STELCO INC. ANNUAL INFORMATION FORM

Transcription

1 STELCO INC. ANNUAL INFORMATION FORM March 30, 2007

2 TABLE OF CONTENTS 1. CORPORATE STRUCTURE GENERAL DEVELOPMENT OF THE BUSINESS CCAA Filing Disposition of Non-Core Assets and Subsidiaries Emergence from CCAA DESCRIPTION OF THE BUSINESS Integrated Steelmaking Facilities Steel Processing Iron Ore Interests Research, Technology, and Product Development Economic Dependence Competitive Conditions Environmental, Health and Safety and Human Resource Policies Foreign Operations Risk Factors DIVIDENDS DESCRIPTION OF CAPITAL STRUCTURE MARKET FOR SECURITIES DIRECTORS AND OFFICERS AUDIT COMMITTEE Composition of the Audit Committee External Auditor Service Fees LEGAL PROCEEDINGS INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS TRANSFER AGENTS AND REGISTRARS MATERIAL CONTRACTS INTERESTS OF SIGNIFICANT EXPERTS ADDITIONAL INFORMATION...25 APPENDIX A AUDIT COMMITTEE CHARTER

3 ANNUAL INFORMATION FORM This annual information form (this Annual Information Form ) of Stelco Inc. ( Stelco ) contains forwardlooking information that is based on Stelco s expectations, estimates and projections as of the date of this Annual Information Form. This forward-looking information includes, among other things, factors relating to the business, financial position, operations and prospects of Stelco, including: Stelco s strategies and plans to reduce costs and the anticipated outcome of such strategies and plans; anticipated productivity levels and profitability; labour matters related to Stelco s predominantly unionized workforce; pension matters; consolidation in the steel industry; Stelco s energy and raw material costs and the availability of such materials; the volatility of selling prices for steel; international trade matters, including steel imports into Canada; employee matters, including staffing levels, the retention of the skills and knowledge of Stelco s employees and the ability to attract and retain new employees; changes to environmental laws and regulations concerned with, among other things, emissions into the air, discharges to water or land, noise control and the generation, handling, storage, transportation and disposal of toxic substances; new technological developments and Stelco s ability to make capital expenditures to maintain and enhance its technological ability; development of new products; planned capital expenditures; and currency fluctuations in the US dollar, steel pricing and costs. Often, but not always, forward-looking information can be identified by the use of words and phrases such as plans, expects or does not expect, is expected, budget, scheduled, estimates, forecasts, intends, anticipates or does not anticipate, or believes, or variations of such words and phrases or states that certain actions, events or results may, could, would, might or will be taken, occur or be achieved. Forward-looking information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Stelco to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. Actual results, performance and achievements are likely to differ, and may differ materially, from those expressed or implied by the forward-looking information contained herein. Such forward-looking information is based on a number of assumptions which may prove to be incorrect, including, but not limited to: exchange rates, energy and other anticipated and unanticipated costs; pension and other benefit contributions and expenses; the supply and demand for, deliveries of, and the level and volatility of prices of steel and raw materials; the continued availability of financing on appropriate terms; market competition; the impact on Stelco of various environmental regulations and initiatives; and Stelco s ongoing relations with its employees and staffing levels. While Stelco anticipates that subsequent events and developments may cause Stelco s views to change, Stelco specifically disclaims any obligation to update this forward-looking information. This forwardlooking information should not be relied upon as representing Stelco s views as of any date subsequent to the date of this Annual Information Form. 1. CORPORATE STRUCTURE Stelco Inc. ( Stelco or the Corporation ) is a corporation amalgamated and existing under the Canada Business Corporations Act (the CBCA ). Its registered and principal office is located at 386 Wilcox Street, Hamilton, Ontario, Canada L8N 3T1. Stelco came into existence as The Steel Company of Canada, Limited in The Corporation was continued under the CBCA by certificate of continuance dated June 27, In connection with the emergence of Stelco from protection under the Companies Creditors Arrangement Act on March 31, 2006 (see General Development of the Business CCAA Filing ), on March 31, 2006 Stelco filed articles of reorganization under the CBCA. Pursuant to the articles of reorganization, each former Series A and B voting common share of Stelco was exchanged for of a new redeemable share. The redeemable shares were then redeemed and cancelled on March 31, 2006 for nil consideration. The articles of reorganization also changed the authorized share capital of the Corporation to consist of an unlimited number of preferred shares, issuable in series, an unlimited number of common shares and an unlimited number of redeemable shares (see Description of Capital Structure ), changed the number of directors of the Corporation to nine and provided that directors of the Corporation will be elected from time to time by cumulative voting. Also on March 31, 2006, articles of arrangement were filed under the CBCA. The articles of arrangement and the attached plan of arrangement provided for the reorganization of Stelco s business, with specific assets and liabilities being transferred into nine separate limited partnerships. Upon implementation of this reorganization, Stelco became the parent company and limited partner of these limited partnerships, with the general partner of each limited partnership being a wholly owned subsidiary of Stelco. On June 23, 2006, articles of amendment were filed under the CBCA to increase the number of directors of the Corporation to 10 directors. STELCO INC ANNUAL INFORMATION FORM 1

