In addition, charges of this nature may cause Algoma to violate net worth or other covenants to which Algoma may be subject as a result of Algoma obtaining debt financing. Accordingly, securityholders could suffer a reduction in the value of their Common shares and Warrants and such securityholders are unlikely to have a remedy for such reduction in value.

Recent SEC guidance required Legato to reconsider the accounting of the Warrants and led Legato to conclude that the Private Warrants be accounted for as derivative liabilities rather than as equity and such requirement resulted in a revision of Legato’s previously issued balance sheet.

On April 12, 2021, the staff of the SEC issued a public statement entitled “Staff Statement on Accounting and Reporting Considerations for Warrants issued by Special Purpose Acquisition Companies (“SPACs”) (the “Statement”). In the Statement, the SEC staff expressed it view that certain terms and conditions common to SPAC warrants may require the warrants to be classified as liabilities on the SPAC’s balance sheet as opposed to equity. Since issuance, all of the Warrants were accounted for as equity within Legato’s balance sheet, and after discussion and evaluation, including with Legato’s independent auditors, Legato concluded that the Private Warrants should be presented as liabilities with subsequent and periodic fair value re-measurement. Therefore, Legato conducted a valuation of the Private Warrants and included in its Form 10-Q for the quarter ended March 31, 2021, a correction of certain line items included in its previously audited balance sheet as of January 22, 2021. Such correction resulted in unanticipated costs and diversion of management resources and may result in potential loss of investor confidence. Although the revision was completed, we cannot guarantee that it will have no further inquiries from the SEC or Nasdaq regarding the re-valuation of the Warrants or matters relating thereto. Any future inquiries from the SEC or Nasdaq as a result of the revision of the Legato historical financial statements will, regardless of the outcome, likely consume a significant amount of our resources.

The grant and future exercise of registration rights may adversely affect the market price of Common Shares.

The Investor Rights Agreement provides that we will, under certain circumstances, agree to file a registration statement as soon as practicable upon a request from certain IRA Parties to register the resale of certain registrable securities under the Securities Act and Canadian securities laws (such request, a “demand registration”). Algoma has also agreed to provide customary “piggyback” registration rights with respect to any valid demand registration request. In addition, we are required to maintain this or another effective registration statement under the Securities Act covering the Securities held by PIPE Investors, and we intend to maintain an effective registration statement for the other outstanding Common Shares (other than the Common Shares issued to Legato public stockholders) as well. See “– A significant portion of our total outstanding Common Shares may be sold into the market in the near future. This could cause the market price of Common Shares and Warrants to drop significantly, even if our business is doing well.”

The registration of these securities will permit the public sale of such securities. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of Common Shares.

The IRS may not agree that Algoma should be treated as a non-U.S. corporation for U.S. federal income tax purposes.

Although Algoma is incorporated and tax resident in Canada, the IRS may assert that it should be treated as a U.S. corporation for U.S. federal income tax purposes pursuant to Section 7874 of the Code. For U.S. federal income tax purposes, a corporation is generally considered a U.S. “domestic” corporation if it is created or organized in or under the laws of the U.S., any state thereof, or the District of Columbia. Because Algoma is not so created or organized (but is instead incorporated only in Canada), it would generally be classified as a foreign corporation (that is, a corporation

 

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other than a U.S. “domestic” corporation) under these rules. Section 7874 of the Code provides an exception under which a corporation created or organized only under foreign law may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes.

As more fully described in the section titled “Certain Material U.S. Federal Income Tax Considerations – U.S. Federal Income Tax Treatment of Algoma – Tax Residence of Algoma for U.S. Federal Income Tax Purposes,” based on the terms of the Merger, the rules for determining share ownership under Section 7874 of the Code and the Treasury regulations promulgated thereunder (the “Section 7874 Regulations”), and certain factual assumptions, Algoma does not currently expect to be treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code as a result of the Merger. However, the application of Section 7874 of the Code is complex, is subject to detailed regulations (the application of which is uncertain in various respects and would be impacted by changes in such U.S. tax laws and regulations with possible retroactive effect), and is subject to certain factual uncertainties. Furthermore, Algoma has not sought and will not seek any rulings from the IRS as to such treatment, and the closing of the Merger was not conditioned upon achieving, or receiving a ruling from any tax authority or opinion from any tax advisor with regard to, any particular tax treatment. Accordingly, there can be no assurance that the IRS will not challenge the status of Algoma as a foreign corporation under Section 7874 of the Code or that such challenge would not be sustained by a court.

If the IRS were to successfully challenge under Section 7874 of the Code Algoma’s status as a foreign corporation for U.S. federal income tax purposes, Algoma and certain Algoma shareholders could be subject to significant adverse tax consequences, including a higher effective corporate income tax rate on Algoma and future withholding taxes on certain Algoma shareholders, depending on the application of any income tax treaty that might apply to reduce such withholding taxes. In particular, holders of Common Shares and/or Warrants would be treated as holders of stock and warrants of a U.S. corporation.

See “Certain Material U.S. Federal Income Tax Considerations – U.S. Federal Income Tax Treatment of Algoma – Tax Residence of Algoma for U.S. Federal Income Tax Purposes” for a more detailed discussion of the application of Section 7874 of the Code to Algoma. Investors should consult their own advisors regarding the application of Section 7874 of the Code to Algoma.

Section 7874 of the Code may limit the ability of Legato to use certain tax attributes following the Merger, increase Algoma’s U.S. affiliates’ U.S. taxable income or have other adverse consequences to Algoma and Algoma’s shareholders.

Following the acquisition of a U.S. corporation by a foreign corporation, Section 7874 of the Code can limit the ability of the acquired U.S. corporation and its U.S. affiliates to use U.S. tax attributes (including net operating losses and certain tax credits) to offset U.S. taxable income resulting from certain transactions, as well as result in certain other adverse tax consequences, even if the acquiring foreign corporation is respected as a foreign corporation for purposes of Section 7874 of the Code. In general, if a foreign corporation acquires, directly or indirectly, substantially all of the properties held directly or indirectly by a U.S. corporation, and after the acquisition the former shareholders of the acquired U.S. corporation hold at least 60% (by either vote or value) but less than 80% (by vote and value) of the shares of the foreign acquiring corporation by reason of holding shares in the acquired U.S. corporation, subject to other requirements, certain adverse tax consequences under Section 7874 of the Code may apply.

If these rules apply to the Merger, Algoma and certain of Algoma’s shareholders may be subject to adverse tax consequences including, but not limited to, restrictions on the use of tax attributes with respect to “inversion gain” recognized over a 10-year period following the transaction, disqualification of dividends paid from preferential “qualified dividend income” rates and the requirement that any U.S. corporation owned by Algoma include as “base erosion payments” that may be subject to a minimum U.S. federal income tax any amounts treated as reductions in gross income paid to certain related foreign persons. Furthermore, certain “disqualified individuals” (including officers and directors of a U.S. corporation) may be subject to an excise tax on certain stock-based compensation held thereby at a rate of 20%.

As more fully described in the section titled “Certain Material U.S. Federal Income Tax Considerations – U.S. Federal Income Tax Treatment of Algoma – Utilization of Legato’s Tax Attributes and Certain Other Adverse Tax Consequences to Algoma and Algoma’s Shareholders,” based on the terms of the Merger, the rules for determining

 

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share ownership under Section 7874 of the Code and the Section 7874 Regulations (as defined above), and certain factual assumptions, Algoma does not currently expect to be subject to these rules under Section 7874 of the Code as a result of the Merger. The above determination, however, is subject to detailed regulations (the application of which is uncertain in various respects and would be impacted by future changes in such U.S. tax laws and regulations, with possible retroactive effect) and is subject to certain factual uncertainties. Furthermore, Algoma has not sought and will not seek any rulings from the IRS as to such treatment, and the closing of the Merger was not conditioned upon achieving, or receiving a ruling from any tax authority or opinion from any tax advisor with regard to, any particular tax treatment. Accordingly, there can be no assurance that the IRS will not challenge whether Algoma is subject to the above rules or that such a challenge would not be sustained by a court.

However, even if Algoma is not subject to the above adverse consequences under Section 7874 of the Code, Algoma may be limited in using its equity to engage in future acquisitions of U.S. corporations over the 36-month period following the Merger. If Algoma were to be treated as acquiring substantially all of the assets of a U.S. corporation within the 36-month period after the Merger, the Section 7874 Regulations would exclude certain shares of Algoma attributable to the Merger for purposes of determining the Section 7874 Percentage (as defined in “Certain Material U.S. Federal Income Tax Considerations – U.S. Federal Income Tax Treatment of Algoma – Tax Residence of Algoma for U.S. Federal Income Tax Purposes”) of that subsequent acquisition, making it more likely that Section 7874 of the Code will apply to such subsequent acquisition.

See “Certain Material U.S. Federal Income Tax Considerations – U.S. Federal Income Tax Treatment of Algoma – Utilization of Legato’s Tax Attributes and Certain Other Adverse Tax Consequences to Algoma and Algoma’s Shareholders” for a more detailed discussion of the application of Section 7874 of the Code to Algoma. Investors in Algoma should consult their own advisors regarding the application of Section 7874 of the Code to Algoma.

Risks Related to Ownership of Common Shares and Warrants

We may issue additional Common Shares or other securities without shareholder approval, which would dilute existing ownership interests and may depress the market price of Common Shares.

We may issue additional Common Shares or other equity securities of equal or senior rank in the future in connection with, among other things, our equity incentive plan, without shareholder approval, in a number of circumstances. Our issuance of additional Common Shares or other equity securities of equal or senior rank would have the following effects:

 

   

our existing shareholders’ proportionate ownership interest in Algoma may decrease;

 

   

the amount of cash available per share, including for payment of dividends in the future, may decrease;

 

   

the relative voting strength of each previously outstanding Common Share may be diminished; and

 

   

the market price of Common Shares may decline.

The price of our Common Shares may be volatile and may decline regardless of our operating performance.

The market price of the Common Shares may fluctuate significantly in response to numerous factors and may continue to fluctuate for these and other reasons, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our revenue and results of operations;

 

   

the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

   

failure of securities analysts to maintain coverage of Algoma, changes in financial estimates or ratings by any securities analysts who follow Algoma or its failure to meet these estimates or the expectations of investors;

 

   

announcements by Algoma or its competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, results of operations or capital commitments;

 

   

changes in operating performance and stock market valuations of other steel companies;

 

   

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

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trading volume of the Common Shares;

 

   

the inclusion, exclusion or removal of the Common Shares from any indices;

 

   

changes in our board of directors or management;

 

   

transactions in the Common Shares by directors, officers, affiliates and other major investors;

 

   

lawsuits threatened or filed against us;

 

   

changes in laws or regulations applicable to our business;

 

   

changes in our capital structure, such as future issuances of debt or equity securities;

 

   

short sales, hedging and other derivative transactions involving our capital stock;

 

   

general economic conditions in the United States;

 

   

pandemics or other public health crises, including, but not limited to, the COVID-19 pandemic;

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to these events; and

 

   

the other factors described in this “Risk Factors” section.

The stock market has recently experienced extreme price and volume fluctuations. The market prices of securities of companies have experienced fluctuations that often have been unrelated or disproportionate to their operating results. In the past, stockholders have sometimes instituted securities class action litigation against companies following periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert our management’s attention and resources, and harm our business, financial condition, and results of operations.

An active, liquid trading market for Common Shares and Warrants may not develop, which may limit your ability to sell Common Shares and Warrants.

Although the Common Shares and Warrants are currently listed on Nasdaq and the TSX, an active, liquid trading market for Common Shares and Warrants may never develop or be sustained. A public trading market having the desirable characteristics of depth, liquidity and orderliness depends upon the existence of willing buyers and sellers at any given time, such existence being dependent upon the individual decisions of buyers and sellers over which neither we nor any market maker has control. The failure of an active and liquid trading market to develop and continue would likely have a material adverse effect on the value of Common Shares and Warrants. The market price of Common Shares may decline, and you may not be able to sell your Common Shares at or above the price at which you purchased them, or at all. An inactive market may also impair our ability to raise capital to continue to fund operations by issuing Common Shares or Warrants.

A significant portion of our total outstanding Common Shares may be sold into the market in the near future. This could cause the market price of Common Shares and Warrants to drop significantly, even if our business is doing well.

Sales of a substantial number of Common Shares and Warrants in the public market could occur at any time. These sales, or the perception in the market that the holders of a large number of holders intend to sell Common Shares or Warrants, could reduce the market price of Common Shares or Warrants. Following the consummation of the Merger, an aggregate of 75,000,403 Common Shares issued to Existing Algoma Investors, prior to the issuance of any additional Common Shares pursuant to the Earnout Rights, are subject to transfer restrictions. Transfer restrictions also apply to the 6,379,875 Common Shares held by the Founders and the 262,254 Warrants and underlying Common Shares held by Eric S. Rosenfeld, David Sgro and Brian Pratt. All of these Common Shares and Warrants will, however, be able to be resold after the expiration of the lock-up period or its waiver (which may occur with the written consent of Algoma and persons holding a majority of the shares subject to the lock-up), as well as pursuant to customary exceptions thereto. Moreover, certain holders of Common Shares (including Common Shares underlying Warrants) will have certain registration rights that could require us to file registration statements in connection with sales of Common Shares and Warrants by such holders. Such sales by such holders could be significant. As restrictions on resale end, the market price of Common Shares and Warrants could decline if the holders of currently restricted Common Shares or Warrants sell them or are perceived by the market as intending to sell them.

 

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USE OF PROCEEDS

All of the Common Shares offered by the Selling Securityholders pursuant to this prospectus will be sold by the Selling Securityholders for their respective amounts. We will not receive any of the proceeds from these sales.

We would receive up to an aggregate of approximately $278 million from the exercise of the Warrants, assuming the exercise in full of all such Warrants for cash. We expect to use the net proceeds from the exercise of the warrants to partially fund our proposed transformation to EAF steelmaking and/or for general corporate purposes, which may include acquisitions and other business opportunities and the repayment of indebtedness. Our management will have broad discretion over the use of proceeds from the exercise of the warrants.

There is no assurance that the holders of the Warrants will elect to exercise any or all of the Warrants. To the extent that any of the Warrants are exercised on a “cashless basis,” as may be permitted in certain circumstances, the amount of cash we would receive from the exercise of the Warrants will decrease.

MARKET PRICE OF OUR SECURITIES AND DIVIDENDS

Our Common Shares and Warrants began trading on Nasdaq under the symbols “ASTL” and “ASTLW”, respectively, and on the TSX under the symbols “ASTL” and “ASTL.WT,” respectively, on October 20, 2021. On November 4, 2021, the last reported sales prices of the Common Shares on Nasdaq and the TSX were $11.29 and C$14.22, respectively, and the last reported sales prices of the Warrants were $3.12 and C$3.75, respectively. As of October 19, there were approximately 200 holders of record of our Common Shares and approximately 25 holders of record of our Warrants. Such numbers do not include beneficial owners holding our securities through nominee names.

Dividends

Algoma has not paid any dividends to its shareholders. Algoma’s board of directors will consider whether or not to institute a dividend policy in the future. The determination to pay dividends will depend on many factors, including, among others, Algoma’s financial condition, current and anticipated cash requirements, contractual restrictions and financing agreement covenants, solvency tests imposed by applicable corporate law and other factors that Algoma’s board of directors may deem relevant.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION

The following presents unaudited pro forma condensed combined consolidated financial information of Algoma and its consolidated subsidiaries after giving effect to the Merger. The following unaudited pro forma condensed combined consolidated financial information has been prepared in accordance with Article 11 of Regulation S-X.

On May 24, 2021, Algoma entered into the Merger Agreement, by and among Algoma, Merger Sub and Legato. Pursuant to the Merger Agreement, Merger Sub merged with and into Legato, with Legato surviving the Merger. On October 19, 2021, the Merger was consummated with Legato becoming a wholly owned subsidiary of Algoma and the stockholders of Legato becoming shareholders of Algoma. The Common Shares trade on Nasdaq and the TSX under the symbol “ASTL” and the Warrants trade on Nasdaq and the TSX under the symbols “ASTLW” and “ASTL.WT”, respectively.

Pursuant to the Merger Agreement:

(i)    Algoma effected the Stock Split, 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 (as defined in the Merger Agreement), with such Common Shares subsequently distributed in the Parent Distribution; and

(ii)    prior to the Effective Time, each outstanding LTIP Award that had vested and that was held by a holder who executed an exchange agreement and joinder to the Lock-up Agreement was exchanged for Replacement LTIP Awards, such that following the Stock Split and the LTIP Exchange, there were approximately 75.0 million Common Shares outstanding on a fully-diluted basis.

As a result of the Merger:

 

  (i)

each outstanding Legato Unit was separated into the one share of Legato Common Stock and one Legato Warrant;

 

  (ii)

at the Effective Time each outstanding share of Legato Common Stock was converted into and exchanged for the right to receive one newly issued Common Share; and

 

  (iii)

each outstanding Legato Warrant was converted into an equal number of Warrants, with each warrant exercisable for one Common Share for $11.50 per share, subject to adjustment, with the exercise period beginning on November 18, 2021, the date that is 30 days following Closing.

The unaudited pro forma condensed combined consolidated balance sheet as of June 30, 2021 assumes that the Merger occurred on June 30, 2021.

The unaudited pro forma condensed combined consolidated statements of net loss for the twelve months ended March 31, 2021 and the unaudited pro forma condensed combined consolidated statements of net loss for the three months ended June 30, 2021 give pro forma effect to the Merger as if it had occurred on April 1, 2020.

The unaudited pro forma condensed combined consolidated financial information does not purport to represent, and is not necessarily indicative of, what the actual financial condition or results of operations of the combined company would have been had the Merger taken place as at the dates indicated, nor is it indicative of the financial condition or results of operations of the combined company as of any future date.

The unaudited pro forma condensed combined consolidated financial information has been prepared using and should be read in conjunction with:

 

   

Algoma’s audited consolidated financial statements as of and for the year ended, March 31, 2021 and unaudited condensed interim financial statements and related notes as of and for the three months ended, June 30, 2021, included elsewhere in this prospectus; and

 

   

Legato’s audited financial statements as of and for the period ended December 31, 2020 and unaudited interim condensed financial statements and related notes as of, and for the six months ended, June 30, 2021, included elsewhere in this prospectus.

 

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The historical financial information of Legato has been adjusted to give effect to the differences between U.S. GAAP and IFRS for the purposes of the condensed combined consolidated unaudited pro forma financial information. No adjustments were required to convert the Legato financial statements from U.S. GAAP to IFRS for purposes of the condensed combined consolidated unaudited pro forma financial information, except to reclassify Legato Common Stock subject to redemption as non-current liabilities under IFRS (the Legato Common Stock was presented as mezzanine equity under U.S. GAAP). The adjustments presented in the unaudited pro forma condensed combined consolidated financial information have been identified and presented to provide relevant information necessary for an understanding of the combined company after giving effect to the Merger.

The pro forma adjustments reflect the adjustments to the historical information of the Company and Legato necessary to depict the accounting for the Merger under IFRS. Algoma’s management has made significant estimates and assumptions in its determination of the pro forma adjustments. As the unaudited pro forma condensed combined consolidated financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented.

The Merger was accounted for as an acquisition of assets (in exchange for shares) as the underlying transactions did not result in a business combination in accordance with IFRS 3, Business Combinations (“IFRS 3”) as Legato does not constitute a business as defined under IFRS 3. Consequently, the Merger was accounted for under IFRS 2, Share-Based Payment. In the accompanying pro forma information, the net assets of Legato were recognized at its fair value, which was approximated by its carrying value, and no goodwill or other intangible assets were recorded. All direct costs of the Merger will be expensed.

The Company has been determined to be the accounting acquirer based on evaluation of the following facts and circumstances:

 

   

Algoma Investors prior to the Merger had, immediately following the Merger, the voting interest in the combined entity relative to other shareholders, including following the redemptions made by Legato stockholders and will have the largest ownership interest and majority voting interest in the combined entity with approximately 73.6% assuming that all of the Common Shares issuable pursuant to the Earnout Rights are issued.

 

   

The combined company’s board of directors will consist of ten directors, six of whom were appointed by Algoma and three of whom were appointed by Legato.

 

   

The executive officers of Algoma Steel Inc., as of June 30, 2021, became or are expected to become the executive officers of Algoma following the Merger and certain of the directors of Algoma Steel Inc., as of June 30, 2021, became the directors of Algoma following the Merger.

