Algoma Steel Group Inc. (NASDAQ:ASTL) Q3 2023 Earnings Conference Call February 14, 2023 11:00 AM ET
Company Participants
Mike Moraca – Treasurer and Investor Relations Officer
Michael Garcia – Chief Executive Officer
Rajat Marwah – Chief Financial Officer
Conference Call Participants
David Ocampo – Cormark Securities
Ian Gillies – Stifel
David Gagliano – BMO Capital Markets
Anoop Prihar – Eight Capital
Ahmad Shaath – Beacon Securities
Operator
Hello and welcome to today’s Conference Call to discuss Algoma Steel’s Fiscal Third Quarter 2023 Financial Results. My name is Shamali and I am your operator for today’s call. At this time, I’d like to hand the call over to Mike Moraca, Treasurer and Investor Relations Officer for Algoma. Mr. Moraca, please go ahead.
Mike Moraca
Good morning, everyone and welcome to Algoma Steel Group, Inc.’s financial and operating results conference call for the fiscal third quarter ended December 31, 2022. Leading today’s call are Michael Garcia, our Chief Executive Officer; and Rajat Marwah, our Chief Financial Officer. As a reminder, this call is being recorded and will be made available for replay later today in the Investors section of Algoma Steel’s corporate website at www.algoma.com.
I would like to remind you that comments made on today’s call may contain forward-looking statements within the meaning of applicable securities laws, which involve assumptions and inherent risks and uncertainties. Actual results may differ materially from statements made today.
In addition, our financial statements are prepared in accordance with IFRS, which differs from U.S. GAAP, and our discussion today includes references to certain non-IFRS financial measures. Last evening, we posted a presentation on our financial and operating results to accompany today’s prepared remarks. The slides for today’s call can be found in the Investors section of our corporate website.
With that in mind, I would ask everyone on the call to read the legal disclaimers on Slide 2 of the accompanying presentation and to also refer to the risks and assumptions outlined in Algoma Steel’s financial statements and management’s discussion and analysis for the full year ended March 31, 2022.
Please note that our financial statements are prepared using the U.S. dollar as our functional currency and the Canadian dollar as our presentation currency. Our fiscal year runs from April 1 to March 31, and our third quarter financial statements have been prepared for the 3 months ended December 31, 2022. Please note all amounts referred to on today’s call are in Canadian dollars unless otherwise noted. Following our prepared remarks, we will open the call to conduct a question-and-answer session.
I will now turn the call over to our Chief Executive Officer, Michael Garcia. Mike?
Michael Garcia
Thank you, Mike. Good morning and thank you for joining us today. As we always do, I would like to begin my remarks by addressing Algoma’s top priority, which is the safety of our employees. At Algoma, safety is nonnegotiable and is firmly rooted in our corporate values, where with every decision, every action and every day, we will work safely with teamwork, integrity and a deep care for our people, their families and the environment. Our continued dedication has led to a significant improvement in our lost time injury frequency rate over the past decade. We will continue to work diligently as we relentlessly pursue our goal of achieving 0 workplace injuries.
Next, I’ll cover key events and milestones during our fiscal third quarter and subsequent to its end. I will then turn the call over to Rajat for a deeper dive into the numbers before closing with an update on market conditions and our strategic investments set to deliver long-term value for all of our stakeholders. Our performance in the third quarter was largely in line with our preannouncement on January 9, 2023. Shipments of 458,000 tons were sequentially higher, though still below our normal run rate as we completed commissioning of our plate mill modernization Phase 1.
Our overall financial results also reflected lower pricing in the third quarter. Steel prices for hot-rolled coil have recovered meaningfully since early November, and plate pricing has maintained a significant price premium. While commissioning of the plate mill modernization Phase 1 was a challenge in the second half of calendar 2022, it’s important to highlight the reasons for the project and the value delivered from it. Our plate mill is the only discrete plate mill in Canada, and it produces a full range of high-quality rolled and heat-treated plate products, including the widest plate manufactured in Canada. Our products can be tailored for high-strength abrasion resistance and military applications among a wide range of other end uses.
