**Exhibit
99.2**








































We
      are pleased to report that 2004 was the most profitable year in the
      Company’s history, generating a net income of $343.8 million. This
      compares to $8.4 million during the same period in 2003. The Company
      reduced its net debt to total capital-ization from 34% at December 31,
      2003, to 0% by June 2004 with a cash balance at year-end of $453.2
      million.
      
      The
      Company’s balance sheet improved through strong earnings and free cash
      flow, which was achieved despite a one-time pension funding contribution
      of $40 million and a $51.7 million profit share payment to our employees.
      Additionally, the Company received net proceeds of $81.5 million through
      an equity offering in February 2004. The result is a significantly lower
      risk profile, and the financial flex-ibility to position Algoma for future
      opportunities.
      
      Algoma’s
      share price ended the year at $29.30. This amounts to an increase of 416%
      from the end of 2003, establishing Algoma as one of the top performers on
      the TSX in 2004. The increase can be attributed to strong market
      conditions as well as the Company’s focus on improving its manufacturing
      and commercial per-formance within this environment. In 2004, Algoma
      achieved outstanding results versus our North American peer group with the
      second highest operating income (earnings before interest and taxes) per
      ton on an annualized basis.
      
      On
      the commercial side, Algoma’s contract to spot ratio increased to 50% - a
      2007 target achieved two years ahead of schedule. Coke sales, which
      represent a new and significant non-steel source of revenue for the
      Company, totaled 62,400 tons, evidence of the entrepreneurial culture
      developing at Algoma.
      
      Steel
      demand remained strong throughout the year, driving higher selling prices
      globally. While we expect the market to remain strong in the short term,
      we will continue to focus our efforts on improving our commercial and
      operating per-formance to ensure acceptable returns, on average, through
      the market cycle.
      
      Last
      year at this time, we outlined a number of objectives for the Company in
      2004. We are pleased to report achievements on all of these objectives
      which were made possible by the concerted effort of employees across the
      Company. Their dedication and steadfast focus on our objectives is
      reflective of a new spirit of accountability and employee involvement that
      is growing across the organization. It is an ongoing process that is
      designed to induce change in our corporate values and culture, and is
      critical to our long-term vitality.
      
      In
      July, Algoma successfully negotiated 3-year labour agreements with both
      USWA Locals, representing approximately 2,800 employees. We believe that
      these collective agreements are fair and balanced and reward our employees
      for their contributions to our success. These agreements provide for
      increased stability and financial flexibility, positioning the Company
      well for the future.




**(
      2 )**
    **Algoma
      Annual Report 2004**














**New
      processes and technology will provide full integration of all information
      systems and the foundational capability to improve analysis, and to
      facilitate quicker decision making and more efficient execution.**





At
      Algoma, we continue to look for ways to reconfigure and improve our asset
      base to drive operating efficiencies. With the support of international
      engi-neering firms, a review of the condition of our No. 7 Blast Furnace
      and supporting maintenance plans was conducted which enabled us to defer
      the 35-day mainte-nance outage scheduled for mid-2005 to 2006 or later.This
      past year the Company implemented facility-wide environmental system
      improvements resulting in ISO 14001 certification. Algoma takes its
      environmental responsibilities seriously, and is committed to pursuing
      opportuni-ties to maximize the efficiency of our operations while reducing
      the impact on our environment.In
      2004, the senior management team turned more of its focus to exploring
      strategic opportunities for the Company. We continue to work with our
      Board and with the support of business and financial consultants to drive
      shareholder value and position the Company for the long run.After
      eighteen months of analysis, Algoma has finalized the scope of a Business
      Systems Renewal project. This three year, four phase initiative is focused
      on developing and implementing best practices throughout the entire
      organization from “order to cash”. These new processes and technology will
      provide full integra-tion of all information systems and the foundational
      capability to improve analysis, and to facilitate quicker decision making
      and more efficient execution.In
      November, the Company also introduced a Shareholder Rights Plan, which is
      designed to ensure fair treatment for our shareholders in the event of a
      takeover bid. The Board determined it prudent to adopt such a plan, given
      Algoma’s growing cash build, improving performance and the ongoing
      consolidation within the steel industry.




**Algoma
      Annual Report 2004**
    **( 3
      )**











Consistent
      with our approach of evaluating opportunities to improve share-holder
      value, Algoma entered into the process to consider acquiring Canada’s
      largest steel company, Stelco. Our due diligence showed that despite the
      significant synergies that could be derived, the risks outweighed the
      benefits and we decided that proceed-ing with the transaction would not be
      in the best interests of our shareholders.We
      will continue to set annual objectives for our Company, and measure and
      report on our performance against these objectives.In
      2005, Algoma’s priorities will be to:•
    Continue
      to optimize the business through the alignment of commercial and
      operations efforts to meet long term profitability and volume
      targets.•
    Improve
      service and reliability through business process changes and the
      establish-ment of a proactive customer service
    organization.•
    Complete
      the review of Algoma’s asset configuration and market position and
      initiate improvements.•
    Initiate
      a structured employee involvement program that aligns corporate cul-ture
      with business processes, systems and objectives and allows our employees
      to develop their full potential.•
    Launch
      the Business System Renewal Project to install best practices across the
      Company and continue to drive margin improvements.Our
      performance will continue to be driven by an entrepreneurial culture that
      embraces innovative thinking and encourages our people to make decisions
      and take action that improves the business.At
      Algoma, we are growing shareholder value, in part, by cultivating a
      cul-ture of values - developing a commitment to do what it takes to build
      a stronger, more competitive steel company. Keeping our word and earning
      our keep with more determination than ever to secure our Company’s
      long-term success, and continue to deliver greater value for our
      shareholders.







**Benjamin
      Duster**
    **Denis
      Turcotte**Chairman
      of the Board
    President
      and Chief Executive Officer




**( 4
      )**
    **Algoma
      Annual Report 2004**




































**69** **%**




**reduction
in**


**customer
claims**





**Objective
1:**


**Improve
the reliability and consistency of**


**our
product quality and service.**





Several
key initiatives over the past year enabled Algoma to achieve a significant
reduction in claims paid out relative to 2003 levels. The introduction of a
“Clean Team”, a multidisciplinary group charged with the task of improving
overall cleanliness of our cold roll products, is one example of how Algoma is
working to continually improve the quality of our products and ensure high
customer satisfaction rates.











**Consistent**


**Quality**





**“
We’ve had customers tell us they can instantly recognize Algoma-made steel when
they see it. That speaks volumes about the consistent quality of our product.
And that’s something we’re very proud of.”**





**Robert
      Perin****Technical
      Sales Specialist**












































**$** **120**




**million
in improvements**





**Objective
#2:**


**Pursue
continuing financial improvement**


**through
our Margin Improvement Plan**


**by
lowering our costs and optimizing our**


**product/market
mix.**





Algoma
initiated its Margin Improvement Plan in early 2003 to act as a focal point in
supporting a culture of continuous improvement. To date we have realized over
$120 million in improvements, and have over 100 cost and revenue enhancement
initiatives under evaluation.








**Top**


**Quartile**




**operating
income**





**Objective
#3:**


**Maintain
tight control over working**


**capital
and capital spending.**





Despite
superior earnings, we have maintained the inventory reductions realized in 2003,
and established detailed inventory targets and accountabili-ties to support
further reductions. These actions, combined with a continued focus on cost
control and capital spending enabled us to achieve the second highest annualized
operating income per ton in 2004 amongst our North American peer group. This
also led to free cash flow of over $400M in 2004.











**Continuous**


**improvement**





**“
We’re all encouraged to look for ways to make Algoma more efficient and more
effective. Continuous improvement is not something we just talk about. It’s
fundamental to how we operate.”**





**Jim
      Dale****Manufacturing
      Technology Associate****DSPC**





**Disciplined**


**execution**





**“
It’s not just about doing more with less. It’s about doing it right every time
out.”**





**Dave
      Hammerstedt****Electrical
      Maintenance Technician****Plate
      Mill**



































**Zero‘T’**





**Objective
#4:**


**Continue
our grade development**


**program
to provide stronger, lighter**


**and
more formable products.**





Ongoing
research and testing have enabled us to develop new products that give our
customers an advantage. This year Algoma launched its newest response to market
demand for high strength steel - DSPC 700B/770B - a superior HSLA light gauge
product with minimum yield strength exceeding 700 MPa, excellent bending
capability and unmatched dimen-sional control. This and other innovative product
work has enabled us to increase our value-added sales by 18% in
2004.







**400**


**Leaders
trained**





**Objective
#5:**


**Reinforce
successful leadership practices**


**to
improve accountability and effectiveness**


**while
maintaining an action-oriented**


**culture
focused on results.**





Algoma
has developed and implemented a systematic appraisal and talent pool development
process to measure and improve the effectiveness of lead-ers throughout the
organization. All effectiveness appraisals are calibrated in cross-functional
gearing sessions to ensure a consistent performance standard; and all of our
leaders have been trained in measuring effective-ness and coached on fulfilling
their mentoring and employee development accountabilities.














**Innovative**


**thinking**





**“
We know that final product performance is the true measure of our success. Our
daily challenge is to solve problems with new answers.”**





**Sosto
      Pittelli****Metallographer**








**Effective**


**leadership**




**“
When you know where you’re headed you can focus on how to get there. They give
us the necessary context and authority and we take it from there.”**





**Robert
      Craig****Turbo
      Blower Operator****#7
      Blast Furnace**





































**0%**


**net
debt**




**A
company with options**





**Objective
#6:**


**Investigate
strategic growth opportunities**





An
aggressive 24 month course of action has positioned Algoma as a com-pany with
choices, focused on one goal - shareholder value. In keeping with our commitment
to investigate all strategic opportunities, Algoma entered into the bid process
for Stelco and actively explored the synergies and ben-efits that could be
derived from a combination of the assets. In the end we decided that the
potential risks and obligations were such that proceeding with the transaction
would not be in the interest of our shareholders. Going forward, any merger,
acquisition or growth initiative will be evaluated on its merit and fit with our
strategic criteria.














**Long-term**


**thinking**





**“
We know strong markets come and go over time. We’re constantly planning our
response to market changes and working to position the business for
profitability throughout the cycle.”**





**Richard
      Peters****Manager,
      Planning and Analysis**


















































**Financial
Sustainability**





**At
      Algoma we are committed to ensuring our economic strength and competitive
      position for today and tomorrow. To this end, we have made significant
      progress in 2004 to improve our Company’s risk profile and to elevate
      shareholder value.**





Through
      our Margin Improvement Plan, introduced in Janu-ary 2003, we have achieved
      $120 million in benefits to date, and identified a further $150 million of
      potential opportuni-ties. This plan was initiated with the goal to improve
      our trend-line profitability and to offset increases to input prices and
      other escalating costs outside the control of management. One of the
      challenges facing our Company is increased costs for raw materials and
      this plan should assist in partially miti-gating the effect of those
      increases.
      Algoma
      is one of the lowest cost producers in North America, as evidenced by our
      strong performance in 2004 in terms of operating income per ton versus our
      competitors and cost comparisons compiled by independent sources. Other
      fac-tors which contribute to our strong position include the low cost
      conversion of ladle steel directly into coils on the Direct Strip
      Production Complex, our self sufficiency in coke, favourable prices
      contracted into early 2006 for a majority of our coal needs, and a large
      blast furnace linked to efficient steelmaking assets.
      In
      2004 Algoma fully benefited from the reductions in employment levels
      implemented in 2003. Reducing our staff complement by 700 people over
      thirteen months resulted
    
    in
      annualized cost reductions of approximately $45 million. These reductions
      were achieved while increasing shipments over previous years.
      Strong
      steel markets in 2004 combined with contin-ued control over spending
      resulted in EBITDA increasing to $597 million from $68 million in 2003.
      Capital expenditures continued to be restrained increasing only slightly
      to $42 mil-lion from $37 million in 2003. Asset sales resulted in proceeds
      of $15 million, while an equity issue in early 2004 generated net proceeds
      of $81.5 million. The net result was a substan-tially stronger balance
      sheet with the elimination of bank debt, and a cash and marketable
      securities balance at year end of $453 million.
      In
      2005 the management team will be focused on investigating strategic
      options, guided by the objective of maximizing value for our shareholders.
      We anticipate substan-tial advancement of this strategic review in 2005,
      which should provide a longer-term direction for
Algoma.












**(
      16 )**
    **Algoma
      Annual Report 2004**

















**A
Commitment to the Environment**





**Algoma
      is committed to maximizing resource efficiency with an emphasis on energy
      and water conservation, and waste management. We maintain strong
      environmental perfor-mance standards with respect to pollution prevention
      and environmental protection.**





In
      2004 Algoma successfully achieved facility-wide registra-tion with the
      globally recognized environmental standard ISO 14001, ensuring our
      environmental management system is fully aligned with environmental best
      practices.
      Algoma
      considers energy efficiency a priority and has reduced the energy
      intensity of our operation by over 8% since 1993. In addition we are
      pursuing opportunities to intro-duce cogeneration into the operation to
      consume waste fuels. Through energy-focused activities, we have reduced
      overall CO2 emissions by 10% since 1993 (Canada’s commitment under the
      Kyoto Accord was 6%), and CO2 intensity by 18%.
      Our
      efforts in resource conservation extend to water as well where we have
      refined production processes and recon-figured facilities to increase the
      amount of process water we reuse and recycle. Algoma has reduced one-time
      consumption and the amount of water discharged by 26.8%. Furthermore, we
      maintain 100% compliance with regulatory requirements set by provincial
      authorities for all process water discharges.
      At
      Algoma, we know the air quality in our community and across the province
      is vital to our well-being. To this end, we have contributed to ongoing
      efforts by all Ontario steel
    
    producers
      to reduce emissions that contribute to smog and acid rain. Over the last
      ten years, Algoma has reduced sulphur dioxide emissions by 90% and
      nitrogen oxide emissions by 33%. Going forward, as we move to retrofit and
      upgrade our furnaces and boilers, we plan to introduce new low-NOx
      technology into the new burner designs.
      Waste
      management is another ongoing challenge at Algoma. We are actively
      pursuing alternatives to landfill for the many by-products of integrated
      steelmaking. Since 1997 we have succeeded in reducing waste disposal to
      landfill by 43%.
      In
      keeping with our environmental policy, and
      consistent
      with our commitment to maintain the high standards of an ISO 14001
      environmental management system, wehave
      set some aggressive targets for our operation for 2005.
      These
      include:
      •Maintain
      100% compliance with water effluent
      •Complete
      the removal and disposal of stored PCB material
      •Complete
      the final year of a voluntary Environmental Management Agreement and
      negotiate a new agreement
      •Continue
      to reduce particulate emissions through an aggressive Road Dust Reduction
      Program








**Algoma
      Annual Report 2004**
    **(
      17 )**














**Our
Workplace and Our Community**





**At
      Algoma, we are building a healthy, safe, results-oriented workplace where
      employees are encouraged to contribute and share in the success of the
      Company. Our financial success allows us to provide active community
      support and leadership, enhancing the quality of life of our employees,
      our families and our neighbours.**





Through
      extensive organizational redesign, proactive commu-nications and the
      development of our leaders, we are building an entrepreneurial,
      action-oriented culture where people are focused on results and committed
      to keeping their word and earning their keep. We value and encourage the
      involvement of all employees in a respectful environment where full, true
      and plain disclosure is the communications standard.
      We
      have adopted a zero injury philosophy with a goal to achieve zero lost
      time performance. Over the last ten years we have made significant strides
      in this direction, reaching consecutively low first treatment frequency
      levels. Algoma’s joint health and safety team actively promotes safety
      through new employee inductions and department specific training by
      focusing on hazards in the mill, safe work procedures and job safe
      practices. As well, in 2004 the committee provided refresher training for
      all supervisors and managers on essential legislation and Algoma’s Health
      and Safety Program.
      Despite
      our diligent focus on safety, in April 2004 one of our employees suffered
      fatal injuries from a fall while working at the basic oxygen steel
      production unit. This tragedy solidifies our relentless commitment to
      keeping safety top of mind to ensure tragedies like this are never
      forgotten and never repeated.
      In
      2005 Algoma will conduct a thorough review of its existing health and
      safety program in an effort to reinforce the positive aspects of the
      program and introduce new, innovative
    
    ideas
      to stimulate a step change improvement toward a goal of zero lost time
      injuries. Additionally, as a preventative measure we will implement an
      ergonomic program, focusing on reduc-ing pains and strains in the
      workplace. At the community level, Algoma Steel will continue to be an
      active participant in the Sault Ste Marie Safe Communities Partnership and
      the Sault Ste Marie IAPA.
      Employee
      well being was further enhanced in 2004 through Algoma’s profit-share
      program which enabled all employees to share directly in the success of
      the Company. Strong financial performance generated an initial $10,000
      payout to every employee in November, 2004 with an average $7,000 balance
      based on 2004 results payable March 31, 2005.
      Our
      charitable giving program combined with in-kind contributions and employee
      volunteerism enables us to address community needs in five areas of focus
      including healthcare, education, sports and recreation, social services,
      and arts, culture and the environment. This year Algoma, together with our
      employees and retirees collectively donated more than $200,000 to the
      United Way in support of 22 community-based agen-cies that ensure our
      contribution goes where it is needed most. In 2004 Algoma was also a
      strong contributor to many other worthy causes, some of which include
      RotaryFest, the Juvenile Diabetes Research Foundation, the Art Gallery of
      Algoma, the High School CPR Program, Easter Seals, the Alzheimer’s
      Society, the Algoma Fall Festival and the Soup
Kitchen.










**(
      18 )**
    **Algoma
      Annual Report 2004**














**Operations**





**This
      year, our operation achieved solid performance gains by focusing on
      maximizing the push and pull potential of the integrated
      process.**





Capitalizing
      on strong market demand for coke, Algoma in-creased cokemaking capacity
      with the commissioning of a new door machine and became a net exporter of
      coke, generating 62,400 surplus tons for sale.
      Ironmaking
      topped targeted pre-reline capacity for the Blast Furnace with an all-time
      record annual production of 2.413 million tons, representing a 7% increase
      over 2003 production levels. This was achieved through improvements to
      operating practices that allowed for enhanced furnace stability. The more
      stable operation resulted in the added advantage of a reduction in the
      asset deterioration rate. The Company con-tinues to monitor and operate
      this asset under the operating and maintenance plan that was developed in
      2003 to ensure asset integrity and minimize risk as we look to a reline in2010
      or beyond.
    