 

   

Algoma is the larger entity, in terms of both revenues and total assets.

Upon consummation of the Merger and the closing of the PIPE Financing, the most significant changes in Algoma’s future reported financial position and results of operations was an estimated increase in cash and cash equivalents (as compared to Algoma’s balance sheet as at June 30, 2021) of approximately C$388.2 million ($313.3 million), including C$124 million ($100 million) in gross proceeds from the PIPE Financing and an estimated increase in other financial liabilities of C$424.3 million ($342.2), including C$433.2 million ($349.4 million) related to Earnout Rights. Total direct and incremental transaction costs of Legato and Algoma are estimated at approximately C$28.4 million ($22.9 million), a portion of which will be treated as a reduction of the cash proceeds and deducted from Algoma’s share capital and a portion of which will be treated as an expense on Algoma’s statement of operations.

As a consequence of the Merger, Algoma became the successor to an SEC-registered and Nasdaq-listed company, which will require Algoma to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

Upon consummation of the Merger, the aggregate share consideration issued by the Company in the Merger is C$376.9 million ($304.0 million), consisting of 30.3 million newly issued Common Shares valued at $10.00 per share and 24,179,000 Warrants valued at C$1.2 million ($0.9 million). The Merger is accounted for under IFRS 2, Share-

 

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Based Payment. Consequently, the difference between the fair value of the Common Shares issued to former Legato stockholders and the fair value of the net assets of Legato acquired in connection with the Merger is accounted for as a listing expense. In this case, the listing expenses are significant due to the fact that the fair value of the Common Shares being issued to the Founders is substantially greater than the amount the Founders paid to acquire their shares.

The following represents the consideration at Closing:

 

(in thousands of C$)    Final
Redemption
 

Common Share issuance to Legato Public Stockholders

   C$ 292,276  

Common Share issuance to Founders & EBC

     83,464  

Warrants

     1,178  
  

 

 

 

Share consideration – at Closing

   C$ 376,918  
  

 

 

 

Listing Expense(1)

   C$ 84,517  
  

 

 

 

 

(1)

The Merger is accounted for under IFRS 2, Share-Based Payment. Consequently, the difference between the fair value of the Common Shares issued to Legato stockholders and the fair value of the net assets of Legato acquired in connection with the Merger is accounted for as a listing expense.

The following summarizes the pro forma Common Shares outstanding prior to the issuance of any additional Common Shares pursuant to the Earnout Rights:

 

     Final
Redemption
 

Legato Public Stockholders

     23,574,284  

Founders & EBC

     6,732,036  

PIPE Investors(1)

     10,000,000  

Existing Algoma Investors

     75,000,000  
  

 

 

 

Pro Forma Shares Outstanding(2)

     115,306,320  
  

 

 

 

 

(1)

Concurrent with the Merger, the Company issued 10.0 million shares at $10.00 per share to PIPE Investors for total cash consideration of $100.0 million.

 

(2)

Pro Forma Shares Outstanding does not give effects to warrants.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET – AS OF JUNE 30, 2021

 

                Final Redemption  
(in millions of C$)   Algoma
Steel
Group Inc.
    Legato Merger
Corp.
    Transaction
Accounting
Adjustments
    Pro Forma
Balance
Sheet
 

ASSETS

       

Current

       

Cash

    21.9       0.3       292.3 (b)      410.1  
        124.0 (d)   
        (28.4 )(e)   

Restricted Cash

    3.9               3.9  

Taxes receivable

                   

Accounts receivable, net

    333.2               333.2  

Inventories, net

    469.5               469.5  

Prepaid expenses and deposits

    72.2       0.1         72.3  

Margin payments

    95.8               95.8  

Other assets

    3.1               3.1  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    999.6       0.4       387.9       1,387.9  
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-current

       

Property, plant and equipment, net

    687.4               687.4  

Cash and marketable securities held in Trust Account

          292.3       (292.3 )(b)       

Intangible assets, net

    1.4               1.4  

Parent company promissory note receivable

    2.1               2.1  

Other assets

    6.7               6.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

    697.6       292.3       (292.3     697.6  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    1,697.2       292.7       95.6       2,085.5  
 

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

       

Current

       

Bank indebtedness

                   

Accounts payable and accrued liabilities

    194.1               194.1  

Taxes payable and accrued taxes

    19.9               19.9  

Current portion of long-term debt

    14.0               14.0  

Current portion of governmental loans

    2.5               2.5  

Current portion of environmental liabilities

    4.2               4.2  

Other financial liabilities

                433.2 (f)      424.3  
        (8.9 )(g)   

Derivative financial instruments

    97.7               97.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    332.4             424.3       756.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-current liabilities

       

Long-term debt

    429.2               429.2  

Warrant liability

          1.5         1.5  

Long-term governmental loans

    85.9               85.9  

Accrued pension liability

    143.8               143.8  

Accrued other post-employment benefit obligation

    305.3               305.3  

Other long-term liabilities

    2.5               2.5  

Environmental liabilities

    35.8               35.8  

Common stock subject to possible redemption

          285.0       (285.0 )(c)       
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

    1,002.5       286.5       (285.0     1,004.0  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,334.9       286.5       139.9       1,760.7  
 

 

 

   

 

 

   

 

 

   

 

 

 

Common stock subject to possible redemption

               

Shareholders’ equity

       

Common stock subject to possible redemption

                   

Historical – Common Shares: no par value – unlimited shares authorized and 100,000,001 shares issued and outstanding as of June 30, 2021

    409.5             375.7 (c)   
        124.0 (d)   

Pro Forma – Common Shares: no par value – unlimited shares authorized

            (1.9 )(e)      907.3  

Historical – Shares of Legato Common Stock: $0.0001 par value – 60,000,000 shares authorized and 7,195,458 shares issued and outstanding (excluding 23,111,578 shares subject to possible redemption) as of June 30, 2021

               

Accumulated other comprehensive income

    (6.9             (6.9

Contributed surplus

    5.3       7.4       (7.4 )(c)      31.7  
        26.4 (g)   

Retained Earnings (Accumulated deficit)

      (1.2     1.2 (c)       

Deficit

    (45.6           (84.5 )(c)      (607.4
        (26.5 )(e)   
        (433.2 )(f)   
        (17.5 )(g)   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    362.3       6.2       (44.7     324.8  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

    1,697.2       292.7       95.6       2,085.5  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF NET LOSS – FOR THE TWELVE MONTHS ENDED MARCH 31, 2021

 

                 Final Redemption  
(in millions of C$)    Algoma Steel
Group Inc.
    Legato Merger
Corp.
    Transaction
Accounting
Adjustments
         Pro Forma
Income
Statement
 

Revenue

     1,794.9                  1,794.9  

Operating expenses

           

Cost of sales

     1,637.7                  1,637.7  

Administrative and selling expenses

     72.4       0.3       25.8     1(c)      98.5  
  

 

 

   

 

 

   

 

 

      

 

 

 

Profit (loss) from operations

     84.8       (0.3     (25.8        58.7  
  

 

 

   

 

 

   

 

 

      

 

 

 

Other (income) and expenses

           

Finance income

     (1.1            (1.1

Investment income on Trust Account

           (0.0          (0.0

Change in fair value of warrants

           (0.6          (0.6

Finance costs

     68.5       0.0            68.5  

Interest on pension and other post-employment benefit obligations

     17.0                  17.0  

Foreign exchange loss (gain)

     76.5                  76.5  

Transaction costs

                 31.3     1(a)      119.9  
         88.6     1(b)   
  

 

 

   

 

 

   

 

 

      

 

 

 

(Loss) income before income taxes

     (76.1     0.3       (145.7        (221.5
  

 

 

   

 

 

   

 

 

      

 

 

 

Income tax recovery

                           
  

 

 

   

 

 

   

 

 

      

 

 

 

Net (loss) income

     (76.1     0.3       (145.7        (221.5
  

 

 

   

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding of common stock – basic

     100,000,001       5,024,345            115,306,320  

Weighted average shares outstanding of common stock – diluted

     100,000,001       5,024,345            115,306,320  

Basic net loss per share

   $ (0.76   $ (0.06        $ (1.92

Diluted net loss per share

   $ (0.76   $ (0.06        $ (1.92

 

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UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF NET INCOME (LOSS) – FOR THE THREE MONTHS ENDED JUNE 30, 2021

 

                  Final Redemption  
(in millions of C$)    Algoma Steel
Group Inc.
     Legato Merger
Corp.
    Transaction
Accounting
Adjustments
         Pro Forma
Income
Statement
 

Revenue

     789.1                   789.1  

Operating expenses

            

Cost of sales

     510.2                   510.2  

Administrative and selling expenses

     26.7        0.4       (8.5   2(b)      18.6  
  

 

 

    

 

 

   

 

 

      

 

 

 

Profit (loss) from operations

     252.2        (0.4     8.5          260.3  
  

 

 

    

 

 

   

 

 

      

 

 

 

Other (income) and expenses

            

Finance income

                        

Investment income on Trust Account

                        

Change in fair value of warrants

                        

Finance costs

     15.1        1.1            16.2  

Interest on pension and other post-employment benefit obligations

     2.9                   2.9  

Foreign exchange loss (gain)

     10.0                   10.0  

Transaction costs

     2.9              (2.9   2(a)       
  

 

 

    

 

 

   

 

 

      

 

 

 

(Loss) income before income taxes

     221.3        (1.4     11.4          231.3  
  

 

 

    

 

 

   

 

 

      

 

 

 

Income tax recovery

     17.7                       17.7  
  

 

 

    

 

 

   

 

 

      

 

 

 

Net (loss) income

     203.6        (1.4     11.4          213.6  
  

 

 

    

 

 

   

 

 

      

 

 

 

Weighted average shares outstanding of common stock – basic

     100,000,001        6,732,036            115,306,320  

Weighted average shares outstanding of common stock – diluted

     100,000,001        6,732,036            115,306,320  

Basic net income (loss) per share

   $ 2.04      $ (0.21        $ 1.85  

Diluted net income (loss) per share

   $ 2.04      $ (0.21        $ 1.85  

 

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Table of Contents

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION

1. Basis of Presentation

The unaudited pro forma condensed combined consolidated balance sheet as of June 30, 2021 assumes that the Merger occurred on June 30, 2021. The unaudited pro forma condensed combined consolidated statement of net loss have been prepared as if the Merger occurred on April 1, 2020.

The pro forma adjustments reflecting the consummation of the Merger are based on certain currently available information and certain assumptions and methodologies that Algoma believes are reasonable under the circumstances. The unaudited condensed pro forma adjustments, which are described in the accompanying notes, may be revised as additional information becomes available and is evaluated. Therefore, it is likely that the actual adjustments will differ from the pro forma adjustments and it is possible the differences may be material. Algoma believes that its assumptions and methodologies provide a reasonable basis for presenting all of the significant effects of the consummation of the Merger based on information available to management at the time and that the pro forma adjustments give appropriate effect to those assumptions and are properly applied in the unaudited pro forma condensed combined consolidated financial information.

The unaudited pro forma condensed combined consolidated financial information is not necessarily indicative of what the actual results of operations and financial position would have been had the Merger taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of the combined company. They should be read in conjunction with the financial statements and notes thereto of each of Legato and Algoma included elsewhere in this prospectus.

2. Adjustments to Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined consolidated financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings or cost savings that may be associated with the Merger.

The historical financial information of Legato has been adjusted to give effect to the differences between U.S. GAAP and IFRS as issued by the IASB for the purposes of the combined unaudited pro forma financial information. No adjustments were required to convert the Legato financial statements from U.S. GAAP to IFRS for purposes of the combined unaudited pro forma financial information, except to classify Legato Common Stock subject to redemption as non-current liabilities under IFRS. The adjustments presented in the unaudited pro forma combined financial information have been identified and presented to provide relevant information necessary for an understanding of the combined company after giving effect to the Merger. Additionally, the historical financial information of Legato was presented in US dollars. The balance sheet as at June 30, 2021 was translated at a spot exchange rate of C$1.239 = $1.00. The condensed statements of operations for the twelve months ended March 31, 2021 were translated at the average exchange rate of C$1.306 = $1.00, and the condensed statements of operations for the three months ended June 30, 2021 were translated at the average exchange rate of C$1.2282 = $1.00.

 

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Table of Contents

Legato Merger Corp. Statement of Net Income for the period from June 26, 2020 through March 31, 2021

 

     For the
period from
June 26, 2020
through
December 31,
2020 (US$)
    Three
months
ended
March 31,
2021
(US$)
    Foreign
Exchange Rate
     in C$  
           (in millions)  

General and administrative costs

     0.0       0.2       1.31        0.3  

Financing cost – derivative warrant liabilities

           0.0       1.31        0.0  
  

 

 

   

 

 

      

 

 

 

Loss from operations

     (0.0     (0.2        (0.3
  

 

 

   

 

 

      

 

 

 

Other (income):

         

Change in fair value of warrants

       (0.4     1.31        (0.6

Investment income on Trust Account

       (0.0     1.31        (0.0
  

 

 

   

 

 

      

 

 

 

Income before income tax provision

     (0.0     0.2          0.3  
  

 

 

   

 

 

      

 

 

 

Provision for income taxes

                 1.31         
  

 

 

   

 

 

      

 

 

 

Net income

     (0.0     0.2          0.3  
  

 

 

   

 

 

      

 

 

 

 

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Table of Contents

Legato Merger Corp. Statement of Net Income for the period from April 1, 2021 through June 30, 2021

 

     For the
period from
April 1, 2021
through
June 30,
2021 (US$)
    Foreign
Exchange Rate
     in C$  
     (in millions)  

General and administrative costs

     0.3       1.23        0.4  

Financing cost – derivative warrant liabilities

     0.9       1.23        1.1  
  

 

 

      

 

 

 

Loss from operations

     (1.2        (1.4
  

 

 

      

 

 

 

Other (income):

       

Change in fair value of warrants

       1.23         

Investment income on Trust Account

       1.23         
  

 

 

      

 

 

 

Income before income tax provision

     (1.2        (1.4
  

 

 

      

 

 

 

Provision for income taxes

           1.23         
  

 

 

      

 

 

 

Net loss

     (1.2        (1.4
  

 

 

      

 

 

 

 

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Table of Contents

Legato Merger Corp Balance Sheet as at June 30, 2021

 

     US$     Foreign
Exchange Rate
     C$     Adjustments for
US GAAP to IFRS
Conversion
          Legato Merger Corp
Balance Sheet (in C$
under IFRS)
 
     (in millions)                    

ASSETS

             

Current

             

Cash

     0.2       1.24        0.3           0.3  

Prepaid expenses and deposits

     0.1       1.24        0.1           0.1  
  

 

 

   

 

 

    

 

 

       

 

 

 

Total current assets

     0.3          0.4           0.4  
  

 

 

      

 

 

       

 

 

 

Non-current

             

Cash and marketable securities held in Trust Account

     235.8       1.24        292.3           292.3  

Total non-current assets

     235.8          292.3           292.3  
  

 

 

      

 

 

       

 

 

 

Total assets

     236.1          292.7           292.7  
  

 

 

      

 

 

       

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current

             

Taxes payable and accrued taxes

           1.24        0.0           0.0  
  

 

 

   

 

 

    

 

 

       

 

 

 

Total current liabilities

              0.0           0.0  
  

 

 

      

 

 

       

 

 

 

Non-current liabilities

             

Warrant liability

     1.2       1.24        1.5           1.5  

Common stock subject to possible redemption

              0.0       285.0       (a     285.0  
  

 

 

   

 

 

    

 

 

       

 

 

 

Total non-current liabilities

     1.2          1.5           286.5  
  

 

 

      

 

 

       

 

 

 

Total liabilities

     1.2          1.5           286.5  

Common stock subject to possible redemption

     229.9       1.24        285.0       (285.0     (a      

Stockholders’ equity

             

Additional paid-in capital

     6.0       1.24        7.4           7.4  

Retained Earnings (Accumulated deficit)

     (1.0     1.24        (1.2         (1.2

Total stockholders’ equity

     5.0          6.2           6.2  
  

 

 

   

 

 

    

 

 

       

 

 

 

Total liabilities and stockholders’ equity

     236.1          292.7           292.7  
  

 

 

   

 

 

    

 

 

       

 

 

 

Algoma and Legato did not have any intercompany transactions, accordingly, no pro forma adjustments were required to eliminate activities between the companies.

The pro forma basic and diluted loss per share amounts presented in the unaudited pro forma condensed combined consolidated statement of net loss are based upon the number of Common Shares outstanding, assuming the Merger occurred on April 1, 2020.

Adjustments to Unaudited Pro Forma Condensed Consolidated Combined Balance Sheet as of June 30, 2021

The adjustments included in the unaudited pro forma condensed combined consolidated balance sheet as of June 30, 2021 are as follows:

 

  a.

Legato’s Common Stock subject to possible redemption balance of C$285.0 million ($229.9 million) was classified as a temporary equity under U.S. GAAP and should be classified as a liability under IFRS because the right to redeem was at the option of the holder.

 

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Table of Contents
  b.

To reclassify cash and marketable securities held in the Trust Account of C$292.3 million ($235.8 million) that becomes available in connection with the Merger.

 

  c.

To record the fair value of the Common Shares issued to Legato stockholders in connection with the Merger in the amount of C$375.7 million ($303.0 million). Legato Common Stock previously subjected to possible redemption will become part of the permanent share capital of the combined entity, resulting in an adjustment of C$285.0 million ($229.9 million) to Legato Common Stock subject to possible redemption. The difference between the fair value of the Common Shares issued to Legato stockholders and the fair value of the net assets of Legato acquired in connection with the Merger is a listing expense in the amount of C$84.5 million ($68.2 million).

 

  d.

To record the C$124.0 million ($100.0 million) investment pursuant to the PIPE Subscription Agreement.

 

  e.

To reflect payment of the estimated C$28.4 million ($22.9 million) of non-recurring Merger-related expenses. Of those expenses, C$1.9 million ($1.5 million) was related to the issuance of Common Shares and was reflected as a reduction of share capital.

 

  f.

To record the derivative liability related to the Earnout Rights granted to the existing shareholders of Algoma in the amount of C$433.2 million ($349.4 million) pursuant to First Earnout Event, Second Earnout Event, Third Earnout Event and Fourth Earnout Event. Algoma currently expects that the full amount of the earnout will be awarded, however, has not reflected any revaluations of the liability that may occur prior to its settlement in the pro forma condensed combined consolidated financial information as such amounts cannot be estimated.

The fair value of the financial liability has been estimated using the fair value of the shares expected to be issued, discounted at the weighted-average cost of capital of Algoma as at June 30, 2021. A C$1.24 ($1.00) increase or decrease in the share value will increase or decrease the liability by approximately C$43.3 million ($34.9 million).

 

  g.

To recognize the impact on the fair value measurement of the rights issued to eligible management shareholders in exchange for vested awards granted under the Long-Term Incentive Plan adopted by Algoma Steel Holdings Inc. effective as of May 13, 2021, and the cancellation of unvested awards as a result of the Merger, in the amount of C$17.5 million ($14.1 million).

Adjustments to Unaudited Pro Forma Condensed Combined Consolidated Statement of Net Loss for the twelve months ended March 31, 2021 and for the three months ended June 30, 2021

The unaudited pro forma condensed combined consolidated statement of net loss for the twelve months ended March 31, 2021 and the unaudited pro forma condensed combined consolidated statement of net loss for the three months ended June 30, 2021 give effect to the Merger as if it had been completed on April 1, 2020.

 

  (1)

The pro forma adjustments included in the unaudited pro forma condensed combined consolidated statement of net loss for the twelve months ended March 31, 2021 are as follows:

 

  a.

To reflect payment of the estimated C$31.3 million ($26.1 million) of non-recurring Merger-related expenses. Of those expenses C$1.9 million ($1.5 million) was related to the issuance of Common Shares and was reflected as a reduction of share capital.

 

  b.

To record the listing expense resulting from the difference between the fair value of the Common Shares issued to Legato stockholders and the fair value of the net assets of Legato acquired in connection with the Merger in the amount of C$88.6 million ($67.0 million).

 

  c.

To recognize the impact on the fair value measurement of the rights issued to eligible management shareholders in exchange for vested awards granted under the long-term incentive plan adopted by Algoma Steel Holdings Inc. effective as of May 13, 2021, and the cancellation of unvested awards as a result of the Merger, in the amount of C$25.8 million ($19.5 million).