4 The structure of Stelco and its principal subsidiaries and affiliated entities is set forth in the chart below. In this Annual Information Form, the terms Stelco and the Corporation include the subsidiaries and affiliated entities of Stelco Inc., where appropriate. STELCO INC ANNUAL INFORMATION FORM 2

5 2. GENERAL DEVELOPMENT OF THE BUSINESS 2.1 CCAA Filing In early 2004, after a thorough financial and strategic review, Stelco concluded that it faced a serious viability issue. The Corporation had incurred significant operating and cash losses in 2003 and believed that it would have exhausted available sources of liquidity before the end of 2004 if it did not obtain legal protection and other benefits provided by a Court-supervised restructuring process. Accordingly, on January 29, 2004, Stelco and certain related entities filed for protection under the Companies Creditors Arrangement Act (the CCAA ) and obtained an order (the Initial Order ) from the Ontario Superior Court of Justice granting it creditor protection. On the same date, Stelco made a concurrent petition for recognition of the Initial Order and ancillary relief under Section 304 of the U.S. Bankruptcy Code. The Canadian proceedings included Stelco and its wholly owned subsidiaries, Stelpipe Ltd. ( Stelpipe ), CHT Steel Company Inc. ( CHT Steel ), Welland Pipe Ltd. ( Welland Pipe ), and Stelwire Ltd. ( Stelwire ), which were collectively referred to as the Applicants. The U.S. proceedings included Stelco, Stelpipe, and Stelwire. The Corporation s other subsidiaries and joint ventures were not included in the proceedings. 2.2 Disposition of Non-Core Assets and Subsidiaries Non-Core Assets Sold As part of the Corporation s overall effort to restructure operations, simplify processes and rationalize non-core resources as part of its CCAA restructuring, a number of assets idled prior to or during CCAA were sold, including: (i) (ii) (iii) (iv) (v) CHT Steel The Corporation announced the closure of CHT Steel, a wholly owned subsidiary located in Richmond Hill, Ontario, in the first quarter of CHT Steel processed plate sourced from the Stelco Hamilton plate mill. The property, plant and equipment were sold in several transactions during 2004 for net proceeds of $4 million. Stelpipe 16 Pipe Mill Stelpipe s 16 pipe mill assets, which had been idled since 1998, were sold during the fourth quarter of 2004 for net proceeds of $1 million. Stelco Hamilton Plate Mill The plate mill equipment of The Stelco Plate Company Ltd. was idled during the fourth quarter of 2003 and sold during the second quarter of 2005 for net proceeds of $23 million. Stelco Hamilton Tin Mill Stelco s tin mill assets were idled in Certain of these assets were sold for net proceeds of $1 million during the fourth quarter of Stelpipe Assets Stelpipe is a wholly owned subsidiary of Stelco that manufactured a number of pipe and tubular products. The Corporation sold substantially all of Stelpipe s assets to Lakeside Steel Corporation, a wholly owned subsidiary of Romspen Investment Corporation in the fourth quarter of The amount of the final purchase price is subject to a dispute with the purchaser relating to assumed liabilities and working capital amounts. The dispute is expected to be submitted to an arbitration process. (vi) Stelco Hamilton Rod Mill Stelco s No. 2 rod mill was closed in the third quarter of The property plant and equipment were sold in the fourth quarter of 2006 for net proceeds of $18 million. Non-Core Subsidiaries Sold All the businesses that comprised Stelco s manufactured products and mini-mill segments were determined to be non-core businesses upon the conclusion of a strategic review completed in 2004 and were sold during various transactions while Stelco was under CCAA protection. (i) Welland Pipe The operations of this wholly owned subsidiary of Stelco, which manufactured large-diameter pipe products, were permanently closed in the first quarter of The principal STELCO INC ANNUAL INFORMATION FORM 3