    Steelmaking,
      pushed by Ironmaking and pulled by the ever improving DSPC operation,
      succeeded in achieving a liquid steel production record of its own.
      Fed
      by the blast furnace’s strong performance, Algoma’s Direct Strip
      Production Complex continued to increase production month over month
      culminating in a new production record in November of 152,671 tons, the
      equivalent of 1.8 million tons annualized. For the year over-all, the DSPC
      continued to approach its rated capacity of 2.0 million tons, producing
      1.6 million tons in 2004. Efforts to increase production to 2.0 million
      tons by 2006 are currently underway.
      As
      part of Algoma’s ongoing shift toward value-added the Company shipped
      153,000 tons of heat treated plate in response to growing market demand.
      Continuous process improvements in this area of the operation are aimed at
      increasing output capacity going forward.







**Algoma
      Annual Report 2004**
    **(
      19 )**














**Products
and Markets**





**Algoma
      continues to differentiate itself in the industry as a meaningful supplier
      of superior high-strength, light gauge
steels.**





Our
      Direct Strip Production Complex (DSPC), Algoma’s cornerstone asset,
      continues to provide opportunities for product advancement and market
      growth. This year Algoma’s product development team responded to a growing
      market for high strength steels for demanding automotive applications with
      the launch of Algoma’s newest HSLA brand - DSPC 700B/770B. This superior
      high strength low alloy, light gauge product offers minimum yield strength
      exceeding 700MPa, ex-cellent bending capability and unmatched dimensional
      control. The new product line addresses issues of tolerance stacking,
      spring back and performance in-use, and cost for customers who measure
      their success by final part performance.
      Building
      on our current automotive customer base, Algoma also established a strong
      market presence as a supplier of steel for automotive seating systems,
      particularly seat tracks and risers. By introducing both traditional and
      differentiated products the technical team worked with automotive
      customers to provide them with a stronger, lighter solution.
      In
      2004 Algoma also entered into the commercial vehicle market on a direct
      supply basis, providing heat treat plate and high strength low alloy sheet
      to manufacturers of dump truck bodies and other commercial and utility
      vehicles.
    
    Working
      with our customers, we will focus on reducing vehicle weight to enable
      customers to realize a measurable improve-ment in their competitive
      position. In 2005 we plan to work with other manufacturers in this sector
      to continue to provide an advantage in steel.
      In
      keeping with our goal to build a more customer-centric orientation,
      several employee team visits to customer sites were coordinated in 2004.
      Drawing from a broad cross section of departments and roles, these teams
      provided front line operators with valuable insight into customer needs
      and service expectations. In August, Algoma hosted a customer appreciation
      event with more than sixty customers in atten-dance. This enabled our
      customers to meet Algoma’s operating people and see first-hand how their
      product is made.
      As
      a result of our concerted effort to improve custom-er satisfaction this
      year, Algoma was ranked very favourably among its peers. In an independent
      steel customer satisfaction report by Jacobson and Associates, Algoma
      ranked number one for customer loyalty. Going forward we will be looking
      to sustain this high level of performance as we make continuous
      improvements to our product quality and
service.







**(
      20 )**
    **Algoma
      Annual Report 2004**














**Management’s
Discussion and Analysis**





This
MD&A is current as of February 8, 2005 and should be read in conjunction
with the 2004 Audited Consolidated Financial Statements and accompanying Notes.
This discussion of the Company’s business may include forward-looking
information with respect to the Company, including its operations and
strategies, as well as financial performance and conditions. The use of
for-ward-looking words such as “may,” “will,” “expect” or similar variations
generally identify such statements. Although management believes that
expectations reflected in forward-looking statements are reasonable, such
statements involve risks and uncertainties.





Additional
information about Algoma Steel is available on the Corporation’s Annual
Information Form, which can be accessed from SEDAR at
www.sedar.com.








**Contents****Reorganization**
    22
    
    **Risks
      and Uncertainties**
    30**Overall
      Performance**
    22
    
    
    Highly
      Competitive Nature of the Global Steel Industry**Selected
      Annual Financial Information**
    22
    
    
    Low
      Priced Imports and Trade Regulation**Results
      of Operations**
    23
    
    
    Cyclicality
      of the North American Steel IndustrySales
    
    
    
    Supply
      and Cost of Raw Materials and EnergyOperating
      Costs
    
    
    
    Currency
      FluctuationsAdministrative
      and Selling Expenses
    
    
    
    Underfunding
      of Pension PlansDepreciation
      and Amortization
    
    
    
    Post
      Employment BenefitsInterest
      Expense
    
    
    
    Substantial
      Capital Investment, Capital Commitments and Maintenance Expenditures
      RequiredForeign
      Exchange Gain
    
    
    
    Variability
      of Financial ResultsProvision
      for Income Taxes
    
    
    
    Adverse
      Impact of the Company’s Level of Indebtedness**Financial
      Condition, Liquidity and Capital Resources**
    26
    
    
    Financial
      RestrictionsCash
      Provided from Operations
    
    
    
    Labour
      MattersCash
      Used for Investment Activities
    
    
    
    Environmental
      MattersCash
      Provided by (Used for) Financing Activities
    
    
    
    Technology
      and CompetitionContractual
      Obligations
    
    
    
    Recent
      InsolvenciesCapital
      Resources
    
    
    
    Competition
      of Products with Other MaterialsOff
      Balance Sheet Financing
    
    
    
    Unexpected
      Equipment Failures**Changes
      in Accounting Policies**
    28
    
    
    Dependence
      on Senior Management**Critical
      Accounting Estimates**
    28
    
    
    InsuranceValuation
      of Income Tax Assets
    
    
    
    Future
      Capital RequirementsEmployee
      Future Benefits
    
    
    
    Tax
      Loss CarryforwardsFuture
      Environmental Liabilities
    
    
    
    Effect
      of Potential Future Acquisitions**Derivative
      Financial Instruments**
    29**Trade**
    29**Outlook**
    30





**Algoma
      Annual Report 2004**
    **(
      21 )**

















**Management’s
Discussion and Analysis**





**Reorganization**





On
January 29, 2002, Algoma implemented its Plan of Arrangement and Reorganization
and emerged from protection under the *Companies’
Creditors Arrangement Act* (“CCAA”). The reorganization was reported in conformity with fresh start
accounting prin-ciples with an effective date of January 31, 2002 (see note 1 to
the consolidated financial statements for additional information).





**Overall
Performance**





In
2004, Algoma reported net income of $343.8 million (basic earnings per share of
$9.35 or diluted earnings of $8.83 per share) compared to net income of $8.4
million in 2003 and a net loss of $9.6 million in 2002. The increase in net
income over 2003 and 2002 was due mainly to higher selling prices. The
improvement in price levels experienced in 2004 was attributed primarily to
stronger global steel markets, particularly China, combined with improved steel
demand in North America.





Costs
increased for the major elements in 2004 over 2003 and particularly for raw
material and energy costs. Increased prices for raw materials, which are
primarily denominated in U.S. dollars, were partially offset by the effect of a
stronger Canadian dollar. The increase to energy costs was due mainly to higher
prices and consumption of natural gas.





There
was a significant improvement in 2004 to the Company’s balance sheet as the
combination of strong cash flow and an $81.9 million equity issue resulted in
the elimination of bank debt from 2003 and a cash and short-term investment
bal-ance at December 31, 2004 of $453.2 million. This balance, combined with
higher receivables, inventories and a future income tax asset of $59.4 million,
resulted in current assets reaching $1,028.4 million in 2004 compared to $369.7
million at the end of 2003. Shareholders’ equity increased substantially to
$912.3 million at the end of 2004 compared to $370.1 million at the end of 2003.





In
order to minimize cash taxes, the Company has requested amendments to prior
years’ tax returns. This contributed to tax depreciation exceeding book
depreciation by a significant amount and resulting in a long-term income tax
liability of $139.8 million.





**Selected
Annual Financial Information**





(in
      millions of dollars except per share amounts)
    
    **Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Net
      Sales
    
    **$**
    **1,803.1**
    
    $
    1,138.2
    
    $
    1,080.1
    
    $
    88.4Net
      Income (Loss)
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    16.5
    
    $
    (26.1
    )Earnings
      per Common Share:Basic
    
    **$**
    **9.35**
    
    $
    0.33
    
    $
    0.72
    
    $
    (0.49
    )Diluted
    
    **$**
    **8.83**
    
    $
    0.27
    
    $
    0.56
    
    $
    (0.49
    )








(in
      millions of dollars)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003
    
    December
      31,
      2002
    
    January
      31,
      2002Total
      Assets
    
    **$**
    **1,673.4**
    
    $
    1,028.8
    
    $
    1,131.8
    
    $
    1,041.5Total
      Long-Term Liabilities
    
    **$**
    **570.2**
    
    $
    498.1
    
    $
    528.6
    
    $
    552.8





Total
assets increased $644.6 million in 2004. The increase is mainly attributable to
cash provided from operations and an equity issue resulting in an increase in
the year-end balances for cash and cash equivalents and short-term investments
of $453.2 mil-lion. Other changes included an increase in accounts receivable,
inventories and the addition of a future income tax asset of $59.4 million. The
Corporation has requested amendments to prior years’ Federal and Provincial
income tax returns in order to maximize tax depreciation deductions. The
amendments have resulted in an increase in the future tax asset in respect of
tax loss carry-forwards and a corresponding increase in the future tax liability
related to tax depreciation deducted in excess of book
depreciation.





**(
      22 )**
    **Algoma
      Annual Report 2004**














Total
long-term liabilities increased $72.1 million in 2004. The increase is
attributable to the recognition of a future income tax liability as at December
31, 2004 of $139.8 million, offset by a reduction in long-term debt and the
accrued pen-sion liability. Long-term debt decreased $14.1 million due to the
strengthening of the Canadian dollar versus the U.S. dollar as at December 31,
2004 compared to December 31, 2003 and the redemption of the 1% Notes. The U.S.
dollar 11% Notes remained unchanged at $125 million. The accrued pension
liability at year-end was $40.3 million compared to $87.4 million as at December
31, 2003. The reduction is mainly attributable to a one-time payment in 2004 of
$40.0 million associated with the new collective bargaining
agreements.





**Results
of Operations**





Algoma
Steel posted record earnings for the year ended December 31, 2004. Income from
operations for the year was $545.0 mil-lion as compared to $12.6 million last
year. The significant increase was mainly attributable to higher steel prices.








for
      the years ended December 31
      (in
      millions except shipments and per share amounts)
    
    **2004**
    
    2003
    
    Change
    
    %
      ChangeSteel
      Shipments (000’s tons)
    
    
    **2,198.2**
    
    
    2,170.0
    
    
    28.2
    
    
    1.3
    %Raw
      Steel Production (000’s tons)
    
    
    **2,532.4**
    
    
    2,444.6
    
    
    87.8
    
    
    3.6
    %Sales
    
    **$**
    **1,803.1**
    
    $
    1,138.2
    
    $
    664.9
    
    
    58.4
    %EBITDA
    
    
    **597.2**
    
    
    67.5
    
    
    529.7
    
    
    784.7
    %Net
      Income
    
    
    **343.8**
    
    
    8.4
    
    
    335.4
    
    
    3,992.9
    %Diluted
      Earnings per Share
    
    **$**
    **8.83**
    
    $
    0.27
    
    $
    8.56
    
    
    3,170.4
    %





**Sales**





Sales
totaled $1.80 billion for the year ended December 31, 2004 on steel shipments of
2.198 million tons. This compares to 2003 sales of $1.14 billion on steel
shipments of 2.170 million tons. Selling prices increased steadily throughout
the first three quarters of 2004 peaking in September. The average realized
price for steel for 2004 increased 54.6% over 2003.




**2004**
    
    2003
    
    Change**Sales**
    
    
    
    Sales
    
    
    
    Salesfor
      the years ended December 31
    
    
    **(millions**)****
    ****
    
    **per
      ton**
    
    
    (millions)
    
    
    per
      ton
    
    
    (millions)
    
    
    per
      tonSheet
    
    **$**
    **1,239.6**
    
    **$**
    **699**
    
    $
    802.1
    
    $
    456
    
    $
    437.5
    
    $
    243Plate
    
    
    **434.5**
    
    
    **1,021**
    
    
    247.3
    
    
    605
    
    
    187.2
    
    
    416Freight
    
    
    **62.1**
    
    
    **28**
    
    
    58.3
    
    
    27
    
    
    3.8
    
    
    1Total
      Steel Products
    
    
    **1,736.2**
    
    
    **790**
    
    
    1,107.7
    
    
    511
    
    
    628.5
    
    
    279Non-steel
      Sales
    
    
    **66.9**
    
    
    
    
    
    30.5
    
    
    
    
    
    36.4Total
    
    **$**
    **1,803.1**
    
    **$**
    **820**
    
    $
    1,138.2
    
    $
    525
    
    $
    664.9
    
    $
    295





The
mix between sheet and plate products shifted slightly with plate products
accounting for 19.3% of total shipments in 2004 as compared to 18.9% in 2003.
Sheet products include hot-rolled coils, cut-to-length cold-rolled coils and
first-stage blanks. Total shipments of sheet products were up less than 1%.
Plate products include as-rolled and heat-treated plate, and welded wide flange
beams. Shipments of plate products increased 3.9% over 2003. Overall shipments
increased 1.3% versus last year mainly due to higher production
levels.





**Steel
Shipments**




**2004**
    
    2003
    
    Changefor
      the years ended December 31
    
    **000’s
      tons**
    ****
    **%**
    
    000’s
      tons
    
    %
    
    000’s
      tons
    
    %Sheet
    
    
    **1,772.9**
    
    
    **80.7**
    **%**
    
    1,760.6
    
    
    81.1
    %
    
    12.3
    
    
    0.7
    %Plate
    
    
    **425.3**
    
    
    **19.3**
    **%**
    
    409.4
    
    
    18.9
    %
    
    15.9
    
    
    3.9
    %Total
    
    
    **2,198.2**
    
    
    **100.0**
    **%**
    
    2,170.0
    
    
    100.0
    %
    
    28.2
    
    
    1.3
    %





**Algoma
      Annual Report 2004**
    **(
      23 )**














**Management’s
Discussion and Analysis**





Algoma
was able to capitalize on strong market demands for coke products during 2004.
The addition of a door machine on the coke ovens, commissioned in the second
quarter, increased the Company’s coke making capacity. This factor, combined
with increased usage of natural gas as a replacement for coke in the blast
furnace, resulted in the sale of 62,400 tons of furnace coke. There were no
sales of furnace coke in 2003.





**Operating
Costs**





Cost
of sales for the year 2004 totaled $1.15 billion as compared to $1.02 billion
last year. The 12% increase is mainly attribut-able to higher operating costs,
an increase in shipments and the addition of coke sales. Cost per ton for steel
products averaged $453 for 2004, an increase of 5.1% over last year. The high
level operating income realized in 2004, resulted in profit sharing expense of
$51.7 million or $24 per ton shipped.





**Cost
of Sales**





**2004**
    
    2003
    
    Change
      per tonfor
      the years ended December 31
    
    **per
      ton**
    
    **(millions)**
    
    per
      ton
    
    (millions)
    
    $
    
    %Steel
      Products
    
    **$**
    **453**
    
    **$**
    **996.1**
    
    $
    431
    
    $
    936.2
    
    $
    22
    
    
    5.1
    %Profit
      Sharing
    
    
    **24**
    
    
    **51.7**
    
    
    -
    
    
    -
    
    
    24Freight
    
    
    **28**
    
    
    **62.1**
    
    
    27
    
    
    58.3
    
    
    1Non-steel
    
    
    
    
    
    **40.4**
    
    
    
    
    
    30.2Total
    
    **$**
    **523**
    
    **$**
    **1,150.3**
    
    $
    472
    
    $
    1,024.7
    
    $
    51
    
    
    10.8
    %





*Major
elements of operating costs for steel products: (excludes profit sharing costs)*




**2004**
    
    2003
    
    2002
    
    2001Raw
      Materials
    
    
    **41**
    **%**
    
    42
    %
    
    41
    %
    
    36
    %Employment
      Costs
    
    
    **24**
    **%**
    
    25
    %
    
    25
    %
    
    30
    %Other
      Supplies and Services
    
    
    **16**
    **%**
    
    17
    %
    
    19
    %
    
    20
    %Energy
    
    
    **19**
    **%**
    
    16
    %
    
    15
    %
    
    14
    %Total
    
    
    **100**
    **%**
    
    100
    %
    
    100
    %
    
    100
    %





(The
proportion of these major elements for January 2002 and the eleven-month period
does not vary significantly from that presented for the year 2002.)





*Raw
Materials*





Raw
materials include coal, ore, purchased coke, purchased scrap, purchased steel
and alloys.





The
cost of raw materials per ton of steel increased 11% in 2004 with higher U.S.
dollar prices partially offset by the benefits of a strengthening Canadian
dollar. The average exchange rate of the Canadian dollar to the U.S. dollar was
$1.3013 in 2004 compared to $1.4010 in 2003, an appreciation of almost 8%. The
majority of Algoma’s raw material purchases are priced in U.S. dollars.





Algoma
obtains its coal requirements through a U.S. supplier with the coal held in a
consignment inventory in Sault Ste. Marie. The current agreement with this
supplier expires March 31, 2006. Coal consumption in 2004 totaled $107 million,
an increase of $8 million from last year’s total of $99 million. The increase
was mainly attributable to higher production levels of coke.





Algoma
has an exclusive supply agreement with Cleveland-Cliffs Inc. for the supply of
iron ore with 12 years remain-ing in the 15-year agreement. (Refer to notes 16
and 19 of the notes to the consolidated financial statements for more details.)
Consumption of iron ore in 2004 totaled $195 million, an increase of 9% from
2003 in which Algoma consumed $179 million of iron ore. Production of hot metal
increased 7% in 2004 from last year accounting for the majority of the increase
in spending.





The
cost of alloys increased significantly during 2004. Consumption of alloys
totaled $87 million. This represents an increase of 55% from the 2003
consumption total of $56 million. Although production levels were higher in 2004
versus last year, the increase is mainly attributable to higher
prices.





**(
      24 )**
    **Algoma
      Annual Report 2004**











Algoma
consumed 132,000 of purchased scrap in 2004 at a total cost of $30 million. This
compares to consumption of 179,000 tons of purchased scrap in 2003 at a total
cost of $32 million. With scrap prices increasing significantly in 2004, the
Company was selective in its purchases and took measures to minimize the
consumption of purchased scrap. Algoma consumes approximately 700,000 tons of
scrap annually with most of its scrap requirements generated from internal
sources.





In
2003, Algoma purchased quantities of furnace and nut coke that it consumed in
2003 and 2004. Tons of purchased coke consumed in 2004 totaled 51,400 at a cost
of $10.6 million as compared to 33,400 tons in 2003 at a cost of $7.6
million.





