Algoma Steel: Canadian Steel Trades 3.5x LTM EBITDA (NASDAQ:ASTL)

Introduction

I adopted (and had a protracted place) Algoma Metal Group Inc. (NASDAQ: ASTL, TSX:ASTL:CA), for the reason that firm went public utilizing a SPAC. The corporate clearly received from sturdy metal market instantly after the COVID pandemic, however the worth of metal weakened considerably, which instantly affected Algoma’s monetary efficiency. Happily, the corporate’s capital prices are fairly low, and it might depend on the Canadian authorities to offer financing to affect manufacturing. The brand new electrical arc furnace will quickly be put into operation, which implies that pulling cash will finish.

FY2024 ended on a disappointing be aware

The corporate’s monetary yr ends in March, which implies that Algoma Metal’s newest monetary statements confer with the final yr outcomes. Throughout fiscal 2024, the corporate shipped roughly 2.08 million tons of metal, up 4% from fiscal 2023. The fourth quarter was just a little weak with a complete of 451,000 tons of metal had been shipped in comparison with practically 572,000 tons within the final quarter of final yr.

The efficiency in This fall is sort of disappointing, however it’s solely because of the failure of the structural hall in January. About 150,000 tons of steel manufacturing was misplaced as a result of this accident and the corporate hopes to be compensated by its insurance coverage corporations. Administration expects the whole affect of the shutdown to be C$120-130 million as a result of decrease income (as a result of decrease manufacturing) and better prices related to remaining manufacturing.

The corporate’s complete income for fiscal 2024 was roughly C$2.8 billion, however with the rise in complete price, working revenue fell by roughly 40% to C$167 million. This can be a little disappointing, however let’s not overlook that the unfavorable affect of the 150,000 tons of “misplaced manufacturing” had a really unfavorable affect on Algoma’s effectivity and value construction.

The corporate reported pre-tax revenue of C$145 million and web revenue of C$105 million, leading to earnings per share of C$0.97. Which, once more, is fairly respectable contemplating the issues Algoma Metal needed to cope with within the final quarter of its fiscal yr.

So the corporate was clearly worthwhile and I clearly additionally wished to determine its money move profile, on condition that it has to cope with sustaining capex in addition to ensuring that it could actually comfortably cowl all of its development capex (which it would not there needs to be a difficulty given the corporate’s good entry to liquidity and the issuance of a US$350 million debt safety after the tip of the earlier monetary yr).

As you possibly can see beneath, the corporate generated roughly C$269 million in working money move, and after deducting C$0.3 million in curiosity funds, in addition to C$5 million in money funds to settle environmental liabilities, adjusted working money move was C$264 million {dollars}. .

You’ll be able to clearly see that the whole capital expenditure was roughly C$490 million, which was fairly excessive by any customary, and never simply because the corporate spent fairly a bit of cash on the EAF plant.

We all know the corporate spent about C$258 million on the EAF plant, however that also would not absolutely clarify the place the remaining C$232 million in capex is coming from. Nonetheless, sheet steel upgrades required C$60 million, and Algoma Metal’s remaining C$172 million in capital expenditures needed to embody some repair-related objects. Through the fiscal yr 2024 convention name, it was made clear that Algoma Metal will search these extra capital expenditures from its insurers, in addition to C$120-130 million in misplaced income.

David Ocampo

Good. So the potential capex restoration by the insurance coverage corporations on prime of the C$120-130 million in misplaced EBITDA that you simply guys try to recoup?

Rajat Marwa

That is appropriate.

Through the convention name, administration additionally confirmed that normalized capital expenditures for sustainment are C$100 million to C$120 million per yr.

Which means if I had been to make use of the midpoint of sustaining capex (which is fairly near C$114 million in annual depreciation expense), Algoma Metal reported a free money move results of C$154 million. There are 104.1 million shares excellent, which interprets to free money move upkeep of roughly C$1.48 per share, or roughly US$1.10.

And that is a fairly good end result for what is unquestionably a downturn within the metal business. And as fellow creator Hong Chew Yew mentioned, switching to EAF ought to enhance margins.

The chipboard will quickly be put into operation

As it’s possible you’ll recall, the Algoma Board of Administrators ordered the development of two Electrical Arc Furnaces (hereafter merely “EAC”) to switch the present blast furnaces. Utilizing EAF is healthier for the surroundings because it reduces carbon emissions by round 70%. The brand new chipboard plant is being constructed on land instantly adjoining to the blast furnace to attenuate disruption to metal manufacturing. The brand new plant needs to be prepared by the tip of this yr and might be put into operation instantly, which ought to result in industrial operation within the first half of the 2025 calendar yr.

As you possibly can see above, the whole price might be round C$825-875 million, and the corporate has already spent C$563 million and dedicated C$800 million. Given C$800 million of the C$825-875 million capex, I feel the probability of an overrun is comparatively low and any overrun needs to be pretty benign as Algoma Metal has wonderful challenge price visibility at this level.

Funding thesis

I’ve a protracted place in Algoma Metal, however I have not had purpose to get too excited in regards to the firm’s efficiency but, as I’ve held the inventory for about 95% of the final 2.5 years, and I have been at a loss. However I might be affected person. As soon as the EAF is up and operating, I anticipate Algoma’s margins to enhance. And if that may coincide with an enhancing metal market, Algoma metal ought to have the ability to report outsized EBITDA and free money move outcomes.

I undoubtedly preserve my lengthy place in Algoma Metal Group Inc. and I could enhance the place within the subsequent few weeks. At a present enterprise worth of simply over C$1 billion, Algoma Metal trades at simply 3.5 occasions LTM EBITDA.