6 (ii) (iii) assets of Welland Pipe were two pipe mills, a spiral weld and U and O pipe mill. These mills were sold in separate transactions during 2004 and 2005 for net proceeds of $10 million. Camrose Pipe Company Partnership Camrose Pipe Company Partnership was a partnership which manufactured small and large diameter pipe. The Corporation held a 40% interest in this partnership. The Corporation sold its interest in this partnership to Canadian National Steel Corporation in the second quarter of 2005 for net proceeds of $22 million. AltaSteel Ltd. AltaSteel Ltd. was a wholly owned subsidiary of Stelco that produced grinding rod, merchant quality and special quality bars, and ballstock. The Corporation sold the shares of AltaSteel, which included its 50% investment in both MOLY-COP Canada and GenAlta Recycling Inc., to Moly Cop Steel Inc., an affiliate of Scaw International Sarl., in the first quarter of 2006 for net proceeds of $78 million. (iv) Norambar Inc. Norambar Inc. was a wholly owned subsidiary of Stelco that manufactured billets, automotive leaf spring, flat bars, rebar, merchant quality and special quality bars, and railway related products. Stelwire Ltd. Stelwire was a wholly owned subsidiary of Stelco that was one of North America s largest producers of steel wire and wire products. Stelfil Ltée Stelfil Ltée was a wholly owned subsidiary of Stelco that produced wire and wire products. The Corporation sold the shares of these subsidiaries to Mittal Canada Inc. during the first quarter of 2006 for net proceeds of $31 million. Effective December 30, 2006, Stelpipe, Welland, CHT Steel and Stelcam Holdings Inc., the latter of which formerly held the Corporation s interest in Camrose Pipe Company Partnership, were wound up into Stelco Inc. 2.3 Emergence from CCAA At the end of the day on March 31, 2006, the Applicants implemented the Third Amended and Restated Plan of Arrangement and Reorganization (the CCAA Plan ), as approved by the Ontario Superior Court of Justice on January 20, 2006, and emerged from CCAA protection. Also, on March 31, 2006, a plan of arrangement under the CBCA that involved the Corporation (the CBCA Plan ) was implemented. In accordance with the CBCA Plan, the Stelco s business was reorganized, with specific assets and liabilities being transferred into nine separate limited partnerships. Upon implementation of this reorganization, Stelco became the parent company and limited partner of these limited partnerships, with the general partner of each limited partnership being a wholly owned subsidiary of Stelco. Treatment of Stakeholders Compromised under the CCAA Plan Under the CCAA Plan, the claims of the unsecured creditors (the Affected Creditors ) were not satisfied in full by the consideration distributed under the CCAA Plan. The final accepted Affected Creditor claims of $547 million were settled in exchange for the following: (i) new secured floating rate notes ( FRN s ) in the aggregate principal amount of US$235 million; (ii) 6,364,000 new common shares of Stelco ( Common Shares ), 1,100,000 of which were prorated among all Affected Creditors and 5,264,000 of which were prorated based on amounts elected through a share election process; (iii) cash of $108,548,000; and (iv) warrants ( Warrants ) to purchase an aggregate of 1,418,500 Common Shares at an exercise price of $11.00 per Common Share for a term of seven years. As part of the CCAA reorganization, each former Series A and B voting common share of Stelco was exchanged for of a new redeemable share of the Corporation. The redeemable shares were then redeemed and cancelled on March 31, 2006 for nil consideration. STELCO INC ANNUAL INFORMATION FORM 4