*Employment
Costs*





The
Company entered into new three-year collective agreements on August 1, 2004 with
both the salaried and hourly union groups. The new agreements include wage and
benefit increases and a pension benefit improvement. The average labour cost per
hour, including all benefit costs but excluding profit sharing, increased by
almost 13% in 2004. Lower average manning levels partially offset higher labour
rates and benefit costs resulting in a 7% increase in total employment costs,
excluding profit sharing, in 2004. Pension and post employment costs account for
over half of the increase. At the end of 2004, there were approximately 3,000
employees working at Algoma, up approximately 100 from the end of 2003.





Algoma
has a profit sharing plan in which all employees, except the executives,
participate. Plan details can be found in note 13 of the notes to the
consolidated financial statements. Profit sharing costs totaled $51.7 million in
2004 or $24 per ton of steel shipped. There was no profit sharing in
2003.





*Other
Supplies and Services*





Included
in other supplies and services are costs related to the purchase of services and
materials used in both operating and maintenance activities. Expenditures in
2004 were flat versus 2003 despite an increase in production resulting in a 4%
decrease in the cost per ton. This is a reflection of the Company’s cost control
initiatives.





*Energy*





Energy
costs include natural gas, purchased electricity, oxygen and other miscellaneous
items.





Algoma’s
total energy costs increased significantly in 2004 accounting for 19% of total
operating costs versus 16% in 2003. The major factor was the higher consumption
of natural gas in the blast furnace. In order to maximize coke available for
sale in 2004, the Company adjusted the fuel mix in the blast furnace displacing
coke consumption for natural gas. Profits realized in the sale of coke exceed
the fuel cost penalty at the blast furnace. Total natural gas costs were $131
million in 2004 compared to $89 million in 2003. Increased natural gas
consumption in the blast furnace accounts for approximately $31 million of the
total year-over-year increase of $42 million. The average cost of natural gas
was up approximately 11% versus last year.





The
cost of purchased electricity increased in 2004 by 9%. Total consumption was up
slightly from 2003. Purchased electricity consumed in operations during 2004
totaled $40 million compared to $35 million in 2003.





Praxair
Canada Inc. supplies oxygen, argon and nitrogen under a contract that has 10.5
years remaining at the end of December 2004. Algoma’s total cost of oxygen in
2004 was virtually unchanged from 2003 at $23 million.





**Administrative
and Selling Expenses**





Administrative
and selling expenses for the year ended December 31, 2004 totaled $55.6 million
as compared to $46.0 mil-lion for 2003. The $9.6 million increase was mainly
attributable to higher expenditures for consulting and professional fees, an
increase in employment costs and management bonuses. The increase in spending
for consulting and professional fees is related to several improvement
initiatives and strategic activities of the fourth quarter.





**Algoma
      Annual Report 2004**
    **(
      25 )**














**Management’s
Discussion and Analysis**





**Other
Income Statement Items**




for
      the years ended December 31 (in millions of dollars)
    
    **2004**
    
    2003
    
    ChangeEBITDA
    
    **$**
    **597.2**
    
    $
    67.5
    
    $
    529.7Depreciation
      and Amortization
    
    
    **52.2**
    
    
    54.9
    
    
    (2.7
    )Income
      from Operations
    
    
    **545.0**
    
    
    12.6
    
    
    532.4Net
      Interest Expense
    
    
    **16.2**
    
    
    26.1
    
    
    (9.9
    )Foreign
      Exchange Gain
    
    
    **(9.2**
    **)**
    
    (40.0
    )
    
    30.8Other
      Income (Expense)
    
    
    **1.4**
    
    
    0.3
    
    
    1.1Income
      before Income Taxes
    
    
    **539.4**
    
    
    26.8
    
    
    512.6Provision
      for Income Taxes
    
    
    **195.6**
    
    
    18.4
    
    
    177.2Net
      Income
    
    
    **343.8**
    
    
    8.4
    
    
    335.4





**Depreciation
and Amortization**





Depreciation
and amortization expense for 2004 totaled $52.2 million as compared to $54.9
million last year. The reduction in expense is a reflection of the relatively
low levels of capital spending over the last three years combined with certain
assets being fully depreciated in this timeframe.





**Interest
Expense**





In
the first quarter of 2004, Algoma Steel issued 10 million common shares for net
proceeds of $81.9 million. This, combined with the cash flow generated from 2004
profits, resulted in cash and securities totaling $453.2 million at the end of
the year. This compares to a balance on the operating line at the end of 2003 of
$20.4 million. The elimination of bank debt, combined with interest income from
cash and securities, resulted in a reduction of $9.9 million to interest expense
for the year 2004. Interest on the Company’s long-term debt of U.S. $125 million
is at 11% and any differences in interest expense on long-term debt
year-over-year are attributed to differences in the exchange rate.





**Foreign
Exchange Gain**





The
Company recognized a foreign exchange gain in 2004 of $9.2 million as compared
to a gain in 2003 of $40.0 million. The gains reflect the appreciation of the
Canadian dollar versus the U.S. dollar in both years and are mainly attributable
to the U.S. denominated debt of $125 million.





**Provision
for Income Taxes**





For
the year ended December 31, 2004, the provision for income taxes was $195.6
million as compared to $18.4 million for 2003. The cash portion of the 2004
provision was $2.6 million versus $2.2 million for 2003.





The
tax benefit of losses from previous years totaling $59.4 million has been
classified as a current asset as they are expected to reduce taxable income in
2005. A future long-term tax liability of $139.8 million reflects tax
depreciation deducted in excess of book amortization. For further information,
see note 15 of the notes to the consolidated financial statements.





**Financial
Condition, Liquidity and Capital Resources**


**Statement
of Cash Flows**




for
      the years ended December 31 (in millions)
    
    **2004**
    
    2003
    
    Change
    
    %
      ChangeNet
      Income
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    335.4
    
    
    3,993
    %Cash
      Provided from Operations before Changes in Working Capital
    
    **$**
    **542.6**
    
    $
    66.7
    
    $
    475.9
    
    
    713
    %Cash
      Provided from Operating Activities
    
    **$**
    **430.8**
    
    $
    153.6
    
    $
    277.2
    
    
    180
    %Cash
      Used for Investment Activities
    
    **$**
    **294.2**
    
    $
    37.0
    
    $
    257.2
    
    
    695
    %Cash
      Provided by (Used for) Financing Activities
    
    **$**
    **49.6**
    
    $
    (116.6
    )
    $
    166.2
    
    
    NA





**(
      26 )**
    **Algoma
      Annual Report 2004**











**Cash
Provided from Operations**





Significant
increases in steel prices throughout much of 2004 resulted in strong cash flow
from operations and a substantial improvement to the Company’s liquidity. Cash
provided from operations before changes in working capital in 2004 was $542.6
million compared to $66.7 million in 2003. Changes in operating working capital
resulted in a use of $111.8 million in 2004, compared to cash provided from
working capital in 2003 of $86.9 million. The increase in working capital in
2004 was mainly attributable to an increase in accounts receivable, a reflection
of much higher pricing over 2003 year-end levels. Higher inventory levels at the
end of 2004 were offset by an increase in accounts payable and accrued
liabilities. The increase in inventories reflects higher costs of production in
2004 compared to 2003 and higher levels of finished products on-hand at
year-end. The increase in accounts payable and accrued liabilities is mainly
attributable to the accrual for profit sharing to be paid at the end of the
first quarter. In 2003, changes in working capital provided $86.9 million, the
result of a reduction of inventory levels from the 2002 year-end and a reduction
in accounts receivable due to lower selling prices.





**Cash
Used for Investment Activities**





The
significant increase in cash used for investment activities, $294.2 million in
2004 compared to $37.0 million in 2003, is the result of short-term investments
held at the end of 2004 in the amount of $267.0 million as compared to $0.2
million at the end of 2003. Capital asset additions totalled $42.4 million in
2004, an increase from the $36.8 million of capital asset additions in the year
2003. The Company realized $15.0 million from the sale of surplus capital assets
during the year, approximately $12.5 million from the sale of tube mill assets
and $2.5 million from the sale of surplus land and buildings.





At
December 31, 2004, the Company had commitments for future capital expenditures
totalling $12.1 million, relating primarily to the purchase of manufacturing
equipment. Capital expenditures in 2005 are expected to be higher than 2004 due
to sustaining capital investment and the launch of a business systems renewal
project.





**Cash
Provided by (Used for) Financing Activities**





Financing
activities in 2004 included the issue of 10 million common shares for proceeds
of $81.9 million, payment of deferred interest on long-term debt of $9.3
million, a payment of $1.8 million for the redemption of the 1% convertible
notes, and a decrease in bank indebtedness of $20.4 million. Financing
activities in 2003 included repayment of the term loan of $29.0 mil-lion, the
payment of deferred interest on long-term debt of $16.4 million, the incurrence
of financing expenses of $4.6 million, and a decrease in bank indebtedness of
$68.2 million.





**Contractual
Obligations**





Algoma’s
contractual obligations and their payment due dates are as follows:





(millions
      of dollars)
    
    Total
    
    Less
      than
      1
      Year
    
    1-3
      Years
    
    4-5
      Years
    
    After
      5
      YearsLong-term
      Debt
    
    $
    150.3
    
    $
    -
    
    $
    15.0
    
    $
    30.1
    
    $
    105.2Operating
      Leases
    
    
    3.1
    
    
    1.3
    
    
    1.1
    
    
    0.7
    
    
    -Purchase
      Obligations(1)
    
    
    2,303.2
    
    
    430.5
    
    
    365.1
    
    
    336.3
    
    
    1,171.3Other
      Long-Term Obligations
    
    
    8.6
    
    
    0.4
    
    
    0.4
    
    
    0.1
    
    
    7.7





(1)
    Purchase
      obligations of future years have been estimated based on prices and
      exchange rates in effect on December 31,
2004.





Algoma
Steel’s long-term debt is in the form of 11% Notes redeemable after 2005 at a
declining premium ranging from 105.5% of principal in 2006 to 101.4% in 2008.





Purchase
obligations include contracts for fixed or minimum quantities of raw materials
such as iron ore and coal, as well as natural gas, electricity and other
utilities.





Other
long-term obligations are mainly comprised of environmental liabilities
totalling $7.9 million.





At
December 31, 2004, there were also contractual commitments totalling $12.1
million related to authorized capital projects.





**Algoma
      Annual Report 2004**
    **(
      27 )**














**Management’s
Discussion and Analysis**





**Capital
Resources**





Capital
resources at December 31, 2004 included cash and cash equivalents and short-term
investments totalling $453.2 million, compared to bank indebtedness of $20.4
million at December 31, 2003. This strong cash position and ongoing cash flow
from operations is expected to enable the Company to satisfy its anticipated
operating and capital cash requirements.





At
December 31, 2004, there was $159.2 million of unused availability under the
Revolving Facility compared to $125.4 million at December 31, 2003.





**Off
Balance Sheet Financing**





The
Company’s off balance sheet financing arrangements are limited to operating
lease contracts for manufacturing equipment and premises. As disclosed in note
16 to the consolidated financial statements, minimum annual lease payments under
operating leases for fiscal 2005 are $1.3 million.





**Changes
in Accounting Policies**





During
the year, the Company was required to adopt an amendment to CICA 3461, “Employee
Future Benefits” that enhanced and expanded disclosure. The effect of adopting
these new standards was related to disclosure only and did not materially impact
the 2004 financial statements.





**Critical
Accounting Estimates**





The
Company’s significant accounting policies are described in note 2 to the
consolidated financial statements. Some of these accounting policies require
management to make estimates and assumptions about matters that are uncertain at
the time the estimates and assumptions are made. Management believes that the
estimates are reasonable, however, different estimates could potentially have a
material impact on the Company’s financial position or results of operations. In
its review of significant accounting policies with the Company’s Audit Committee
and independent auditors, management has discussed the develop-ment and
selection of the critical accounting estimates described below.





**Valuation
of Income Tax Assets**





In
preparing the consolidated financial statements, the Company is required to
estimate its income tax obligations. This process involves estimating the actual
tax exposure and assessing temporary differences resulting from different
treatment of items for tax and accounting purposes. These temporary differences,
together with income tax loss carryforwards, result in future income tax assets
and liabilities, which are recorded on the balance sheet. The Company assesses
the likelihood that the future income tax assets will be recovered from future
taxable income and, to the extent that recovery is not “more likely than not,” a
valuation allowance is established. If the valuation allowance is changed in a
period, an expense or benefit must be included within the tax provision on the
consolidated income statement.





Judgement
is required in determining the amounts of future income tax assets and
liabilities and the related valuation allowance recorded against the future
income tax assets. In assessing the potential realization of future income tax
assets, man-agement considers whether it is “more likely than not” that some
portion or all of the future income tax assets will be realized. The ultimate
realization of future income tax assets is dependent upon the Company generating
sufficient future taxable income during the period in which the future income
tax assets are recoverable. Management expects to realize all the future income
tax assets in respect of its income tax loss carryforwards, and no valuation
allowance has been provided. A full valuation allowance has been provided for
all other future income tax assets. The Corporation’s estimate of income tax
loss carryforwards, after giving effect to the financial reorganization in 2002,
has not been reviewed by the Canada Customs and Revenue Agency and may be
subject to change.





**(
      28 )**
    **Algoma
      Annual Report 2004**











**Employee
Future Benefits**





The
Company provides pensions and post-retirement benefits including health care,
dental care and life insurance to employees. The determination of the obligation
and expense for defined benefit pension plans and post-retirement benefits is
dependent on the selection of certain assumptions used by the Company’s
actuaries in calculating such amounts. Those assumptions are dis-closed in notes
9 and 10 to the Company’s consolidated financial statements, the most
significant of which are the discount rate, the rate of increase of
compensation, expected rates of return on plan assets, and the rate of increase
in the cost of health care. The significant actuarial assumptions adopted are
internally consistent and reflect the long-term nature of employee future
ben-efits. Significant changes in assumptions could materially affect the
Company’s employee benefit obligations and future expense.





**Future
Environmental Liabilities**





Included
in “Other long-term liabilities” on the Company’s consolidated balance sheet is
$7.9 million related to future environ-mental liabilities. These liabilities
primarily relate to remediation required on land owned by the Company that is no
longer used in the Company’s operations. Remediation costs that can be
reasonably estimated are recorded based on the Company’s best estimates. The
timing and amount of these future expenditures can be subject to significant
judgement.





**Derivative
Financial Instruments**





Algoma
utilizes natural gas and electricity swap contracts to manage risks associated
with future variability in cash flows. Algoma designates its natural gas and
electricity hedge agreements as hedges of the underlying expense. The related
expense is adjusted to include the payments made or received under the swaps.
Unrealized gains and losses on the swaps are not recognized until realized.





At
December 31, 2004, there were no natural gas or electricity swaps outstanding.
However, the Company plans on utilizing natural gas and electricity swap
contracts in 2005.





**Trade**





During
the course of the year, anti-dumping findings in place covering plate,
hot-rolled sheet and cold-rolled sheet from a number of countries were subject
to review. In all three cases, the Canadian International Trade Tribunal (CITT)
rescinded the findings, despite the determination by the Canada Border Services
Agency that dumping would resume from most of the countries covered by the
findings if the findings were removed. The CITT considered it unlikely that
producers in the subject countries would sell significant volumes of steel into
Canada or that any such volumes imported would be at such low prices that they
would cause injury to the domestic industry in the near to medium term.





In addition
to the findings on product manufactured by the Company, findings were also
rescinded on Corrosion Resistant Sheet and on Re-bar (January 2005). The Company
along with the rest of the industry is disappointed with the rescind-ing of the
five findings. It is the Company’s view that, over the longer term, imports from
these countries will certainly cause injury to the domestic industry. Since the
removal of the findings, significant quantities of low priced imports from
several of the previously covered countries have arrived and, along with imports
from other countries, are putting pressure on domestic pricing.





The
expiry review concerning the dumping in Canada of carbon steel plate from
Brazil, Finland, India, Indonesia, Thailand and Ukraine, and the subsidizing of
plate from India, Indonesia and Thailand is underway. On February 10, 2005, the
president of the Canada Border Services Agency determined that dumping from
Finland and Thailand was not likely to resume. These two countries have now been
removed from the dumping review. The review continues at the CITT and a public
hearing is scheduled for May 2. Completion of the review is scheduled no later
than June 27, 2005.





Customers
have been reporting significant import offerings for all product lines. This
increased availability of imports put pressure on domestic pricing in late 2004.
The Company is reviewing the import offers and will take the appropriate action
if the imports appear to be unfairly traded.





**Algoma
      Annual Report 2004**
    **(
      29 )**














**Management’s
Discussion and Analysis**





**Outlook**





Spot
prices for sheet and plate products are expected to decline in 2005 from the
peak pricing level reached in the third quarter of 2004, although an increase in
contract prices is expected to partially offset the effect of lower spot prices.
The level of contract sales for 2005 approximates 50%. Excess inventories in
early 2005 are suppressing prices and North American demand from several market
sectors has weakened from 2004 levels. Management is optimistic that this
inventory overhang is temporary and believes that pricing will stabilize in the
coming months.





Higher
coal costs are expected in the first quarter due primarily to the purchase of
117,000 tons of coal in late 2004 and early 2005 at spot prices due to a
temporary disruption in supply from the Company’s primary coal supplier. A
substantial increase is expected for iron ore prices in 2005 and this will
affect earnings after existing iron ore inventories purchased in 2004 are
exhausted.





Lower
earnings are expected in the first quarter compared to the fourth quarter of
2004, but a substantial increase in the cash and short-term investments is
expected. The outlook for the balance of 2005 is dependent on a number of key
variables including the global steel situation and particularly the supply and
demand situation within China.





**Risks
and Uncertainties**





**Highly
Competitive Nature of the Global Steel Industry**





In
recent years, there has been a substantial increase in global steel capacity,
particularly in China which has become the larg-est steel producer and consumer
in the world. A significant slowdown in growth and/or increases in capacity,
which exceeded consumption rates in China, could result in surplus steel which
may be exported to world markets. In addition, an economic downturn which
affects demand for the Company’s products or an increase in the strength of the
U.S. dollar or Canadian dollar relative to other currencies could increase
imports. It is, therefore, possible that more unfairly priced imports could
enter into the North American markets at a future date, resulting in further
price erosion, which would adversely affect the Company’s ability to compete,
its revenue and its profitability.





Algoma
competes with numerous foreign and domestic steel producers. Some of its
competitors have greater financial and capital resources than Algoma does and
continue to invest heavily to achieve increased production efficiencies,
increased capacity and improved product quality. Algoma primarily competes with
other steel producers based on the delivered price of finished products to
Algoma’s customers. Algoma’s labour, raw material and energy costs are higher
than those of many for-eign producers. Although freight costs for steel can
often make it uneconomic for distant steel producers to compete with the
Company, to the extent that they have lower cost of sales such as lower labour,
raw material or energy costs or are government subsidized, they may be able to
successfully compete. Although the Company is continually striving to improve
its operating costs, it may not be successful in achieving labour, raw material
and energy cost improvements or gaining operating efficiencies that may be
necessary to remain competitive.





