Strategic Transition and Operational Resilience
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Underlying EBITDA performance improved for the second consecutive quarter, driven by higher steel prices and a strategic shift toward a plate-heavy product mix despite lower transition-related volumes.
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The Lake Superior Power (LSP) outage necessitated a temporary suspension of steel production, which management mitigated by pulling forward planned maintenance and advancing EAF Unit 2 commissioning.
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A 'Canada-centric plate first' strategy was reinforced by the 50% U.S. Section 232 tariff environment, which led to an 83% year-over-year decline in U.S. shipment volumes.
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Management strengthened power reliability by commissioning a replacement turbine and exercising a lease option for an additional unit, creating equipment redundancy to prevent future production interruptions.
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The transition to electric arc furnace (EAF) steelmaking is intended to provide a structural cost and carbon advantage while aligning with new domestic procurement policies like 'Buy Canadian'.
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Operational focus has shifted from commissioning to ramping the combined EAF platform, with EAF Unit 2 achieving its first commercial heat on October 9.
Production Ramp and Cost Evolution
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Fourth quarter shipments are expected to increase by 25% to 35% as production volumes are weighted toward November and December following the EAF Unit 2 ramp.
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Management targets an average production of approximately 1.2 million tons for the next year, with an exit run rate of 1.5 million to 1.6 million tons by the end of 2027.
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Cost structures are expected to improve as volumes increase, though the 'scrap plus $225' target is contingent on achieving full capacity once additional power is available in early 2028.
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The company expects to increase coil sales through 2027 as market opportunities allow, supported by new federal and provincial steel action funds and strengthened trade enforcement.
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Management anticipates that the third quarter represented the low point of the transition, with the toughest operational challenges now behind the company.
Non-Recurring Items and Structural Changes
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A $53.1 million capacity utilization adjustment was excluded from adjusted EBITDA to reflect the impact of the transition and power outage on fixed cost absorption.
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A negotiated settlement was reached with Haverkoke to resolve historical coke supply disputes, though specific financial terms remain confidential.
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Direct tariff costs fell to $18.1 million in the quarter, down from $89.7 million a year ago, reflecting the substantial decline in U.S.-bound shipments.
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The company received $163.9 million in income tax refunds during the quarter, with an additional $35 million received subsequent to quarter end.
Q&A Session Insights
Ramping expectations and production targets for next year
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Management expects to arc the two EAF units alternately while learning the combined platform, targeting a 1.2 million ton average for the year.
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The exit run rate for the end of 2027 is projected at 1.5 million to 1.6 million tons.
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If the learning curve quickens, management noted the potential to reach a run rate as high as 1.8 million to 1.9 million tons.
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Impact of increased sheet production on Canadian market pricing
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Management believes the market will balance out due to new 'Buy Canadian' policies and restrictions on imports through TRQs.
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They intend to remain disciplined as they reclaim domestic market share previously served by imports or U.S. exports.
Utilization of new government steel action funds for diversification
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Discussions are active regarding funding for the beam mill project under the new joint steel action fund.
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The strategic rationale for diversification into products Canada needs, such as those for infrastructure and defense, remains unchanged.
Reliability and scrap procurement for the EAF ramp
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Scrap procurement has not been an issue; the ramp-up pace is primarily dictated by the learning curve of operating two units.
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EAF Unit 2 is ramping faster than Unit 1 because the team applied lessons learned from the first unit's commissioning.
Cost base evolution and capacity utilization charges
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Capacity utilization add-backs to EBITDA are expected to cease in the fourth quarter as production increases.
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The full structural cost advantage of 'scrap plus $225' depends on reaching higher volumes and securing additional power by 2028.