7 Plan Sponsor Agreement Upon implementation of the CCAA Plan, Common Shares were issued to the Affected Creditors and to Tricap Management Limited ( Tricap ), Sunrise Partners Limited Partnership ( Sunrise ) and Appaloosa Management LP ( Appaloosa and, together with Tricap and Sunrise, the Plan Sponsors ). The Plan Sponsors acquired their equity interests for cash pursuant to a plan sponsor agreement between the Corporation and the Plan Sponsors. Pursuant to the plan sponsor agreement, the Equity Sponsors agreed to purchase an aggregate of 19,736,000 Common Shares at a price of $5.50 per Common Share for proceeds of $108,548,000. These funds were used for the cash distribution to Affected Creditors under the CCAA Plan. Pension Plan Funding Arrangements On March 31, 2006, the Corporation, the Province of Ontario and the Superintendent of Financial Services of Ontario, together with certain of the newly formed limited partnerships, entered into a pension funding agreement (the Pension Agreement ) that sets out funding requirements with respect to Stelco s four main pension plans. The purpose of the Pension Agreement is to transition the four main plans from the section 5.1 election of Regulation 909 of the Pension Benefits Act (Ontario) (the PBA ), which had exempted the four main plans from funding of the solvency deficiencies under the plans in exchange for higher pension benefit guarantee fund payments, to the general regulatory requirements of the PBA by no later than January 1, The key terms of the Pension Agreement are as follows: (i) Stelco was obligated to make an initial up-front payment of $400 million to its four main pension plans less any contributions to the plans already made in As a result, Stelco made a $382 million payment to the plans on March 31, (ii) Stelco is required to fund its four main pension plans in the following amounts in the years subsequent to December 31, 2005: (iii) (iv) Province Note Years 1 5: $65 million per year ($32.5 million in 2006), payable monthly, commencing July 1, 2006; and Years 6 10: $70 million per year, payable monthly. Stelco is required to make additional pension plan payments to fund any solvency deficiency in Stelco s four main pension plans if Stelco generates free cash flow in excess of certain minimum thresholds as set out in the Pension Agreement, subject to Stelco having more than a minimum liquidity amount. Stelco is not required to make any adjustments to its pension funding based on annual actuarial valuations up to December 31, 2015, provided that any future benefit improvements required to be funded in accordance with the PBA will be in addition to the funding payments outlined above. In accordance with the Pension Agreement, the Province of Ontario provided Stelco with $150 million on March 31, 2006 in exchange for a note payable (the Note ) and Warrants to purchase 851,100 Common Shares. The Note is unsecured and is repayable on December 31, 2015 (subject to an extension to March 31, 2016 in certain circumstances) in cash or, at the option of Stelco, by the delivery of an equivalent value in Common Shares. The Note is subject to a 75 per cent discount if the solvency deficiencies in Stelco s four main pension plans are eliminated on or before the maturity date of the Note and provided there is no event of default under the Note. The Note bears an interest rate of 1% per annum, payable semi-annually in cash or, at the option of Stelco, by delivering Common Shares. Corporate Reorganization On February 14, 2006, the Ontario Superior Court of Justice approved the reorganization of Stelco s business pursuant to the CBCA Plan. On March 31, 2006, the CBCA Plan was implemented and Stelco s business was reorganized, with specific assets and liabilities being transferred into nine separate limited partnerships: Hamilton Steel Limited Partnership, Hamilton Coke Limited Partnership, STELCO INC ANNUAL INFORMATION FORM 5