Completion of Phase 1 will now deliver enhanced capabilities, including improved surface quality and shape. Importantly, plate shipments returned to normalized levels by the end of the third quarter, and we expect shipments in calendar 2023 to be consistent with historical production levels. The next phase of our plate mill modernization project, Phase 2, will focus on increasing mill throughput and is expected later in 2023. As we outlined on our last quarterly call, we will be mindful of market conditions before commencing Phase 2, and we will be laser-focused on utilizing lessons learned from Phase 1 in its implementation.
Looking forward on the cost side, we expect a quarter-over-quarter improvement on cost of goods sold per ton as we return to normal production levels. It should be noted that we continue to experience some headwinds on account of higher-priced purchased coke. Our demand for coke at the blast furnace outstrips our production capacity, requiring us to supplement with purchased coke.
In an effort to mitigate this, we are focused on operational improvement initiatives at our coke-making facilities to increase throughput. We anticipate to complete these improvements over the next few months, providing additional internal coke production by the end of fiscal Q1 2024. As previously disclosed, we have a long-term contract with a third-party coke producer, which provides us with the coke needed to maintain steel production at normalized levels. The fiscal third quarter was also characterized by a volatile market for steel and raw material inputs, which continued to impact realized prices and costs. Pricing reached 2022 lows in early November before recovering through the end of the quarter and into 2023.
During the quarter, we continued to advance construction of our transformative electric arc furnace project, which remains on budget and on time for our planned mid-2024 startup. Piling and foundational work is largely complete. Cranes are in position, and the first structural steel components are being raised as we speak, an exciting milestone in the project. On the capital allocation side, we declared our regular quarterly dividend of $0.05 per share, and we remained active on to our normal course issuer bid program.
Now I will pass the call over to Rajat to go over the financial results of the third quarter. Rajat?
Rajat Marwah
Thanks Mike. Good morning and thank you all for joining the call. Our fiscal third quarter results, while challenging for the operational reasons Mike alluded to, came in line with our guidance for shipments and EBITDA provided in January. I will remind you again that all numbers are expressed in Canadian dollars unless otherwise noted. However, our functional currency is the U.S. dollar.
For the third quarter, we reported a net loss of $69.8 million or $0.64 per diluted share compared to net income of $123 million or $0.92 per diluted share in the prior year quarter with the decline attributable to weaker steel market conditions as well as lower-than-expected shipments due to the commissioning delays at the plate mill.
Now let me summarize the key drivers of our performance. We shipped 458,000 net tons in the quarter, down 17% as compared to the prior year quarter. As we previously disclosed, delays experienced during the commissioning of our plate mill modernization project had the largest impact on shipments. Net sales realization averaged 1,116 per ton, down 38.9% versus the prior year period. The decrease versus the prior year level primarily reflects weaker market conditions during the quarter relative to record pricing levels seen during the prior year period. This resulted in steel revenue of $512 million in the quarter, down 49.3% versus the same quarter of last year.
On the cost side, Algoma’s cost of goods sold averaged $1,157 per ton in the quarter, up 22.3% over the prior year period. This includes approximately $100 per ton of cost attributed to previously disclosed operational challenges flowing through inventories. Further cost pressure comes from higher prices for key inputs, including metallurgical coke, natural gas, alloys and scrap as well as the impact of lower shipments. Adjusted EBITDA for the quarter was a loss of $35.9 million as compared to $457.3 million in the prior year comparable quarter. The year-over-year decrease was driven primarily by a decline in realized steel pricing and lower shipment volumes.
From a cash flow perspective, cash flow from operating activity was a use of $128.6 million in the quarter compared to cash generation of $318.4 million in the prior year comparable quarter. The main drivers include lower EBITDA and a significant investment in the working capital in the quarter as we continue to build both raw material and work-in-progress inventories given seasonal inventory build and lower-than-normal production volumes.
