Description

Algoma Steel trades on the Toronto stock exchange with 23.8 million shares outstanding and 30 million shares on a fully diluted basis (convertible debenture). Algoma is Canada’s third largest steelmaker. It emerged from bankruptcy in February 2002 after going through a restructuring that significantly reduced it debt load and employee wage concessions. A new well respected CEO took over last September. The company’s debt load is still relatively burdensome even after the restructuring (LTD/Equity is 529/345 = 1.5) and therefore it’s current plan is to conserve cash to pay down debt and save for a $120 million furnace reline that will need to be done around 2005.

The attraction of this company is simply based on have a low p/bv ratio of around 0.3 ($3.30 / $11.47) and it’s strong earnings and cash flow potential if steel prices and demand are strong (ie. it is highly levered to the steel price).

The primary risk is that the company fails to meet its debt load obligations which would most likely occur if there was a prolonged period of low demand and pricing.

The company does have takeover potential as there is no controlling shareholder and its market value is lower than replacement cost.

Catalyst

Catalysts:
1. Improvement in steel pricing which could be effected by either a stronger economy or a postive resolution to anti-dumping claims.
2. More coverage by brokerage research analysts.