8 Hamilton Land Limited Partnership, HLE Mining Limited Partnership, HMLTN Energy Limited Partnership, Lake Erie Steel Limited Partnership, Lake Erie Coke Limited Partnership, Lake Erie Land Limited Partnership and Lake Erie Energy Limited Partnership. Upon implementation of this reorganization, Stelco became the parent company and limited partner of these limited partnerships, with the general partner of each limited partnership being a wholly owned subsidiary of Stelco. Change in Management Team Upon emergence from CCAA, the board of directors of Stelco appointed Rodney Mott as President and Chief Executive Officer of Stelco. Courtney Pratt, Stelco s former President and Chief Executive Officer, was appointed as Chairman of Stelco. Mr. Mott is a North American steel industry veteran with over 30 years of experience in the business. Prior to joining Stelco, Mr. Mott was President and Chief Executive Officer of International Steel Group Inc. until its sale to Mittal Steel Company in April He has also held senior roles in United States Steel Corporation, Nucor Corporation, Lone Star Steel Company and Pechiney Rolled Products, LLC. Upon assuming office, Mr. Mott appointed a number of officers with backgrounds at International Steel Group Inc. and Nucor Corporation to head up certain key areas of Stelco s business including: Bill McKenzie, who was appointed as Vice President, as well as General Manager of Hamilton Steel Limited Partnership; Jerome Nelson, who was appointed Vice President, Sales and Marketing; Karen Smith, who was appointed Vice President, Human Resources; and Gordon Spelich, who was appointed Vice President, Business Development and Strategic Planning. In addition, a number of other appointments were made to the management team during 2006, including: Ken Rutherford, who was appointed Chief Financial Officer; Peter Knocke, who was appointed Vice President, as well as General Manager of Lake Erie Steel Limited Partnership; Mike McQuade, who was appointed Vice President, Finance; Gary Seichter, who was appointed Vice President, Corporate Controller; and Chad Hutchison, who was appointed General Counsel and Corporate Secretary. Labour Contracts The Lake Erie Steel labour contract with Local 8782 of the United Steelworkers ( USW ) expired on July 31, The bargaining unit employees continued to work after the labour contract expired. A new labour contract was ratified on January 18, 2006 and will continue in effect until July 31, The Hamilton Steel labour contract with USW Local 1005 was set to expire on July 31, 2006, but was renewed on June 16, The new contract took effect August 1, 2006 and will expire on July 31, Operational Restructuring Stelco s focus since emerging from CCAA protection on March 31, 2006 has been on an operational restructuring which includes the following initiatives: (i) Implementation of productivity improvement initiatives which resulted in the reduction of the labour force. Through these initiatives voluntary programs were offered to both hourly and salary employees providing for their early retirement from the Corporation. A total of 280 hourly and 282 salary employees elected to participate in these plans. This action combined with normal attrition has reduced the workforce from 4,954 on March 31, 2006 to 4,243 on December 31, With an additional 192 employees whose last day worked was in January 2007, the total work force has been reduced to 4,051 as of January 31, 2007, which reduction is expected to provide an annualized wage savings of approximately $65 million. This reduction has not negatively affected productivity or the quality of products or services. STELCO INC ANNUAL INFORMATION FORM 6

9 (ii) Implementation of a new business model focused on utilizing a de-centralized approach to simplify the management of the business and eliminate wasted efforts and redundant processes. Benefits are expected to be realized in scheduling, purchasing, information systems and operations. (iii) Reducing operating costs, improving product flow and reducing inventories by simplifying material handling, reducing product offerings and minimizing outside processing programs. (iv) A significant reduction in work-in-process and finished goods inventories which offset working capital requirements from the seasonal increase in raw material volumes. (v) Optimizing capital by only selecting projects that are required to sustain operations or provide a pay back within a relatively short period of time. Stelco s annual capital plan was reduced from a projected $250 million to $150 million for (vi) Reducing general overhead and administrative costs by redefining requirements and focusing on improving processes. The major components of the operational restructuring are now complete and are expected to lead to increased volumes, revenue growth, lower costs and improved productivity. 3. DESCRIPTION OF THE BUSINESS 3.1 Integrated Steelmaking Facilities Stelco has two integrated steelmaking facilities a facility in Hamilton, Ontario and one in Nanticoke, Ontario. In 2006, Stelco s integrated steelmaking facilities produced approximately 3,630,000 tons of semi-finished steel. Coal/coke and iron ore are two basic raw materials required for the production of steel. Metallurgical coal is supplied to Stelco from outside suppliers, mainly located in West Virginia and Pennsylvania in the United States and British Columbia in Canada. Coke is manufactured in coke ovens from metallurgical coal. The Corporation manufactures approximately 85% of its coke requirements through coke ovens at each of its integrated steelmaking facilities. Approximately 90% of the Corporation s total iron ore requirements are secured by its ownership interest in mining properties (see Iron Ore Interests below). The balance of the Corporation s coke and iron ore requirements are purchased on the open market. The Corporation operations also require a substantial amount of other raw materials and energy, including scrap, limestone, air, natural gas and electricity, which are sourced from market participants through both contracts and spot purchases and is subject to availability and prices fluctuations (see - Risks Factors below). Hamilton Steel Limited Partnership Hamilton Steel Limited Partnership ( Hamilton Steel LP ), the interests in which are directly and indirectly wholly owned by Stelco, owns and operates an integrated steelmaking facility in Hamilton, Ontario ( Hamilton Steel ). Its operations are situated on approximately 900 acres, including harbour facilities. Its location on Lake Ontario provides favourable access to raw material sources in Canada and the United States via water-borne transportation. In addition, its location provides ready access via water, rail and highway transportation to steel-consuming markets in Canada and the United States. Approximately 2,800 people were employed at this location as at December 31, The hourly employees are unionized and are represented by USW Local The labour contract with USW Local 1005 was set to expire on July 31, 2006, but was renewed on June 16, The new contract took effect August 1, 2006 and will expire on July 31, Hamilton Steel has six principal areas of operations: (i) cokemaking operations, (ii) ironmaking operations (iii) steelmaking and casting operations, (iv) bloom and billet and bar mill operations, (v) hot strip rolling and pickling operations, and (vi) cold rolling and coating operations. A chart illustrating the manufacturing process at Hamilton Steel is set out below. STELCO INC ANNUAL INFORMATION FORM 7