The
North American steel industry has historically faced significant competition
from foreign steel producers. Some non-market economy foreign steel producers
are owned, controlled or subsidized by their governments and their decisions
with respect to production, sales and exports may be influenced more by
political and economic policy considerations than by prevail-ing market
conditions. In addition, foreign steel producers may be subject to less
restrictive regulatory and environmental regimes that could provide a cost
advantage relative to North American producers.





The
domestic steel industry has experienced lengthy periods of difficult markets due
to increased foreign imports. Due to unfavourable foreign economic conditions,
excess foreign capacity and a strong Canadian and U.S. dollar, imports of steel
products to the U.S. and Canadian markets have reached high levels and, in some
cases, have been sold at prices below their combined production and export
costs. From 1995 to 2004, U.S. steel industry production capacity utilization
levels ranged from a high of 93.3% in 1995 to a low of 79.2% in 2001 and were
approximately 91% in 2004.





On
January 29, 2004, Stelco Inc., Canada’s largest steel company, applied for
protection under the *Companies’
Creditors Arrangement Act* .
In addition, since the beginning of 1997, over 35 U.S. steel companies have
sought protection under Chapter 11 of the United States Bankruptcy Code. Many of
these companies have continued to operate, while reducing prices to maintain
volumes and cash flow and obtaining concessions from their labour unions and
suppliers. Some companies have even expanded and modernized during these
reorganizations. Upon emerging from reorganization, these companies, or new
entities that pur-chased their facilities through this process, have been
relieved of many obligations including environmental, employee and retiree





**(
      30 )**
    **Algoma
      Annual Report 2004**














benefits
and other obligations, commonly referred to as legacy costs. As a result, they
may be able to operate with lower costs than Algoma. Stelco Inc. may emerge from
a court-supervised restructuring with some or all of these
advantages.





**Low
Priced Imports and Trade Regulation**





The
Company’s business has historically been affected by both Canadian and United
States trade legislation intended to limit “dumping”, a practice employed by
certain foreign competitors that have sold steel into the United States or
Canadian mar-kets at prices below their costs or below prices prevailing in
their own domestic markets. Such practices may result in injury to companies
producing goods in Canada or the U.S. in the form of suppressed prices, lost
sales, lower profits and reductions in production, employment levels and the
ability to raise capital. Although in a number of cases Canadian trade laws have
been successfully employed in the past, they may be inadequate to prevent future
unfair import pricing practices which individually or collectively could
materially adversely affect the Company. If current and future trade cases do
not provide relief from such trade practices, relevant Canadian trade laws are
weakened, world demand for steel decreases, or the U.S. or Canadian dollars
strengthen against foreign currencies, an increase in the market share of
imports into Canada may occur, which could have a material adverse effect on the
Company. Moreover, trade regulations in other countries, particularly the United
States, could materially adversely affect Algoma to the extent that they reduce
or eliminate Algoma’s access to certain steel markets. There can be no
assurances that the Company will be able to compete effectively in the future.





A
change in the situation in China could have a significant impact on steel
markets in the rest of the world. China is presently increasing steel producing
capacity by millions of tons every year. They are also importing large volumes
of finished steel and raw materials. China’s imports of raw materials are
driving up prices in the rest of the world, particularly for iron ore and scrap.
Chinese demand for vessels to import raw materials and export finished products
has also caused increasing ocean freight rates. Although this situation may be
favourable to the Company at the present time as it is driving up the price of
steel products in North America, it may change in the future. As the Chinese
supply of steel is brought into balance with the demand, countries presently
exporting to China will be searching for alternative markets. Since Canada and
the U.S. are the largest “open market” in the world, imports from these other
countries could impact the North American market resulting in a loss of sales
volume, price and profitability for the Company.





**Cyclicality
of the North American Steel Industry**





The
North American steel industry is cyclical in nature and sensitive to general
economic conditions. The financial condition and results of operation of
companies in the steel industry are generally affected by macroeconomic
fluctuations in the Canadian, U.S. and global economies. Due mainly to its
product mix, Algoma has a higher exposure to spot markets than most of its North
American competitors and is, therefore, subject to more volatility in its
selling prices. In addition, steel prices are sensi-tive to trends in cyclical
industries such as the North American automotive, construction, appliance,
machinery and equipment, and transportation industries, which are significant
markets for the Company’s products. In addition, many of its customers are
affected by North American and worldwide economic downturns, which have
resulted, and may in the future result, in defaults in the payment of accounts
receivable owing to the Company and reduced sales levels.





**Supply
and Cost of Raw Materials and Energy**





Algoma’s
operations require substantial amounts of raw materials and energy including
coal, iron ore, alloys, scrap, oxygen, natu-ral gas, electricity and other
inputs. The price and availability of such raw materials and inputs are subject
to market forces and, in some cases, government regulations and accordingly, are
subject to change. The cost of several key inputs, including iron ore, is
expected to increase substantially in 2005 and coal costs are projected to
increase significantly in 2006 as an existing three-year agreement with
favourable prices expires. The Company could be particularly adversely affected
during a period of declining selling prices for steel without a corresponding
decline in raw material costs. Algoma’s results of operations could be adversely
affected by supply interruptions or further increases in the cost of materials.
Algoma’s iron ore, coal, alloy and scrap costs would be adversely affected by a
decrease in the relative value of the Canadian dollar. There can be no assurance
that adequate supplies of oxygen, electricity, natural gas, coal, iron ore or
alloys will be available in the future or that future increases in the cost of
such materials will not adversely affect Algoma’s operations.





**Algoma
      Annual Report 2004**
    **(
      31 )**














**Management’s
Discussion and Analysis**





**Currency
Fluctuations**





The
prices for steel products sold in Canada are derived mainly from price levels in
the U.S. market in U.S. dollars converted into Canadian dollars at the
prevailing exchange rates. As a result, a stronger Canadian dollar relative to
the U.S. dollar reduces the Company’s Canadian dollar selling prices for sales
into both Canada and the U.S.





Increases
in the value of the Canadian dollar relative to the U.S. dollar make Canadian
steel products and Canadian customers less competitive in U.S. markets and also
encourage imports from the U.S. Therefore, a significant increase in the value
of the Canadian dollar could materially and adversely affect Algoma’s results of
operations and financial condition. Algoma con-siders its currency hedging
strategy from time to time and currently has no hedging contracts in place.





Increases
in the value of the Canadian dollar relative to the home currencies of global
steel producers would also increase the probability of increased
imports.





**Underfunding
of Pension Plans**





The
Company had an unfunded pension liability of $254 million as at December 31,
2004, based on an actuarial estimate for financial reporting. On a statutory
funding basis, the unfunded liability is estimated at $212 million as at
December 31, 2004. Employer contributions in 2004 were $72 million which
included a one-time contribution of $40 million. Based on current interest
rates, benefits and projected investment returns, the Company expects that
annual funding will increase to approxi-mately $45 million in 2005, subject to
annual adjustments thereafter. A significant portion of the estimated increased
funding is expected to be a payment towards the reduction of the unfunded
liabilities. The unfunded liability could increase due to changes to the
collective bargaining agreements, decline in interest rates, investment returns
at less than the actuarial assumptions, or changes to the governmental
regulations governing funding and other factors. The Company could be adversely
affected by the resulting increases in annual funding obligations.





**Post
Employment Benefits**





The
Company provides certain post employment benefits to its retirees. These
benefits include drug, life insurance and hospitaliza-tion coverage. The Company
does not prefund these obligations. At December 31, 2004, the liability for
these obligations was $245 million. The cash paid in 2004 to fund these benefits
was $13 million. The Company’s obligation for these benefits could increase in
the future due to a number of factors including changes in interest rates,
changes to the collective bargaining agreements, increasing costs for these
benefits, particularly drugs, and any transfer of costs currently borne by
government to the Company.





**Substantial
Capital Investment, Capital Commitments and Maintenance Expenditures
Required**





The
Company’s operations are capital intensive. Algoma expects to be required to
make ongoing significant capital expenditures in an effort to achieve and
maintain competitive levels of capacity, cost, productivity and product quality.
Total capital expendi-tures were $25.9 million, $36.8 million and $42.4 million
for the years ended December 31, 2002, 2003 and 2004, respectively. Capital
expenditures at these low levels cannot be sustained indefinitely. Capital
expenditures in 2005 are expected to be approximately $75.0 million.





The
most significant capital project facing the Company is the #7 Blast Furnace
reline currently scheduled for 2010 at an estimated cost of $120 million. In
addition to the capital expenditure for the reline, there is a substantial
operating cost penalty during the reline related to lower production volume and
the need for purchased slabs. The timing and cost of the #7 Blast Furnace reline
is critical to the Company and there is a risk that a complete reline could be
required prior to 2010. The Company has estimated that an additional expenditure
of approximately $50 million will be required between 2005 and 2010 to support
the blast furnace operation until the planned reline in 2010.





Algoma’s
business may not generate sufficient operating cash flow and external financing
sources may not be available in an amount sufficient to enable it to make
anticipated capital expenditures, service or refinance its indebtedness, or fund
other liquidity needs.





**(
      32 )**
    **Algoma
      Annual Report 2004**

















**Variability
of Financial Results**





Algoma’s
financial results may fluctuate substantially, not only due to the cyclicality
of the steel industry and fluctuations in foreign exchange rates, but also due
to other factors such as Algoma’s higher exposure to spot markets than most of
its North American competitors, specific product competition, operating
performance, uncontrollable increases in prices of raw materials and energy, and
difficulties or delays in capital projects. Although selling prices increased
significantly in 2004, no assurance can be given that these improvements will be
sustained in the future.





**Adverse
Impact of the Company’s Level of Indebtedness**





The
Company’s debt obligations are manageable under current circumstances, but a
change in steel market conditions or other variables may necessitate
consideration of refinancing or the adoption of alternative strategies to reduce
or delay expenditures, selling assets or seeking additional equity
capital.





**Financial
Restrictions**





The
trust indenture in respect of Algoma’s 11% Notes, its loan agreement and other
agreements governing Algoma’s indebted-ness contain provisions that limit its
ability to pay dividends or make other restricted payments or investments, incur
additional indebtedness, create liens on assets, merge, consolidate or sell all
or substantially all of its assets, and create restrictions on divi-dends or
other payments by restricted subsidiaries. In addition, Algoma’s revolving
credit facility contains restrictive covenants that require Algoma to maintain a
minimum unused availability of $25 million and to maintain financial ratios when
unused availability is below $50 million, including minimum levels of cash flow
to total debt service and maximum annual capital expen-diture levels. Algoma’s
ability to comply with these restrictions may be affected by events beyond its
control. Algoma may not achieve operating results that will permit it to meet
these restrictive covenants or may need to take business actions prohibited by
these covenants. These covenants may also limit Algoma’s ability to obtain
additional or more favourable financing. In addition, substantially all of
Algoma’s assets have been pledged to secure its revolving credit facility and
the 11% Notes.





**Labour
Matters**





Algoma
has approximately 3,000 employees, of which approximately 2,900, representing
97% of the Company’s employees, are represented by two locals of the United
Steelworkers of America under two collective bargaining agreements. The
collective agreements expire July 31, 2007. Algoma may be unable to successfully
negotiate new collective bargaining agreements without any labour disruption.





Algoma’s
customers, or companies upon which Algoma is dependent for raw materials,
transportation or other services, could also be affected by labour difficulties.
Any such activities, disruptions or difficulties could result in a significant
loss of pro-duction and sales and have a material adverse effect on Algoma’s
financial condition or results of operations.





**Environmental
Matters**





Algoma’s
operations are required to comply with an evolving body of environmental laws
concerned with, among other things, emissions into the air, discharges to
surface and ground water, the investigation and remediation of contaminated
property, noise control, waste management and disposal, mine closure and
rehabilitation, and the generation, handling, storage, transportation, presence
and disposal of toxic and hazardous substances. These laws and regulations vary
depending on the location of the facil-ity and can fall within federal,
provincial or municipal jurisdictions.





**Algoma
      Annual Report 2004**
    **(
      33 )**














**Management’s
Discussion and Analysis**





In
the United States and Canada, certain environmental laws and regulations impose
joint and several liability on cer-tain classes of persons for the costs of
investigation and remediation of contaminated properties. Liability may attach
regardless of fault or the legality of the original management or disposal of
the substance or waste. Some of the Company’s present and for-mer facilities
have been in operation for many years and, over such time, have used substances
and disposed of wastes that may require investigation and remediation. Algoma
could be liable for the costs of such investigations and remediation. Costs for
any remediation of contamination, on or off site, whether known or not yet
discovered, or to address other issues relating to waste disposal, mine closure,
emissions into the air or water, or the storage of materials, could be
substantial and could have a material adverse effect on Algoma’s results of
operations.





The
Company is required to file a mine closure plan respecting its former iron ore
mine in Wawa by December 31, 2006. At that time, the Company expects to be
required to provide financial assurance to the Province of Ontario in respect of
ongoing maintenance and further capital required at the mine site. The annual
ongoing maintenance expenses are estimated at $200,000. Total capital
expenditures, currently estimated at $7 million, are expected to commence in
2010. No assurance can be given that current estimates for ongoing maintenance
and capital expenditures are accurate. The form or amount of financial assurance
required by the Province will not be determined until the filing of the mine
closure plan in December 2006.





Pursuant
to a Certificate of Approval dated May 24, 2003, the Company is required to
install, by 2010, certain equip-ment in the No. 7 Blast Furnace to reduce
casthouse emissions. The cost of this equipment and its installation is
currently estimated at $25 million. No assurance can be given that the actual
cost of the equipment and its installation will not exceed the Company’s current
estimate.





Algoma’s
Environment, Health and Safety Department regularly reviews and audits the
Company’s operating practices to monitor compliance with Algoma’s environmental
policies and legal requirements.





No
assurance can be given that unforeseen changes, such as new laws or stricter
enforcement policies, or a crisis at one of Algoma’s properties or operations,
will not have a material adverse effect on the business, financial condition or
results of operations of Algoma. Algoma’s operations are required to have
governmental permits and approvals. Any of these permits or approvals may be
subject to denial, revocation or modification under various circumstances.
Failure to obtain or comply with the conditions of permits or approvals may
adversely affect the operations of Algoma and may subject Algoma to penalties.
In addition, if environmental laws are amended or are interpreted or enforced
differently, or if new environmental legislation is enacted, Algoma may be
required to obtain additional operating permits or approvals and incur
additional costs. There can be no assurance that Algoma will be able to meet all
applicable regulatory requirements. In addition, Algoma may be subject to fines,
penalties or other liabilities arising from its actions imposed under
environmental laws, including as a result of actions or other proceedings
commenced by third parties, such as neighbours or government
regulators.





**Technology
and Competition**





There
is ongoing research and technological developments with respect to the various
processes associated with steel production which have the potential to reduce
costs and improve quality. It is possible that certain developments could
substantially impair the Company’s competitive position if other companies
implement new technology and the Company does not or cannot.





**Recent
Insolvencies**





In
February 1991, the predecessor company to Algoma became insolvent and sought
protection under the *Companies
Creditors Arrangement Act* (the “CCAA”). In April 2001, the Company filed for protection under the CCAA. On
January 29, 2002, Algoma emerged from court protection pursuant to a plan of
arrangement and reorganization.





**Competition
of Products with Other Materials**





In
the case of certain product applications, steel competes with a number of other
materials such as plastic, aluminum, and com-posite materials. Improvements in
the technology, production, pricing or acceptance of these competitive materials
relative to steel or other changes in the industries for these competitive
materials could cause net sales to decline.





**(
      34 )**
    **Algoma
      Annual Report 2004**

















**Unexpected
Equipment Failures**





Algoma’s
manufacturing processes are dependent upon critical steelmaking equipment such
as furnaces, continuous casters, roll-ing mills, and electrical equipment (such
as transformers), and this equipment may incur downtime as a result of
unanticipated failures. The Company has experienced, and may in the future
experience, plant shutdowns or periods of reduced production as a result of such
equipment failures. Unexpected interruptions in production capabilities would
adversely affect productivity and results of operations for the affected period.
No assurance can be given that a significant shutdown will not occur in the
future or that such a shutdown will not have a material adverse effect on the
business, financial condition or results of operations of the Company. In
addition, an unexpected failure in the Company’s computer system may have the
same result.





**Dependence
on Senior Management**





Algoma’s
operations and prospects depend, in large part, on the performance of Algoma’s
senior management team. The Company cannot assure that such individuals will
remain as employees. In addition, Algoma can make no assurance that it would be
able to find qualified replacements for any of these individuals if their
services were no longer available. The loss of the services of one or more
members of senior management or difficulty in attracting, retaining and
maintaining additional senior management personnel could have a material adverse
effect on Algoma’s business, financial condition and results of
operations.





**Insurance**





To
date, Algoma has been able to obtain liability insurance for the operation of
its business. However, there can be no assurance that Algoma’s existing
liability insurance will be adequate, or that it will be able to be maintained,
or that all possible claims that may be asserted against Algoma will be covered
by insurance.





**Future
Capital Requirements**





The
Company may need to raise additional funds in the future in order to take
advantage of growth opportunities or to respond to competitive pressures. There
can be no assurance that additional financing will be available on terms
acceptable to the Company. If adequate funds are not available or are not
available on acceptable terms, the Company may be adversely
affected.





**Tax
Loss Carryforwards**





The
Company’s income tax loss carryforwards were reduced by approximately $180
million under the financial reorganization as a result of debts being discharged
for less than their principal amount. Federal and Ontario non-capital loss
carryforwards at December 31, 2004 are estimated to be $111 million and $282
million respectively based on requested amendments. Algoma’s estimate of
non-capital loss carryforwards has not been reviewed by the Canada Customs and
Revenue Agency (or any successor agency) and could be reduced.





**Effect
of Potential Future Acquisitions**





Algoma
believes that there continues to be significant opportunity for future growth
through selective acquisitions given the pace of consolidation in the steel
industry and the increasing trend of its customers to focus on fewer key
suppliers. As a result, Algoma intends to continue to apply a selective and
disciplined acquisition strategy. Possible future acquisitions will likely
involve a number of risks.





Future
acquisitions may be required for the Company to remain competitive, but there
can be no assurance it can com-plete any such transactions on favourable terms
or that it can obtain financing, if necessary, for such transactions on
favourable terms. In addition, there can be no assurance that future
transactions will improve the Company’s competitive position and busi-ness
prospects as anticipated; if they do not, its results of operations may be
adversely affected.