For context, our inventory position as at December 31, 2022, stood at 912 million versus 616 million in the same quarter of the prior year. This nearly 300 million increase in inventory was partially attributable to higher prices and exchange variation. However, approximately 55% of the variance relates to higher inventory quantities. We expect to gradually release this excess inventory in the coming quarters, which will add to our liquidity levels. We finished the quarter with $245 million of cash and equivalents on the balance sheet. And our asset-backed credit facility was undrawn with $239 million in availability.
As an update to year project spending through the end of the third fiscal quarter ended December, we have spent approximately $220 million on the EAF project and issued letters of credit of $48 million, securing fabrication and delivery of key components. While this aggregate spending level is lower than originally anticipated for the quarter end, it is primarily due to timing differences in fabrication and erection of EAF building and the delivery of offshore equipment. These timing differences do not affect the critical path of the completion of the project. And we remain on time and on budget for a mid-2024 start-up.
To-date, approximately 70% of the total EAF investment amount has been contracted with fixed price commitments with the balance still to be contracted. Supporting the remaining items to be contracted, we maintain approximately $50 million of available contingency. We expect to spend approximately $70 million to $80 million on the EAF project in the fourth fiscal quarter. Putting this altogether, I would like to highlight a few points. As at December 31, Algoma’s net working capital plus cash totaled $1.15 billion, and we have full access to our undrawn ABL facility. We have a conservative and prudent approach to our balance sheet with virtually no long-term debt, except for attractive government financing.
We have access to an additional $168 million of funding available on the SIF facility, which is supporting the development of the EAF. All this together puts us in a strong position to advance on our strategic capital initiatives, including the transformation to EAF, which we expect to deliver improved operational performance, enhanced cash flow and EBITDA through the cycle and reduce earnings volatility.
I’d now like to turn the call back to Mike for a market update and closing remarks.
Michael Garcia
Thank you, Rajat. Now turning to the North American steel market, 2022 was marked by significant volatility in pricing. Highs that were reached in March around the start of the Ukraine war quickly reversed, testing various support levels through the summer and fall before bottoming in November. We are encouraged by the recent price improvements in hot-rolled coil and continued robust plate pricing. Key market indicators including extended lead times and a strengthening forward curve, support our expectation of improved performance in calendar 2023.
Our order book supported by a significant portion of contract sales, shows consistent demand for our product, including sales to the automotive, construction, oil and gas and other steel-intensive industries. And from a global perspective, price dynamics and trade measures continue to reduce the attractiveness of imports into our North American markets. For the fiscal fourth quarter, we expect sequentially higher shipments, more consistent with our normal operating levels. And in combination with current steel pricing, we expect sequential improvement in net sales realizations and EBITDA performance.
That said, we continue to experience pricing pressure on our key inputs, including metallurgical coke, coking coal, alloys and general inflationary increases on other goods and services, which will have an effect on margins for our products. In calendar 2023, we expect to benefit from normalized and consistent operating performance, labor stability, a strong and flexible balance sheet and great support from our government partners and our community. We expect this year to yield a combination of improved operational results and accelerating progress on our transformative EAF investment. As the market is showing signs of greater stability, we expect to generate significant free cash over the longer term, which supports our two main capital improvement program: the second phase of the plate mill modernization and the EAF investment.
Our focus remains on prudent financial discipline, maintaining full operating capabilities and completion of our EAF project, ushering in the next era for Algoma Steel and providing long-term value creation for our stakeholders. As the world transitions towards a more sustainable future, it will continue to need steel for decades to come. At Algoma, we are building on our proud 120-year-plus history to serve our customers today while simultaneously becoming one of the lowest cost producers of green steel in North America. We are very excited for our company and employees, and look forward to what the future holds.
Thank you very much for your continued interest in Algoma Steel. At this point, we would be happy to take your questions. Operator, please give the instructions for the Q&A.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of David Ocampo with Cormark Securities. Please proceed with your question.
