Algoma Steel's Outlook to Positive; Rtgs Afmd by S&P.

TORONTO--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/17/97 --Standard & Poor's today affirmed Algoma Steel Inc.'s single-'B' corporate credit rating and the single-'B' rating on the company's senior secured first mortgage notes due 2005. The outlook was revised to positive from stable.

The outlook revision reflects the completion of the Direct Strip Production Complex (DPSC) allaying earlier concerns regarding construction risks and other lengthy start-up delays. As a consequence, the company's financial risk profile should benefit from enhanced profitability, increased cash flow, and a decline in capital expenditures on strategic initiatives following a transition period. As a smaller steel producer within the highly competitive and cyclical North American industry, the sustainability of the company's low cost position is a key consideration. To enhance the company's cost competitiveness Algoma implemented a significant capital expenditure program, the principal component of which is the construction of a C$400 million thin slab caster linked to a hot strip mill called the DPSC. Now completed, the new mill is due to enter commercial production in 1998. As a result, profitability should improve from a reduction in both the company's energy and handling costs and its work force, a 10% increase in capacity and an enhanced product capability arising from the installation of the thin slab caster. These cost savings are expected to reduce Algoma's operating costs per barrel by C$33. The thin slab caster will increase Algoma's focus on hot-rolled sheet as its core product and expose the company to potential competition from planned new mini-mill capacity in the U.S. Hot-rolled sheet currently accounts for over 60% of Algoma's annual shipments, with the balance made up of plate, structural steels, and seamless tubes. The percentage of revenues derived from hot-rolled sheet is expected to increase going forward.

The pre-funding of the DPSC and capital expenditure program was debt-financed, thereby increasing Algoma's debt leverage significantly. The completion of the financing of the program is still reliant on internal cash generation, although Algoma did raise $50 million through the issuance of equity in the first quarter of 1997. As a result, total debt to capital, excluding the company's pension liability, improved to 56% at March 31, 1997.

However, in light of Algoma's high leverage and limited financial flexibility, a lengthy transition trade between the commercial start-up of the DPSC and the decommissioning of the existing strip mill could adversely affect the company's operational competitiveness and financial health.

OUTLOOK: POSITIVE

Standard & Poor's expects the transition period between commercial production and the retirement of the existing facility to be completed during the latter half of 1998. Beyond that period, Algoma's financial risk profile is expected to improve assuming that steel market conditions remain favorable, Standard & Poor's said. -- CreditWire

CONTACT: Christopher Lee, Toronto 416/202-6019

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