**Algoma
      Annual Report 2004**
    **(
      35 )**














**Auditors’
Report**





**To
the Shareholders of Algoma Steel Inc.**





We
have audited the consolidated balance sheets of Algoma Steel Inc. as at December
31, 2004 and 2003 and the consoli-dated statements of income (loss) and retained
earnings (deficit) and cash flows for the years ended December 31, 2004 and
December 31, 2003, the eleven months ended December 31, 2002 and one month ended
January 31, 2002. These financial statements are the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on these
finan-cial statements based on our audits.





We
conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
mis-statement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.





In
our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at December 31,
2004 and December 31, 2003 and the results of its operations and its cash flows
for the years ended December 31, 2004 and December 31, 2003, eleven months ended
December 31, 2002, one month ended January 31, 2002 in accordance with Canadian
generally accepted accounting principles.








Ernst
& Young LLP


Chartered
Accountants








Toronto,
Canada


January
28, 2005





**(
      36 )**
    **Algoma
      Annual Report 2004**

















**Management’s
Responsibility for Financial Reporting**





The
consolidated financial statements of Algoma Steel Inc. (“Algoma”) have been
prepared in accordance with generally accepted accounting principles. When
alternative accounting methods exist, management has chosen those it deems most
appropriate in the circumstances. These statements include certain amounts based
on management’s estimates and judgements. Management has determined such amounts
on a reasonable basis in order to ensure that the financial statements are
presented fairly in all material respects. Management has prepared the financial
information presented elsewhere in this annual report and has ensured that it is
consistent with that in the financial statements.





The
integrity and reliability of Algoma’s reporting systems are achieved through the
use of formal policies and proce-dures, the careful selection of employees and
an appropriate division of responsibilities. These systems are designed to
provide reasonable assurance that the financial information is reliable and
accurate.





The
Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and is ultimately responsible for
reviewing and approving the financial statements. The Board carries out this
responsibility principally through its Audit Committee. The Audit Committee is
appointed by the Board and meets periodically with man-agement and the
shareholders’ auditors to review significant accounting, reporting and internal
control matters. Following its review of the financial statements and
discussions with the auditors, the Audit Committee reports to the Board of
Directors prior to its approval of the financial statements. The Committee also
considers, for review by the Board and approval by the shareholders, the
engagement or re-appointment of the external auditors.





The
consolidated financial statements have been audited on behalf of the
shareholders by Ernst & Young LLP, in accordance with generally accepted
auditing standards.





D.
      Turcotte
    G.
      ManchesterPresident
      and Chief Executive Officer
    Vice
      President, Finance and Chief Financial OfficerSault
      Ste. Marie, OntarioJanuary
      28, 2005





**Algoma
      Annual Report 2004**
    **(
      37 )**














**Consolidated
Financial Statements**





**Consolidated
Statements of Income (Loss)**


**and
Retained Earnings (Deficit)**








(in
      millions of Canadian dollars)
    
    **Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002**Sales**
    
    **$**
    **1,803.1**
    
    $
    1,138.2
    
    $
    1,080.1
    
    $
    88.4**Operating
      expenses**Cost
      of sales
    
    
    **1,150.3**
    
    
    1,024.7
    
    
    915.3
    
    
    90.0Administrative
      and selling
    
    
    **55.6**
    
    
    46.0
    
    
    36.3
    
    
    3.1Amortization
    
    
    **52.2**
    
    
    54.9
    
    
    52.1
    
    
    5.8**1,258.1**
    
    
    1,125.6
    
    
    1,003.7
    
    
    98.9**Income
      (loss) from operations**
    
    
    **545.0**
    
    
    12.6
    
    
    76.4
    
    
    (10.5
    )**Financial
      expense (income)**Interest
      on long-term debt (note 8)
    
    
    **18.5**
    
    
    19.6
    
    
    20.3
    
    
    -Foreign
      exchange (gain) loss
    
    
    **(9.2**
    **)**
    
    (40.0
    )
    
    0.2
    
    
    (2.3
    )Other
      interest
    
    
    **(2.3**
    **)**
    
    6.5
    
    
    11.3
    
    
    7.6**7.0**
    
    
    (13.9
    )
    
    31.8
    
    
    5.3**Other
      income**
    
    
    **1.4**
    
    
    0.3
    
    
    -
    
    
    -Income
      (loss) before the following
    
    
    **539.4**
    
    
    26.8
    
    
    44.6
    
    
    (15.8
    )Loss
      on disposal of joint venture interest (note 19)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (6.8
    )Reorganization
      expenses
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (3.3
    )Income
      (loss) before income taxes
    
    
    **539.4**
    
    
    26.8
    
    
    44.6
    
    
    (25.9
    )Provision
      for income taxes (note 15)
    
    
    **195.6**
    
    
    18.4
    
    
    28.1
    
    
    0.2**Net
      income (loss)**
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    16.5
    
    $
    (26.1
    )**Net
      income (loss) per common share (note 11)**Basic
    
    **$**
    **9.35**
    
    $
    0.33
    
    $
    0.72
    
    $
    (0.49
    )Diluted
    
    **$**
    **8.83**
    
    $
    0.27
    
    $
    0.56
    
    $
    (0.49
    )**Retained
      earnings (deficit)**Balance,
      beginning of period
    
    **$**
    **23.7**
    
    $
    15.9
    
    $
    -
    
    $
    (264.6
    )Net
      income (loss)
    
    
    **343.8**
    
    
    8.4
    
    
    16.5
    
    
    (26.1
    )Accretion
      of equity component of convertible long-term debt
    
    
    **(0.2**
    **)**
    
    (0.6
    )
    
    (0.6
    )
    
    -Redemption
      of 1% Notes (note 8(b))
    
    
    **(0.2**
    **)**
    
    -
    
    
    -
    
    
    -Fresh
      start adjustment (note 1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    290.7Balance,
      end of period
    
    **$**
    **367.1**
    
    $
    23.7
    
    $
    15.9
    
    $
    -





See
accompanying notes





**(
      38 )**
    **Algoma
      Annual Report 2004**














**Consolidated
Balance Sheets**





(in
      millions of Canadian dollars)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003**Assets****Current**Cash
      and cash equivalents
    
    **$**
    **186.2**
    
    $
    -Short-term
      investments
    
    
    **267.0**
    
    
    0.2Accounts
      receivable (notes 17 and 22(c))
    
    
    **257.9**
    
    
    134.2Inventories
      (note 3)
    
    
    **241.9**
    
    
    213.1Prepaid
      expenses (note 16)
    
    
    **16.0**
    
    
    10.2Future
      income taxes (note 15)
    
    
    **59.4**
    
    
    -Capital
      assets held for sale (note 5)
    
    
    **-**
    
    
    12.0**1,028.4**
    
    
    369.7Capital
      assets, net (note 4)
    
    
    **642.1**
    
    
    653.2Capital
      assets held for sale (note 5)
    
    
    **-**
    
    
    1.7Deferred
      charges, net
    
    
    **2.9**
    
    
    4.2**$**
    **1,673.4**
    
    $
    1,028.8**Liabilities
      and Shareholders’ equity****Current**Bank
      indebtedness (note 7)
    
    **$**
    **-**
    
    $
    20.4Accounts
      payable and accrued liabilities (note 6)
    
    
    **138.5**
    
    
    93.8Accrued
      interest on long-term debt (note 8(a))
    
    
    **-**
    
    
    8.9Income
      and other taxes payable
    
    
    **9.8**
    
    
    8.0Accrued
      pension liability and post-employment benefit obligation (notes 9 and
      10)
    
    
    **42.6**
    
    
    29.5**190.9**
    
    
    160.6Long-term
      debt (note 8)
    
    
    **150.3**
    
    
    164.4Accrued
      pension liability (note 9)
    
    
    **40.3**
    
    
    87.4Accrued
      post-employment benefit obligation (note 10)
    
    
    **231.2**
    
    
    227.4Other
      long-term liabilities (note 20)
    
    
    **8.6**
    
    
    18.9Future
      income tax liability (note 15)
    
    
    **139.8**
    
    
    -**570.2**
    
    
    498.1**Contingencies
      and commitments (notes 16 and 19)****Shareholders’
      equity**Capital
      stock (notes 11 and 12)
    
    
    **318.5**
    
    
    214.8Convertible
      long-term debt (note 8(b))
    
    
    **-**
    
    
    19.5Contributed
      surplus (note 14)
    
    
    **226.7**
    
    
    112.1Retained
      earnings
    
    
    **367.1**
    
    
    23.7**912.3**
    
    
    370.1**$**
    **1,673.4**
    
    $
    1,028.8





See
accompanying notes





On
behalf of the Board




Benjamin
      Duster
    Patrick
      LavelleDirector
    Director





**Algoma
      Annual Report 2004**
    **(
      39 )**














**Consolidated
Financial Statements**





**Consolidated
Statements of Cash Flows**




(in
      millions of Canadian dollars)
    
    **Year**
      **ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002**Operating
      activities****Net
      income (loss)**
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    16.5
    
    $
    (26.1
    )Funding
      of long-term pension liability (note 9)
    
    
    **(40.0**
    **)**
    
    -
    
    
    -
    
    
    -Payment
      of deferred compensation
    
    
    **(10.0**
    **)**
    
    -
    
    
    -
    
    
    -Adjustments
      and items not affecting cashAmortization
    
    
    **52.2**
    
    
    54.9
    
    
    52.1
    
    
    5.8Future
      income tax expense (note 15)
    
    
    **181.3**
    
    
    16.2
    
    
    26.0
    
    
    -Utilization
      of pre-reorganization tax credits (note 15)
    
    
    **13.5**
    
    
    -
    
    
    -
    
    
    -Pension
      and other post-employment benefit expense in excess of payments (notes 9
      and 10)
    
    
    **9.8**
    
    
    4.4
    
    
    1.4
    
    
    -Foreign
      exchange loss (gain) on long-term debt and accrued interest
    
    
    **(11.4**
    **)**
    
    (39.5
    )
    
    (1.3
    )
    
    (1.9
    )Stock-based
      compensation (note 12)
    
    
    **0.7**
    
    
    0.5
    
    
    0.2Deferred
      interest on long-term debt (note 8(a))
    
    
    **-**
    
    
    8.9
    
    
    19.8
    
    
    -Cost
      savings repayment due in future years (note 20)
    
    
    **-**
    
    
    10.0
    
    
    10.0
    
    
    -Loss
      on disposal of joint venture interest (note 19)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    6.8Other
    
    
    **2.7**
    
    
    2.9
    
    
    2.0
    
    
    (2.6
    )**542.6**
    
    
    66.7
    
    
    126.7
    
    
    (18.0
    )Changes
      in operating working capital components affecting cash (note 18)
    
    
    **(111.8**
    **)**
    
    86.9
    
    
    (102.1
    )
    
    49.0**430.8**
    
    
    153.6
    
    
    24.6
    
    
    31.0**Investing
      activities**Capital
      asset additions
    
    
    **(42.4**
    **)**
    
    (36.8
    )
    
    (24.6
    )
    
    (1.3
    )Proceeds
      on sale of capital assets
    
    
    **15.0**
    
    
    -
    
    
    -
    
    
    -Increase
      in short-term investments
    
    
    **(266.8**
    **)**
    
    (0.2
    )
    
    -
    
    
    -**(294.2**
    **)**
    
    (37.0
    )
    
    (24.6
    )
    
    (1.3
    )**Financing
      activities**Proceeds
      from (repayment of) term loan
    
    
    **-**
    
    
    (29.0
    )
    
    (21.0
    )
    
    50.0Payment
      of deferred interest on long-term debt (note 8(a))
    
    
    **(9.3**
    **)**
    
    (16.4
    )
    
    -
    
    
    -Increase
      (decrease) in other long-term liabilities (note 20)
    
    
    **-**
    
    
    1.6
    
    
    -
    
    
    -Financing
      expense
    
    
    **(1.0**
    **)**
    
    (4.6
    )
    
    -
    
    
    -Redemption
      of 1% Notes (note 8(b))
    
    
    **(1.8**
    **)**
    
    -
    
    
    -
    
    
    -Net
      proceeds from common shares issued (note 11)
    
    
    **81.9**
    
    
    -
    
    
    -
    
    
    -Proceeds
      on exercise of share options (note 12)
    
    
    **0.2**
    
    
    -
    
    
    -
    
    
    -Increase
      (decrease) in bank indebtedness
    
    
    **(20.4**
    **)**
    
    (68.2
    )
    
    21.0
    
    
    (79.7
    )**49.6**
    
    
    (116.6
    )
    
    -
    
    
    (29.7
    )**Cash
      and cash equivalents**Change
      during period
    
    
    **186.2**
    
    
    -
    
    
    -
    
    
    -Balance,
      beginning of period
    
    
    **-**
    
    
    -
    
    
    -
    
    
    -**Balance,
      end of period**
    
    **$**
    **186.2**
    
    $
    -
    
    $
    -
    
    $
    -**Supplemental
      information**Income
      taxes paid
    
    **$**
    **-**
    
    $
    -
    
    $
    -
    
    $
    -Interest
      paid
    
    **$**
    **27.0**
    
    $
    30.3
    
    $
    10.0
    
    $
    -
 
 See
accompanying notes





**(
      40 )**
    **Algoma
      Annual Report 2004**














**Notes
to Consolidated Financial Statements**


(in
millions of Canadian dollars, except as noted)





**Note
1. Financial Reorganization and Basis of Presentation**





**Financial
reorganization**





After
emerging from protection under the Companies’ Creditors Arrangement Act (“CCAA”)
on January 29, 2002, Algoma Steel Inc. (the “Corporation”) implemented a
financial reorganization. The Corporation accounted for the reorganization using
the principles of fresh start accounting as required under Canadian generally
accepted accounting principles (“GAAP”). For accounting purposes the Corporation
used an effective date of January 31, 2002. Under fresh start accounting, all
assets and lia-bilities were revalued at estimated fair values. In order to
establish the fresh start balance sheet, an equity value of $300.0 million was
calculated based on the net present value of estimated future free cash flows
reduced by bank indebtedness, long-term debt and pension and post-employment
obligations. The Corporation’s previous Board of Directors passed a resolution
setting the stated capital of the new common shares issued under the
reorganization at $10 per share based upon the calculated equity value. The book
values of the assets and liabilities at January 31, 2002 approximated their fair
values, with the exception of capital assets and the pension and post-employment
benefit obligations. The fair values of the pension and post-employment
obligations were determined by an independent actuary. The revaluation
adjustment of $441.4 and the deficit of $290.7 were reclassified as contributed
surplus, resulting in a net increase of $150.7.





**Basis
of presentation**





The
consolidated financial statements have been prepared by the Corporation in
accordance with Canadian generally accepted accounting principles.





Management
is required to make estimates and assumptions that affect the amounts reported
in the consolidated finan-cial statements and accompanying notes. Management
believes that the estimates are reasonable, however, actual results could differ
from these estimates.





Comparative
financial information for periods prior to January 31, 2002 is required under
securities legislation and may be of limited interest to readers of these
consolidated financial statements. In reviewing the comparative information,
readers are reminded that the information does not reflect the effects of the
financial reorganization or the application of fresh start accounting.





Certain
items in the December 31, 2003 consolidated financial statements have been
reclassified from statements previ-ously presented to conform to the
presentation adopted in the current year.





**Note
2. Summary Of Significant Accounting Policies**





The
Corporation’s significant accounting policies comply, in all material respects,
with those generally accepted in the United States, except as described in note
22. Significant accounting policies are summarized below:





**Basis
of consolidation**





The
consolidated financial statements include the accounts of the Corporation and
its subsidiaries.





**Cash
and cash equivalents**





Cash
and cash equivalents include cash on deposit and term deposits with remaining
maturities of less than 90 days at acquisi-tion and are valued at cost plus
accrued interest, which approximates fair value.





**Short-term
investments**





Short-term
investments include bankers’ acceptances and commercial paper with remaining
maturities greater than 90 days at acquisition. The average effective interest
rate of the short-term investments is approximately 2%.





**Algoma
      Annual Report 2004**
    **(
      41 )**














**Notes
to Consolidated Financial Statements**





**Revenue
recognition**





Revenue
is recognized on the sale of manufactured products when legal title passes to
the customer, which generally occurs at the time of shipment.





**Inventories**





Inventories
are valued at the lower of average cost and market value. Market value is
defined as net realizable value. Average cost is comprised of direct costs and
an allocation of production overheads for finished goods and work in
process.





**Capital
assets**





Capital
assets are recorded at their historical cost. Interest incurred in connection
with the construction of major new facilities is capitalized until the asset is
ready for its intended use.





Amortization
is calculated generally by the straight-line method based on their estimated
useful lives as follows:





Buildings
    
    
    4
    %Machinery
      and equipment
    
    
    5%
      to 20
    %





Major
new facilities are amortized using a unit of production basis until a commercial
level of production is reasonably sustained and using the straight-line method
thereafter. The cost of mill rolls is amortized using the straight-line method
over their esti-mated lives while the cost of relining the blast furnace is
amortized over its estimated life on a unit of production basis.





**Income
taxes**





The
Corporation follows the liability method of income tax allocation. Future tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using
substantively enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are provided to the
extent that it is not more likely than not that the future income tax assets
will be realized.





**Financing
costs**





Financing
costs associated with the issue of debt and entering into debt facilities are
deferred and amortized on a straight-line basis over the term of the debt or
debt facility as a component of interest expense. Financing costs related to
equity issues are accounted for as a reduction of capital stock.





**Translation
of foreign currencies**





Foreign
currency monetary assets and liabilities of domestic operations and integrated
U.S. subsidiaries are translated at year-end exchange rates. All non-monetary
assets and liabilities are translated using historical rates. Revenue and
expenses are translated using average exchange rates prevailing during the year,
except for depreciation and amortization, which are translated at historical
rates. All gains and losses resulting from foreign currency translation are
included in the determination of net income (loss) as incurred.





**Pensions
and other post-employment benefits**





The
Corporation measures its accrued benefit obligation and the fair value of plan
assets for accounting purposes at November 30 (the measurement date) each year.
The accrued benefit obligations and the benefit costs are actuarially determined
using the pro-jected benefit method pro-rated on services. The past service
costs resulting from negotiated benefit changes are amortized over the contract
period. Cumulative gains and losses (such as adjustments arising from plan
amendments, experience gains and losses and changes in assumptions) in excess of
10% of the greater of the accrued benefit obligation and the market value of
pension assets are amortized over the expected average remaining service of
active members expected to receive the benefits under the plans.





The
expected return on plan assets is based on the market value of plan assets.
Values of the pension fund assets are based on market values.