David Ocampo
Thank you. Good morning, everyone. Rajat, I was wondering if you could – Rajat, I was hoping we could touch a little bit on the working capital, particularly as it relates to the inventory. You called out that 55% of it is due to higher inventory levels. I was wondering if you could break that down between potentially how much of it is related to unfinished slabs versus, say, higher inventory levels of iron ore?
Rajat Marwah
So on a very high level, let’s say 40% will be in – within finished, and the balance will be in rest of the raw materials, so roughly 40%, 60%.
David Ocampo
Okay. And then on the work-in-process – in-progress, is there potentially a catch-up in shipments that we could expect that sort of unwinds in calendar ‘23?
Rajat Marwah
Yes, we should – as we start reducing and finish, we should expect that to flow into the shipments over the next, let’s say, couple of quarters.
David Ocampo
Okay. That’s good. And then on the plate mill modernization Phase 2 component of it, should we expect any downtime if you guys do decide to go forward with this for the end of the year? Or how should we think about any disruptions to your production levels as you move forward with that next phase?
Michael Garcia
Yes. David, this is Mike. So the Phase 2 implementation of the plate mill modernization project involves two components. One component is to bring online the new in-line high-capacity shear that will replace a small undersized shear that’s there currently and replace most of the gas flame cutting that we need to do in the facility anything under 2 inches. That portion of Phase 2 does not require any mill downtime. So as we’re doing that, we can continue to produce both plate and strip the small amount of cutting that would be done on the small shear we will do with an outside processor.
The other component is the replacement and the upgrade of drives on the four-high stand in the hot mill. That does require an outage. Currently, that outage will be approximately 40 days of production or you can think about roughly it’s 60,000 tons of both plate and strip. And that’s kind of what that outage looks like currently. And again, the timing for the outage is the shear work and the finishing end work will begin in May, take approximately 5 months. Again, no impact to ongoing operations and then the 40-day mill outage for the drive upgrade has not been scheduled with a final implementation date and that will depend on both market conditions and our readiness for the down. Does that help?
David Ocampo
That’s extremely helpful. That’s all the questions I had. I’ll hop back in the queue. Thanks.
Operator
Our next question comes from the line of Ian Gillies with Stifel. Please proceed with your question.
Ian Gillies
Good morning, everyone.
Michael Garcia
Good morning, Ian.
Ian Gillies
I just wanted to start on the volume side. As you think about it from a business planning perspective, are you anticipating pretty standard volumes across all the quarters this year? Do you think – should we be thinking about it as a build through the year, given that there is still a little bit of ancillary repair and maintenance work left to be completed?
Michael Garcia
Yes. Thanks, Ian. So we anticipate it to be pretty standard. Other than the plate mill outage that I spoke about, which we haven’t decided when exactly we will take that, it should be relatively standard and somewhat equal across the four quarters with maintenance kind of spread evenly throughout the steelworks.
Ian Gillies
Okay. That’s helpful. Switching gears to the pricing side. Obviously, there is been two increases by one of your competitors in the last, call it, 11 or 12 days. Are you able to provide any initial feedback from how your customers are feeling about these price increases and how you’re thinking about that in the context of current market conditions?
Michael Garcia
Sure. I mean, I think difficult for me to speak for the entire market, but I think the price increases have been received relatively well by the market with an understanding that the price is moving up. And I think as we go forward into the remainder of this quarter and into the first quarter of the new fiscal year, we will start to see that displayed in our own order book and results. We – our lead times are going out a little bit. So there is a matter of weeks before a price increase that hits the market kind of today is reflected in our bookings. Even if it’s a new price today, and we book it at that new price today, it’s still 6, 7, sometimes 8 weeks, but more 6 or 7 weeks before that product is produced and shipped and realized as revenue for us. Does that help?
