Steel Mills

Essar Steel Algoma Update

Written by Sandy Williams

Essar Steel Algoma generated positive earnings in May and June, due to higher steel pricing, resulting in net revenue of C$136 million in June and total net revenue of C$753 million for the first half of 2016. EBITDA before restructuring costs was negative C$49 million for the first six months of 2016.

For the reporting period May 14 – August 12, 2016 net cash flow was negative C$13 million, an improvement of C$30 million from earlier projections. Steel pricing, however, began softening in July due to subdued market demand, said Algoma Court Monitor Brian Denega, senior vice-president of Ernst and Young.

In the first half of 2016 Algoma produced 1,241,962 million tons of steel and shipped 1,215,162 tons. Monthly shipments have decreased from 229,193 tons in January to 186,633 tons in June.

“Algoma continues to take various steps to address certain temporary production issues, which have negatively affected its operations and shipment levels and have prevented operating results from fully benefitting from steel price increases,” said Denega.

As of August 12, Essar Steel Algoma has withdrawn the full amount of the Debtor in Possession Facility (DIP) ($228 million), $20 million of which is in an escrow account for future use. Algoma has $6.5 million in an undrawn revolving facility that is available under certain conditions.

Essar Steel Algoma has asked for extension of the DIP loan through Sept 30 and is seeking approval of a replacement or extended DIP that will provide liquidity into 2017. Several DIP proposals have already been submitted, said Denega.

Purchase negotiations continue

The sale of Essar Steel Algoma has continued with a few bumps in the proceedings.

Essar Steel accepted a joint bid on June 30 from KPS Capital Partners and the Term Lenders. On July 12 KPS withdrew from that bid following the USW’s strong support of alternate bidder Ontario Steel, backed by Essar Global.

The Term Lenders are continuing to pursue purchase of Essar Steel Algoma without KPS and have met with government officials, stakeholders and United Steelworkers representatives.

Ontario Steel Inc., controlled by Essar Global, signed a letter of intent with USW Local 2252 but has not submitted a formal bid for the company as of August 17, according to the Monitors Report. Ontario Steel, which stated intentions of acquiring both Algoma and US Steel Canada, was rejected from the bidding at USSC. Previous to the formation of Ontario Steel, Essar Global was rejected from the bidding by both companies for failure to show the financial ability to complete a purchase transaction.

United Steelworkers Local 2251 President Michael Da Prat said that Ontario Steel is still interested in purchasing Algoma and has been in ongoing contract talks with the union.

The Monitor recommends that to provide more time for interested parties to work out a purchase deal, “no motions, either for a sale transaction or any other potential transaction, be scheduled at present.”

Port dispute

In other matters, the DIP lenders have filed a motion to expand the Monitors powers to allow him to further review USSC’s cargo handling agreement with the Port of Algoma and to potentially commence “oppression proceedings” under the Canada Business Corporations Act. CBCA gives businesses the right to bring a court action against a corporation where conduct has occurred which is oppressive, unfairly prejudicial or unfair towards the complainant.

In November 2014 Portco purchased the port assets, including the dock and cargo handling equipment from Essar Steel Algoma under terms of 50-year lease agreement. In return, Algoma entered into a 20 year lease agreement with Portco that requires the company to pay the port a minimum monthly cargo charge of US$3 million. Payments by Algoma to Portco have been suspended since May under CCAA proceedings.

In late June, Superior Court Justice Frank Newbould refused to reinstate payments to the Port and urged the parties to come to an agreement using set-off rights. Set-off rights refer to a settlement of debt between a creditor and debtor through offsetting transaction claims.

“The persons providing the services are not [Port of Algoma] employees but employees of Algoma. Under the shared services agreement, Algoma provides all of the services as may be necessary for [the port] to fulfill its obligations under the cargo-handling agreement. Those services are paid for by Algoma,” said Newbould.

In the latest monitor report, Denega recommends that payments continue to be suspended to the port while restructuring efforts continue.

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