The
Corporation also provides for other post-employment benefits upon retirement for
employees and their dependants. The cost of these benefits is accrued over the
service lives of the employees based on actuarial estimates.





**(
      42 )**
    **Algoma
      Annual Report 2004**

















**Earnings
per share**





Basic
earnings per share is determined by dividing net income attributable to common
shareholders by the weighted average number of common shares outstanding during
the year. Diluted earnings per share is determined by applying the treasury
stock method to outstanding stock options and the “if-converted” method to
outstanding convertible debentures and is based on the weighted average number
of common shares and dilutive common share equivalents outstanding during the
year.





**Environmental
costs**





For
environmental liabilities that can be estimated, the Corporation accrues based
upon the Corporation’s best estimate of the costs to be incurred.





**Fair
value of financial instruments**





The
fair value of short term investments, accounts receivable, bank indebtedness,
accounts payable and accrued liabilities and income and other taxes payable
approximates carrying value due to the short-term nature of these
instruments.





**Derivative
financial instruments**





To
manage risks associated with future variability in cash flows attributable to
certain commodity purchases, the Corporation uses natural gas and electricity
swap contracts with maturities of twelve months or less. The Corporation does
not utilize deriva-tive financial instruments for trading or speculative
purposes.





The
Corporation formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives to forecasted transactions. The Company also formally assesses, both
at the hedge’s inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in
cash flows of hedged items.





The
Corporation designates its natural gas and electricity swap contracts as hedges
of the underlying expense. The related expense is adjusted to include the
payments made or received under the swap contracts. Unrealized gains and losses
on the swap contracts are not recognized until realized.





**Stock-based
compensation plans**





At
December 31, 2004, the Corporation has three stock-based compensation plans as
described in note 13. The Corporation accounts for its grants under those plans
in accordance with the fair value based method of accounting for stock-based
compensation.





**Note
3. Inventories**




(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003Raw
      materials and supplies
    
    **$**
    **100.0**
    
    $
    106.5Work
      in process
    
    
    **46.6**
    
    
    44.2Finished
      products
    
    
    **95.3**
    
    
    62.4**$**
    **241.9**
    
    $
    213.1





**Note
4. Capital Assets**





(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003Land
    
    **$**
    **2.7**
    
    $
    3.3Manufacturing
      plant and equipment
    
    
    **748.1**
    
    
    720.5Construction
      in progress
    
    
    **42.1**
    
    
    32.3**792.9**
    
    
    756.1Accumulated
      amortization
    
    
    **150.8**
    
    
    102.9**$**
    **642.1**
    
    $
    653.2





**Algoma
      Annual Report 2004**
    **(
      43 )**














**Notes
to** **Consolidated
Financial Statements**





**Note
5. Capital Assets Held for Sale**





The
Corporation signed an agreement of purchase and sale dated September 2, 2003 for
the sale of an unused manufacturing facility. The proceeds from the sale were
$12.5 million.





The
Corporation had an agreement to sell some excess land. The proceeds from the
sale were equal to $1.7 million, which was the book value of the land.





Both
sales were completed in the first quarter of 2004.





**Note
6. Accounts Payable and Accrued Liabilities**





(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003Trade
      payables
    
    **$**
    **35.4**
    
    $
    31.1Accrued
      liabilities
    
    
    **27.1**
    
    
    18.3Wages
      and employee deductions payable
    
    
    **48.9**
    
    
    22.6Accrued
      vacation pay
    
    
    **27.1**
    
    
    21.8**$**
    **138.5**
    
    $
    93.8





**Note
7. Banking Facilities**





On
September 3, 2003, the Corporation entered into a new Loan and Security
Agreement (“Agreement”). This agreement was subsequently amended on June 3,
2004. The Agreement expires on September 3, 2007 and provides the Corporation
with a revolving credit facility (“Revolving Facility”) with financing equal to
the lesser of $200 million and a borrowing base determined by the levels of the
Corporation’s accounts receivable and inventories less certain reserves.





At
December 31, 2004 there was $159.2 million of unused availability under the
Revolving Facility after taking into account $40.8 million of outstanding
letters of credit (December 31, 2003 - $125.4 million of unused availability
with $33.8 mil-lion of outstanding letters of credit). The Corporation is
required to maintain a minimum availability of $25 million. The Revolving
Facility is collateralized by a first charge on short-term investments, accounts
receivable and inventories. Borrowings can be made in either Canadian or United
States (U.S.) funds at rates fluctuating between 0.75% and 1.5% above either the
Canadian prime bank rate or the U.S. base rate or, at the Corporation’s option,
at rates fluctuating between 1.75% and 2.5% over bankers’ acceptance rate or
London interbank offering rate.





Under
the terms of the Agreement, the Corporation is required to be in compliance with
various restrictive covenants.





**Note
8. Long-term Debt**




(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      200311%
      Notes maturing December 31, 2009, principal value U.S. $125 million(December
      31, 2003 - U.S. $125 million)(a)
    
    **$**
    **150.3**
    
    $
    162.11%
      convertible Notes maturing December 31, 2030, principal value, nil(December
      31, 2003 - U.S. $37.9 million) (b)
    
    
    **-**
    
    
    2.3**150.3**
    
    
    164.4Less:
      current portion
    
    
    **-**
    
    
    -**$**
    **150.3**
    
    $
    164.4





**(
      44 )**
    **Algoma
      Annual Report 2004**

















(a)
    The
      11% Notes are redeemable after 2005 at a declining premium ranging from
      105.5% of principal in 2006 to 101.4% in 2008. A mandatory annual
      redemption of U.S. $12.5 million is required commencing December 31, 2007
      with the balance payable at maturity. Interest for 2002 and the first half
      of 2003 was paid on December 31, 2003. Interest for the second half of
      2003 was paid on June 30, 2004. After 2003, interest is paid semi-annually
      on June 30 and December 31 of each year. The 11% Notes are collateralized
      by a first charge on capital assets and a second charge on other assets.
      The fair market value of the Notes at December 31, 2004 was approximately
      $167.2 million (U.S. $139.1 million) based upon the quoted market price
      (December 31, 2003 - $169.4 million (U.S. $130.6
  million)).(b)
    The
      collateral, interest accrual and payment terms were the same as for the
      11% Notes. The 1% Notes were convertible into common shares at the
      holders’ option at a conversion price per share of $10 (“Conversion
      Price”). After December 31, 2002, the Corporation could convert all or any
      part of the principal amount at the Conversion Price if the average
      trading price of the common shares exceeded 125% of the Conversion Price
      for 30 consecutive trading days, or at any time after December 31, 2009.
      For conversion purposes, the exchange rate used was U.S. $1.00 = CDN
      $1.60. As required by Canadian GAAP, the 1% convertible Notes were
      separated into debt and equity components in the consolidated balance
      sheets. The present value of the interest payments up to and including
      2009 were presented as debt. The present value of the principal payment in
      2030 and interest for the period 2010 through 2030 plus the value ascribed
      to the holder conversion option were presented as equity. All present
      value amounts were determined using an 11% discount rate. The fair market
      value of the 1% Notes at December 31, 2003 was $34.4 million (U.S. $26.5
      million) based upon the quoted market price.





During
the year ended December 31, 2004, U.S. $36.5 million principal value (2003 -
$0.7 million) of 1% Notes were converted at the holders’ option into 5.8 million
common shares (2003 - 0.1 million) resulting in $19.0 million of the equity
com-ponent (2003 - $0.4 million) and $2.2 million of the debt component (2003 -
$0.1 million) being transferred to share capital.





On
September 30, 2004 the remaining Notes were redeemed at a cost of $1.8 million
resulting in a charge to expense of $0.4 million and a charge to retained
earnings of $0.2 million.





**Note
9. Pension Benefits**





**Defined
contribution plan**





The
Corporation initiated a new defined contribution plan in 2004 for non-unionized
employees joining the Corporation after January 1, 2003. Under the plan, the
Corporation provides a base contribution of 3% of salary and also matches
employee con-tributions to a maximum of 4%, depending on years of service. The
pension expense under this plan is equal to the Corporation’s contribution. The
2004 pension expense was less than $0.1 million.





**Defined
benefit plans**





The
Corporation maintains non-contributory defined benefit pension plans that cover
substantially all of its unionized employees and substantially all non-unionized
employees joining the Company prior to January 1, 2003. The benefits are based
on years of service and average earnings for a defined period prior to
retirement. Each of the pension plans has benefit obligations in excess of plan
assets.





As
part of the financial reorganization (note 1) the Corporation restructured its
existing pension plans. A portion of the assets and obligations from the
existing plans was transferred to new pension plans that cover all employees
retiring after January 1, 2002. The responsibility for the remaining assets and
obligations of the existing pension plans, to certain benefit lim-its, was
assumed by the Ontario Pension Benefit Guarantee Fund. Pension benefits in
excess of these limits are provided by the Corporation in a separate
plan.





**Algoma
      Annual Report 2004**
    **(
      45 )**














**Notes
to** **Consolidated
Financial Statements**





**Components
of net periodic pension cost**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Current
      service cost
    
    **$**
    **17.7**
    
    $
    15.9
    
    $
    14.8
    
    $
    1.9Interest
      cost
    
    
    **34.8**
    
    
    32.6
    
    
    27.7
    
    
    7.9Actual
      return on plan assets
    
    
    **(40.2**
    **)**
    
    (24.9
    )
    
    29.0
    
    
    (8.3
    )Actuarial
      loss (gain) on benefit obligation
    
    
    **95.9**
    
    
    38.2
    
    
    (19.1
    )
    
    84.6Plan
      amendments
    
    
    **46.9**
    
    
    -
    
    
    -
    
    
    -Costs
      arising in the period
    
    **$**
    **155.1**
    
    $
    61.8
    
    $
    52.4
    
    $
    86.1Differences
      between costs arising in the period and costs recognized in the period in
      respect of:Return
      on plan assets
    
    
    **16.1**
    
    
    3.9
    
    
    (49.6
    )
    
    2.1Actuarial
      loss (gain)
    
    
    **(94.3**
    **)**
    
    (36.6
    )
    
    19.2
    
    
    (85.9
    )Unamortized
      past service costs
    
    
    **(41.6**
    **)**
    
    -
    
    
    -
    
    
    -**Net
      periodic pension cost**
    
    **$**
    **35.3**
    
    $
    29.1
    
    $
    22.0
    
    $
    2.3





Plan
amendments relate to benefit improvements as a result of the new collective
agreements that took effect on August 1, 2004.





**Changes
in accrued benefit obligation**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Accrued
      benefit obligation at beginning of period
    
    **$**
    **511.9**
    
    $
    445.5
    
    $
    437.6
    
    $
    1,569.9Current
      service cost
    
    
    **17.7**
    
    
    15.9
    
    
    14.8
    
    
    1.9Interest
      cost
    
    
    **34.8**
    
    
    32.6
    
    
    27.7
    
    
    7.9Actuarial
      loss (gain)
    
    
    **95.9**
    
    
    38.2
    
    
    (19.1
    )
    
    -Benefits
      paid
    
    
    **(24.2**
    **)**
    
    (20.3
    )
    
    (15.5
    )
    
    (7.9
    )Plan
      amendments
    
    
    **46.9**
    
    
    -
    
    
    -
    
    
    -Disposition
      of joint venture interest (note 19)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (112.2
    )Reorganization
      adjustment (note 1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (1,133.1
    )Fresh
      start adjustment (note 1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    111.1**Accrued
      benefit obligation at end of period**
    
    **$**
    **683.0**
    
    $
    511.9
    
    $
    445.5
    
    $
    437.6




**(
      46 )**
    **Algoma
      Annual Report 2004**














**Change
in defined benefit pension plan assets**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Market
      value at beginning of period
    
    **$**
    **341.0**
    
    $
    306.4
    
    $
    327.2
    
    $
    1,018.3Actual
      return on plan assets
    
    
    **40.2**
    
    
    24.9
    
    
    (29.0
    )
    
    8.3Employer
      contributions
    
    
    **72.0**
    
    
    30.0
    
    
    23.7
    
    
    4.8Benefits
      paid
    
    
    **(24.2**
    **)**
    
    (20.3
    )
    
    (15.5
    )
    
    (7.9
    )Disposition
      of joint venture interest (note 19)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (81.1
    )Reorganization
      adjustment (note 1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (615.2
    )**Market
      value at end of period**
    
    **$**
    **429.0**
    
    $
    341.0
    
    $
    306.4
    
    $
    327.2





The
assets of the pension plans are held by an independent trustee and accounted for
separately in the Corporation’s pension funds. Based on the fair value of the
assets at November 30, 2004, the plan assets were comprised of 25% Canadian
equity, 25% global equity, 49% bonds and 1% other.





**Reconciliation
of funded status**




**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Funded
      status
    
    **$**
    **(254.0**
    **)**
    $
    (170.9
    )
    $
    (139.1
    )
    $
    (110.4
    )Unamortized
      actuarial loss
    
    
    **141.2**
    
    
    63.1
    
    
    30.3
    
    
    -Employer
      contributions after measurement date
    
    
    **2.5**
    
    
    2.5
    
    
    2.5
    
    
    -Unamortized
      past service costs
    
    
    **41.6**
    
    
    -
    
    
    -
    
    
    -**Accrued
      pension liability**
    
    **$**
    **(68.7**
    **)**
    $
    (105.3
    )
    $
    (106.3
    )
    $
    (110.4
    )**Allocation
      of accrued pension liability on consolidated balance
      sheets**Current
      portion
    
    
    **(28.4**
    **)**
    
    (17.9
    )
    
    (18.0
    )
    
    (18.0
    )Accrued
      pension liability
    
    
    **(40.3**
    **)**
    
    (87.4
    )
    
    (88.3
    )
    
    (92.4
    )**$**
    **(68.7**
    **)**
    $
    (105.3
    )
    $
    (106.3
    )
    $
    (110.4
    )





**Algoma
      Annual Report 2004**
    **(
      47 )**














**Notes
to** **Consolidated
Financial Statements**





The
significant weighted-average assumptions are as follows:





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,2002Accrued
      benefit obligation:Discount
      rate
    
    
    **5.91**
    **%**
    
    6.51
    %
    
    7.00
    %
    
    7.00
    %Rate
      of compensation increase
    
    
    **4.00**
    **%**
    
    2.00%
      for
      1 yr
      4.00%
      thereafter
    
    
    2.00%
      for
      2 yrs
      4.00%
      thereafter
    
    
    2.00%
      for
      3 yrs
      4.00%
      thereafterNet
      periodic pension costs:Discount
      rate
    
    
    **6.51**
    **%**
    
    7.00
    %
    
    6.75
    %
    
    6.50
    %Expected
      long-term rate of return on plan assets
    
    
    **6.75**
    **%**
    
    6.75
    %
    
    7.00
    %
    
    8.00
    %Rate
      of compensation increase
    
    
    **2.00%**
      **for
      1 yr**
      **4.00%**
      **thereafter**
    
    
    2.00%
      for
      2 yrs
      4.00%
      thereafter
    
    
    2.00%
      for
      3 yrs
      4.00%
      thereafter
    
    
    2.00%
      for
      3 yrs
      4.00%
      thereafter





**Cash
flow information**





Total
pension funding during the twelve months ended December 31, 2004 was $72.0
million (2003 - $30.0 million; 2002 - $28.5 million), which included $40.0
million of funding of the long-term pension liability. The estimated employer
contributions for 2005 are $45.0 million.





The
estimated future pension benefit payments for the next ten years are as follows:





2005
    
    
    30.02006
    
    
    31.82007
    
    
    34.52008
    
    
    35.52009
    
    
    36.12010
      - 2014
    
    
    220.8





Contributions
to two plans were based on Actuarial Valuations as at September 17, 2001, dated
June 2002. Contributions for a third plan were based on Actuarial Valuations as
at September 1, 2003. Actuarial Valuations as at September 1, 2004 are
cur-rently being completed for all plans.





**(
      48 )**
    **Algoma
      Annual Report 2004**














**Note
10. Other Post-employment Benefits**





The
Corporation offers post-employment life insurance, health care and dental care
to some of its retirees.