Ian Gillies
No, no, that’s very helpful. I appreciate that. With – and then on the cost side, I have two separate questions. The first one, you made some commentary in and around coking coal this quarter and buying from a third party. Just to clarify, is there anything unusual expected to happen in the fiscal fourth quarter relative to, say, last year on the coking coal side? Or was that more of just a general comment that you’re working on getting that cost lower over the course of time?
Rajat Marwah
So coking coal, there is no change from pricing perspective between last quarter, this quarter and going forward. I think we indicated that the pricing year-over-year is very similar. On the coking coal coke production, metallurgical coke production, the change will start coming from end of the first fiscal quarter where we will start getting more of internal coke produced, which will definitely help us on the cost side. We don’t – we are not expecting a significant change quarter-over-quarter on the cost side. We are expecting it to improve as we get into the second fiscal quarter of next year.
Ian Gillies
Okay. Understood. And then, Rajat, the last one for me. There was, I think, a $19 million inventory impairment in the quarter. Are you expecting – should we expect to see much more of those sorts of items? Or do you think you’ve largely worked through that piece?
Rajat Marwah
I think it’s worked through. The pricing from a realization perspective was pretty low at $600. And now when we are hovering around $900, $850 to $900, it’s not there. So at $600-odd or $700, those would be – those were the adjustments that came through. And that reflected lower production and the cost challenges that we faced in the first – in the last two quarters. So most of it is taken care of that is we don’t – we should not expect if the market conditions continue where they are with our production levels, we don’t expect that to happen.
Ian Gillies
Thank you very much. That’s helpful. I appreciate for taking all my questions. I will turn it back over.
Rajat Marwah
Thanks, Ian.
Michael Garcia
Thanks, Ian.
Operator
Our next question comes from the line of David Gagliano with BMO Capital Markets. Please proceed with your question.
David Gagliano
Hi. Great. Thanks for taking my questions. I just wanted to drill down a bit on the near-term outlook if possible. We’ve had a few of the U.S. steel producers report and guide pricing down quarter-over-quarter in the first quarter, mainly because of the lags versus the price increases. Is that a reasonable assumption? And can you frame the magnitude of the decline in pricing expected on a per ton basis in the first quarter?
Michael Garcia
Yes. I’ll start, David. If you think of maybe the bottom – finding the bottom of the market in November, in November, the business we were booking at that time, the majority of it would have shifted in January. So I think that would kind of agree with what you’re picking up and what you mentioned earlier. Rajat, do you have any other?
Rajat Marwah
Yes, sure. So I think the expectation is definitely to come down to some extent. For us, it’s slightly different. We do have advantage of our quarterly contracts and monthly contracts, most on the quarterly contract side, which gives us some advantage. The other big portion for us definitely will be on the plate side. We will be having higher plate volume coming into our – coming into this quarter versus last quarter. So, when you factor all of this in, we should see some decline, less so than what others would have faced.
David Gagliano
Okay. That’s helpful. Thank you. And then just shifting to the cost side, I know there has been obviously clearly commentary here. And I believe mentioned was expectations for cost of goods sold per ton to improve largely due to the – obviously to the improved volumes, although somewhat offset by these higher priced, for example, merchant coke and the other input cost. Can you frame the net result of those two in terms of the quarter-over-quarter expectations on cost of goods sold per ton?
Rajat Marwah
So, I think what – I will try and see if I can provide some more clarity. But what we said is that there is $100 per ton one-time impact that was in the cost last time, which should go away. And then we should see further improvements coming because of volume, because of lower cost of some of the input items primarily on the iron ore side as we always see five months to six months lag when the iron ore hits our cost versus where the index was. So, we will see some advantages and some benefits coming from that side. On the other major cost items, whether it’s coking coal, coke, we should see probably very similar impacts quarter-over-quarter from a cost perspective. So, it will be – the trajectory will be down. The cost will come down $100 plus, and that’s because of some of the input material as well as the high production.