 

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Table of Contents
  (2)

The pro forma adjustments included in the unaudited pro forma condensed combined consolidated statement of net loss for the three months ended June 30, 2021 are as follows:

 

  a.

To reverse non-recurring Merger-related expenses accrued in the current period of C$2.9 million ($2.2 million) that have already been reflected in pro forma adjustments in the unaudited pro forma condensed combined consolidated statement of net loss for the twelve months ended March 31, 2021.

 

  b.

To reverse the share-based payment expense of C$8.5 million ($6.4 million) recognized in the current period for the LTIP adopted by Algoma Steel Holdings Inc. effective as of May 13, 2021. The adjustment for the fair value measurement of the rights issued to eligible management shareholders in exchange for vested awards, and the cancellation of unvested awards as a result of the Merger was reflected as a pro forma adjustment in the unaudited pro forma condensed combined consolidated statement of net loss for the twelve months ended March 31, 2021.

3. Income (Loss) per Share

Represents the net earnings per share calculated using the weighted average of Common Shares and the issuance of additional Common Shares in connection with the Merger, assuming the Common Shares were outstanding since April 1, 2020. As the Merger is being reflected as if it had occurred at the beginning of the period presented, the calculation of weighted average Common Shares outstanding for basic and diluted net loss per ordinary share assumes that the Common Shares issuable in connection with the Merger have been outstanding for the entire period presented.

The unaudited pro forma condensed combined consolidated financial information has been prepared assuming that it is prior to the issuance of any additional Common Shares pursuant to the Earnout Rights, for the three months ended June 30, 2021 and the twelve months ended March 31, 2021:

 

As of and for the three month period ended June 30, 2021

   Legato     Algoma      Algoma
Post-Stock Split
     Final
Redemption
 

Book Value per Share:

          

Total shareholders’ equity (deficit)

   $ 6,200,000     $ 362,300,000      $ 362,300,000      $ 324,778,877  

Number of Outstanding Shares

     7,319,888       100,000,001        75,000,000        115,306,320  
  

 

 

   

 

 

    

 

 

    

 

 

 

Book Value per Share

   $ 0.85     $ 3.62      $ 4.83      $ 2.82  
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding, basic and diluted (anti-dilutive for loss position):

          

Net loss per share – basic and diluted (anti-dilutive for loss position)

          

Net income (loss)

   $ 1,444,363     $ 203,600,000      $ 203,600,000      $ 213,555,637  

Total outstanding shares

     6,732,036       100,000,001        75,000,000        115,306,320  
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding and net loss per share

   $ (0.21   $ 2.04      $ 2.71      $ 1.85  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

As of and for the year ended March 31, 2021

   Legato      Algoma     Algoma
Post-Stock Split
    Final
Redemption
 

Book Value per Share:

         

Total shareholders’ equity (deficit)

   $ 6,300,000      $ 173,800,000     $ 173,800,000     $ 140,800,000  

Number of Outstanding Shares

     7,195,458        100,000,001       75,000,000       115,306,320  
  

 

 

    

 

 

   

 

 

   

 

 

 

Book Value per Share

   $ 0.88      $ 1.74     $ 2.32     $ 1.22  
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted (anti-dilutive for loss position):

         

Net loss per share – basic and diluted (anti-dilutive for loss position)

         

Net income (loss)

   $ 300,000      $ (76,100,000   $ (76,100,000   $ (221,500,000

Total outstanding shares

     5,024,345        100,000,001       75,000,000       115,306,320  
  

 

 

    

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding and net loss per share

   $ 0.06      $ (0.76   $ (1.01   $ (1.92
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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As a result of pro forma net loss, the earnings per share amounts exclude the dilutive impact from the 37.5 million Earnout Rights granted to existing Algoma shareholders as part of the Merger Agreement, and 24,179,000 Common Shares issuable to former Legato stockholders upon conversion of warrants. For the three month period ended June 30, 2021, when there is pro forma net income, the earnings per share amounts also exclude the dilutive impact of the Earnout Rights because such rights are issuable pursuant to a contingent event that has not yet occurred, as well as the Common Shares issuable to former Legato stockholders upon conversion of warrants as they are anti-dilutive.

 

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BUSINESS

Unless the context otherwise requires, all references in this section to “Algoma,” “the Company,” “we,” “us,” or “our” refer to Algoma Steel Group Inc. and its subsidiaries prior to the consummation of the Merger.

Corporate Structure

The following organization chart indicates the intercorporate relationships of the Company and its material subsidiaries, together with the jurisdiction of formation, incorporation or continuance of each entity:

 

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Overview

Algoma, a corporation organized under the laws of the Province of British Columbia, is a fully integrated steel producer of hot and cold rolled steel products including sheet and plate. With a current production capacity of an estimated 2.8 million tons per year, our size and diverse capabilities enable us to deliver responsive, customer-driven product solutions straight from the ladle to direct applications in the automotive, construction, energy, defense, and manufacturing sectors.

We manufacture a broad range of high-quality semi-finished and finished flat steel sheet and plate products. In 1995, approximately $450 million was invested in the construction of our Direct Strip Production Complex (“DSPC”), one of the world’s first hot strip mills with integrated continuous casting and our cornerstone asset. In addition to the DSPC, our facilities include two blast furnaces, Blast Furnace No. 6 and Blast Furnace No. 7, of which Blast Furnace No. 7 is currently operating. Our discreet 106 inch hot strip and 166 inch plate rolling mills provide us with the flexibility to adjust product mix between our many sheet and plate products to take advantage of changes in market demand and pricing, allowing us to optimize our margins. Our idle blast furnace, Blast Furnace No. 6, provides redundancy and incremental flexibility to our operating platform, allowing for the management of any future re-lines for Blast Furnace No. 7, and could quickly add cost effective capacity with limited additional capital outlays. We believe a restart of Blast Furnace No. 6 could be achieved within approximately six months for an estimated

 

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C$60 million investment, including approximately C$18 million required to reduce casthouse emissions in Blast Furnace No. 6.

Our flat/sheet steel products include a wide variety of widths, gauges and grades, and are available unprocessed and with value-added temper processing for HRC, annealed and full hard cold-rolled coil (“CRC”), hot-rolled pickled and oiled products, floor plate and cut-to-length products. Primary end-users of our sheet products include service centers and automotive, manufacturing, construction, and tubular industries. Sheet steel products have represented approximately 89% of our total steel shipment volumes, on average, in the three month period ended June 30, 2021 and approximately 85% of our total steel shipment volumes, on average, in our fiscal year ended March 31, 2021.

Our plate steel products consist of various carbon-manganese, high-strength and low-alloy grades, and are sold in the as-rolled condition as well as subsequent value-added heat-treated conditions. The primary end-user of our plate products is the fabrication industry, which uses our plate products in the manufacture or construction of railcars, buildings, bridges, off-highway equipment, storage tanks, ships, military applications, large diameter pipelines and power generation equipment. Plate steel products have represented approximately 11% of our total steel shipment volumes in the three month period ended June 30, 2021 and approximately 15% of our total steel shipment volumes in the fiscal year ended March 31, 2021.

We sell our finished products to a geographically diverse customer base across North America. For fiscal year ended March 31, 2021, our sales by product, geography and end markets were as follows:

 

FY2021 Product Shipment Mix    FY2021 Geographic Sales Mix    FY2021 End Markets

 

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Source: Company information. Automotive comprised of direct automotive customer sales and estimated service center sales to the automotive industry.

The Company has consistently experienced capacity utilization comparable to or greater than is typical in the North American market, due in part to its flexible operations and ability to quickly respond to market drivers. Excluding the capacity of its idle second blast furnace, Algoma’s 2017-2019 average capacity utilization was 91% while its peers averaged 86%.

 

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2017-2019 Average Capacity Utilization (%)

 

 

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Source: Company information.

 

1

Reflects Algoma’s 2018-2020 average capacity utilization, based on Blast Furnace No. 7’s total steel capacity of 2,600kt and 2018-2020 production of 2,300kt, 2,435kt and 2,305kt, respectively.

 

2

Steelco capacity utilization based on total capacity of 2,750kt and 2018 and 2019 steel production of 2,620kt and 2,444kt, respectively.

Superior Cost Position

We believe we have a superior structural cost position as a result of our cost-efficient DSPC asset, our geographic location on the Great Lakes, which provides economical access to key raw materials and steel-consuming markets, and our strong track record of implementing improvements in conversion costs.

Moreover, in connection with the purchase of substantially all of the operating assets and some of the liabilities of Old Steelco and its affiliates, Algoma re-established its control of the port of Algoma as a means to receive critical inbound raw materials and outbound shipment of finished goods. Our on-site port facilities enable access to low-cost water transportation across the Great Lakes. Additionally, Algoma has an advantage in power sourcing through a low-cost co-generation (“Co-Gen”) facility. A 70 million watts Co-Gen facility fueled with by-product gases from Algoma’s ironmaking and cokemaking operations provides on average approximately 45% of our power needs at favorable prices, reducing reliance on the Ontario power grid.

Our structural low cost position is evidenced by CRU’s 2021 international data, which placed us among the lowest cash costs of North American steel plants.

2021 Cash Cost Curve – Hot Rolled Coil (BOF / EAF)

 

 

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Source: CRU International, 2021.

 

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Our highly competitive cost position allows us to generate Adjusted EBITDA margins above the industry average and sustain profitability through business cycles. Algoma’s Adjusted EBITDA margin from 2017 to 2019 averaged 15% compared to approximately 12% average of our North American peers over the same period of time.

2017-2019 Average Adjusted EBITDA Margin (%)

 

 

 

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Source: Company information. Cleveland-Cliffs Adjusted EBITDA Margin based on Steel and Manufacturing Segment and includes the acquisition of AK Steel but not ArcelorMittal.

For the three month period ended June 30, 2021, we shipped approximately 610.0 thousand tons of steel products, which generated revenue of approximately C$722.0 million, net income of approximately C$221.3 million before income taxes, and Adjusted EBITDA of approximately C$280.8 million. For the fiscal year ended March 31, 2021, we shipped approximately 2.1 million tons of steel products, which generated revenue of approximately C$1,615.1 million, net loss of approximately C$76.1 million, and Further Adjusted EBITDA of approximately C$189.0 million.

Unique Production Process Supports Superior Cost Position Among North American Steel Producers

As mentioned above, we are the only integrated steel producer in North America to operate a DSPC line that converts liquid steel directly into coil. The DSPC line is among the newest, continuous thin slab casters in North America. We believe that this process provides us with an estimated cost advantage over our competitors of between C$30 and C$40 per ton due to reduced manpower, reduced re-heating costs and reduced yield loss. Additionally, the DSPC allows for us to seamlessly execute the installation of EAF mills.

We have recently upgraded our process automation to incorporate the most recent original equipment manufacturer technology and enhanced the throughput and quality via software enhancements in casting controls and defect detection. We successfully completed mechanical upgrades of spindles, strand entry tables and the coiler mandrel, which have had a positive impact on quality and throughput, efficiency and reliability.

Current annualized production capacity of the DSPC complex is 2.3 million tons. Algoma is also the only plate producer in Canada with current capacity of 350,000-400,000 tons with the potential to increase capacity to 700,000 tons per year, once on-going debottlenecking, automation and productivity investments are completed.

 

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Blast Furnace No.6, with current capacity of approximately 900,000 tons, provides Algoma flexibility to manage any future re-lines for Blast Furnace No.7 and we believe can be re-started in approximately six months for an estimated C$60 million investment including approximately C$18 million required to reduce casthouse emissions in Blast Furnace No. 6.

 

 

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Source: Company information.

 

1

Represents percentage of a trailing 7-year average HRC CRU (USA Midwest Domestic HR Coil) Index, lagged one month.

 

2

Represents percentage of a trailing 7-year average AS Rolled CRU Index, lagged one month.

Proposed EAF Mill to Transform Operations

One of our reasons for undertaking the Merger is to provide us with access to capital to partially fund our proposed transformation to EAF steelmaking, although we have not yet made a final decision to proceed. The proposed EAF mill is expected to meaningfully reduce SG&A and improve Adjusted EBITDA by approximately C$150 million per year with the majority of this benefit expected to be realized within the first year. We believe that the EAF mill has the potential to enhance our liquid steel capacity by 900,000 tons per year and would provide us with the ability to pursue a higher value-add product mix with a more flexible operating footprint. The proposed EAF mill would also reduce our exposure to iron pricing volatility since we would replace iron ore in our steelmaking process with readily available recycled regional scrap.

Additionally, we estimate that the transition to EAF steelmaking would result in a reduction of 3.0 million tonnes of CO2 emissions per year, representing a 70% reduction to current emissions levels with a goal of eliminating all coal use in our steelmaking operations over time, which we believe will allow us to become one of the greenest producers in North America and reduce the potential impact of the Canadian carbon tax regime on our business.    

If we proceed with the proposed EAF transformation, we would anticipate an approximately thirty month construction period that would be completed by the end of 2024. We estimate that the conversion to EAF steelmaking would cost approximately $500 million, which would be funded by the Green Steel Funding expected to be provided by the Government of Canada, as well as by the proceeds from the Merger and the PIPE Investment. The Green Steel Funding is subject to, and contingent on, the negotiation of definitive documentation and/or the achievement of certain funding milestones. See “Prospectus Summary – Recent Developments.

The EAF transformation will require a number of permits, including environmental compliance approvals in respect of sewage works and air/noise, as well as indigenous consultations. The project will also require the adoption of site specific standards under CEPA. We are engaged in ongoing discussions with the MECP with respect to these matters. The MECP has expressed support for the project generally and is working collaboratively with us to facilitate the project, which the MECP has described as having “positive environmental benefits for [the] community”. While the permitting process is ongoing, based on our discussions with the provincial government to date and our long track record of building and operating significant capital projects, we currently believe we will be able to obtain the required

 

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permits and approvals. See “Risk Factors – Risks Related to our Business – Failure to complete, or delays in completing, our proposed EAF transformation could adversely affect our business and prospects.” There are significant risks and uncertainties associated with, and we may fail to realize the anticipated benefits of, the proposed EAF transformation.

 

 

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Strong Government and Local Community Support

We are the largest employer in Sault Ste. Marie, Ontario. As of June 30, 2021, the Company had 2,696 full-time employees, of which approximately 95% are represented by two locals of the USW under two collective bargaining agreements. As a result of the Company’s good relationship with its unionized workforce, there has not been a work disruption in approximately 30 years, and we have achieved contract terms that are comparable to those achieved by our peers.

We believe the Company is critical to the local economy and has strong relationships with local, provincial and federal governments. Algoma represents approximately 40% of Sault Ste. Marie’s GDP, and approximately 70% of the city’s population is directly or indirectly dependent upon Algoma. Furthermore, Algoma is the only plate producer in Canada with current capacity of 350,000-400,000 tons and opportunity to increase capacity to 700,000 tons per year once on-going debottlenecking, automation and productivity initiatives are completed. These initiatives may significantly reduce Canada’s reliance on plate imports and positively impact the trade balance. As a result of Algoma’s significant contribution to the Canadian steel making industry, we benefit from strong federal and provincial government support in various forms. For example, the Canadian federal and Ontario provincial governments have provided support in the form of certain interest-free or low-interest loans and grants, which together total approximately C$150 million in the aggregate and have enabled us to undertake various capital expenditures to revitalize Algoma. See “Description of Indebtedness” for a description of these loans and grants. The Ontario government also enacted the 2018 Pension Regulations and Ontario Regulation 2017/19 as filed on June 20, 2019 (the “Wrap Regulations”) to facilitate our acquisition of substantially all of the assets and liabilities of Old Steelco in November 2018, including the DB Pension Plans and the Wrap Plan that has been maintained by Old Steelco. Among other things, the 2018 Pension Regulations significantly reduced our obligation for historical pension obligations by capping our special pension contributions (cash funding in addition to the current service funding) to the DB Pension Plans at C$31 million per year. As of March 1, 2021, the Company’s solvency funded status on its Hourly Plan and Salaried Plan was greater than 85%, which reduces the Company’s obligation with respect to special pension contributions to the DB Pension plan to near zero and also triggers the guarantees provided by the PBGF. On July 5, 2021, we announced the Green Steel Funding. See “Prospectus Summary – Recent Developments.”

 

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Strategic Initiatives to Further Strengthen Our Cost Position

Cost Saving Initiatives.    We have implemented several measures to reduce costs and improve our operating performance. Algoma has implemented cost savings plans to achieve headcount reductions that bring us in-line with our peers and estimate that we realized approximately 60% of the full benefit in the fiscal year ended March 31, 2020. We estimate that the full realization of cost saving initiatives were achieved in the fiscal year ended March 31, 2021, resulting in sustainable annual savings of approximately C$44 million excluding non-recurring cost to implement.

Ladle Metallurgical Furnace No2 Initiative.    In February 2021, we completed the installation and commissioning of Ladle Metallurgical Furnace No2 (“LMF2”), which will eliminate a bottleneck in our production process and enable 100,000 tons of incremental volumes with approximately C$318 per ton margin, contributing an estimated C$32 million of Adjusted EBITDA improvement annually. We invested C$35 million (net of government support) in this project and have completed the construction in a timely fashion against a challenging macroeconomic backdrop caused by the COVID-19 pandemic.

Plate Mill Modernization.    We are Canada’s only plate mill with current capacity of 350,000-400,000 tons and potential to ship up to 700,000 tons per year. We are undertaking a plate mill modernization project requiring capital expenditures of C$70 million (net of government support), which we expect to be completed in October 2022. This strategic initiative will enhance the capacity and quality of one of our key products and sources of competitive advantage. The Plate Mill Modernization Project will allow us to achieve product quality requirements of our 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 will be comprised of two phases: quality focus and productivity focus. The first phase, which focuses on quality, is expected to be completed by March 2022 and includes the installation and commissioning upgrades of a new primary slab de-scaler (which improves surface quality), automated surface inspection system (which detects and maps surface quality), a new in-line hot leveler (which improves flatness), and automation of the 166 inch Mill (which expands grade offering). The second phase, which focuses on productivity, is expected to be completed by October 2022 and includes installation and commissioning upgrades of the onboard descaling systems for both the 2Hi and 4Hi roughing roll stands, mill alignment and work roll offset at the 4Hi, 4Hi DC drive, in-line plate cutting including new cooling beds coupling the plate mill and shear line, dividing shear, new plate piler and automated marking machine.

 

Recent Strategic Initiatives (millions of U.S. dollars)

        Annualized
Benefit
    CapEx1     Schedule

Cost Saving Initiatives

 

•  Ongoing cost-cutting initiatives

•  200+ projects identified

•  Third party hired to review operational efficiency

  ~$ 44           2020: ~60%

2021: 100%

Ladle Metallurgical Furnace No. 2

 

•  Completed new 2.1 million ton ladle furnace in February 2021

•  Unlocked 100,000 tons of additional capacity

•  Adds more advanced grades of steel to product mix

  ~$ 25       ~$35     Feb-2021

Plate Mill Modernization

 

•  Overhaul and optimize plate mill to improve reliability and quality

•  Additional plate capacity of up to 350 kilotons

•  New grades capability unlocks new end markets

  ~$ 35      

~$70

($63 remaining

 

) 

  Quality: Oct-2021
Volume: Oct-2022

 

Source: Company information. Capex is net of government support.

 

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Well Positioned with Historical Issues Addressed

We experienced an unplanned outage in April 2019 that disrupted production in our Blast Furnace No. 7. This outage had no impact on the integrity of the furnace. The resulting lost production led to a shipping volume reduction in fiscal year 2020 of over 100,000 tons. During April 2019, the Company recorded a capacity utilization adjustment of C$32.7 million to cost of steel products sold. Planned maintenance, originally scheduled for later in the year, was accelerated and performed during this outage in April 2019. Rescheduling maintenance to align with the unplanned outage was part of the plan management implemented to make up for the lost production in the remaining quarters of fiscal year 2020. The outage, caused by a chemistry imbalance of certain materials, resulted from a poor and unforgiving construct of the blend of raw materials fed into the blast furnace. Operating parameters have been tightened and systems have been put in place to improve the overall monitoring of the Blast Furnace. We have modified operating practices following a deep-dive investigation with assistance from Hatch, our consulting engineering firm, undertook process control measures and personnel changes as well as adopted predictive modeling to ensure far greater control and less risk in our future operations.

