ALGOMA STEEL GROUP INC.
Fitch Ratings has assigned
The Rating Outlook is Stable. Fitch has also assigned 'BB'/'RR1' ratings to
The ratings reflect Algoma's relatively small size and the heightened operational risk of operating a single blast furnace facility. This is offset by the company's strategy of transitioning to an electric arc furnace (EAF) facility which lowers costs and capital intensity. The ratings also reflect Fitch's expectation for adequate liquidity, low financial leverage and minimal execution risk to complete the project and fund associated capex for the new EAF.
Key Rating Drivers
EAF Transition Positive: Fitch views Algoma's strategy of transitioning to an electric arc furnace facility (EAF) from a blast furnace facility as positive. EAFs have a highly variable cost structure, are less capital intensive, and are often lower cost than blast furnaces. The new EAF project is comprised of two facilities, which reduces operational risk from a single facility operation.
The company is approximately
Single Facility Producer: Algoma is a relatively small steel producer with around 2.8 million tons of annual capacity. The company has one operational blast furnace facility and ships primarily sheet steel to customers in the
Iron ore is the primary raw material for blast furnace steel production. Algoma relies entirely on third parties for its iron ore requirements, where as other North American steel producers tend to own a proportion of their primary raw material requirements. This is partially offset by the company's agreement with U. S. Steel (BB/Rating Watch Positive), which provides a surety of supply of iron ore pellets through FY26. Algoma has an option to extend the agreement to FY27 at its discretion.
The company also has in place an agreement to supply scrap requirements for its new EAF as it transitions from its blast furnace operations to an EAF facility where the primary raw material is scrap.
Conservative Leverage Profile: Fitch forecasts Algoma's EBITDA leverage, 0.3x as of
Plate Mill Modernization Positive: Algoma is in the process of completing a plate mill modernization project that will increase plate capacity to 700,000 tons from 350,000 tons. Fitch views the increase in product diversification as positive to the company's business profile. The investment is expected to be complete in FY24. Fitch notes that plate products have commanded a premium to hot rolled coil (HRC) over the past few years, which increases projected cash flow and provides some product diversification.
Derivation Summary
Algoma is significantly smaller, has less product diversification, and higher operational risk compared with majority blast furnace producers
Key Assumptions
Relatively flat steel price environment;
Annual shipments average around 2.3-2.4 million tons from FY25-FY27;
EAF begins production in FY25;
Algoma operates both its blast furnace facility and EAF facility in FY25 and FY26 as the new EAF is ramping up;
Blast furnace production ceases in FY27;
Capex of
No share repurchases or acquisitions.
Recovery Analysis
The recovery analysis assumes that Algoma would be organized as a going-concern in a bankruptcy rather than liquidated. Fitch has assumed a 10% administrative claim. Fitch has also assumed a bankruptcy exit GC EBITDA of
A bankruptcy scenario could occur from some combination of a period of sustained low steel prices and/or weak demand which results in low capacity utilization over a sustained period of time and drains FCF.
Fitch generally applies EBITDA multiples that range from 4.0x-6.0x for metals and mining issuers, given the cyclical nature of commodity prices. Fitch applied a 5.0x multiple to the GC EBITDA estimate to calculate a post-reorganization enterprise value of
The valuation compares with
The allocation of value in the liability waterfall results in a recovery rating of 'RR1' for the 1st lien secured ABL credit facility resulting in a 'BB' rating and a recovery rating of 'RR2' for the 2nd lien secured notes resulting in a 'BB-' rating.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increase in size resulting in reduced operational risk;
Increase in product diversification;
EBITDA leverage sustained below 3.0x;
Sustained positive FCF.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA leverage sustained above 4.0x;
EBITDA margins sustained below 8%;
Sustained negative FCF
Deteriorating liquidity position.
Liquidity and Debt Structure
Sufficient Liquidity: As of
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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