10 Slabs Facilities used at Hamilton Steel in the production of semi-finished steel include an 83-oven coke oven battery, a pulverized coal injection facility, a blast furnace, a sinter plant, a three-vessel basic oxygen furnace shop and a ladle metallurgy/continuous casting complex with one slab caster and one combination slab/bloom caster. Annual semi-finished steelmaking capacity is 2.6 million tons. Steel slabs and blooms produced are used at Hamilton Steel in the production of sheet and bar products. In addition, slabs are shipped to Lake Erie Steel Limited Partnership s facilities for hot rolling or can be sold to third parties. Hot Rolled Slabs for flat rolled products are hot-processed through a 56-inch coilbox-equipped hot strip mill with annual capacity of 1.5 million tons or are shipped to Lake Erie Steel Limited Partnership s facilities for conversion through its 80-inch hot strip mill. A significant portion of hot rolled sheet output is further processed at the cold rolling and coating facilities at Hamilton Steel. Principal markets for hot rolled sheet are the automotive sector, pipe and tubular products manufacturers and steel service centres. Cold Rolled and Coated Hamilton Steel has a four-stand cold reduction mill with an annual capacity of 1.5 million tons. Other facilities include two pickling lines, a batch annealing facility, two temper mills and two hot-dipped galvanizing lines. Hamilton Steel also provides management and operating services to the Z-Line Company, a hot-dipped galvanizing/galvannealing joint venture (see Steel Processing Z-Line Company below). Hamilton Steel is a supplier of cold rolled and coated sheet products to the North American market. Coated sheet products include galvanized and prepainted sheet. Prepainted sheet is produced at Baycoat Limited Partnership (see Steel Processing Baycoat Limited Partnership below). STELCO INC ANNUAL INFORMATION FORM 8

11 Principal markets for cold rolled and coated products in North America are the automotive, construction, appliance and steel service centre sectors. Bar Cast blooms for bar products are hot-processed through a bloom and billet mill to produce billets, which are then processed through a bar mill. The annual capacity of the mill is 450,000 tons. The principal market for bar products in North America is the automotive sector. Lake Erie Steel Limited Partnership Lake Erie Steel Limited Partnership ( Lake Erie Steel LP ), the interests in which are directly and indirectly wholly owned by Stelco, owns and operates an integrated steelmaking facility in Nanticoke, Ontario ( Lake Erie Steel ) which was commissioned in stages from 1980 to It is situated on 6,600 acres on the north shore of Lake Erie, approximately 65 kilometres from Hamilton, in a predominantly rural location. Included in this acreage is a 2,500-acre industrial park and a woodlot preserve which forms a buffer zone on the north side of this facility. Its location provides favourable access to raw material sources via water-borne transportation. Its location also provides ready access via highway transportation to steel-consuming markets in Canada and the United States. At December 31, 2006 Lake Erie Steel employed approximately 1,300 people. The hourly employees are unionized and are represented by USW Local A new labour contract with USW Local 8782 was ratified on January 18, 2006 and will continue in effect until July 31, Lake Erie Steel has four principal areas of operations: (i) cokemaking operations, (ii) ironmaking operations (iii) steelmaking and casting operations, and (iv) hot strip rolling operations. A chart illustrating the manufacturing process at Lake Erie Steel is set out below. Slabs Primary production facilities at Lake Erie Steel include a 45-oven coke oven battery, a blast furnace, a two-vessel basic oxygen furnace shop, a vacuum degasser, a ladle trim station and a STELCO INC ANNUAL INFORMATION FORM 9