The COVID-19 pandemic has significantly disrupted the steel industry, leading to idling, shutdowns and capacity reductions across the industry and driving an 18% decline in North American production levels during the period from April to September 2020. In March 2020, management took the precautionary measure of drawing on the Revolving Credit Facility (as defined below). During the three month period ended June 30, 2021, Algoma repaid the entire Revolving Credit Facility balance and there is currently no balance drawn on this facility. As of June 30, 2021, there was C$292.1 million ($228.8 million) of unused availability on the Revolving Credit Facility after taking into account C$26.2 million ($21.2 million) of outstanding letters of credit and borrowing base reserves. At March 31, 2021, Algoma had drawn C$90.1 million ($71.7 million), and there was C$200.8 million ($156.5 million) of unused availability after taking into account C$27.4 million ($21.8 million) of outstanding letters of credit and borrowing base reserves.

Quarterly Shipment Volume

 

 

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Source: Company information.

 

1

CRU USA Midwest Domestic Hot Rolled Coil Prices in US$/NT.

Our Competitive Strengths

Strategically Located on the Great Lakes in Close Proximity to Customers and Suppliers

We are strategically located on Lake Superior, close to key steel consuming regions of the United States (the U.S. Mid-West, U.S. Northeast) and Canada (Southern Ontario), allowing us to serve our customers at competitive costs. Approximately 70% of our customers are located within a 500-mile radius of our facility.

Additionally, our location on the Great Lakes provides access to multiple modes of transportation, supporting our ability to negotiate competitive rates for inbound raw materials and outbound steel products. The Company’s acquisition of the adjacent port facility as part of the 2018 restructuring transaction – the fourth largest port on the Great Lakes by volume, handling nearly 500 vessels a year and over 5 million tons of shipments – facilitated access to

 

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low cost transportation across the Great Lakes and secures our distribution network. Algoma has an option to pursue rail transportation from certain iron ore mines via well-established rail links, facilitating access to ore through the winter months when transport over the Great Lakes is less feasible.

 

Location Relative to Top 10 Customers

 

Location Relative to Key Raw Material Suppliers

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Source: Company information. Top 10 customers determined by revenue in fiscal year 2021.

We sell steel products to a diverse base of over 200 customers across multiple sectors in North America with no single customer making up greater than 11% of sales. Our top ten customers accounted for approximately 52% of our total revenue in the three month period ended June 30, 2021 and approximately 52% of total revenue in fiscal year 2021. Our geographic, sector and customer diversity makes us less exposed to demand shifts. We have built strong customer relationships with the average tenure for Algoma’s top ten customers of 20-25 years. Despite the U.S. tariffs imposed on Canadian steel producers on June 1, 2018, the Company was able to maintain its geographic mix with 60.7% of revenue in the three month period ended June 30, 2021 and 57.1% of fiscal year 2021 revenue generated by our customers in the United States.

FY2021 Customer Concentration by Revenue

 

 

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Source: Company information.

Operations to Meet the Needs of a Diversified Blue-Chip Customer Base in Attractive End Markets

Our hot strip and plate rolling mills provide the flexibility to adjust our product mix within our existing asset base to align with market pricing and customer demand, and maximize profitability. Plate products accounted for 11% of shipments, hot rolled sheet for 81% and Cold Rolled Sheet for 8% in the three month period ended June 30, 2021 and 15%, 78% and 7% respectively for fiscal year 2021. Additionally, flexible union labor contracts allow us to optimize manpower allocation across the entire facility to meet variations in demand.

Our product width, gauge and strength flexibility allows us to serve a broad customer base across various end markets, including service centers, automotive, manufacturing, construction and tubular markets. Furthermore, our research and development investments support higher quality, lower cost products and drive a value proposition for customers.

 

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Product Attributes

 

End Markets

 

Width Range

 

Gauge Range

Hot Rolled Coil

 

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✓  High strength formable hot rolled grades

 

✓  Broad width and strength capabilities

 

•  Automotive Hollow structural product and welded pipe manufacturers

 

•  Transportation Light manufacturing

 

106”Strip Mill

30”-96”

DSPC

32”-63”

 

106”Strip Mill

0.070”-0.500”

DSPC

0.060”-0.625”

Cold Rolled Coil

 

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✓  Commercial grades

 

✓  High strength formable cold roll grades

 

✓  Full hard grades (not annealed)

 

•  Automotive Welded pipe manufacturers

 

•  Transportation

 

•  Light manufacturing

  36”-74”   0.015”-0.129”

Plate

 

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✓  High strength, low-alloy grades

 

✓  Abrasion resistant and heat treat grades

 

✓  Only producer in Canada

 

•  Fabrication industry- constructors or manufactures of railcars, buildings, bridges off-highway equipment, etc.

  72”-154”   0.236”-4.500”

 

Source: Company information.

Low Cost Position Underpinned by Advantageous Raw Material Contracts

Algoma’s largest input cost in the steel-making process is iron ore, which we purchase under supply contracts with Cliffs and U.S. Steel. Algoma had previously sourced 100% of its iron ore from Cliffs. To further improve stability in our raw material procurement, we recently entered into a contract with U.S. Steel to purchase iron ore pellets through the 2024 shipping season. We believe that having a second competitive supply arrangement for this critical raw material will help mitigate our supply risks for iron ore. Taken together, Algoma’s agreements with Cliffs and U.S. Steel provide for supply of iron ore pellets through the close of the 2024 shipping season.

Historically, Algoma’s metal spread has been subject to limited fluctuations. For a given period, metal spread is the difference between Algoma’s average realized price of steel and the average cost of the various raw materials used to make it. There is a correlation between average HRC prices and the average prices of raw materials, such that a decrease in HRC prices results in a decrease in underlying raw material input costs, albeit on a delayed basis. As a result, our metal spread tends to remain relatively consistent over longer periods through the cycle. However, in periods of very low HRC prices, our metal spread would tend to be disproportionately compressed, and in periods of very high HRC prices, our metal spread would tend to be larger than the historical average.

 

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Historical Metal Spread1

 

 

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Source: Historical Algoma information.

 

1.

“Realized Price” and “Raw Materials” figures, respectively, represent the average price realized and corresponding average raw material costs for the period indicated. Key components of Raw Materials include iron ore, met coal and scrap. FY2019 metal spread was impacted by U.S. tariffs.

Recent Cost Cutting Initiatives Further Strengthen Our Position

In addition to benefitting from favorable raw material contracts, the benefits of recent cost cutting initiatives are beginning to be realized, significantly reducing conversion costs. Conversion costs, which consist of manufacturing and service labor costs, fixed consumables maintenance and services costs (“Fixed CM&S”) and sales and general and administrative costs (“SG&A”), declined in fiscal year 2021 relative to prior years, with average conversion costs demonstrating an approximately 20% reduction compared to the average quarterly conversion costs in fiscal year 2019.

Historical Conversion Costs1

 

 

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Source: Historical Algoma information.

 

1.

“Volume (kt)” refers to steel shipments in thousands of tons. “$ Per Ton” refers to conversion costs per ton of steel shipments.

Flexible Cost Structure Allows Algoma to Generate Cash Flow Through-the-Cycle

A flexible cost structure and the ongoing reduction in fixed costs allows Algoma to generate Adjusted EBITDA and cashflow through the steel industry business cycle, including at HRC prices significantly lower than in the current pricing environment. We believe the Company is well-positioned to generate positive Adjusted EBITDA and cash flow even with HRC prices as low as US$550 per net ton, assuming shipment levels between 2.3 and 2.5 million tons, which

 

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is consistent with our historical shipment rates under normal operating conditions. In addition, as described above, in the current HRC pricing environment, our metal spread improves significantly compared to historical averages, resulting in substantially higher Adjusted EBITDA and cash flow.

Legacy Liabilities Sustainably De-Risked from CCAA Process

On November 9, 2015, Algoma’s predecessor, Old Steelco, filed for creditor protection in Canada under the CCAA and in the United States under chapter 15 of title 11 of the United States Bankruptcy Code. On November 30, 2018, pursuant to a transaction approved by the court in the CCAA proceedings, Algoma Steel Inc. completed the purchase of substantially all of the operating assets and some of the liabilities of Old Steelco and its affiliates. As part of the CCAA restructuring, Algoma achieved transformational improvements in its capital structure, pension funding obligations and environmental liabilities. Algoma emerged as a more resilient company with a strong balance sheet and stable operating profits.

Algoma successfully reduced outstanding debt by approximately 40%, when including government loans and 50%, when excluding government loans, as compared to pre-CCAA leverage.

The predecessor company, prior to the CCAA process, carried unsustainable leverage of approximately C$1,369 million in debt obligations and C$172 million in annual interest expense.

As part of the completion of the Purchase Transaction, Algoma assumed the following pension plans that had been maintained by Old Steelco: (i) the Hourly Plan; (ii) the Salaried Plan; and (iii) the Wrap Plan. The assumption of these pension plans was conditional upon, among other things, certain legislative amendments and the enactment of regulations applicable to the pension plans. As a result of the 2018 Pension Regulations implemented in connection with the Purchase Transaction, the aggregate going concern and solvency special payments to the DB Pension Plans equal C$31 million per annum until the solvency ratio of each of the DB Pension Plans is at least 85%. As of March 1, 2021, both DB Pension Plans obtained an 85% solvency ratio, which reduces the Company’s obligation with respect to special pension contributions to the DB Pension plan to near zero and also triggers the guarantees provided by the PBGF. If the Company is required to make annual special payments to the DB Pension Plans in the future, these payments would remain subject to a C$31 million annual cap. Since the DB Pension Plan achieved an 85% solvency ratio, the DB Pension Plans are eligible to participate in the PBGF.

The Wrap Regulations implemented by the province in 2019 to provide a funding framework for the Wrap Plan require the Company to make monthly contributions to the Wrap Plan equal to the lesser of C$416,667 and the amount of the prior month’s benefit payments until the Wrap Plan’s solvency ratio is 100%. This funding requirement supersedes the normal funding requirements under applicable law.

The revised funding framework implemented in connection with the Company’s assumption of the pension plans provided significant funding relief in respect of historical pension obligations and established maximum annual contributions that provide enhanced certainty and reduced risk for the Company.

Algoma also developed LEAP in accordance with the Framework Agreement Concerning Environmental Issues entered into with the Ontario Ministry of the Environment, Conservation and Parks (“MECP”) in connection with the 2018 restructuring to address legacy environmental issues. The MECP provided a release in favor of the Company from any obligations under applicable environmental laws relating to legacy environmental issues at the Company’s Sault Ste. Marie site with respect to the historical soil, groundwater and sediment contamination at the Sault Ste. Marie facility, which we acquired in connection with the CCAA process. Steel making activities have occurred on Algoma’s site since 1901 and before the adoption of modern environmental best practices. Pursuant to LEAP, Algoma agreed to fund C$3.8 million per year for 20 years to a financial assurance fund, established to fund LEAP expenses and provided a C$10 million letter of credit to the MECP to provide financial assurance for these obligations. Additionally, Algoma was released from all legacy environmental issues with respect to the historical soil, groundwater and sediment contamination at Old Steelco’s closed iron ore mines, which we did not acquire in connection with the CCAA process. Algoma agreed, among other things, to pay C$10 million to the ENDM in installments of C$250,000 semi-annually to be used to rehabilitate the closed iron ore mines that we did not acquire and provided a C$3.5 million letter of credit to the ENDM to provide financial assurance for these obligations.

 

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Transformational Changes

 

 

LOGO

 

Source: Company information.

 

1

Includes $147 million of Revolving Credit Facility, $304 million of Secured Term Loan Facility, $62 million of the Algoma Docks Term Loan Facility and $106 million of government loans. Converted to Canadian dollar using an exchange rate of $1.00 = C$1.34.

 

2

Includes interest expense on the Revolving Credit Facility, the Secured Term Loan Facility and the Algoma Docks Facility.

Experienced Management Team with Extensive Industry Experience

We have an experienced management team with significant operating experience in the global steel industry. Our executives collectively have almost 200 years of steel industry experience. Under the leadership of our current management team, we have made significant capital expenditures and have achieved significant operating performance improvements by employing benchmarking and implementing industry best practices. In addition, our management team has successfully navigated our business, even during the turbulent times of the U.S. steel tariffs and the COVID-19 pandemic that significantly disrupted the entire industry. Our management achieved higher capacity utilization rates as compared to our North American peers, significantly strengthened our raw material supply position and took measures to improve the stability of future profits. Furthermore, we maintain a strong relationship with our skilled unionized workforce, as evidenced by the near 30-year period since our last work disruption. We benefit from favorable collective bargaining agreements that allow us flexibility to adapt to changes in operational and production needs.

Business Strategy and Strategic Goals

Our key strategic goals are:

Continuous Margin Stability Enhancement and Cost Improvement.    We are striving to continue reducing our costs and improving our operating performance. Cost improvements include maintenance effectiveness and operational cost reductions, headcount reductions, power efficiency improvements, process yield improvements, improvements in product quality and optimization of gas usage. We have reduced our operating expenses and headcount by 20% since fiscal year 2019. We expect that our new raw material contract with U.S. Steel for procurement of iron ore pellets through 2024 will help reduce Algoma’s earnings volatility in the future. Furthermore, we expect that such contract will create optionality that will benefit us when negotiating new contracts in the future.

Additionally, we are constantly striving to improve the stability of our revenue by increasing the share of contracted revenue while maintaining the ability to participate in increasing prices through flexible pricing mechanisms. The majority of our contracts are volume commitments with pricing tied to HRC and HRP CRU indexes on a one- and three-month lag basis. This results in exceptionally high correlation with the HRC and HRC CRU indexes on a one month lagging basis. Furthermore, the time lag allows Algoma’s management to plan effectively and design solutions to navigate uncertain times.

We expect that our proposed transformation to EAF steelmaking will assist in reducing our costs and improving our operating performance. The proposed EAF mill is expected to improve Adjusted EBITDA by approximately C$150 million per year with the majority of this benefit expected to be realized by 2024. We believe that the EAF mill has the potential to enhance our liquid steel capacity by 900,000 tons per year and would provide us with the ability to pursue a higher value-add product mix with a more flexible operating footprint. The proposed EAF mill would also reduce our exposure to iron pricing volatility since we would replace iron ore in our steelmaking process with readily available recycled regional scrap.

 

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FY2020 Product Shipment Mix

      

FY2021 Product Shipment Mix

 

LOGO

 

 

LOGO

  

 

LOGO

 

Source: Company information.

Capitalize on Low Cost Growth Opportunities.    Our goal is to continue enhancing our productivity and profitability through prudent capital investment projects. In addition to LMF2 debottlenecking our process flow and the added capacity from the plate mill modernization, we have an opportunity to restart the idled Blast Furnace No. 6 and bring it to production as needed in response to market demand changes with limited capital expenditure. The restart of Blast Furnace No. 6 would provide an incremental 900,000 tons of capacity of iron at an incremental capital investments of C$60 million over approximately six months. With both blast furnaces operating, our hot metal capacity will exceed our steelmaking capacity and thus our steelmaking capacity of 3.7 million becomes the constraint, resulting in the need for approximately 3.2 million tons of iron capacity from the two blast furnaces. Given the lag in our contracted prices and general lag in the industry due to long lead times, we believe we are well positioned to react quickly and take advantage of increasing demand.

Maintaining a Prudent Financial Policy.    We are committed to creating a strong financial profile for Algoma. Our management is focused on generating disciplined growth while maintaining a strong credit profile. We will continue to seek to de-lever the balance sheet while maintaining adequate liquidity throughout the seasonality in our business cycle. By providing access to the public markets, we believe the Merger will help achieve this goal. Algoma utilizes hedging for both revenue and raw materials to further enhance earnings stability.

Focus on Safety and Environmental Compliance.    Management is focused on sustainable and safe operations by engaging in projects to improve safety, including machinery and crane guarding upgrades and coke battery door and jamb cleaners. Since fiscal year 2015, we have reduced our LTIFR from 0.72 to approximately 0.19 in fiscal year 2021 and 0.0 in the three month period ended June 30, 2021. Health and safety remains paramount and to further the Company’s efforts to improve, we are implementing an ISO 45001 Safety Management System.

We are committed to being good environmental stewards and encourage open communication and reporting to our communities with regard to our environmental performance. Through our participation in the Canadian Steel Producers Association, we have committed to pursue the aspirational goal of carbon neutrality by 2050. We continue to evaluate strategies to both meet this goal and maintain our competitiveness, including through the modernization of our existing facilities and/or the adoption of other technologies such as less carbon-intensive iron making or EAF steel-making. We estimate that the transition to EAF steelmaking would result in a reduction of 3.0 million tonnes of CO2 emissions per year, representing a 70% reduction to current emissions levels with a goal of eliminating all coal use in our steelmaking operations over time, which we believe will allow us to become one of the greenest producers in North America and reduce the potential impact of the Canadian carbon tax regime on our business.

Algoma currently has three greenhouse gas reduction projects that are expected to reduce emissions by 79,000 tons a year. All of our facilities are registered to the world-wide ISO 14001 Environmental Management System Standard. We are supporting open dialogue on environmental issues with the community by establishing community outreach and ensuring frequent reporting on our environmental performance. For example, Algoma has established a Community Liaison Committee as a forum for exchanging relevant environmental information with the public, conducting meetings on monthly basis and publishing meeting notes on our website.

 

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Lost Time Injury Frequency1

 

 

LOGO

 

Source: Company information. Note: Lost Time Injury Frequency is calculated as ((Number of lost time injuries in the reporting period x 200,000) / Total hours worked in the reporting period).

 

1

2010-2015 Algoma Lost Time Injury Frequency Average: 0.72

Significant Projects Not Yet Generating Revenues

EAF Steelmaking Transformation

EAF steelmaking is a modern method of producing steel; with primary inputs of scrap steel and electricity, steel is formed by using an electrical current to melt scrap steel and/or other metallic inputs. Our proposed EAF steelmaking facility is to be built adjacent to the current steel shop and will utilize existing downstream equipment and facilities, thereby reducing capital expenditure requirements of the build. The EAF is expected to improve product mix, reduce fixed costs, provide for material carbon tax savings, increase production capacity and decrease our environmental footprint, with a majority of the benefits realized by 2024. See “Business – Proposed EAF Mill to Transform Operations.” Algoma has engaged key stakeholders, including relevant government and regulatory agencies, to start the process of obtaining the required permits to build, commission and operate the EAF.

 

Status(1)    Preparing for final investment decision.
Expenditures to
Date(2)
   $1.5 million
Anticipated
Timeline
  

•  Final Investment Decision – By end of 2021

 

•  2022-2024: Completion of 30-month construction timeline for the EAF mill.

 

•  2024-2025: Commissioning ramp up period, product certification / acceptance testing

 

•  2025-: Interim/Alternating Hybrid Mode (Phase I). The EAF would operate one furnace at a time using on-site cogeneration facility, LSP and local 230kV transmission upgrade.

 

•  Long-Term: Long-Term/Full Grid Power Mode (Phase II). After the completion of a power upgrade, the EAF would operate both furnaces simultaneously.

Estimated Total
Capital Cost of
the Project(3)
  

The total capital cost for the conversion to EAF steelmaking is estimated to be $500 million, consisting of:

 

•  $425 million of EAF installation ($200 million for building and labor and $225 million for EAF equipment);

 

•  $30 million for internal cogeneration upgrade and electrical infrastructure; and

 

•  $45 million for contingencies.

 

This is expected to be funded by the Government of Canada, the Merger, the PIPE Investment and cash from operations. See “Prospectus Summary – Recent Developments – Government Funding”.

 

(1)

As of the date of this prospectus.

 

(2)

Expenditures to date reflect the total cumulative expenditures incurred from inception of the project to the date of this prospectus.

 

(3)

These amounts are estimates and are subject to upward or downward adjustment based on various factors.

 

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LMF2 Initiative

Our LMF2 facility is expected to eliminate a bottleneck in our production process (between steelmaking and casting facilities), enable 100,000 tons of incremental volume and add more advanced grades of steel to our product mix. The annualized benefit of the LMF2 facility is expected to be $25 million, beginning in fiscal 2022. See “Business – Strategic Initiatives to Further Strengthen Our Cost Position.” Algoma obtained the required permits to build and operate the LMF2 facility prior to the project being built.

