Algoma goes as steel industry goes
BENJ GALLANDER and BEN STADELMANN
One of us recently made the trek north to Sault Ste. Marie, Ontario. He took the Agawa Canyon Train tour, a spectacular 182-kilometre run, at a time when the trees were dancing in their autumn finery. This is a classic cut of the splendour of Canada.
Of course, it would be even more majestic if the choice on the box lunch had been more than a ham and cheese sandwich, or a ham and cheese sandwich. No mayo, mustard or lettuce, to boot. Yeesh!
No, we’re not beginning to think we’re the "Restaurant Review Guys."
Also taken in on this trip was the opening of the Steelback Centre, new home of the Ontario Hockey League’s Sault Ste. Marie Greyhounds. The edifice is a modern, 5,000-seat arena for hockey, expandable to 6,497 for concerts. A season ticket for the former costs less than $500. That kind of pricing makes one think of moving from the big city.
While the Steelback Centre is named for a beer, it is even more appropriate given that the primary employer of this city of 75,000 is Algoma Steel. The company went into production in 1902, driven by founder Sir Francis Hector Clergue.
It has had many ups and downs, but recently has been enjoying spectacular success: revenues in the first two quarters of this year topped $1 billion with profit bettering $110 million.
In the first and second quarters this translated to share profit of 87 cents and $2.07 respectively. That is mighty impressive. The stock price has also been doing exceedingly well, firing above $40 in 2005.
However, we suspect that this might be the high-water mark for the enterprise, which faced severe questions about whether it would survive in the early 1990s. Recently, the company repurchased $200 million of shares for cancellation at $36.50, so since one would opine that they feel that they are getting a bargain, they likely disagree.
The steel industry is notoriously cyclical. The economy has been burning on all cylinders, but the winds of a slowdown are in the works. Housing prices have stopped their stratospheric rise, and are now either tailing off or receding, depending on where one lives in North America.
Ford and General Motors are battling to survive. The US debt and deficit are running amok, and though Canada is currently running a surplus, the current political stewardship of the economy makes some of us wonder how long before a deficit is in the cards.
Though oil prices have receded, the economy still must cope with prices far higher than a few years past. Plus, competition from foreigners continues to gain strength, transporting jobs from this country to those with lower costs of production.
Given the current economic landscape, it is not difficult to imagine Algoma’s share price cascading downwards from the current level around $34.25. In 2004 it was as low as $6.60, and in 2003 it touched $1.01. While these numbers seem at odds with the corporation’s recent success, this outfit makes for a better short than a long position in our opinion.
The Steelback Centre replaced the Sault Memorial Gardens, which had been in operation for 57 years. Hopefully the Centre will last as long, and run as successfully, accompanied by Algoma Steel.