**Components
of net periodic post-employment benefit cost**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Current
      service cost
    
    **$**
    **2.6**
    
    $
    2.0
    
    $
    2.1
    
    $
    0.2Interest
      cost
    
    
    **16.6**
    
    
    15.3
    
    
    14.0
    
    
    1.1Actuarial
      loss (gain)
    
    
    **66.0**
    
    
    6.2
    
    
    (3.5
    )
    
    -Plan
      amendments
    
    
    **5.9**
    
    
    -
    
    
    -
    
    
    -Costs
      arising in the period
    
    
    **91.1**
    
    
    23.5
    
    
    12.6
    
    
    1.3Differences
      between costs arising in the period and costs recognized in the period in
      respect of:Actuarial
      (loss) gain
    
    
    **(66.0**
    **)**
    
    (6.2
    )
    
    3.5
    
    
    -Plan
      amendments
    
    
    **(5.2**
    **)**
    
    -
    
    
    -
    
    
    -**Net
      periodic post-employment benefit cost**
    
    **$**
    **19.9**
    
    $
    17.3
    
    $
    16.1
    
    $
    1.3





**Change
in post-employment benefit obligation**




**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Benefit
      obligation at beginning of period
    
    **$**
    **242.6**
    
    $
    231.1
    
    $
    227.8
    
    $
    255.5Current
      service cost
    
    
    **2.6**
    
    
    2.0
    
    
    2.1
    
    
    0.2Interest
      cost
    
    
    **16.6**
    
    
    15.3
    
    
    14.0
    
    
    1.1Actuarial
      loss (gain)
    
    
    **66.0**
    
    
    6.2
    
    
    (3.5
    )
    
    -Benefits
      paid
    
    
    **(13.2**
    **)**
    
    (12.0
    )
    
    (9.3
    )
    
    (0.9
    )Plan
      amendments
    
    
    **5.9**
    
    
    -
    
    
    -
    
    
    -Disposition
      of joint venture interest (note 19)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (58.3
    )Reorganization
      adjustment (note 1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    4.0Fresh
      start adjustment (note 1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    26.2**Benefit
      obligation at end of period**
    
    **$**
    **320.5**
    
    $
    242.6
    
    $
    231.1
    
    $
    227.8





**Change
in post-employment plan assets**




**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Market
      value at beginning of period
    
    **$**
    **-**
    
    $
    -
    
    $
    -
    
    $
    11.4Employer
      contributions
    
    
    **-**
    
    
    -
    
    
    -
    
    
    -Disposition
      of joint venture interest (note 19)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (11.4
    )**Market
      value at end of period**
    
    **$**
    **-**
    
    $
    -
    
    $
    -
    
    $
    -





**Algoma
      Annual Report 2004**
    **(
      49 )**














**Notes
to** **Consolidated
Financial Statements**





**Reconciliation
of funded status**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Funded
      status
    
    **$**
    **(320.5**
    **)**
    $
    (242.6
    )
    $
    (231.1
    )
    $
    (227.8
    )Unamortized
      actuarial loss (gain)
    
    
    **68.6**
    
    
    2.7
    
    
    (3.5
    )
    
    -Unamortized
      past service costs
    
    
    **5.3**
    
    
    -
    
    
    -
    
    
    -Benefits
      paid after measurement date
    
    
    **1.2**
    
    
    1.1
    
    
    0.9
    
    
    -**Accrued
      post-employment benefit obligation**
    
    **$**
    **(245.4**
    **)**
    $
    (238.8
    )
    $
    (233.7
    )
    $
    (227.8
    )**Allocation
      of accrued post-employment benefit obligation on consolidated balance
      sheets**Current
      portion
    
    
    (14.2
    )
    
    (11.6
    )
    
    (11.9
    )
    
    (11.9
    )Accrued
      post-employment benefit obligation
    
    
    (231.2
    )
    
    (227.2
    )
    
    (221.8
    )
    
    (215.9
    )$
    (245.4
    )
    $
    (238.8
    )
    $
    (233.7
    )
    $
    (227.8
    )





The
significant weighted-average assumptions are as follows:




**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Accrued
      benefit obligation:Discount
      rate
    
    
    **6.00**
    **%**
    
    6.50
    %
    
    7.00
    %
    
    6.75
    %Rate
      of compensation increase
    
    
    **4.00**
    **%**
    
    4.00
    %
    
    4.00
    %
    
    4.00
    %Initial
      health care rate
    
    
    **7.20**
    **%**
    
    5.10
    %
    
    5.20
    %
    
    5.30
    %Ultimate
      health care rate
    
    
    **4.50**
    **%**
    
    4.30
    %
    
    4.30
    %
    
    4.30
    %Year
      ultimate rate reached
    
    
    **2013**
    
    
    2011
    
    
    2011
    
    
    2011Net
      periodic benefit costs:Discount
      rate
    
    
    **6.50**
    **%**
    
    7.00
    %
    
    6.75
    %
    
    6.75
    %Rate
      of compensation increase
    
    
    **4.00**
    **%**
    
    4.00
    %
    
    4.00
    %
    
    4.00
    %Initial
      health care rate
    
    
    **5.10**
    **%**
    
    5.20
    %
    
    5.30
    %
    
    5.30
    %Ultimate
      health care rate
    
    
    **4.30**
    **%**
    
    4.30
    %
    
    4.30
    %
    
    4.30
    %Year
      ultimate rate reached
    
    
    **2011**
    
    
    2011
    
    
    2011
    
    
    2011





Increasing
the health care trend by 1% would change the accrued benefit obligation at
December 31, 2004 by approximately $43.8 million and the post-employment benefit
cost for 2004 by approximately $3.2 million. Decreasing the trend by 1% would
change the accrued benefit obligation at December 31, 2004 by approximately
$35.9 million and the post-employment benefit cost for 2004 by approximately
$2.6 million.





**(
      50 )**
    **Algoma
      Annual Report 2004**














**Cash
flow information**





Payments
made for other post-employment benefits were $13.2 million in the twelve months
ended December 31, 2004 (2003 - $12.0 million; 2002 - $10.3 million), and are on
a pay-as-you-go basis.





The
estimated future benefit payments for the next ten years are as follows:





2005
    
    
    14.22006
    
    
    15.42007
    
    
    16.52008
    
    
    17.42009
    
    
    18.42010-2014
    
    
    104.0





**Note
11. Capital Stock**





**Common
shares**





Authorized
- unlimited number





The
following table summarizes the share capital transactions since December, 31,
2002 expressed in millions of shares, options and dollars:




Common
      sharesStock
      options
    
    To
      be issued
    
    Issued
      and outstanding#
      options
    
    Ascribed
      value
    
    #
      shares
    
    Stated
      capital
    
    #
      shares
    
    Stated
      capitalBalance
      at December 31, 2002
    
    
    -
    
    $
    -
    
    
    -
    
    $
    0.1
    
    
    23.8
    
    $
    214.0Conversion
      of long-term debt (note 8(b))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    0.5Stock
      options granted (note 12)
    
    
    0.3
    
    
    0.5Directors’
      Share Award Plan (note 12)Shares
      granted
    
    
    
    
    
    
    
    
    0.1
    
    
    0.2Shares
      issued
    
    
    
    
    
    
    
    
    (0.1
    )
    
    (0.2
    )
    
    0.1
    
    
    0.2Balance
      at December 31, 2003
    
    
    0.3
    
    $
    0.5
    
    
    -
    
    $
    0.1
    
    
    24.0
    
    $
    214.7Conversion
      of long-term debt (note 8(b))
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5.8
    
    
    21.2Common
      shares issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10.0
    
    
    81.9Stock
      options (note 12)Granted
    
    
    0.1
    
    
    1.2Exercised
    
    
    (0.1
    )
    
    (0.2
    )
    
    
    
    
    
    
    
    0.1
    
    
    0.2Directors’
      Share Award Plan (note 12)Shares
      granted
    
    
    
    
    
    
    
    
    -
    
    
    0.4Shares
      issued
    
    
    
    
    
    
    
    
    -
    
    
    (0.4
    )
    
    0.2
    
    
    0.4Balance
      at December 31, 2004
    
    
    0.3
    
    $
    1.5
    
    
    -
    
    $
    0.1
    
    
    40.1
    
    $
    318.4





During
the year, the Corporation completed an equity issue of 10,000,000 common shares
for net proceeds of $81.9 million.





**Algoma
      Annual Report 2004**
    **(
      51 )**














**Notes
to** **Consolidated
Financial Statements**





**Basic
and diluted earnings per share**





Basic
net income (loss) per common share is calculated by adjusting reported net
income (loss) by the net charge to retained earnings related to the accretion of
the equity component of the 1% convertible Notes. Diluted net income (loss) per
com-mon share assumes the dilutive effect of the conversion of the 1%
convertible Notes as of the beginning of each period at the Conversion Price
(note 8(b)) and the dilutive effect of the stock-based compensation plans (note
12).




**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002**Basic**Net
      income (loss)
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    16.5
    
    $
    (26.1
    )Convertible
      debt - net charge to retained earnings (deficit)
    
    
    **(0.4**
    **)**
    
    (0.6
    )
    
    (0.6
    )
    
    -Net
      income (loss) attributable to common shareholders
    
    **$**
    **343.4**
    
    $
    7.8
    
    $
    15.9
    
    $
    (26.1
    )**Diluted**Net
      income (loss)
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    16.5
    
    $
    (26.1
    )Convertible
      debt - net inclusion in (charge to) income
    
    
    **0.1**
    
    
    (0.3
    )
    
    0.3
    
    
    -Net
      income (loss) attributable to common shareholders
    
    **$**
    **343.9**
    
    $
    8.1
    
    $
    16.8
    
    $
    (26.1
    )Basic
      weighted average number of common shares outstanding
    
    
    **36.74**
    
    
    24.00
    
    
    22.18
    
    
    53.65Common
      shares issued on the assumed conversion of convertible long-term
      debt
    
    
    **1.91**
    
    
    6.36
    
    
    7.84Common
      shares issued on the assumed exercising of stock options
    
    
    **0.31**
    
    
    0.19
    
    
    0.02
    
    
    -Diluted
      weighted average number of common shares outstanding
    
    
    **38.96**
    
    
    30.55
    
    
    30.04
    
    
    53.65





**Note
12. Stock-based Compensation Plans**





At
December 31, 2004, the Corporation has three stock-based compensation plans,
which are described below. The Corporation accounts for its grants under these
plans in accordance with the fair value based method of accounting for
stock-based compen-sation. The compensation expense recognized for all awards
granted under these plans for the year ended December 31, 2004 was $0.7 million
(December 31, 2003 - $0.5 million).





**Share
Award Plan**





In
May 2002, the shareholders of the Corporation approved a Share Award Plan for
members of the Board of Directors which permits the Corporation, at its option,
to award common shares to eligible directors as a portion of their compensation.
Any shares granted under the Share Award Plan are issued quarterly. The
Corporation accounts for the related compensation expense based on the fair
market value of the shares on the date granted. The maximum number of shares
that may be issued pursuant to the terms of the plan shall not exceed 500,000
common shares. The cumulative number of shares issued under the plan to December
31, 2004 was 164,994. During the year ended December 31, 2004, 36,271 shares
were awarded with an average fair market value of $9.88 per share (December 31,
2003 - 84,087 shares were awarded with an average fair market value of $2.72 per
share).





**Share
Option Plan**





In
May 2003, the Corporation’s shareholders approved the creation of a Share Option
Plan that permits the Corporation, at its option, to award common share options
to senior management and directors. The Corporation has reserved two million
common shares for issuance under the plan. The exercise price of a share option
may not be less than the market value of the common shares on the date of the
grant. The options have a term not exceeding ten years and may not be exercised
until the third anni-





**(
      52 )**
    **Algoma
      Annual Report 2004**














versary
of the date granted. During the year ended December 31, 2004, 153,785 (December
31, 2003 - 260,777) options were granted with a weighted average exercise price
of $8.00 (December 31, 2003 - $1.78) per share. The options vest on the first,
second and third anniversary dates. The estimated weighted average fair value of
the options of $4.35 (December 31, 2003 - $1.08) per share was determined using
the Black-Scholes options pricing model with the following assumptions:





**2004**
    
    2003Expected
      time until exercise
    
    
    **5
      years**
    
    
    5
      yearsRisk-free
      interest rate
    
    
    **4**
    **%**
    
    4
    %Expected
      volatility in stock price
    
    
    **60**
    **%**
    
    70
    %Expected
      dividend yield
    
    
    **0**
    **%**
    
    0
    %





A
summary of the status of the Corporation’s share option plan as of December 31,
2004 is as follows:





**2004**
    
    2003**Options**
    
    **Weighted**
      **Average**
      **Exercise
      Price**
    
    Options
    
    Weighted
      Average
      Exercise
      PriceBalance
      outstanding, beginning of year
    
    
    **260,777**
    
    **$**
    **1.78**
    
    
    -
    
    $
    -Granted
    
    
    **153,785**
    
    
    **8.00**
    
    
    260,777
    
    $
    1.78Exercised
    
    
    **(133,990**
    **)**
    
    **1.78**
    
    
    -
    
    
    -Forfeited/expired
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -Balance
      outstanding, end of year
    
    
    **280,572**
    
    **$**
    **5.19**
    
    
    260,777
    
    $
    1.78Exercisable,
      end of year
    
    
    **346**
    
    **$**
    **1.78**
    
    
    123,122
    
    $
    1.78





The
weighted average remaining term of the outstanding share options is 8.7 years
(2003 - 9.4 years).





**Restricted
Share Unit Plan**





In
May 2003, the Corporation’s shareholders approved the creation of a Restricted
Share Unit Plan that permits the Corporation, at its option, to award restricted
share units to senior management and directors. A restricted share unit vests on
the grant date and entitles the participant to one common share to be issued
from treasury on the third anniversary of the grant date. The Corporation has
reserved one million common shares for issuance under the plan. During the year
ended December 31, 2004, the Corporation granted 43,480 (December 31, 2003 -
27,300) restricted share units with a grant date fair value of $8.00 (December
31, 2003 - $1.67) per unit. All of these restricted share units were outstanding
at December 31, 2004.





**Note
13. Profit Sharing Plan**





The
Corporation has a profit sharing plan for all employees. The amount of profit
sharing is based on a percentage of annual income from operations as follows:





Annual
      Income from Operations
    
    Profit
      Sharing Percentage$0
      - $50 million
    
    
    0
    %$50
      - $100 million
    
    
    6
    %$100
      - $150 million
    
    
    8
    %Greater
      than $150 million
    
    
    10
    %





During
the year, $51.7 million was accrued under the Corporation’s profit sharing plan
and charged to Cost of Sales. Under the terms of the collective agreements
reached with the Corporation’s unionized employees on July 30, 2004, $27.6
million was advanced to employees in August 2004. Settlement of the profit
sharing plan will be made in March 2005.





**Algoma
      Annual Report 2004**
    **(
      53 )**














**Notes
to** **Consolidated
Financial Statements**





**Note
14. Contributed Surplus**





(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003Balance,
      beginning of year
    
    **$**
    **112.1**
    
    $
    95.6Realization
      of income tax assets not recognized on implementation of fresh start
      accounting
    
    
    **114.6**
    
    
    16.5Balance,
      end of year
    
    **$**
    **226.7**
    
    $
    112.1





**Note
15. Income Taxes**





The
Corporation has requested amendments to prior years’ Federal and Provincial
income tax returns in order to maximize tax depreciation deductions. The
amendments resulted in an increase in the future tax asset in respect of tax
loss carry-forwards and a corresponding increase in the future tax liability
related to tax depreciation deducted in excess of book amortization. The changes
have no impact on the income tax provision or the net future income tax assets
reported in the statement of financial position. Where applicable, comparative
information presented in the tables below have been adjusted to reflect the
amendments.





The
provision for income taxes is summarized as follows:





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Current
    
    **$**
    **14.3**
    
    $
    2.2
    
    $
    2.1
    
    $
    0.2Future
    
    
    **181.3**
    
    
    16.2
    
    
    26.0
    
    
    -**$**
    **195.6**
    
    $
    18.4
    
    $
    28.1
    
    $
    0.2





The
composition of the future income tax provision is as follows:




**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Initiating
      temporary differences:Non-deductible
      accounting reserves
    
    **$**
    **1.3**
    
    $
    (0.6
    )
    $
    (2.8
    )
    $
    1.1Non-deductible
      pension and post-employment expense
    
    
    **(14.8**
    **)**
    
    (11.4
    )
    
    (8.6
    )
    
    -Tax
      depreciation greater (less) than book amortization
    
    
    **54.7**
    
    
    4.9
    
    
    9.1
    
    
    (1.8
    )Unrealized
      foreign exchange gains on $U.S. debt
    
    
    **2.0**
    
    
    6.5
    
    
    0.2
    
    
    -Current
      period tax loss
    
    
    **-**
    
    
    (4.1
    )
    
    (2.9
    )
    
    -Realization
      of income tax assets not recognized on implementation of fresh start
      accounting:Non-deductible
      accounting reserves
    
    
    **-**
    
    
    -
    
    
    5.2
    
    
    -Tax
      loss carry-forwards
    
    
    **99.6**
    
    
    1.3
    
    
    4.7
    
    
    -Pension
      and post-employment costs
    
    
    **25.1**
    
    
    10.0
    
    
    8.2
    
    
    -Other
    
    
    **1.8**
    
    
    -
    
    
    0.7
    
    
    -Effect
      of tax rate increase
    
    
    **-**
    
    
    (2.5
    )
    
    -
    
    
    -Loss
      carry-forwards
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (13.3
    )Disposition
      of joint venture interest
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (10.5
    )Decrease
      in future income tax assets resulting from financial reorganization (note
      1)
    
    
    **-**
    
    
    -
    
    
    -
    
    
    64.9Other
    
    
    **0.4**
    
    
    (1.5
    )
    
    0.8
    
    
    (1.3
    )**170.1**
    
    
    2.6
    
    
    14.6
    
    
    39.1Increase
      in valuation allowance in respect of tax assets arising after implementing
      fresh start accounting
    
    
    **11.2**
    
    
    13.6
    
    
    11.4
    
    
    -Decrease
      in valuation allowance
    
    
    **-**
    
    
    -
    
    
    -
    
    
    (39.1
    )**$**
    **181.3**
    
    $
    16.2
    
    $
    26.0
    
    $
    -




**(
      54 )**
    **Algoma
      Annual Report 2004**














The
geographical components of the income (loss) before income taxes is as follows:





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Canada
    
    **$**
    **540.8**
    
    $
    30.5
    
    $
    44.7
    
    $
    (20.1
    )United
      States
    
    
    **(1.4**
    **)**
    
    (3.7
    )
    
    (0.1
    )
    
    (5.8
    )**$**
    **539.4**
    
    $
    26.8
    
    $
    44.6
    
    $
    (25.9
    )





**Effective
income tax rate**





The
following table explains the variation between the Corporation’s provision for
income taxes and the statutory income tax rate:





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Income
      tax provision based on the combined statutory rate of 43.1% [2003 - 41.6%;
      2002 - 41.6%]
    
    **$**
    **232.4**
    
    $
    11.1
    
    $
    18.5
    
    $
    (10.8
    )Add
      (deduct):Non-taxable
      items
    
    
    **-**
    
    
    (5.6
    )
    
    (1.8
    )
    
    -Manufacturing
      and processing credit
    
    
    **(48.0**
    **)**
    
    0.4
    
    
    (3.3
    )
    
    1.8Unrecognized
      income tax benefit of initiating deductible differences
    
    
    **11.1**
    
    
    11.8
    
    
    11.5
    
    
    9.0Large
      Corporations Tax
    
    
    **2.7**
    
    
    2.2
    
    
    2.2
    
    
    0.2Other,
      net
    
    
    **(2.6**
    **)**
    
    (1.5
    )
    
    1.0
    
    
    -**Provision
      for income taxes**
    
    **$**
    **195.6**
    
    $
    18.4
    
    $
    28.1
    
    $
    0.2





The
Corporation’s effective income tax rate is higher than its statutory
manufacturing and processing rate of 34.1% primarily due to a valuation
allowance being taken against future tax assets arising in periods after the
application of fresh start accounting.