 

Status(1)    Installation and commissioning of LMF2 was completed in February 2021. Currently, the facility is undergoing acceptance testing and ramping up production.

Total Capital Cost

of the Project(2)

   $43.5 million

Anticipated

Timeline

   Completed

 

(1)

As of the date of this prospectus.

 

(2)

Reflects the total cumulative expenditures incurred from inception of the project to completion and are shown gross of any government financing received.

Plate Mill Modernization Project

We are undertaking a plate mill modernization project, which is expected to allow us to achieve product quality requirements of our 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 annualized benefit of the plate mill modernization project is expected to be $35 million, after completion of the project. See “Business – Strategic Initiatives to Further Strengthen Our Cost Position.” Algoma has obtained the relevant necessary regulatory approvals required to complete this project.

 

Status(1)    Project underway. Algoma has completed the necessary civil work, including the construction of required auxiliary buildings and has begun the installation of its new hot leveler preparing for Phase I, as described below.

Expenditures

to Date(2)

   $38.9 million

Anticipated

Timeline

  

•  March 2022: Phase I (Quality Focus). Completion of installation and commissioning of the following updates:

 

•  New primary de-scaler (improves surface quality);

 

•  Automated surface inspection system (detects and maps quality);

 

•  New hot leveler (improves flatness); and

 

•  Automation upgrade of the 166 mill (expands grade offering).

 

•  October 2022: Phase II (Productivity Focus). Completion of installation and commissioning of the following updates:

 

•  Onboard descaling system upgrade for 2Hi and 4Hi;

 

•  Mill alignment and work roll offset at the 4Hi;

 

•  4Hi DC drive upgrade;

 

•  In-Line Plate Cutting including new cooling beds coupling the plate mill and shear line, dividing shear and new plate piler; and

 

•  Automated marking machine.

Estimated Total

Capital Cost of the

Project(3)

   $95 million

 

(1)

As of the date of this prospectus.

 

(2)

Expenditures to date reflect the total cumulative expenditures incurred from inception of the project to the date of this prospectus and are shown gross of any government financing received.

 

(3)

These amounts are estimates and are subject to upward or downward adjustment based on various factors.

 

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Description of Algoma’s Indebtedness

The following is a summary of the material terms and conditions of our material debt instruments. The description is only a summary and is not intended to describe all of the terms of our material debt instruments that may be important. All information in this section is as of June 30, 2021 unless otherwise specified.

Revolving Credit Facility

Algoma Steel Inc. is the borrower under a secured asset-based revolving credit facility (the “Revolving Credit Facility”) made available pursuant to a revolving credit agreement dated November 30, 2018 among the Algoma Steel Inc., as borrower, Algoma Steel Intermediate Holdings Inc. and certain subsidiaries of Algoma Steel Inc., as guarantors, Wells Fargo Capital Finance Corporation Canada, as administrative agent and collateral agent (the “RCF Agent”), and the lenders party thereto from time to time.

The maximum availability under the Revolving Credit Facility is $250 million. The Revolving Credit Facility includes a sublimit for letters of credit and a sublimit for borrowings on same-day notice, referred to as swingline loans.

At March 31, 2021, we had drawn $71.7 million (C$90.1 million) under the Revolving Credit Facility and had $21.8 million (C$27.4 million) of outstanding letters of credit. We had unused availability of $156.5 million (C$200.8 million) under the Revolving Credit Facility as at March 31, 2021.

During the three month period ended June 30, 2021, we repaid the entire Revolving Credit Facility balance and there is currently no balance drawn on this facility. There was C$292.1 million ($228.8 million) of unused availability after taking into account C$26.2 million ($21.2 million) of outstanding letters of credit and borrowing base reserves. At March 31, 2021, we had drawn C$90.1 million ($71.7 million), and there was C$200.8 million ($156.5 million) of unused availability after taking into account C$27.4 million ($21.8 million) of outstanding letters of credit and borrowing base reserves.

Interest rate and fees. Loans under the Revolving Credit Facility bear interest at an annual rate equal to, at the Borrower’s option, Base Rate, London Interbank Offered Rate (“LIBOR”), Canadian Prime Rate or Canadian Dollar Offered Rate (“CDOR”), plus the “Applicable Margin”. The Applicable Margin is determined on a quarterly basis based on the type of loan and historical excess availability under the Revolving Credit Facility.

Interest is payable quarterly in arrears in respect of Base Rate Loans and Canadian Prime Rate Loans and on the last date of each interest period (which may be, at the Borrower’s option, one, three, six, or if approved by the lenders, twelve months) or in three month intervals, where the interest period is in excess of three months, in respect of LIBOR Loans and CDOR Loans, in each case subject to a requirement to pay accrued interest in connection with certain repayments of applicable loans or at maturity.

In addition to paying interest on outstanding principal under the Revolving Credit Facility, we are required to pay a commitment fee in respect of unutilized commitments and a letter of credit fee and facing fee in respect of outstanding letters of credit. These fees are payable quarterly in arrears.

Availability and repayments. Availability under the Revolving Credit Facility is governed by a conventional borrowing base calculation comprised of eligible accounts receivable, eligible inventory and cash. We are required to maintain a minimum 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.

Maturity. The Revolving Credit Facility has a maturity date of November 30, 2023.

Guarantees and security. All obligations under the Revolving Credit Facility are jointly and severally guaranteed by Algoma Steel Intermediate Holdings Inc. and each Algoma Steel Inc.’s restricted subsidiaries (subject to certain exceptions) on a secured basis.

By way of pledge agreements separate from the Revolving Credit Facility agreement, Algoma Steel Inc. and Algoma Steel Intermediate Holdings Inc. have pledged certain collateral as continuing collateral security for the obligations, including all tangible and intangible personal property and all proceeds therefrom, all trademarks, goodwill, and proceeds therefrom, and our registered patents.

 

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By way of security agreements separate from the Revolving Credit Facility agreement, Algoma Steel Inc. and Algoma Steel Intermediate Holdings Inc. have each granted a security interest to the RCF Agent for the benefit of the secured parties over the collateral.

Certain covenants and events of default. The Revolving Credit Facility contains covenants that, among other things, restrict, subject to certain exceptions, our ability to:

 

   

incur liens;

 

   

engage in mergers, consolidations or amalgamations;

 

   

make certain investments or acquisitions;

 

   

make certain restricted payments, including the payment of dividends, the repurchase of our capital stock, and the repayment of junior indebtedness prior to maturity;

 

   

incur additional indebtedness;

 

   

engage in certain transactions with our affiliates;

 

   

amend or modify certain indebtedness;

 

   

sell or transfer assets;

 

   

in the case of Algoma Steel Intermediate Holdings Inc., engage in any material business or operations; and

 

   

make changes to our defined benefit pension plans.

In addition, if availability under the Revolving Credit Facility falls below a specified threshold, we are required to maintain compliance with a springing minimum fixed charge coverage ratio test of 1.00:1.00.

The Revolving Credit Facility also contains certain customary affirmative covenants and events of default, including an event of default upon the occurrence of a change of control.

Secured Term Loan Facility

Algoma Steel Inc. is the borrower under a $285 million secured term loan facility (the “Secured Term Loan Facility”) made available pursuant to a term loan credit agreement dated November 30, 2018 among Algoma Steel Inc., as borrower, Algoma Steel Intermediate Holdings Inc. and certain subsidiaries of Algoma Steel Inc., as guarantors, Cortland Capital Market Services LLC, as administrative agent and collateral agent (the “Term Agent”), and the lenders party thereto from time to time. The maturity date of the Secured Term Loan Facility is November 30, 2025. The collateral under the Secured Term Loan Facility includes all property (whether real or personal) with respect to which any security interests have been granted (or purported to be granted) pursuant to any Security Document (as defined in the Secured Term Loan Facility), which includes certain future property that may be acquired.

The Secured Term Loan Facility was fully advanced to Algoma Steel Inc. on November 30, 2018. As at June 30, 2021, the aggregate principal amount outstanding under the Secured Term Loan Facility was $303.0 million (C$371 million) after giving effect to principal repayments. As at March 31, 2021, the aggregate principal amount outstanding under the Secured Term Loan Facility was $304 million (C$378 million).

Algoma Docks Secured Term Loan Facility

Algoma Docks LP (“Algoma Docks”), a wholly-owned subsidiary of Algoma Steel Inc., is the borrower under a $73.0 million term loan facility (the “Algoma Docks Term Loan Facility”) made available pursuant to a senior secured term loan credit agreement dated November 30, 2018 among Algoma Docks, as borrower, Algoma Docks GP Inc. (“Algoma Docks GP”), Algoma Steel Inc., as guarantor, Cortland Capital Market Services LLC, as administrative agent and collateral agent, and the investors party thereto from time to time. The maturity date of the Algoma Docks Term Loan Facility is May 30, 2025. The Algoma Docks Term Loan Facility is secured by a first priority security interest in all present and future real and personal property of Algoma Docks and a pledge of all equity interests held by us in Algoma Docks.

 

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The Algoma Docks Term Loan Facility was fully advanced to Algoma Docks on November 30, 2018. As at June 30, 2021, the aggregate principal amount outstanding under the Algoma Docks Term Loan Facility was $58.3 million (C$72.2 million). The Algoma Docks Term Loan bears interest at a rate of LIBOR plus 5.00% per annum. As at March 31, 2021, the aggregate principal amount outstanding under the Algoma Docks Term Loan Facility was $60.4 million (C$76 million).

Federal AMF Loan

Algoma Steel Inc. is the recipient of an interest-free loan through the Advanced Manufacturing Fund of the Federal Economic Development Agency (the “Federal AMF Loan”) pursuant to an amended and restated contribution agreement dated as of December 19, 2018 among Algoma Steel Inc., as borrower, Algoma Steel Intermediate Holdings Inc. and Algoma USA, as guarantors, and Her Majesty the Queen in Right of Canada as represented by the Minister responsible for the Federal Economic Development Agency for Southern Ontario (the “Federal Lender”).

Under the Federal AMF Loan, Algoma Steel Inc. is reimbursed for certain eligible capital expenditures made between October 1, 2014 and March 31, 2021 (including eligible expenditures made by Old Steelco) in respect of Algoma Steel Inc.’s modernization project (as defined in the Federal AMF Loan, the “Project”). The amount to be advanced to Algoma Steel Inc. under the Federal AMF Loan is the lesser of (i) 50% of eligible capital expenditures, and (ii) $60 million.

As at June 30, 2021, the full C$60 million of funding under the Federal AMF Loan has been advanced to Algoma Steel Inc.

Interest rate and fees. The Federal AMF Loan is a non-interest bearing loan. Any overdue amounts will accrue interest in accordance with the Interest and Administrative Charges Regulations (Canada) in effect on the due date, compounded monthly.

Repayments. Algoma Steel Inc. is required to repay the loan in equal monthly instalments of C$833,000 beginning on April 1, 2022, with the final instalment payable on March 1, 2028. Algoma Steel Inc. may at any time make prepayments on account of repayment instalments, without premium or penalty.

Guarantees and security. Algoma Steel Intermediate Holdings Inc. and Algoma USA, as guarantors, provided an absolute and unconditional guarantee to the Federal Lender of all of Algoma Steel Inc.’s obligations under the Federal AMF Loan.

The obligations under the Federal AMF Loan are secured against substantially the same collateral as the Revolving Credit Facility, on a third priority basis (pari passu with the Provincial Loan).

Certain covenants and events of default. The Federal AMF Loan contains affirmative and negative covenants related to the Project. Algoma Steel Inc. is required to make capital expenditures of not less than C$600 million under its capital investment plan between October 1, 2014 and March 31, 2023 (including eligible expenditures made by Old Steelco), comply with Project related reporting obligations and complete the Project as described in the statement of work provided in the Federal AMF Loan.

The Federal AMF Loan contains negative covenants that are generally consistent with the negative covenants in the Revolving Credit Facility and the Secured Term Loan Facility and currently incorporates by reference certain affirmative and negative covenants and the “change of control” default from the Secured Term Loan Facility.

The Federal AMF Loan also contains certain customary affirmative covenants and contains customary events of default.

Provincial Loan

Algoma Steel Inc. is the borrower under a loan from the Ministry of Energy, Northern Development and Mines (the “Provincial Loan”) pursuant to a credit agreement dated as of November 30, 2018 between Algoma Steel Inc., as borrower and Her Majesty the Queen in Right of Ontario as represented by the Minister of Energy, Northern Development and Mines, as lender (the “Provincial Lender”).

 

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Under the Provincial Loan, Algoma Steel Inc. receives advances equal to 50% of eligible capital expenditures incurred between April 1, 2017 and November 30, 2024 (including eligible expenditures made by Old Steelco), subject to an aggregate advance limit of C$60 million. As at June 30, 2021, the full C$60 million of funding under the Provincial Loan has been advanced to Algoma Steel Inc.

Interest rate. Advances under the Provincial Loan bear interest at an interest rate equal to the greater of (i) 2.5% per annum, and (ii) the lender’s cost of funds for a ten-year non-amortizing bond, in each case calculated and compounded monthly. Since December 1, 2019, the applicable interest rate under the Provincial Loan has been 2.5% per annum.

Repayments. Algoma Steel Inc. is required to repay the loan in monthly blended payments of principal and interest beginning on December 31, 2024 and ending on November 30, 2028. The Provincial Loan matures on November 30, 2028.

Algoma Steel Inc. is also required to make a partial repayment of the Provincial Loan, determined pursuant to a formula set out in the Provincial Loan, if it does not maintain prescribed employment levels at its Sault Ste. Marie facility through March 31, 2024, and if Algoma Steel Inc. receives funds from other sources for the specified project in amounts greater than specified in the budget provided to the lender.

Algoma Steel Inc. may prepay, without penalty or bonus, amounts outstanding under the Provincial Loan.

Guarantees and security. Algoma Steel Intermediate Holdings Inc. and Algoma USA, as guarantors, provided an absolute and unconditional guarantee of all of Algoma Steel Inc.’s obligations under the Provincial Loan.

The obligations under the Provincial Loan are secured against substantially the same collateral as the Revolving Credit Facility, on a third priority basis (pari passu with the Federal AMF Loan).

Certain covenants and events of default. The Provincial Loan contains affirmative and negative covenants related to applicable capital projects. Among other covenants, Algoma Steel Inc. is required to make capital expenditures of not less than C$600 million under its capital investment plan between October 1, 2014 and March 31, 2023 (including eligible expenditures made by Old Steelco), meet certain job targets and refrain from making material changes to the project.

The Provincial Loan contains negative covenants that are generally consistent with the negative covenants in the Revolving Credit Facility and the Secured Term Loan Facility and currently incorporates by reference certain affirmative and negative covenants and the “change of control” default from the Secured Term Loan Facility.

The Provincial Loan also contains certain customary affirmative covenants.

The Provincial Loan also contains customary events of default, including an event of default if Algoma Steel Inc. abandons any project funded by the Provincial Loan prior to its completion.

Federal SIF Loan

Algoma Steel Inc. is the recipient of funding through the Government of Canada’s Strategic Innovation Fund pursuant to an agreement dated as of March 29, 2019 (the “Federal SIF Agreement”) among Algoma Steel Inc., as recipient, Algoma Steel Intermediate Holdings Inc., as guarantor, and Her Majesty the Queen in Right of Canada as represented by the Minister of Industry.

Under the Federal SIF Agreement, Algoma Steel Inc. receives contributions equal to 44.76% of eligible costs incurred between November 1, 2018 and May 1, 2021 associated with a project involving the adoption of new equipment to improve operations and production (the “SIF Project”), subject to an aggregate contribution limit of C$30 million. As at June 30, 2021, C$27 million of funding under the Federal SIF Agreement has been advanced to Algoma Steel Inc.

Algoma Steel Inc. is required to repay C$15.0 million of the funding received under the Federal SIF Agreement (the “Federal SIF Loan”) pursuant to the Federal SIF Agreement. The remaining C$15.0 million received under the Federal SIF Agreement is not subject to repayment and has been treated as a grant for accounting purposes.

 

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Interest rate. The Federal SIF Loan is a non-interest bearing loan. Interest is payable on any overdue payments, calculated and payable at the Bank Rate (as defined in the Interest and Administrative Charges Regulations (Canada) in effect on the due date plus 3.0%, compounded monthly.

Repayments. Algoma Steel Inc. is required to repay the Federal SIF Loan in equal annual payments of C$1,875,000 beginning on April 30, 2024 and ending on April 30, 2031. Algoma Steel Inc. may prepay any portion of the Federal SIF Loan at any time without premium or penalty.

Guarantees and security. The obligations of Algoma Steel Inc. under the Federal SIF Agreement are guaranteed by Algoma Steel Intermediate Holdings Inc. on an unsecured basis.

Certain covenants and events of default. The Federal SIF Agreement contains limited covenants related to, among other things, the SIF Project, the maintenance of employment levels, the reduction of greenhouse gas emissions, research and development spending, capital expenditures, collaborations with academic organizations, employee training, gender equality and diversity, and related reporting.

The Federal SIF Agreement contains covenants that, among other things, restrict, subject to certain exceptions, the ability of Algoma Steel Inc. to:

 

   

sell, transfer or dispose of SIF Project assets the cost of which has been contributed to by the federal Minister of Industry under the Federal SIF Agreement;

 

   

pay dividends or other shareholder distributions; and

 

   

license intellectual property relating to the SIF Project or to utilize such intellectual property outside of Canada.

The Federal SIF Agreement also contains customary events of default, including the occurrence of a change of control without the prior written consent of the federal Minister of Industry.

Green Steel Funding

On July 5, 2021, Algoma announced that the Government of Canada has, subject to final documentation, committed up to C$420 million in financial support for Algoma’s proposed EAF transformation. The C$420 million of financial support consists of (i) the SIF Funding, a loan of up to C$200 million from the Innovation Science and Economic Development Canada’s Strategic Innovation Fund and (ii) the CIB Funding, a loan of up to C$220 million from the Canada Infrastructure Bank. It is currently expected that the CIB Funding will be a low-interest loan on commercial terms. Annual repayment of the SIF Funding will be scalable based on Algoma’s GHG performance. The CIB Funding is subject to, and contingent on, the negotiation of definitive documentation. On September 20, 2021, Algoma, Algoma Steel Inc. and the Government of Canada entered into an agreement with respect to the SIF Funding. Algoma’s rights and obligations under the agreement with respect to the SIF Funding, including the availability of borrowings thereunder, are subject to and contingent on Algoma demonstrating its ability to fully fund the EAF transformation, the remainder of which is expected to be funded by the CIB Funding, if available, as well as by the proceeds from the Merger and the PIPE Investment.

Industry Overview

Macroeconomic Outlook.    We believe steel consumption in North America is highly correlated to the macroeconomic state of the broader economy and growth in the construction and manufacturing sectors. According to the Bureau of Economic Analysis of the U.S. Department of Commerce, U.S. GDP increased at an annual rate of 4.3% in the fourth quarter of calendar year 2020, while in the third quarter, U.S. GDP increased 33.4%. The increase in real U.S. GDP reflects increases in exports, nonresidential fixed investment, personal consumption expenditures, residential fixed investment and private inventory investment, that were partly offset by decreases in state and local government spending as well as federal government spending.

The International Monetary Fund (“IMF”) further predicts that global GDP growth will be 3.4% in 2021. Similarly, the Purchasing Managers’ Index (“PMI”), a barometer of manufacturing activity, registered 60.8% in February 2021, an increase of 2.1 percentage points from January. This figure indicates an expansion in the overall economy for the ninth consecutive month after a contraction in March, April and May 2020.

 

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The steel product manufacturing market is driven by stable economic growth, which in turn increases investments in the end user markets. The sheet and plate portions of the steel industry, both of which we offer products in, are benefiting from this growth. Governments globally are increasingly spending on infrastructure projects that stimulate the demand for steel. Canada, for instance, has announced infrastructure investments of more than C$180 billion over a span of 12 years, and the Biden Administration recently announced its American Jobs Plan, which if passed would invest approximately $2 trillion in infrastructure in the United States this decade. This increased infrastructure spending is expected to drive the demand for steel and contribute to the growth of the steel market going forward.

Demand Dynamics.    In the three month period ended March 31, 2021, U.S. steel mills produced 73.8 million tons of steel, a 18.3% decrease compared to the 90.3 million tons produced during the same period in 2019 (American Iron and Steel Institute). This decline in production was a result of COVID-19 and the timing related to domestic supply and imports returning to the North American marketplace. Demand has rebounded alongside prices. The strong rebound is attributed to the recovery from the negative impact caused by COVID-19, along with unprecedented government stimulus around the world.