12 twin-strand slab caster. Annual semi-finished steelmaking capability is 2.6 million tons, all in the form of slabs. Hot Rolled Slabs sourced from both Lake Erie Steel and Hamilton Steel for flat rolled products are rolled on a coilbox-equipped, 80-inch hot strip mill. A number of upgrades have been installed over the past few years aimed at improving the quality and capacity of the mill, including the addition of a fourth reheat furnace, the installation of a more powerful rougher motor and the addition of a sixth finishing stand. These upgrades are expected to increase the annual capacity of this mill by this mill by 700,000 tons to an annual capacity of 3.7 million tons. Lake Erie Steel is focused on the production and sale of high-quality hot rolled sheet. Principal markets for hot rolled sheet products in North America are the automotive sector, steel service centres and pipe and tubular products manufacturers. 3.2 Steel Processing Z-Line Company Hamilton Steel LP owns 60% of the Z-Line Company, a partnership which owns and operates a galvanizing line located within Hamilton Steel s facilities. The Z-line, which has an annual capacity of 430,000 tons, is a toll coating facility that zinc coats cold rolled sheets for Hamilton Steel for a wide variety of demanding applications, primarily automotive. The remainder of the interest in Z-Line Company is owned by Metal One Canada Corporation. Baycoat Limited Partnership Hamilton Steel LP owns 50% of Baycoat Limited Partnership ( Baycoat ). Baycoat applies a variety of paint finishes to flat rolled steel coils at its facility in Hamilton, Ontario. Baycoat currently operates three coil-coating lines each equipped to coat cold rolled or galvanized substrates with a variety of exterior and interior paint systems. Upon commissioning of a recently upgraded line, Baycoat intends to close a less efficient line and operate only with two lines. Annual capacity of these two lines is expected to be approximately 280,000 tons. Baycoat s customers are its owners, Hamilton Steel LP and Dofasco Inc. The primary market for these products are the construction, manufacturing and other sectors. At December 31, 2006, Baycoat employed approximately 200 hourly and salaried personnel. D.C. Chrome Limited Hamilton Steel LP owns 50% of D.C. Chrome Limited ( D.C. Chrome ). The remaining interest in D.C. Chrome is owned by The Court Group of Companies Limited. D.C. Chrome operates a plant in Stoney Creek, Ontario which textures and chromium plates work rolls used in the cold rolling of steel at Hamilton Steel as well as for other customers and the grinding and chroming of steel shafts used in manlifts. Approximately 30 people were employed by D.C. Chrome at December 31, Stelco USA, Inc. Stelco USA, Inc. ( Stelco USA ), a wholly owned subsidiary of Stelco, is located in Troy, Michigan. Stelco USA purchases the products of Stelco s businesses for the purposes of further processing and warehousing in the United States prior to shipment to the final customer. 3.3 Iron Ore Interests Stelco secures approximately 90% of its iron ore requirements for its integrated steelmaking facilities through its ownership interest in the following mines and related supply agreements. Tilden Mine Through its indirect ownership interest in Tilden Mining Company, LLC, Stelco owns a 15% interest in the Tilden mine which is located on the Marquette Iron Range in Michigan s Upper Peninsula, approximately five miles south of Ishpeming, Michigan. The Tilden mine has been in operation since 1974 and has an annual plant capacity of 7.8 million tons. Stelco s other partner is Cleveland-Cliffs Inc. ( Cleveland-Cliffs ), which manages the mine. Each partner takes its share of production pro rata in STELCO INC ANNUAL INFORMATION FORM 10