**Algoma
      Annual Report 2004**
    **(
      55 )**














**Notes
to** **Consolidated
Financial Statements**





Components
of future income tax assets and liabilities are summarized as follows:





**December
      31, 2004**
    
    December
      31, 2003**Pre-fresh**
      **Start**
    
    **Post-fresh**
      **Start**
    
    Pre-fresh
      Start
    
    Post-fresh
      Start**Future
      income tax assets - current****Canadian
      taxes**Accounting
      reserves not currently deductible for tax purposes
    
    **$**
    **-**
    
    **$**
    **2.4**
    
    $
    -
    
    $
    3.7Tax
      loss carry-forwards
    
    
    **48.5**
    
    
    **8.5**
    
    
    13.0
    
    
    -**48.5**
    
    
    **10.9**
    
    
    13.0
    
    
    3.7Valuation
      allowance
    
    
    **-**
    
    
    **-**
    
    
    (13.0
    )
    
    (3.7
    )**Total
      current assets**
    
    **$**
    **48.5**
    
    **$**
    **10.9**
    
    $
    -
    
    $
    -**Future
      income tax assets - non-current****Canadian
      taxes**Tax
      loss carry-forwards
    
    **$**
    **6.2**
    
    **$**
    **-**
    
    $
    142.6
    
    $
    8.5Unfunded
      pension benefits
    
    
    **5.8**
    
    
    **17.6**
    
    
    26.2
    
    
    9.8Post-employment
      benefit obligation
    
    
    **65.3**
    
    
    **18.3**
    
    
    70.0
    
    
    11.4Provincial
      minimum tax credits
    
    
    **-**
    
    
    **-**
    
    
    13.1
    
    
    -Other
    
    
    **10.6**
    
    
    **1.5**
    
    
    12.8
    
    
    0.2**87.9**
    
    
    **37.4**
    
    
    264.7
    
    
    29.9Valuation
      allowance
    
    
    **(81.7**
    **)**
    
    **(37.4**
    **)**
    
    (183.6
    )
    
    (21.4
    )**6.2**
    
    
    **-**
    
    
    81.1
    
    
    8.5**United
      States taxes**Tax
      loss carry-forwards
    
    
    **54.0**
    
    
    **-**
    
    
    55.8
    
    
    -Valuation
      allowance
    
    
    **(54.0**
    **)**
    
    **-**
    
    
    (55.8
    )
    
    -****
    
    
    **-**
    
    
    **-**
    
    
    -
    
    
    -**Total
      non-current assets**
    
    
    **6.2**
    
    
    **-**
    
    
    81.1
    
    
    8.5**Future
      income tax liabilities - non-current****Canadian
      taxes**Tax
      depreciation claimed in excess of book amortization
    
    
    **(66.6**
    **)**
    
    **(70.7**
    **)**
    
    (67.0
    )
    
    (15.9
    )Unrealized
      foreign exchange gain on $U.S. debt
    
    
    **-**
    
    
    **(8.7**
    **)**
    
    -
    
    
    (6.7
    )**Total
      non-current liabilities**
    
    
    **(66.6**
    **)**
    
    **(79.4**
    **)**
    
    (67.0
    )
    
    (22.6
    )**Net
      non-current assets (liabilities)**
    
    **$**
    **(60.4**
    **)**
    **$**
    **(79.4**
    **)**
    $
    14.1
    
    $
    (14.1
    )





Future
income tax assets are recognized to the extent that it is determined to be more
likely than not that sufficient taxable income will be available within the
carry-forward periods to allow the asset to be realized. The determination is
made at the bal-ance sheet date by assessing all positive and negative evidence
regarding the future sources of taxable income. In accordance with GAAP, any
benefit recognized in respect of the pre-fresh start tax assets is credited
directly to contributed surplus (note 14).





The
valuation allowance in respect of the Canadian future income tax assets
decreased by $102.6 million during 2004 due to the recognition of $114.9 million
of pre-fresh start assets offset by an additional allowance of $12.3 million in
respect of post-fresh start assets.





The
Corporation’s U.S. subsidiary, Cannelton Iron Ore Company (“Cannelton”), has not
engaged in any business activ-ity since the disposition of its joint venture
interest (note 19). Consequently, a full valuation allowance of $54.0 million
has been recorded against its future income tax assets.





**(
      56 )**
    **Algoma
      Annual Report 2004**














**Loss
carry-forwards**





The
Corporation’s non-capital losses were reduced by approximately $179.4 million as
a result of debts being discharged under the financial reorganization for less
than their principal amount. After giving effect to the reorganization and the
refiling of prior year income tax returns, Federal and Ontario non-capital
losses at December 31, 2004 are approximately $110.8 million and $282.0 million,
respectively, and expire between the years 2008 and 2010. The foreign exchange
effect of the settlement of the $US First Mortgage Notes under the
reorganization resulted in a capital loss of $42.1 million, $7.8 million of
which was applied against capital gains realized in 2004. A future income tax
asset of $6.2 million has been recognized at December 31, 2004 in respect of the
remaining capital losses. The Corporation’s estimate of income tax loss
carry-forwards has not been reviewed by the Canada Revenue Agency and may be
subject to change.





Cannelton
has non-capital losses of approximately U.S. $79.2 million, U.S. $37.0 million
of which expire between 2006 and 2010, U.S. $5.8 million in 2021 and U.S. $36.4
million in 2022. Cannelton also has a capital loss of approximately U.S. $52.8
million that expires in 2007 and can be applied against future capital
gains.





**Note
16. Contingencies and Commitments**





Contractual
commitments at December 31, 2004 amounted to $12.1 million relating to
authorized capital projects.





Under
operating leases for premises and equipment, the Corporation is obligated to
make aggregate payments of $3.1 million, comprised of $1.3 million in 2005, $0.8
million in 2006 and $1.0 million in subsequent years.





The
Corporation has 12 years remaining in a 15-year agreement to source all iron ore
requirements from a single sup-plier (note 19). The purchase commitment for 2005
under this agreement is approximately U.S. $190.0 million. Under the terms of
the agreement, the Corporation pays for its annual purchases evenly throughout
the year which, at any given time, can result in prepayments. At December 31,
2004, $11.3 million (U.S. $9.5 million) is included in prepaid expenses in this
respect (December 31, 2003 - $5.2 million (U.S. $4.0 million)).





The
Corporation has fixed volume and price contracts for the purchase of natural gas
and electricity. The natural gas contracts have from 3 to 12 months remaining
while the electricity contract has 12 months remaining. The 2005 purchase
com-mitments under these contracts are approximately $61.3 million for natural
gas and $12.0 million for electricity.





The
Corporation has an agreement to source all coal requirements from a single
supplier until March 31, 2006. The purchase commitment for 2005 under this
agreement is approximately U.S. $94.0 million.





The
Corporation has 10-1/2 years remaining in a contract with a single supplier for
the purchase of oxygen, argon and nitrogen. The annual purchases under this
contract approximate $15.8 million.





The
Corporation is committed to approximately $31.0 million of capital expenditures
extending to 2010 for environmental compliance.





**Note
17. Segmented Information**





The
Corporation is viewed as a single business segment involving basic steel
production for purposes of internal performance measurement and resource
allocation. The revenue by product group is as follows:





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Sheet
      and strip
    
    **$**
    **1,285.8**
    
    $
    847.7
    
    $
    845.9
    
    $
    71.6Plate
    
    
    **450.4**
    
    
    262.2
    
    
    198.7
    
    
    16.8Other
    
    
    **66.9**
    
    
    28.3
    
    
    35.5
    
    
    -**$**
    **1,803.1**
    
    $
    1,138.2
    
    $
    1,080.1
    
    $
    88.4





Sales
to customers in the United States were approximately $427.3 million for the year
ended December 31, 2004 (2003 -$241.8 million; eleven months ended December 31,
2002 - $235.7 million; month of January, 2002 - $14.6 million). Export sales to
other countries were approximately $26.4 million for the year ended December 31,
2004 (2003 - $16.5 million; eleven months ended December 31, 2002 - $8.4
million; month of January 2002 - $0.7 million).





**Algoma
      Annual Report 2004**
    **(
      57 )**














**Notes
to** **Consolidated
Financial Statements**





One
customer represented 11% of total sales in the year ended December 31, 2004
(2003 - no customer represented 10% or more; eleven months ended December 31,
2002 - no customer represented 10% or more; month of January 2002 - no customer
represented 10% or more).





At
December 31, 2004, one customer represented 14.5% of the accounts receivable
balance (December 31, 2003 - two customers each represented 12.9% of the
accounts receivable balance).





**Note
18. Changes in Operating Working Capital Components Affecting Cash**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Accounts
      receivable
    
    **$**
    **(123.7**
    **)**
    $
    20.1
    
    $
    (28.7
    )
    $
    18.3Inventories
    
    
    **(28.8**
    **)**
    
    58.3
    
    
    (78.2
    )
    
    49.5Prepaid
      expenses
    
    
    **(5.8**
    **)**
    
    10.8
    
    
    (13.0
    )
    
    1.5Accounts
      payable and accrued liabilities
    
    
    **44.7**
    
    
    (5.6
    )
    
    23.6
    
    
    (22.8
    )Income
      and other taxes payable
    
    
    **1.8**
    
    
    3.3
    
    
    (5.8
    )
    
    2.5**$**
    **(111.8**
    **)**
    $
    86.9
    
    $
    (102.1
    )
    $
    49.0





**Note
19. Disposition of Joint Venture Interest**





In
January 2002, the Corporation’s wholly-owned U.S. subsidiary, Cannelton,
completed an agreement with Cleveland-Cliffs Inc. (“Cliffs”) to transfer
Cannelton’s 45% interest in the Tilden Mining Company L.C. (“Tilden”) in
exchange for the assumption by Cliffs of Cannelton’s share of Tilden’s
liabilities and no cash consideration. As part of this arrangement, the
Corporation entered into an exclusive 15-year supply agreement with Cliffs for a
minimum annual supply of 2.5 million tons of iron ore at market prices. If the
Corporation defaults under the supply agreement prior to December 31, 2008, then
50% of the liabilities assumed by Cliffs will revert back to Cannelton and the
Corporation. These assumed liabilities could include contingent obligations,
such as environmental costs, that are not reflected in Tilden’s financial
statements.





**Note
20. Other Long-term Liabilities**





(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003Environmental
      liabilities (a)
    
    **$**
    **7.9**
    
    $
    7.3Cost
      savings repayment (b)
    
    
    **-**
    
    
    10.0Long-term
      lease obligation
    
    
    **0.5**
    
    
    0.7Other
    
    
    **0.2**
    
    
    0.9**$**
    **8.6**
    
    $
    18.9





(a)
    At
      December 31, 2004, this liability has been determined based on the
      Corporation’s best estimate of the costs to be incurred, discounted at a
      risk-free rate of 4.5% (December 31, 2003 - 4.9%). Changes in future
      conditions could require a change in this liability.(b)
    Under
      the terms of the collective bargaining agreements negotiated as part of
      the financial reorganization, $10.0 million of the 2002 cost savings were
      paid to employees on June 30, 2004, and $10.0 million of the 2003 savings
      will be paid on June 30, 2005. The payments will be deferred if, at the
      relevant time, all accrued interest on the 11% Notes and 1% convertible
      Notes has not been paid.





**Note
21. Financial Instruments**





The
Corporation utilizes commodity price swap contracts to hedge the cost of natural
gas and electricity. As at December 31, 2004, the Corporation had no natural gas
swaps outstanding. At December 31, 2003, the aggregate notional amount of the





**(
      58 )**
    **Algoma
      Annual Report 2004**














natural
gas swaps outstanding was approximately 4.3 million MMBtus. The Corporation paid
a fixed average price of $6.30 per MMBtu and received a floating average price
per MMBtu based on the settlement price per MMBtu for the NYMEX Henry Hub
Natural Gas futures contract.





As
at December 31, 2004, the Corporation had no electricity swaps outstanding. At
December 31, 2003, the aggregate notional amount of the electricity swap
outstanding was 120,600 Megawatt hours. The Corporation paid a fixed average
price of $48.50 per Megawatt hour and received a floating average price per
Megawatt hour based on the hourly Ontario energy price.





The
Corporation estimated that the fair value of the commodity price swap contracts
at December 31, 2003 was $4.4 million based on available broker
quotes.





**Note
      22.**
    **Significant
      Differences Between Canadian and United States Generally Accepted
      Accounting Principles (GAAP)**





The
Corporation’s consolidated financial statements are prepared using Canadian GAAP
which conforms with United States GAAP (“U.S. GAAP”) except as described below.





Under
Canadian GAAP, the discounted value of the 1% convertible Notes is segregated
into a debt and equity com-ponent with the accretion of the equity component
being charged directly to retained earnings (note 8(b)). Under U.S. GAAP, the
discounted value of the 1% convertible Notes would be presented entirely as
long-term debt with accretion being charged to income as interest on long-term
debt. The value ascribed to the holder conversion option would be reclassified
within share-holders’ equity to contributed surplus.





An
additional minimum pension liability is reported under U.S. GAAP when the
accrued benefit liability in the consol-idated balance sheet is less than the
plan deficit represented by the excess of the accumulated benefit obligation
over the market value of the plan assets. An intangible asset is recorded up to
the amount of any unrecognized past service costs with any remain-ing amount
being charged to comprehensive income.





Under
U.S. GAAP, the change in the fair value of a derivative in a cash flow hedging
relationship is recorded in com-prehensive income until realized.





Under
Canadian GAAP, adjustments to the reported amounts of assets and liabilities
resulting from reorganization and the application of fresh start accounting are
charged to shareholders’ equity. Under U.S. GAAP, these amounts are charged to
net income in the period prior to the application of fresh start
accounting.





**(a)**
    **Reconciliation
      of net income (loss) between Canadian and United States GAAP:**





**Year
      ended**
      **December
      31,**
      **2004**
    
    Year
      ended
      December
      31,
      2003
    
    Eleven
      months
      ended
      December
      31,
      2002
    
    Pre-
      reorganization
      One
      month
      ended
      January
      31,
      2002Net
      income (loss) as reported
    
    **$**
    **343.8**
    
    $
    8.4
    
    $
    16.5
    
    $
    (26.1
    )Accretion
      of equity component of convertible long-term debt
    
    
    **(0.4**
    **)**
    
    (0.6
    )
    
    (0.6
    )
    
    -Foreign
      exchange adjustment on equity component of long-term debt
    
    
    **-**
    
    
    1.0
    
    
    0.1
    
    
    -Reorganization
      and fresh start adjustments
    
    
    **-**
    
    
    -
    
    
    -
    
    
    441.0Net
      income (loss) in accordance with U.S. GAAP
    
    
    **343.4**
    
    
    8.8
    
    
    16.0
    
    
    414.9Change
      in fair value of swap contracts
    
    
    **(4.4**
    **)**
    
    4.4
    
    
    -
    
    
    -Additional
      minimum pension liability
    
    
    **(40.9**
    **)**
    
    (47.7
    )
    
    (4.6
    )
    
    -Comprehensive
      income (loss) in accordance with U.S. GAAP
    
    **$**
    **298.1**
    
    $
    (34.5
    )
    $
    11.4
    
    $
    414.9Net
      income (loss) per share:Basic
    
    **$**
    **9.35**
    
    $
    0.38
    
    $
    0.72
    
    $
    7.74Diluted
    
    **$**
    **8.81**
    
    $
    0.29
    
    $
    0.53
    
    $
    7.74Comprehensive
      income (loss) per share:Basic
    
    **$**
    **8.11**
    
    $
    (1.42
    )
    $
    0.50
    
    $
    7.74Diluted
    
    **$**
    **7.65**
    
    $
    (1.42
    )
    $
    0.37
    
    $
    7.74





**Algoma
      Annual Report 2004**
    **(
      59 )**














**Notes
to** **Consolidated
Financial Statements**




**(b)**
    **As
      a result of the Canadian/U.S. GAAP reconciliation and additional
      disclosure requirements under U.S. GAAP, the changes to the consolidated
      balance sheet are as follows:**





(in
      millions)
    
    **December
      31,**
      **2004**
    
    December
      31,
      2003**[i]
      Swap asset**Balance
      under Canadian GAAP
    
    **$**
    **-**
    
    $
    -Fair
      value of swap contracts
    
    
    **-**
    
    
    4.4Balance
      under U.S. GAAP
    
    **$**
    **-**
    
    $
    4.4**[ii]
      Deferred pension costs**Balance
      under Canadian GAAP
    
    **$**
    **-**
    
    $
    -Deferred
      past service cost
    
    
    **41.6**
    
    
    -Balance
      under U.S. GAAP
    
    **$**
    **41.6**
    
    $
    -**[iii]
      Accrued pension liability**Balance
      under Canadian GAAP
    
    **$**
    **40.3**
    
    $
    87.4Additional
      minimum pension liability
    
    
    **134.8**
    
    
    52.3Balance
      under U.S. GAAP
    
    **$**
    **175.1**
    
    $
    139.7**[iv]
      Long-term debt**Balance
      under Canadian GAAP
    
    **$**
    **150.3**
    
    $
    164.4Equity
      component of convertible debt
    
    
    **-**
    
    
    6.2Foreign
      exchange adjustment on equity component of convertible
debt
    
    
    **-**
    
    
    (1.2
    )Balance
      under U.S. GAAP
    
    **$**
    **150.3**
    
    $
    169.4**[v]
      Shareholders’ equity****[a]
      Capital stock**Balance
      under Canadian GAAP
    
    **$**
    **318.5**
    
    $
    214.8Foreign
      exchange adjustment of equity component on conversion
    
    
    **(1.3**
    **)**
    
    (0.1
    )Ascribed
      value of holder conversion option credited on conversion
    
    
    **(21.5**
    **)**
    
    (8.7
    )Balance
      under U.S. GAAP
    
    **$**
    **295.7**
    
    $
    206.0**[b]
      Convertible long-term debt**Balance
      under Canadian GAAP
    
    **$**
    **-**
    
    $
    19.5Reclassified
      to long-term debt
    
    
    **-**
    
    
    (6.2
    )Ascribed
      value of holder conversion option
    
    
    **-**
    
    
    (13.3
    )Balance
      under U.S. GAAP
    
    **$**
    **-**
    
    $
    -**[c]
      Contributed surplus**Balance
      under Canadian GAAP
    
    **$**
    **226.7**
    
    $
    112.1Foreign
      exchange adjustment on convertible long-term debt
    
    
    **0.1**
    
    
    0.1Ascribed
      value of holder conversion option on convertible long-term debt at January
      31, 2002
    
    
    **21.5**
    
    
    22.0Balance
      under U.S. GAAP
    
    **$**
    **248.3**
    
    $
    134.2**[d]
      Retained earnings**Balance
      under Canadian GAAP
    
    **$**
    **367.1**
    
    $
    23.7Foreign
      exchange adjustment on equity component of long-term debt
    
    
    **1.2**
    
    
    1.2Balance
      under U.S. GAAP
    
    **$**
    **368.3**
    
    $
    24.9**[e]
      Accumulated other comprehensive loss**Balance
      under Canadian GAAP
    
    **$**
    **-**
    
    $
    -Fair
      value of swap contracts
    
    
    **-**
    
    
    4.4Additional
      pension obligation
    
    
    **(93.2**
    **)**
    
    (52.3
    )Balance
      under U.S. GAAP
    
    **$**
    **(93.2**
    **)**
    $
    (47.9
    )


(c)
    The
      accounts receivable balance at December 31, 2004 includes a $2.2 million
      allowance for doubtful accounts (December 31, 2003 - $2.2
      million).(d)
    Approximately
      98% of the Corporation’s employees are covered by collective bargaining
      agreements. The new collective bar-gaining agreements negotiated August 1,
      2004, expire on July 31, 2007.





**(
      60 )**
    **Algoma
      Annual Report 2004**