North American steel demand is expected to return to 2019 levels in 2023 due to better prospects for infrastructure and spending on durable goods. There are a number of encouraging demand signals for steel products generally, including as a result of the Biden Administration’s American Jobs Plan, which if passed would invest approximately $2 trillion in infrastructure in the United States this decade, including through increased spending on roads, bridges, rail, ports, airports, and transit systems. Demand from the energy industry is expected to remain strong, amid an increasing transition to renewable energy sources such as wind and solar power, where steel is a key material.

Regional Finished Product Demand, 000 tons

 

LOGO

 

Source: Fastmarkets.

Steel Pricing.    In addition to movements in supply and demand, our business is impacted by movements in steel pricing. Steel prices are impacted by a number of factors, including raw material costs, capacity utilization and foreign imports. Increasing steel demand and limited new capacity has led to a rebound in North American utilization. Since reaching a trough at approximately 34% utilization during the period from December 2008 through January 2009, North American capacity utilization rates have significantly improved, averaging approximately 78% in January of 2021. While Canadian demand is expected to be stable, capacity is projected to increase by approximately 500,000 tons due to infrastructure improvements (American Iron and Steel Institute). Our capacity utilization has averaged 91% between 2017 and 2019.

U.S. hot-rolled coil prices improved in the final months of 2020 with domestic spot prices exceeding $1,000 per ton, marking their highest level in 12 years. The increase in steel prices comes as mills have struggled to keep up with demand after end-users restarted their operations following the global pandemic. At the same time, rising raw material costs further place upward pressure on steel pricing. The uptrend for steel prices for the first quarter of 2021 continued higher, with U.S. average monthly hot-rolled coil prices increasing to $1,055 per ton in February, up 25.8% since the prior month, and up 141% since the beginning of August 2020 when CRU index hit a low of $437 per short ton. Prices are more volatile in the United States compared to Europe due to the U.S.-China trade war.

 

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Hot Rolled Coil Prices – Historical & Forward Curve ($/ton)

 

LOGO

Hot Rolled Plate Prices – Historical & Forward Curve ($/ton)

 

LOGO

 

Source: Bloomberg, Fastmarkets.

Industry Consolidation.    The outlook for the North American steel sector has also improved as a result of recent consolidation in the sector. In December 2019, for example, iron ore producer Cliffs announced its acquisition of AK Steel for $1.1 billion. Cliffs later acquired most of steelmaker ArcelorMittal USA in December of 2020 for $1.4 billion. In January 2021, U.S. Steel completed the acquisition of the remaining equity of Arkansas-based Big River Steel for approximately $774 million. Over the last several years, the steel industry has undergone significant consolidation. As one of the largest Canadian steel producers, we believe that future industry consolidation will provide our Company with competitive opportunities and paths for growth.

Products

Sheet Steel:    Our flat/sheet steel products include a wide variety of widths, gauges, and grades, and are available unprocessed and with value-added processing such as temper rolling, cold rolled in both full-hard and annealed, hot-rolled pickled and oiled products, floor plate and cut-to-length products. The primary end-users of our flat/sheet products are the automotive industry, hollow structural product manufacturers and the light manufacturing and transportation industries. For the last five years, sheet steel products have represented approximately 85% of our total steel shipment volumes. Over the same period, value-added applications represented approximately 45% of total steel volume.

Plate Steel:    Our plate steel products consist of various carbon-manganese, high-strength, low-alloy grades that are produced in as-rolled, hot-rolled and heat-treated. The primary end-user market of our plate products is the fabrication industry, which uses our plate products in the construction or manufacture of railcars, buildings, bridges, off-highway equipment, storage tanks, ships, armored products for military applications, large diameter pipelines and wind energy generation equipment. For the last five years, plate steel products have represented approximately 15% of our total steel shipment volumes.

 

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Sales by Major Product Lines

Total sales, accounted for by each of our major product lines for the periods indicated below, were as follows:

 

     Twelve Months
Ended
March 31, 2021
     Twelve Months
Ended
March 31, 2020
     Twelve Months
Ended
March 31, 2019
 
     (in millions)  

Sheet & Strip

   C$ 1,340.4      C$ 1,417.8      C$ 2,011.1  

Plate

     274.7        324.8        456.4  

Freight

     150.4        175.1        182.2  

Non-steel sales

     29.4        39.2        48.6  
  

 

 

    

 

 

    

 

 

 

Total

   C$ 1,794.9      C$ 1,956.9      C$ 2,698.3  
  

 

 

    

 

 

    

 

 

 

Sales and Marketing

The principal markets for our products are steel service centers, the automotive industry, manufacturing and construction. We market our sheet and plate products direct to end-users and also through distributors in Canada and the United States. We are focused on leveraging various competitive attributes of our process and product technologies to improve market and customer segmentation. We pursue the development of applications and markets for our high strength and light gauge products to respond to application design factors. We are also focused on increasing the Company’s product portfolio to include more value-added products.

As part of our strategy to increase direct sales to end users of plate products, we have reduced the percentage of products sold through service centers. However, due to the nature of the market and the customers for such products, we continue to sell through service centers.

The Company pursues a diversified market and customer strategy to manage earnings volatility in the North American steel market. It is critical that a North American steel producer provide products to customers in all sectors of the economy given the industry dynamics, strong competition and global overcapacity. Focusing on more than one commodity to one sector is key to ensuring earnings stability through the business cycle and achieving greater stability in economic downturns. The Company believes it has strong customer loyalty which helps it to manage through the volatility of the steel pricing cycle.

The distribution of total steel shipments by principal markets for the periods indicated below, was as follows:

Total North American Finished Steel Shipments by Major Markets

 

     April 1, 2020 to
March 31, 2021
     April 1, 2019 to
March 31, 2020
     April 1, 2018 to
March 31, 2019
 
     Tons (in
thousands)
     %      Tons (in
thousands)
     %      Tons (in
thousands)
     %  

Steel service center(1)

     1,092,000        52        1,012,000        22        1,091,000        45  

Automotive (direct and indirect)

     636,000        30        847,000        36        861,000        35  

Manufacturing & Construction

     199,000        9        246,000        11        291,000        12  

Tubular and other

     175,000        8        206,000        9        193,000        8  

Total

     2,102,000        100        2,311,000        100        2,436,000        100  

 

(1)

We believe that our shipments to service centers were predominantly resold to the automotive and the fabricating and manufacturing sectors, which have historically been the sectors that absorb the most finished steel.

Facilities

We are an integrated steelmaker in that we produce coke from coal, convert iron ore to iron, iron to liquid steel and produce finished and semi-finished steel products. Our production facilities, all of which are located in Sault Ste. Marie, include the following:

 

   

three coke batteries;

 

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two blast furnaces (one currently idle);

 

   

basic oxygen steelmaking shop consisting of two vessels and secondary steel refining facilities;

 

   

DSPC with twin strand thin slab caster coupled with roughing and finishing hot mill;

 

   

twin strand conventional slab caster;

 

   

combination hot rolling mill capable of switching between plate and sheet products;

 

   

plate heat treat facilities and plate finishing facilities; and

 

   

downstream finishing operations consisting of pickling, cold rolling, annealing and tempering, sheet slitting, and cut to length facilities.

The following table sets forth the “nameplate” annual production capacity in tons and actual production for certain of our facilities for the periods indicated:

 

     Actual Production  

Annual Production Process Line

   Capacity (NT)      Fiscal 2021      Annual
Production
Process Line
     Capacity (NT)  

Coke Batteries No. 7, No. 8 and No. 9

     900,000        801,717        830,882        765,199  

Blast Furnace No. 7

     2,690,000        2,069,943        2,010,295        2,450,734  

Blast Furnace No. 6

     1,000,000                       

Basic Oxygen Furnace (BOF)

     3,600,000        2,322,106        2,508,871        2,727,207  

Direct Strip Production Complex

     2,300,000        1,627,446        1,796,450        1,890,436  

Slab Caster

     2,000,000        618,963        625,476        742,150  

106” Strip Mill

     460,000        243,539        309,656        337,445  

166” Plate Mill

     400,000        356,313        369,627        432,865  

Heat Treat

     320,000        169,909        131,246        174,775  

100” Pickler

     800,000        528,139        566,041        667,306  

80” Cold Reduction Mill

     350,000        158,310        155,430        147,923  

80” Temper/Skinpass Mill

     800,000        516,874        602,381        692,032  

Batch Annealing

     250,000        130,293        140,846        146,007  

Raw materials and energy

Iron ore

Our largest input cost in the steel-making process is iron ore, which we purchase under our supply contracts with Cliffs and U.S. Steel.

Our iron ore needs of 3.5 million tons are satisfied by our contracts with Cliffs and U.S. Steel. The Cliffs iron ore purchase contract was first negotiated in 2002 and has been amended and extended on a number of occasions. Our current contract, dated May 31, 2013 provides for the supply of iron ore through 2024.

In 2020, the Company secured a long term iron ore purchase contract with U.S. Steel for the supply of the Company’s remaining tonnage requirement. The U.S. Steel contract, dated May 13, 2020, provides for the supply of iron ore through 2025. The Company believes that having a second competitive supply arrangement for this critical raw material will help mitigate the Company’s supply risks for iron ore.

Taken together, the Company’s agreements with Cliffs and U.S. Steel ensure supply of iron ore pellets through the close of the 2024 shipping season.

Coal

The Company’s procurement team has worked with the operations team to develop a desired coal mix with reduced total volatile matter to produce more coke, which is stronger, creating less degradation and less gas. Coal is sourced from mines in Central Appalachia. Annual contracts have been set up with four suppliers which are incumbents for the past several years.

 

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Coke

Our internal coke batteries produce the majority of our coke requirements for the Blast Furnace No. 7. Additional coke is purchased as required under contract or from the spot market.

Other raw materials

We purchase limestone, alloys and other raw materials for our manufacturing operation at what we believe to be competitive prices. We generate half of our scrap requirements internally and the balance is purchased from third parties, primarily from regional sources where we have a pricing advantage over other markets due to our proximity to the suppliers.

Energy

We purchase all of our natural gas from independent suppliers at market pricing. From time to time, we may use forward contracts over three- to twelve-month periods, mainly for peak winter months (January through March) to manage exposure to natural gas price changes. Currently, we do not have any fixed price natural gas commodity contracts in place. We do have fixed price contracts in place in relation to natural gas transportation.

The Company sources approximately 50-60% of its electricity needs internally and under a supply agreement with the operator of a low-cost cogeneration facility. We also obtain electricity from the Independent Electricity System Operator in Ontario and obtain electricity rebates under the Northern Industrial Electricity Rate program.

Oxygen is supplied by Praxair Canada Inc. through a supply agreement that extends to mid-2026.

Environment

The Company’s environmental policy is to conduct our business in a manner that ensures the Company and its personnel act reasonably and responsibly with respect to the protection of the environment. Where appropriate, we have introduced environmental accountability to all employees. Activities that may have an impact on the natural environment have been identified and managed through the implementation of our ISO14001 compliant environmental management system. Our Environment Department regularly reviews and audits our operating practices to monitor compliance with our environmental policies and legal requirements.

The Company is required to comply with a stringent and evolving body of federal, provincial and local environmental laws concerned with, among other things, emissions into the air, carbon and greenhouse gas emissions, discharges to surface and ground water, the investigation and remediation of contaminated property, noise and odor control, waste management, recycling and disposal. Significant expenditures could be required for compliance with current or future laws or regulations relating to environmental compliance and remediation.

In the United States and Canada, certain environmental laws and regulations impose joint and several liabilities on certain classes of persons for the costs of investigation and remediation of contaminated properties. Liability may attach regardless of fault or the legality of the original management or disposal of the substance or waste. Some of our current and former facilities have been in operation for many years and, over such time, have used substances and disposed of wastes that may require investigation and remediation. The Company could be liable for the costs of such investigations and remediation. Costs for any remediation of contamination, on or off site, whether known or not yet discovered, or to address other issues relating to waste disposal, mine closure, emissions into the air or water, or the storage of materials, could be substantial and could have an adverse effect on our operating results.

The LEAP was developed in accordance with the Framework Agreement Concerning Environmental Issues that was signed by the MECP and the Company in connection with the Company’s acquisition of substantially all of the operating assets and liabilities of Old Steelco concerning legacy environmental issues at the Company’s site in Sault Ste. Marie, Ontario (the “Site”). The MECP provided a full environmental release in favor of the Company and its current and future directors and officers from any obligations under applicable environmental laws relating to legacy environmental contamination at the Site. The release was provided in consideration for the Company implementing the LEAP environmental management plan, maintained and funded by the Company, with the objectives of identifying,

 

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assessing, managing and mitigating off-Site adverse environmental effects caused by legacy environmental contamination at the Site. The LEAP Emergency Financial Assistance program requires a fixed annual amount of C$4.4 million from calendar years 2021 to 2023 inclusive and C$3.8 million thereafter until 2040 to either be invested in MECP approved LEAP activities or added to the existing C$10.7 million LEAP financial assurance provided to MECP at the end of each calendar year.

The Company is required by an agreement with the Ministry of Energy, Northern Development and Mines (the “ENDM”) to fund a financial assurance associated with a mine closure at the former MacLeod Mine operations in Wawa, Ontario and other former mine properties. The amended agreement requires payment be made to the ENDM on April 1 and October 1 of each year. The amount for calendar years 2021 to 2023 inclusive is C$333,333, after which the amount reduces to C$250,000 until 2039. The agreement also requires that the Company provide, handle, blend and load any and all alkaline fill material required for the rehabilitation of certain mine properties (estimated at 114,000 tons), when directed by ENDM, at any time following reasonable advance written notice during the term of the agreement.

Pursuant to an Environmental Compliance Approval issued by the Ontario Ministry of Environment and Climate Change, we are required to install, within ten months after start up, certain equipment in the Blast Furnace No. 6 to reduce casthouse emissions. The cost of this equipment and its installation is currently estimated at approximately C$18.0 million. The actual cost of the equipment and its installation could vary significantly due to cost escalation, design changes, regulatory policies or other factors. In addition, the tightening of air emissions standards in Ontario for our blast furnace and cokemaking operations could result in significant costs for additional pollution controls or other equipment or operational changes. The foregoing costs would not be incurred until Blast Furnace No. 6, which is currently idled, is restarted.

Pursuant to an Environmental Compliance Approval issued by the Ontario Ministry of Environment and Climate Change, the Company is required to apply technology or process changes to mitigate noise levels from identified sources within the Sault Ste. Marie operations. It is estimated that the capital cost associated with the noise abatement plan is approximately C$4.0 million to be completed by 2023.

We provided financial assurance of C$3.6 million to the Province of Ontario in the form of a letter of credit for reclamation of the landfill site at our facility in Sault Ste. Marie, Ontario. The Province of Ontario may request further financial assurances of the Company for other close-out obligations or known or suspected contamination, particularly if it becomes concerned about the Company’s ongoing financial viability. No assurance can be given that unforeseen changes, such as new laws or stricter enforcement policies, or a critical incident at one of our facilities, will not have a material adverse effect on our business, estimated capital or operating costs, financial position, or financial performance. Accordingly, we may be required to give additional financial assurances to the Province of Ontario.

The Company is currently subject to the Canadian federal Output-Based Pricing System (“OBPS Program”) for GHG emissions, which requires payment by April 15, 2021 for any emissions above the OBPS Program benchmarks for emissions relating to the 2019 calendar year, which payment is approximately C$7.49 million. Compliance obligations for the 2020 calendar year are due by November 15, 2021 and have yet to be verified. A regulatory transition is currently underway to transition from the federal OBPS Program to the Ontario Emissions Performance Program (“EPS Program”) for GHG emitters in Ontario. Details of the timeline for the transition and future compliance obligations are currently under development. See “Risk Factors – Increased regulation associated with climate change and greenhouse gas emissions could impose significant additional costs on our operations.”

The Company is required to implement plans and measures to reduce the amount of sulphur dioxide emitted from the combustion of coke oven gas by-product in accordance with the Notice issued under subsection 56(1) of CEPA. The target date for desulphurization of coke oven gas is January 1, 2026. The Company currently estimates that it will cost approximately C$60 million to comply with the Notice. See “Risk Factors – Environmental compliance and site remediation obligations could result in substantially increased costs and could materially adversely affect our competitive position.”

On October 18, 2019, there was a rupture of a steam drain line which was located below an electrical room in our cokemaking BP, which resulted in a loss of power to the BP. In accordance with our emergency procedures, the coke oven gas bleeders were lit to flare the coke oven gas. Additionally, the loss of power caused the cokemaking south raw

 

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liquor tank and the tar running tanks to overflow. Raw liquor was conveyed to the MWFP via a sewer located in the BP. This resulted in effluent exceedances at the MWFP for phenol, ammonia and total cyanide and a toxicity failure for rainbow trout. The incident remains under investigation by MECP.

The Company is subject to an order from the MECP, which requires vapor collection and air pollution control devices to be installed on four sources by December 31, 2021 for the purpose of reducing benzene emissions from the site.

Information systems

Our information technology landscape supports a high level of business automation across three distinct segments of business processes: management decision systems, manufacturing execution/scheduling systems and process control systems. Our management decision systems, including the full order-to-cash cycle, are running on the SAP (Windows/Oracle) platform. Our manufacturing execution/scheduling systems run on the IBM mainframe environment. Our process control systems run on Windows, Vax, and Honeywell environments. Our infrastructure includes a LAN/WAN data network, desk/mobile phone services, approximately 100 servers, approximately 1400 PCs and two main datacenters (SAP at the Sault Ste. Marie, ON and Mainframe at Markham, ON). Daily incremental and full back-ups to disk and tape, including offsite replication and storage, are created for disaster recovery purposes.

Employees

The Company has 2,696 full-time employees as of June 30, 2021, of which approximately 95% are represented by two locals of the USW: Local 2251, which represents hourly employees, and Local 2724, which represents salaried employees. The Company’s collective bargaining agreements with Local 2251 and 2724 were amended in connection with the Purchase Transaction and have terms extending to July 31, 2022.

The provisions of the collective bargaining agreements with Locals 2251 and 2724 are generally similar. Both collective bargaining agreements provide for the establishment of a Joint Steering Committee (‘‘JSC’’) whose mandate includes ensuring that changes that are implemented in the workplace will achieve the objectives agreed to in the strategic plan set by the board of directors. Further, the JSC is mandated to work with the Company’s President and Chief Executive Officer and senior management on business matters generally and in particular with respect to the achievement of goals in our strategic plan, annual business plans and other general business goals and objectives.

We believe our management has built a constructive relationship with the USW and has successfully renegotiated its collective bargaining agreements over the last 30 years. Labor relations have been further strengthened through the success of a profit sharing plan that has provided substantial additional compensation to our employees.

Enterprise risk management

The Company employs an enterprise risk management (“ERM”) process to coordinate risk management among departments to manage the organization’s full range of risks as a whole. ERM offers a framework for effectively managing uncertainty, responding to risk and harnessing opportunities as they arise.

Competition

There has been a substantial increase in global steel capacity, particularly in China, which has become the largest producer and consumer of steel in the world. In addition, there has been consolidation of global steel producers and the emergence of China as an industry leader with global capacity exceeding 500 million metric tons. A significant slowdown in domestic Chinese growth and/or increases in capacity that exceed consumption rates in China could result in surplus steel being exported to world markets. In addition, an economic downturn that affects demand for our products or an increase in the strength of the U.S. dollar or Canadian dollar relative to other currencies could increase imports. It is, therefore, possible that more unfairly priced imports could enter the North American markets at a future date, which could result in domestic price erosion, which would adversely affect our ability to compete, or generate revenue and reduce profitability.

 

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We compete with numerous foreign and domestic steel producers, primarily from integrated producers, like ourselves, as well as EAF producers. We primarily compete with other steel producers based on the delivered price of finished steel products to customers. EAF producers typically require lower capital expenditures for construction and maintenance of facilities, and may have lower total employment costs. However, these competitive advantages may be reduced or eliminated when scrap prices are high.