David Gagliano
Okay. That’s helpful. So and then just to wrap up the same line of question here, this will be my last question. When we started to the mix, I mean at least from my view, it looks like it will be a positive EBITDA per ton quarter. I just want to confirm based on the moving parts that we just talked about, is that a reasonable expectation that EBITDA turns positive on a per ton basis?
Rajat Marwah
Yes, that’s reasonable.
David Gagliano
Okay. Great. Thank you.
Operator
Our next question comes from the line of Anoop Prihar with Eight Capital. Please proceed with your question.
Anoop Prihar
Yes. Good morning. I just want to ask a couple of questions on the plate mill if I could. I noticed in the MD&A, you talked about the CapEx there being $135 million. Has that number increased from the $120 million you were using previously?
Rajat Marwah
Yes. I think we disclosed it last quarter that the number went up just because of the delays during COVID and the other pressure that we had on it with some changes that was coming. So, yes, it went up from $120 million to $135 million.
Anoop Prihar
And can you give us an idea of how much is left to spend there on Phase 2?
Rajat Marwah
It will be around $20 million to $25 million.
Anoop Prihar
Okay. And we should assume basically throughput returning to normal in Q4 on the plate part?
Rajat Marwah
That’s correct.
Michael Garcia
Yes.
Anoop Prihar
Alright. Okay. And then just lastly on the quality, so the quality coming out of the plate mill now, is it higher than what it was before you guys started the expansion? In other words, the quality improvements that Phase 1 was supposed to achieve, have they been achieved?
Michael Garcia
Anoop, yes, they have. One of the – and the critical – there is a couple of critical pieces that were involved in Phase 1 that are delivering that quality primarily the new leveler, which gives us much better control and levelness of the product. We also have a new de-scaler, which de-scales the plate as it comes out of the reheat furnace before it hits the first rolling operation, the four-high. So, those two new pieces of equipment especially have delivered significantly better surface quality and profile of the plate.
Anoop Prihar
When do you – what’s the reasonable expectation then for when you will be able to get a higher realized price for that improved quality product?
Michael Garcia
Well, it will still be some months probably the – probably at the earliest, the second half of this calendar year. You can appreciate that we have some amount of work to do with our current base of customers and any new customers that we want to work with, given our difficult start-up over the second half of last calendar year. So, we are working very hard on that now. We are restocking or repopulating our stocking program so that we have heavy runners in terms of specific dimensions of plate. We have those on hand, ready for quick delivery. And we are working through and with the intention of eventually eliminating any remaining backlog orders that built up over the start-up of – from Phase 1.
Anoop Prihar
And Mike, just lastly, just to be clear, what’s the reasonable expectation for sort of the net margin improvement that you could realize when you are actually in a position to get a higher price?
Michael Garcia
Yes. That’s difficult to give you a specific number, Anoop, because there is a lot of kind of moving pieces within that. But obviously, we are going to want to bias our ratio of plate and strip as much as we can to the plate side and take advantage of that historically high spread between As Rolled Plate and Hot Rolled Coil. I think looking at last week’s CRU number, that spread stands at $657, which is against a historical spread of $150 – between $100 and $200 usually over the years. Now, how much incremental above that can we get with kind of the higher margin part of the plate market kind of remains to be seen, but it’s our intention to position ourselves in that area.
Anoop Prihar
That’s great. Thank you.
Operator
And our next question comes from the line of Ahmad Shaath with Beacon Securities. Please proceed with your question.
Ahmad Shaath
Hi guys. Thanks for taking the questions. I guess just one for me on the CapEx shift for the EAF. I noticed about 25% kind of spilled over from fiscal ‘23 to ‘24. Can you give us a little more color on that, please?