Although freight costs for steel can often make it uneconomic for distant steel producers to compete with us, to the extent that they have lower cost of sales resulting from lower labor, raw material or energy costs or from government subsidies, they may be able to successfully compete. Although we are continually striving to improve our operating costs, we may not be successful in achieving labor, raw material and energy cost improvements or gaining operating efficiencies that may be necessary to remain competitive on a global scale.

Our competitive position is positively affected by lower transportation costs than those of other Canadian producers. Our position on the Great Lakes provides us with access to lower cost modes of transportation for our inbound raw materials and outbound steel products. Approximately 70% of our customers are located within a 500-mile radius of our facility in key steel consuming regions of the Midwest and Northeast United States and southern Ontario, allowing us to service our customers at competitive costs. In accordance with common industry practice, we may from time to time assume additional shipping costs when selling outside of our local geographic area in order to provide competitive pricing.

Trade

Our business has historically been affected by “dumping” – the selling of steel into Canadian or U.S. markets at prices below cost or below the price prevailing in a foreign company’s domestic market. Dumping may result in injury to steel producers in Canada or the U.S. in the form of suppressed prices, lost sales, lower profits and reductions in production, employment levels and the ability to raise capital. Some foreign steel producers are owned, controlled or subsidized by foreign governments. Decisions by these foreign producers to continue production at marginal facilities may be influenced to a greater degree by political and economic policy considerations than by prevailing market conditions and may further contribute to excess global capacity. Although trade legislation to limit dumping has had some success, it may be inadequate to prevent future unfair import pricing practices which individually or collectively could materially adversely affect our business. If Canadian or U.S. trade laws are weakened, an increase in the market share of imports into the U.S. and Canada may occur, which would have a material adverse effect on our business and financial performance.

There remains in place anti-dumping findings covering imports of (i) hot rolled sheet into Canada from Brazil, China, India and Ukraine and into the United States from Russia, China, India, Indonesia, Taiwan, Thailand, Ukraine, Australia, Japan, South Korea, Netherlands, Turkey and United Kingdom, among other countries, (ii) cold rolled sheet into Canada from China, South Korea and Vietnam and into the United States from Brazil, China, India, Japan, South Korea and United Kingdom, and (iii) hot rolled plate into Canada from China, Ukraine, Bulgaria, Czech Republic, Romania, South Korea, Italy, Brazil, Japan, Denmark, Indonesia, Taiwan and Germany and into the United States from China, Russia, Ukraine, India, Indonesia, South Korea, Austria, Belgium, Brazil, France, Germany, Italy, Japan, South Africa, Taiwan, and Turkey.

New trade cases in other jurisdictions are being considered to cover such exports. This and the potential for such exports to continue to displace hot rolled sheet product exports from other countries in markets worldwide may result in large quantities of hot rolled sheet products being exported into Canada and United States. The Company will continue to monitor imports of competing steel products into its customer markets and take appropriate action, including filing complaints, where such actions are warranted.

Properties

Our production facility is located on the St. Mary’s River adjacent to other industrial facilities in Sault Ste. Marie, Ontario. It is on 686 hectares of land, much of which is available for expansion. Transportation services are provided by road, rail and water. Our facilities include raw material and commercial docks and we operate the only deep-water dock on the upper St. Mary’s River, at Leigh’s Bay.

 

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Legal proceedings

There are no legal proceedings involving a material amount outstanding against us or our subsidiaries. We have various litigation matters pending that have arisen out of the ordinary course of our business. In the opinion of our management, the ultimate resolution of these matters will not have a material adverse effect on our financial position.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management 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 in this section to “Algoma,” “the Company,” “Successor,” “we,” “us,” or “our” refer to Algoma Steel Group Inc. and its consolidated subsidiaries. References to “Old Steelco” or “Predecessor” are to Essar Steel Algoma Inc.

The following MD&A provides Algoma management’s perspective on the financial position and financial performance of the Company and its consolidated subsidiaries for the three month periods ended June 30, 2021 and 2020, the years ended March 31, 2021 and 2020 and pro forma combined twelve month period ended March 31, 2019. As described in Note 4 to the Algoma Audited Financial Statements (as defined below), the Company purchased substantially all of the operating assets and liabilities of Old Steelco on November 30, 2018, prior to which it had no operations. It is the Company’s opinion that comparing the Company’s results for the years ended March 31, 2021 and 2020 to the pro forma combined results of (i) the Company for the four-month period ended March 31, 2019 together with (ii) Old Steelco’s results for the eight-month period ended November 30, 2018 (such pro forma combined results, the “Pro Forma Combined Results”), including the pro forma adjustment described herein, will be useful to the readers of this MD&A. Discussion in this MD&A that compares the year ended March 31, 2020 to the year ended March 31, 2019 is a comparison of the Company’s results for the year ended March 31, 2020 to the Pro Forma Combined Results. Readers are cautioned that the Pro Forma Combined Results are not necessarily indicative of what the Company’s results would have been had the Company been operating for the full year ended March 31, 2019.

This MD&A provides information to assist readers of, and should be read in conjunction with, the Company’s condensed interim consolidated financial statements and the accompanying notes thereto as of June 30, 2021 and March 31, 2021 and for the period ended June 30, 2021 and 2020 (the “Algoma Condensed Interim Consolidated Financial Statements”) and the Company’s audited consolidated financial statements and the accompanying notes thereto as of March 31, 2021 and 2020 and for the years ended March 31, 2021, 2020 and for the four-month period ended March 31, 2019 and for the eight-month period ended November 30, 2018 for Old Steelco (the “Algoma Audited Financial Statements”), included elsewhere in this prospectus. The Company’s year-end is March 31.

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. Readers are directed to carefully review the sections entitled “Forward-Looking Statements,” “Presentation of Algoma’s Financial Information,” “Non-IFRS Financial Measures” and “Risk Factors” included elsewhere in this prospectus.

Overview of the Business

Algoma Steel Group Inc., formerly known as 1295908 B.C. Ltd., was incorporated on March 23, 2021 under the BCA for the purpose of purchasing Algoma Steel Holdings Inc. A purchase agreement between the Company and Algoma Steel Intermediate S.A R.L., or LuxSarl, was executed March 29, 2021, whereby the Vendor sold its equity holdings in the capital of Algoma Steel Holdings Inc. to the Company. The transaction resulted in LuxSarl transferring its 100,000,001 common shares of Algoma Steel Holdings Inc. to the Company in exchange for 100,000,000 common shares of the Company.

Algoma Steel Inc., the operating company and a wholly owned subsidiary of Algoma Steel Holdings Inc., was incorporated on May 19, 2016 under the BCA for the purpose of purchasing substantially all of the operating assets and liabilities of Old Steelco. Prior to the Purchase Transaction, which was completed on November 30, 2018, the Company had no operations and was capitalized with 1 common share with a nominal value. Further information about the Purchase Transaction is disclosed in Note 4 to the Algoma Audited Financial Statements included elsewhere in this prospectus. The Company is an integrated steel producer with its active operations located entirely in Canada. The Company produces sheet and plate products that are sold primarily in North America.

 

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Factors Affecting Financial Performance

The Company’s profitability is correlated to the pricing of steel, ore, coal and energy and the existence of tariffs on its sales outside of Canada. Changes in the underlying pricing of the Company’s steel products and raw materials, and changes in tariffs on sales outside of Canada cause variation in operating results between periods. During periods of stronger or improving steel market conditions, the Company is more likely to be able to pass the increased costs of ore, coal and energy to its customers, protecting the Company’s margins from significant erosion. During weaker or rapidly deteriorating steel market conditions, including due to weak steel demand, low industry utilization rates and/or increasing steel product imports, the competitive environment intensifies which results in increased pricing pressure. All of those factors, to some degree, impact pricing, which in turn impacts margins.

Steel pricing is largely dependent on global supply, the level of steel imports into North America and economic conditions in North America. Global steel production overcapacity continues to be a long-term challenge. Steel production in China rose in 2020, going from approximately 1.10 billion tons in 2019 to approximately 1.16 billion tons in 2020 – an increase of 5.5%. As a result, China’s share of global crude steel production rose from 53.3% in 2019 to 56.6% in 2020 (source: Worldsteel Association “2021 World Steel in Figures” and Worldsteel Association “2020 World Steel in Figures”). This trend continued for the first five months of 2021 as steel production in China rose 13.9%, with China producing 473.1 million tons in this period (source: Worldsteel Association Press Release “May 2021 Crude Steel Production” June 22, 2021). The Organisation for Economic Co-operation and Development (“OECD”) projects that global excess steel production capacity was approximately 776 million tons in 2020, up from 624 million tons at the end of 2019, which was itself up significantly from the prior year.

COVID-19 Pandemic

On March 11, 2020, the coronavirus (COVID-19) was declared a pandemic by the World Health Organization. Concerns about the spread of the virus, and measures taken to control the spread of the virus have negatively affected economies globally and upset normal commercial patterns. The manufacture of steel was deemed an essential service by the government of Ontario, Canada, and as a result, operations at the Company have been ongoing since the onset of the COVID-19 pandemic.

From the onset of this global health crisis, management, has worked in close consultation with public health officials, to implement extensive preventative measures and safety protocols. Management has continued to adjust and refine preventative measures throughout this health crisis as regulations and best practice evolve. These measures include:

 

   

Mandatory self-attestation and restricted eligibility for work for employees that fall under a self-isolation or quarantine scenario;

 

   

Mandatory mask use in all shared areas;

 

   

Visitor restrictions and protocols;

 

   

Contractor self-attestation and pre-screening;

 

   

Heightened sanitation protocols, including rotating deep cleaning measures;

 

   

Immediate intensive sanitation of an area where a worker has displayed symptoms;

 

   

Physical distancing protocols for employees and essential service providers, including truck drivers and couriers;

 

   

Staggered shift starts, lunches and breaks to reduce congestion in welfare facilities and lunchrooms;

 

   

Mandatory personal protective equipment, including respirator, disposable coveralls, safety glasses, masks, when working within two metres of another person;

 

   

On-site worker transportation limit of two persons per vehicle, with mask usage;

 

   

Revised vendor delivery protocols to provide for contactless delivery and maintain social distancing;

 

   

Transitioned paper processes online;

 

   

Facilitated work from home arrangements;

 

   

Redesigned work station layout to provide for adequate spacing and limited pulpit occupancy;

 

   

Directed teams to hold meetings via teleconference and video conference;

 

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Online training delivery; and

 

   

An Employee Hotline where employees can call twenty-four hours a day with any questions or concerns.

Measures have also been taken to safeguard the Company’s liquidity position. At June 30, 2021, the Company had cash of C$21.9 million (March 31, 2021 – C$21.2 million) and no balance outstanding on the Revolving Credit Facility (March 31, 2021 – C$90.1 million). During the year ended March 31, 2021, management elected to pay the interest due on the Secured Term Loan Facility in kind for interest accrued during April to September 2020, resulting in an increase in the principal amount of the Secured Term Loan Facility of C$11.3 million, C$11.0 million and C$10.9 million, respectively. In January 2021 and April 2021, interest of C$10.2 million and C$9.4 million on the Secured Term Loan Facility was paid in cash, not in kind.

At the onset of the COVID-19 pandemic, slowdowns and disruptions in the operations of our customers led to a reduction in demand. In response, during the six month period ended September 30, 2020, the Company adjusted production to match demand and control costs. For the three month period ended June 30, 2021, production and shipment volumes improved, returning to pre-pandemic levels.

Management believes that the Company has sufficient resources to remain in compliance with its debt covenants and support the operations of the Company. However, future unanticipated disruptions in the Company’s business activities, and costs incurred by the Company in response to changing conditions and regulations could have a material adverse impact on our business, operating results and financial condition. See “Risk Factors – Risks Related to Our Business”.

Overall Results

Comparison of Year Ended March 31, 2020 and Pro Forma Combined Year Ended March 31, 2019

We believe that reviewing our operating results for the year ended March 31, 2019 by combining results of the 2019 Successor period (April 1, 2018 to November 30, 2018) and 2019 Predecessor period (December 1, 2018 to March 31, 2019) with pro forma adjustments related to the Purchase Transaction is useful as supplemental information discussing our overall operating performance compared to the results of the year ended March 31, 2020 (Successor).

 

    For the year
ended March 31,
2020
    Period from
April 1, 2018
to November 30,
2018
    Period from
December 1,
2018 to
March 31,
2019
    Pro Forma
Adjustments
    Notes     Pro Forma
Combined Year
Ended March 31,
2019
 
expressed in millions of Canadian dollars (except
per share amounts)
                                   

Revenue

  C$ 1,956.9     C$ 1,828.6     C$ 869.7     C$       C$ 2,698.3  

Operating expenses

           

Cost of sales

  C$ 2,037.0     C$ 1,512.6     C$ 815.5     C$ 18.0       1 (a)    C$ 2,346.1  

Administrative and selling expenses

    56.9       44.5       21.9               66.4  

Impairment reserve

          105.4                     105.4  

Restructuring costs

          20.9                     20.9  

Profit (loss) from operations

  C$ (137.0   C$ 145.2     C$ 32.3     C$ (18.0     C$ 159.5  

Other (income) and expenses

           

Finance income

  C$ (2.6   C$ (0.4   C$ (0.3   C$       C$ (0.7

Finance costs

    63.8       119.3       20.6       (78.0     1 (b)      61.9  

Interest on pension and other post-obligations

    17.3       12.0       7.0               19.0  

Foreign exchange gain

    (35.3     (13.7     (1.8             (15.5
  C$ 43.2     C$ 117.2     C$ 25.5     C$ (78.0     C$ 64.7  

Income before income taxes

  C$ (180.2   C$ 28.0     C$ 6.8     C$ 60.0       C$ 94.8  

Income tax expense (recovery)

    (4.3     (1.5     4.1               2.6  

Net income

  C$ (175.9   C$ 29.5     C$ 2.7     C$ 60.0       C$ 92.2  

 

Notes:

 

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1(a)

To reflect the impact of increased amortization of C$18.0 million, as a result of assets acquired at their fair value determined based on the difference of combined actual amortization for the eight and four month periods ended November 30, 2018 and March 31, 2019, respectively, compared to normalized post-transaction amortization.

 

1(b)

To reflect the impact of decreased finance costs of C$78.0 million, as a result of settlement of debt by the Predecessor and new debt acquired by the Successor at a lower interest rate determined based on the difference of combined actual finance costs for the eight and four month periods ended November 30, 2018 and March 31, 2019, respectively, compared to normalized post-transaction finance costs.

Net Income (Loss)

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

The Company’s net income for the three month period ended June 30, 2021 was C$203.6 million, compared to a net loss of C$42.7 million for the three month period ended June 30, 2020, a C$246.3 million increase of net income. This increase was due primarily to a significant increase in steel revenue of C$422.7 million in the quarter compared to the corresponding prior year period, a result of increased shipment volume (46.6%) and higher selling prices of steel, offset, in part, by associated increases in cost of steel revenue (C$152.0 million).

Fiscal Year Ended March 31, 2021 Compared to Fiscal Year Ended March 31, 2020

The Company’s net loss for the year ended March 31, 2021 was C$76.1 million, compared to a net loss of C$175.9 million for the year ended March 31, 2020, resulting in a C$99.8 million reduction of net loss. This reduction of net loss was due primarily to decreased amortization (C$40.8 million) and lower cost of steel revenue per ton of steel sold, decreased by 12.3% from C$791 to C$694, due to a reduction in the purchase price of many inputs such as alloys, scrap and natural gas as well as certain cost control measures that were put in place to mitigate the impact of deteriorating market conditions at the onset of the pandemic.

Four Month Period Ended March 31, 2019

The Company’s net income for the four month period ended March 31, 2019 was C$2.7 million.

Eight Month Period Ended November 30, 2018

The Company’s net income for the eight month period ended November 30, 2018 was C$29.5 million.

Fiscal Year Ended March 31, 2020 Compared to Pro Forma Combined Twelve-Month Period Ended March 31, 2019

The Company’s net loss for the year ended March 31, 2020 was C$175.9 million, compared to C$92.2 million net income for the year ended March 31, 2019 (Pro Forma Combined), resulting in a C$268.1 million reduction in net income. This reduction in net income was due primarily to decreased steel revenue (C$724.9 million), a result of lower selling prices of steel products and lower shipping volume (declined by 5.3%), offset in part by associated lower cost of steel products sold (C$323.6 million).

The Company experienced an unplanned outage in April 2019 that disrupted production in our Blast Furnace No. 7. This outage had no impact on the integrity of the furnace. However, the resulting lost production led to a shipping volume reduction during the year ended March 31, 2020, of over one hundred thousand tons. During April 2019, the Company recorded a capacity utilization adjustment of C$32.7 million to cost of steel products sold. Planned maintenance, originally scheduled for later in the year, was accelerated and performed during this outage in April. Rescheduling maintenance to align with the unplanned outage was part of the plan management implemented to make up for the lost production in the remaining quarters of the year ended March 31, 2020. The outage, caused by a chemistry imbalance of certain materials, resulted from operator error. Operating parameters have been tightened and systems have been put in place to improve the overall monitoring of the blast furnace.

The unplanned outage, discussed above, led to an increase in net loss of C$32.7 million for the year ended March 31, 2020. Additionally, decreased selling prices and lower shipment volumes for the year ended March 31, 2020 further increased net loss as compared to the year ended March 31, 2019 (Pro Forma Combined).

 

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Income (Loss) from Operations

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

The Company’s income from operations for the three month period ended June 30, 2021 was C$252.2 million, compared to a loss from operations of C$2.8 million for the three month period ended June 30, 2020, an increase of C$255.0 million, due primarily to the reasons described above for net income.

As discussed above, the onset of the COVID-19 pandemic disrupted the operations of the Company’s customers and reduced the demand for steel products. Accordingly, the Company slowed production during the three month period ended June 30, 2020, to match the reduced demand. However, production has subsequently, over the latter half of fiscal 2021 and throughout the three month period ended June 30, 2021, returned to normal levels to match the increased demand for steel products.

Fiscal Year Ended March 31, 2021 Compared to Fiscal Year Ended March 31, 2020

The Company’s income from operations for the year ended March 31, 2021 was C$84.8 million (March 31, 2020 – loss from operations of C$137.0 million), an increase of C$221.8 million, due primarily to the reasons described above for net income.

Four Month Period Ended March 31, 2019

The Company’s income from operations for the four month period ended March 31, 2019 was C$32.3 million.

Eight Month Period Ended November 30, 2018

The Company’s income from operations for the eight month period ended November 30, 2018 was C$145.2 million.

Fiscal Year Ended March 31, 2020 Compared to Pro Forma Combined Twelve-Month Period Ended March 31, 2019

The Company’s loss from operations for the year ended March 31, 2020 was C$137.0 million, compared to net income from operations of C$159.5 million for the year ended March 31, 2019 (Pro Forma Combined), a decrease of C$296.5 million, due primarily to lower selling prices of steel products, offset in part by discontinuation of tariffs imposed on Canadian steel producers (25% on all steel revenues earned on shipments made to the United States) effective June 1, 2018, and subsequently lifted May 20, 2019.

Adjusted EBITDA

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

The Company’s Adjusted EBITDA for the three month period ended June 30, 2021 was C$280.8 million (June 30, 2020 – C$20.5 million), with an Adjusted EBITDA margin of 35.6% (June 30, 2020 – 5.9%), average net sales realization (“NSR”) of C$1,185 per ton (June 30, 2020 – C$746 per ton) and cost of steel products sold of C$695 per ton (June 30, 2020 – C$673 per ton), due primarily to the reasons described above for net income.

Fiscal Year Ended March 31, 2021 Compared to Fiscal Year Ended March 31, 2020

As discussed above, the onset of the COVID-19 pandemic disrupted the operations of the Company’s customers, and reduced the demand for steel products. Accordingly, the Company slowed production during the year ended March 31, 2021, to match the reduced demand. Steel shipments for the year ended March 31, 2021 were 8.8% lower compared to the year ended March 31, 2020. However, production was increased in the last six months of the year to match increased demand, resulting in increased shipments and steel revenue during such period.

The Company’s Adjusted EBITDA for the year ended March 31, 2021 was C$189.0 million (March 31, 2020 – (C$2.2) million), with an Adjusted EBITDA margin of 10.5% (March 31, 2020 – (0.1%)), average NSR of C$768 per

 

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ton (March 31, 2020 – C$756 per ton) and cost of steel products sold of C$646 per ton (March 31, 2020 – C$732 per ton). The Company’s net loss for the year ended March 31, 2021 was C$76.1 million (March 31, 2020 – net loss of C$175.9 million).

During the year ended March 31, 2021, the COVID-19 pandemic dampened demand for steel products, leading to a reduction in shipment volumes and decreased selling prices. However, during the last six months of the year, demand and selling prices rebounded strongly. The FY 2020 Q1 Outage (as defined below) led to a reduction in Adjusted EBITDA of C$32.7 million for the year ended March 31, 2020.

In addition, for the year ended March 31, 2021, tariff expense in cost of sales was nil as the tariff on steel products was revoked as of May 20, 2019. For the year ended March 31, 2020, tariff costs of C$27.8 million were included in cost of sales.

Four Month Period Ended March 31, 2019

The Company’s Adjusted EBITDA and Further Adjusted EBITDA for the four month period ended March 31, 2019 was C$79.9 million and C$166.9 million, respectively.

Eight Month Period Ended November 30, 2018

The Company’s Adjusted EBITDA and Further Adjusted EBITDA for the eight month period ended November 30, 2018 was C$315.9 million and C$454.4 million, respectively.

Fiscal Year Ended March 31, 2020 Compared to Pro Forma Combined Twelve-Month Period Ended March 31, 2019

The Company’s Adjusted EBITDA for the year ended March 31, 2020 was (C$2.2) million, compared to C$395.8 million for the year ended March 31, 2019 (Pro Forma Combined), with an Adjusted EBITDA margin of (0.1%), compared to 14.7% for the year ended March 31, 2019 (Pro Forma Combined), average NSR of C$756 per ton (Pro Forma Combined March 31, 2019 – C$1,013 per ton) and cost of steel products sold of C$732 per ton (Pro Forma Combined March 31, 2019 – C$825 per ton). The Company’s net loss for the year ended March 31, 2020 was C$175.9 million (Pro Forma Combined March 31, 2019 – net income of C$92.2 million).

In addition, the Company incurred tariff expense of C$27.8 million during the year ended March 31, 2020 (Pro Forma Combined March 31, 2019 – C$225.5 million). The tariff was revoked as of May 20, 2019. Further Adjusted EBITDA for the year ended March 31, 2020 would have been C$58.3 million (Pro Forma Combined March 31, 2019 – C$621.3 million).

 

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Steel Revenue and Cost of Sales

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

 

     April 1 to June 30  
     Change     FY 2022     FY 2021  

tons

      

Steel Shipments

     46.6     610,057       416,216  

millions of dollars

      

Revenue

     C$ 789.1     C$ 349.4  

Less:

      

Freight included in revenue

       (41.8     (31.6

Non-steel revenue

       (24.4     (7.4

Steel revenue

     132.9   C$ 722.9     C$ 310.4  

Cost of steel revenue

     C$ 444.0     C$ 300.7  

Less:

      

Amortization included in cost of steel revenue

       (20.6     (19.1

Carbon tax included in cost of steel revenue

       0.6       (1.5

Cost of steel products sold

     51.4   C$ 424.0     C$ 280.1  

dollars per ton

      

Revenue per ton of steel sold

     54.1   C$ 1,293     C$ 839  

Cost of steel revenue per ton of steel sold

     0.7   C$ 728     C$ 722  

Average net sales realization on steel sales(i)

     58.9   C$ 1,185     C$ 746  

Cost per ton of steel products sold

     3.3   C$ 695     C$ 673  

 

(1)

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.

The Company’s NSR on steel sales (excluding freight) per ton shipped was C$1,185 for the three month period ended June 30, 2021 (June 30, 2020 – C$746), an increase of 58.9%. Steel revenue increased by 123.6% and steel shipment volumes increased by 46.6% during the three month period ended June 30, 2021, compared to the three month period ended June 30, 2020. The overall increase in steel shipment volumes and steel revenue is due to increased steel prices and demand compared to the three month period ended June 30, 2020, when the impacts of the COVID-19 pandemic were initially realized.

For the three month period ended June 30, 2021, the Company’s cost of steel products sold increased by 51.4% to C$424.0 million (June 30, 2020 – C$280.1 million), due primarily to the increase in shipping volume (46.6%).

Further, the Government of Canada passed the Canada Emergency Wage Subsidy (“CEWS”) in response to the COVID-19 pandemic, which allowed the Company to maintain its headcount during the COVID-19 pandemic, notwithstanding reductions in production that would otherwise have resulted in temporary layoffs. For the three month period ended June 30, 2021, the Company did not receive CEWS funding. For the three month period ended June 30, 2020, the Company recorded a reduction of C$27.0 million to the cost of steel products sold as a reduction to personnel costs, included therein, in connection with the CEWS program, which was offset by overall personnel costs being higher due to CEWS funding being applied to retain employees that would otherwise have been subject to temporary layoffs.

 

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Fiscal Years Ended March 31, 2021 and 2020 and Pro Forma Combined Twelve-Month Period Ended March 31, 2019

 

          Successor     Predecessor              
          Change
(FY2021 to
FY2020)
    FY 2021     Change
(FY2020 to
Pro Forma
Combined -
FY2019)
    FY 2020     Period from
December 1,
2018 to March
31, 2019
    Period from
April 1, 2018 to
November 30,
2018
    Pro Forma
Adjustments
    Pro Forma
Combined - FY
2019
 

tons

                   

Steel Shipments

  i       8.8     2,102,086     i         5.3 %      2,305,039       806,134       1,628,855             2,434,989  

millions of dollars

                   

Revenue

      C$ 1,794.9       C$ 1,956.9     C$ 869.7     C$ 1,828.6     C$     C$ 2,698.3  

Less:

                   

Freight included in revenue

        (150.4       (175.1     (64.0     (118.2           (182.2

Non-steel revenue

        (29.4       (39.2     (13.1     (35.5           (48.6
     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Steel revenue

  i       7.3   C$ 1,615.1     i 29.4 %    C$ 1,742.6     C$ 792.6     C$ 1,674.9     C$     C$ 2,467.5  
     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of steel revenue

      C$ 1,457.9       C$ 1,822.7     C$ 738.4     C$ 1,358.9     C$ 18.0     C$ 2,115.3  

Less:

                   

Amortization included in cost of steel revenue

        (86.8       (127.6     (29.2     (41.3     (18.0     (88.5

Carbon tax included in cost of steel revenue

        (13.4       (6.9                        

Business combination adjustments

                (1.4     (16.4                 (16.4
     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of steel products sold

  i       19.5   C$ 1,357.7     i 16.1 %    C$ 1,686.8     C$ 692.8     C$ 1,317.6     C$     C$ 2,010.4  
     

 

 

     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

dollars per ton

                   

Revenue per ton of steel sold

  h       0.7   C$ 854     i 23.4 %     C$ 849     C$ 1,079     C$ 1,123     C$     C$ 1,108  

Cost of steel revenue per ton of steel sold

  i       12.3   C$ 694     i 8.2 %     C$ 791     C$ 916     C$ 834     C$     C$ 869  

Average net sales realization on steel sales(ii)

  h       1.7   C$ 768     i 25.4 %     C$ 756     C$ 983     C$ 1,028     C$     C$ 1,013  

Cost per ton of steel products sold

  i       11.7   C$ 646     i 11.3 %    C$ 732     C$ 858     C$ 809     C$     C$ 825  

 

(i)

Due to the Purchase Transaction, as disclosed in Note 4 to the Algoma Audited Financial Statements, the Successor acquired assets at their fair value and, as a result, amortization increased for the year ended March 31, 2020 compared to the year ended March 31, 2019 (Pro Forma Combined).

 

(ii)

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.

Fiscal Year Ended March 31, 2021 Compared to Fiscal Year Ended March 31, 2020

The Company’s NSR on steel sales (excluding freight) per ton shipped was C$768 for the year ended March 31, 2021 (March 31, 2020 – C$756), an increase of 1.7%. Steel revenue decreased by 7.3% and steel shipment volumes decreased by 8.8% during year ended March 31, 2021, as compared to the year ended March 31, 2020. The overall decrease in steel shipment volumes was a result of the reduction in demand caused by the COVID-19 pandemic as discussed above. However, increased steel prices and demand during the last six months of the year resulted in improved NSR for the year ended March 31, 2021 compared to the year ended March 31, 2020.

 

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For the year ended March 31, 2021, the Company’s cost of steel products sold on a per ton basis decreased by 19.5% to C$1,357.7 (March 31, 2020 – C$1,686.8). For the year ended March 31, 2021, the Company’s cost of steel products sold on a per ton basis decreased by 11.7% to C$646 (March 31, 2020 – C$732). The decrease in cost of steel products sold on a per ton basis was the result of a reduction in the purchase price of many inputs such as alloys, scrap and natural gas as well as certain cost control measures that were put in place to mitigate the impact of deteriorating market conditions at the onset of the pandemic.

For the year ended March 31, 2021, the Company recorded a C$52.8 million reduction to cost of steel products sold in connection with the CEWS (March 31, 2020 and Pro Forma Combined March 31, 2019 – nil), which was offset by overall personnel costs being higher due to CEWS funding being applied to retain employees that would otherwise have been subject to temporary layoffs.

Four Month Period Ended March 31, 2019

The Company’s NSR on steel sales (excluding freight) per ton shipped and cost of steel products sold on a per ton basis were C$983 and C$858, respectively, for the four month period ended March 31, 2019.

Eight Month Period Ended November 30, 2018

The Company’s NSR on steel sales (excluding freight) per ton shipped and cost of steel products sold on a per ton basis were C$1,028 and C$809, respectively, for the eight month period ended November 30, 2018.

Fiscal Year Ended March 31, 2020 Compared to Pro Forma Combined Twelve-Month Period Ended March 31, 2019

The Company’s NSR on steel sales (excluding freight) per ton shipped was C$756 for the year ended March 31, 2020 (Pro Forma Combined March 31, 2019 – C$1,013). The decrease was primarily as a result of declines in selling prices. NSR on steel sales, (excluding freight) decreased by 25.4%, steel revenue decreased by 29.4% and steel shipment volumes decreased by 5.3% during the year ended March 31, 2020, as compared to the year ended March 31, 2019 (Pro Forma Combined). The decrease in NSR for the year ended March 31, 2020 was a result of lower market prices. The decrease in shipment volumes for the year ended March 31, 2020 was the result of the unplanned outage described above.

For the year ended March 31, 2020, the Company’s cost of steel products sold on a per ton basis was C$732 (Pro Forma Combined March 31, 2019 – C$825 per ton). The reduction of 11.3% in the cost of steel products sold on a per ton basis was primarily the result of a decrease in the cost of raw materials and certain cost reduction initiatives undertaken by the Company.

Non-steel Revenue and Cost of Sales

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

For the three month period ended June 30, 2021, the Company’s non-steel revenue was C$24.4 million (June 30, 2020 – C$7.4 million). The increase of C$17.0 million was primarily due to higher sales volume and higher selling prices of tar, light oil and braize. For the three month periods ended June 30, 2021 and 2020, non-steel cost of sales approximated non-steel sales.

Fiscal Year Ended March 31, 2021 Compared to Fiscal Year Ended March 31, 2020

For the year ended March 31, 2021, the Company’s non-steel revenue was C$29.4 million (March 31, 2020 – C$39.2 million). The decrease of C$9.8 million was primarily due to lower sales volume and lower selling prices of tar, light oil and braize. For the years ended March 31, 2021 and 2020, non-steel cost of sales approximated non-steel sales.    

Four Month Period Ended March 31, 2019

For the four month period ended March 31, 2019, the Company’s non-steel revenue was C$13.1 million, which approximated non-steel cost of sales.

 

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Eight Month Period Ended November 30, 2018

For the eight month period ended November 30, 2018, the Company’s non-steel revenue was C$35.5 million, which approximated non-steel cost of sales.

Fiscal Year Ended March 31, 2020 Compared to Pro Forma Combined Twelve-Month Period Ended March 31, 2019

For the year ended March 31, 2020, the Company’s non-steel revenue was C$39.2 million (Pro Forma Combined March 31, 2019 – C$48.6 million). The decrease of C$9.4 million was primarily as a result of lower sales volumes of mill scale, ore fines and granulated slag. For the years ended March 31, 2020 and 2019, non-steel cost of sales approximated non-steel sales.

Administrative and Selling Expenses

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

 

     April 1 to June 30  
millions of dollars    FY 2022      FY 2021  

Personnel expenses

   C$ 17.7      C$ 5.2  

Professional, consulting, legal and other fees

     6.4        4.9  

Software licenses

     1.4        1.0  

Amortization of intangible assets and non- production assets

     0.1        0.1  

Other administrative and selling

     1.1        1.3  
  

 

 

    

 

 

 
   C$ 26.7      C$ 12.5  
  

 

 

    

 

 

 

As illustrated in the table above, the Company’s administrative and selling expenses for the three month period ended June 30, 2021 were C$26.7 million (June 30, 2020 – C$12.5 million). The increase in administrative and selling expenses of C$14.2 million was comprised of increased personnel expenses (C$12.5 million), due primarily to share-based compensation, and increased professional, consulting, legal and other fees (C$1.5 million), due primarily to costs associated with on-going cost reduction and efficiency projects.

For the three month period ended June 30, 2021, the Company did not receive CEWS funding. For the three month period ended June 30, 2020, the Company recorded a C$2.4 million reduction in administrative and selling expenses as a reduction to personnel costs, included therein, in connection with the CEWS program, which was offset by overall personnel costs being higher due to CEWS funding being applied to retain employees that would otherwise have been subject to temporary layoffs.

Fiscal Years Ended March 31, 2021 and 2020 and Pro Forma Combined Twelve-Month Period Ended March 31, 2019

 

    Successor     Predecessor              
millions of dollars   FY 2021     FY 2020     Period from
December 1,
2018 to March
31, 2019
    Period from
April 1, 2018 to
November 30,
2018
    Pro Forma
Adjustments
    Pro Forma
Combined -
FY 2019
 

Personnel expenses

  C$ 39.6     C$ 29.7     C$ 11.3     C$ 23.2     C$     C$ 34.5  

Professional, consulting, legal and other fees

    22.2       17.1       6.2       10.3             16.5  

Software licenses

    3.1       2.7       1.0       2.2             3.2  

Amortization of intangible assets and non- production assets

    0.4       0.5       0.4       2.9             3.3  

Other administrative and selling

    7.1       6.9       3.0       5.9             8.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  C$ 72.4     C$ 56.9     C$ 21.9     C$ 44.5     C$     C$ 66.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Fiscal Year Ended March 31, 2021 Compared to Fiscal Year Ended March 31, 2020

As illustrated in the table above, the Company’s administrative and selling expenses for the year ended March 31, 2021 were C$72.4 million (March 31, 2020 – C$56.9 million). The increase in administrative and selling expenses of C$15.5 million was comprised of increased personnel expenses ($9.9 million), due primarily to share based compensation (see Note 36 to the Algoma Audited Financial Statements), and increased professional, consulting, legal and other fees (C$5.1 million), due primarily to costs associated with on-going cost reduction and efficiency projects.

In addition, for the year ended March 31, 2021, the Company recorded a C$4.2 million reduction in administration and selling expenses (personnel) in connection with the CEWS (March 31, 2020 and Pro Forma Combined March 31, 2019 – nil), which was offset by overall personnel costs being higher due to CEWS funding being applied to retain employees that would otherwise have been subject to temporary layoffs.

Four Month Period Ended March 31, 2019

As illustrated in the table above, the Company’s administrative and selling expenses for the four month period ended March 31, 2019 were C$21.9 million.

Eight Month Period Ended November 30, 2018

As illustrated in the table above, the Company’s administrative and selling expenses for the eight month period ended November 30, 2018 were C$44.5 million.

Fiscal Year Ended March 31, 2020 Compared to Pro Forma Combined Twelve-Month Period Ended March 31, 2019

As illustrated in the table above, the Company’s administrative and selling expenses for the year ended March 31, 2020, were C$56.9 million (Pro Forma Combined March 31, 2019 – C$66.4 million). The decrease in administrative and selling expenses of C$9.5 million for the year ended March 31, 2020 is primarily the result of decreases in personnel expenses (C$4.8 million) and amortization (C$2.8 million).

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 debt facilities, including the Revolving Credit Facility, Secured Term Loan Facility and Algoma Docks Term Loan Facility. Finance cost also includes 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, and the unwinding of discounts on the Company’s environmental liabilities.

Three Month Period Ended June 30, 2021 Compared to Three Month Period Ended June 30, 2020

 

     April to June  
millions of dollars    FY 2022     FY
2021
 

Interest on the following facilities

    

Revolving Credit Facility

   C$ 0.5     C$ 1.4  

Secured Term Loan Facility

     9.4       12.0  

Algoma Docks Term Loan Facility

     1.0       1.4  

Revolving Credit Facility fees

     0.3       0.3  

Unwinding of issuance costs of debt facilities and discounts on environmental liabilities, and accretion of governmental loan benefits

     3.6       3.3  

Other interest expense

     0.3       0.4  
  

 

 

   

 

 

 
     C$15.1     C$18.8  
  

 

 

   

 

 

 

Finance cost as a percent of revenue

     1.9     5.4

 

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As illustrated in the table above, the Company’s finance costs for the three month period ended June 30, 2021 was C$15.1 million, compared to C$18.8 million for the three month period ended June 30, 2020, a decrease of C$3.7 million. The decrease is primarily attributable to the Secured Term Loan Facility (C$2.6 million), due to declining balance, a result of principal repayments, and the Revolving Credit Facility (C$0.9 million), due to repayment of the Revolving Credit Facility. The Company’s finance cost as a percentage of revenue was lower by 3.5% at 1.9% for the three month period ended June 30, 2021 compared to 5.4% for the three month period ended June 30, 2020. On April 1, 2020, management elected to pay the interest due on the Secured Term Loan Facility in kind, which resulted in a 1.0% interest premium. Interest on the Secured Term Loan Facility of C$9.4 million in April 2021 was paid in cash.

The Company’s finance income for the three month period ended June 30, 2021 was nil, compared to C$0.6 million for the three month period ended June 30, 2020, representing a decline of C$0.6 million, due to interest income from tariff overpayments.

The Company’s interest in pension and other post-employment benefit obligations for the three month period ended June 30, 2021 was C$2.9 million, compared to C$4.3 million for the three month period ended June 30, 2020, due to a decrease in discount rates as at March 31, 2021 that was used to determine the 2022 fiscal year pension benefit expense.

The Company’s foreign exchange loss for the three month period ended June 30, 2021 was C$10.0 million, compared to C$17.4 million for the three month period ended June 30, 2020. These foreign exchange movements reflect the effect of U.S. dollar exchange rate fluctuations on the Company’s Canadian dollar denominated monetary assets and liabilities.

Fiscal Years Ended March 31, 2021 and 2020 and Pro Forma Combined Twelve-Month Period Ended March 31, 2019

 

     Successor     Predecessor               
millions of dollars    FY 2021     FY 2020     Period from
December 1,
2018 to
March 31,
2019
    Period from
April 1, 2018
to November 30,
2018
    Pro Forma
Adjustments
     Pro Forma
Combined - FY
2019
 

Interest on the following facilities

               

Revolving Credit Facility

   C$ 4.3     C$ 2.1     C$ 0.3     C$ 2.7     C$      C$ 3.0  

DIP Facility

                       11.7              11.7  

Secured Term Loan Facility

     43.0       41.0       14.3                    14.3  

Algoma Docks Term Loan Facility

     4.7       6.7       2.5                    2.5  

Revolving Credit Facility fees

     1.2       2.2                           

7.5% Senior Secured Term Loan

                       34.3              34.3  

9.5% Senior Secured Notes

                       32.6              32.6  

14% Junior Secured Notes

                       34.3              34.3  

Unwinding of issuance costs of debt facilities and discounts on environmental liabilities, and accretion of governmental loan benefits

     13.8       10.3       1.2       1.9              3.1  

Other interest expense

     1.5       1.5       2.3       1.8              4.1  

Pro forma adjustment(i)

                             (78.0      (78.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
   C$ 68.5     C$ 63.8     C$ 20.6     C$ 119.3     C$ (78.0    C$ 61.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Finance cost as a percent of revenue

     3.8     3.3     2.4     6.5     6.5      2.3

 

(i)

Due to the Purchase Transaction, as disclosed in Note 4 to the Algoma Audited Financial Statements, finance costs for the Successor decreased due to the settlement of debt held by the Predecessor and new debt acquired by the Successor at a lower interest rate.