Michael Garcia
Yes. Ahmad, I think at a high level, the main reason is because even though the overall timeline and completion date of the project has not moved or slipped, within that timeline, there are certain components of the way the project is unfolding that have moved. I think a very good example of that is the erection of the building, the main steelworks building that we are building. Originally, the original project schedule contemplated starting that building in October of last year and kind of being heavy into the erection of it through the current period. As we reworked the project that confirmed all of the different components of the project completion, we moved the erection of that building to beginning this month actually. I think our first pillar, our column is going above ground today. So, obviously, the cash flows associated with that building, to that contractor have shifted into this quarter versus last – beginning in the last quarter. And then as a part of that, we have got all this built component and machinery sitting in the build shops in various parts of the world, whether it’s Thailand or Europe. And of course, we have been over there and done all the factory acceptance testing. But originally, in the project schedule, we contemplated shipping that equipment here as the building comes up. And now that the building is coming up a few months later, there is no need to ship it on the original schedule. We will ship it a little bit delayed so that the cash flows associated with that because that’s largely triggered upon shipment move to the right as well. So, kind of all of that is happening within the overall project schedule, but the overall timeline has not shifted. Does that help?
Ahmad Shaath
Yes, that’s very helpful. And I noticed maybe on your MD&A, there is some commentary around discussions with the Ministry of Energy for securing power for the full year of transformation. Any positive or progress development there that transpired since the last quarter, given the change in the disclosure?
Michael Garcia
Yes. We have had a lot of interaction with the ministry, with the local utility entity PUC, with the provincial power provider Hydro One and the provincial grid operator as well. So, there is a lot of stakeholders or entities that we are in pretty much constant contact with them. I think the support we have seen has been overall very, very positive. They – there is nobody in the province from the political or the ministerial level that isn’t a very strong supporter of this project. It moves the province exactly the direction it wants to move in terms of reducing CO2 emissions. We have gotten great support from that perspective. Of course, they are responsible for the stability and the performance of the overall grid. So, they are very mindful of what the new load in Sault Ste. Marie will mean for overall grid stability and robustness. So, we continue to have those conversations with them because not only do we look to be a future customer of the grid, but we want the grid to be very stable as well. So, we will work with them and make sure that everything we are doing to bring all this demand online keeps the grid very stable.
Ahmad Shaath
Got it. So, if I got it correctly, positive development, but still too early to make any assumptions about earlier timeline for EAF production than we previously discussed, right?
Michael Garcia
Correct. But I would note that regardless of the development of grid power and the local 230 cable line, part of our project involves the installation of two new turbine generators at our Lake Superior power plant. And that will give us 115 megawatts of internal generation. And that combined with the available power we are already taking off the grid, will allow us to proceed with start-up without any type of delays.
Ahmad Shaath
Yes. For sure. Well, that’s great color and thanks.
Michael Garcia
Yes.
Operator
Our next question comes from the line of Ian Gillies with Stifel.
Ian Gillies
Hi everyone. Thanks for taking my follow-up. With respect to the remaining items to be ordered for the EAF and the $50 million contingency, do you see anything in those remaining items that need to be ordered that are – have undergone significant inflationary pressures since the initial cost estimate, or is that $50 million continues to see – still looking like a very healthy amount in the context of estimated total project cost?
Michael Garcia
That’s a great question, Ian. No, we haven’t seen any specific inflationary-based contingencies or escalations that we are expecting. But we do – the contingency is there. It’s almost to be spent, if you will. We are not going to be disappointed or we are not going to make shortsighted decisions in order to protect the remaining contingency. It’s there for unseen areas of factors of cost, and that’s what we will use it for. So, we do expect to contract out the remaining scope of work for this project at that $170 million, $175 million range. But if it happened a little higher, then that’s what the contingency is there for.
Ian Gillies
That’s helpful. That’s the last thing for me. I will turn the call back over. Thank you.
Michael Garcia
You’re welcome. Thanks Ian.
Operator
And we have reached the end of the question-and-answer session. And I will turn the call back over to Michael Garcia for closing remarks.
Michael Garcia
Okay. Thank you again for your participation in our third quarter fiscal 2023 conference call and for your continued interest in Algoma Steel. We look forward to updating you on our results and progress when we report our fourth quarter and full year fiscal 2023 results this spring.
Operator
And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
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