13 accordance with its ownership interest. Provisions in the partnership agreement allow additional or reduced production to be delivered to partners under certain circumstances. Cleveland-Cliffs owns all of the ore reserves at the Tilden mine and leases them to the Tilden Mining Company, LLC. As at December 31, 2006 approximately 700 people were employed at the Tilden mine. All bargaining unit employees are represented by the United Steelworkers of America. Railroads link the Tilden mine with Lake Michigan at the loading port of Escanaba, Michigan and with the Lake Superior loading port of Marquette, Michigan. Hibbing Mine Through its indirect ownership interest in Hibbing Taconite Company, Stelco owns a 14.7% interest in the Hibbing mine which is located in the centre of Minnesota's Mesabi Iron Range, approximately ten miles north of Hibbing, Minnesota and five miles west of Chisholm, Minnesota. The Hibbing mine has been in operation since 1976 and has an annual plant capacity of 8.2 million tons. Stelco s other partners are Cleveland-Cliffs (23%) and Mittal Steel USA (62.3%). Cleveland-Cliffs manages the mine. Each partner takes its share of production pro rata in accordance with its ownership interest. Provisions in the joint venture agreement allow additional or reduced production to be delivered to partners under certain circumstances. From the Mesabi Range, Hibbing pellets are transported by rail to a ship-loading port at Superior, Wisconsin. At December 31, 2006, there were approximately 700 employees at the Hibbing mine. All bargaining unit employees are represented by the United Steelworkers of America. Wabush Mines Stelco owns an indirect 44.6% interest in the Wabush mine and concentrator which are located in Wabush, Labrador, Canada, and a pellet plant which is located in Pointe Noire, Quebec, Canada. The Wabush mine has been in operation since 1965 and has an annual plant capacity of 6 million tons. Cleveland-Cliffs manages the mine. Cleveland-Cliffs has a 26.8% interest and Dofasco Inc. has a 28.6% interest in the mine. As at December 31, 2006, approximately 800 people were employed. All bargaining unit employees are represented by the United Steelworkers of America. At the Wabush mine, concentrates are shipped by rail to Pointe Noire where they are pelletized for shipment via vessel to Canada, the United States and other international destinations or shipped as concentrates for sinter feed to Europe. Mine Facilities Each of the foregoing mines has crushing, concentrating and pelletizing facilities. The facilities at each site are in satisfactory condition, requiring routine capital and maintenance expenditures on an ongoing basis. The Tilden, Hibbing and Wabush mines are all open pit mines. Additional pit development is underway at each mine in accordance with long-range mine plans. Drilling programs are conducted periodically for the purpose of refining guidance related to ongoing operations. Geologic models are developed for all mines to define the major ore and waste rock types. Computerized block models are then constructed that include all relevant geologic and metallurgical data. These are used to generate grade and tonnage estimates, followed by detailed mine designs. Each of the mines has a legal responsibility for site restoration and reclamation of the iron ore properties upon the conclusion of its useful life. A mine s useful life is generally measured by its depletion rate relative to its remaining economical iron ore reserves. The period over which these obligations are expected to be settled ranges from Research, Technology and Product Development Research and Development Stelco spent $3.6 million on scientific research and experimental development activities in Research activities are focussed on new product development and continuous improvement of existing products to increase productivity and product quality and reduce manufacturing cost. New product development of several advanced automotive grades of sheet steel was undertaken with a patent application being filed for one of the new advanced high strength steels. Automotive product developments were focused on dual phase and stretch-flangeable steel for both hot rolled and zinc STELCO INC ANNUAL INFORMATION FORM 11

14 coated product applications. Stelco also worked to develop more robust product and processing practices for hot rolled impact critical grades for linepipe including a new grade of X80 linepipe steel. Technology development was also focused on investigating potential alternative surface treatment systems for customers requiring products compliant with the European Union s Restriction of Hazardous Substance (RoHS) legislation. Stelco continues to support the McMaster University Steel Research Centre and was instrumental in the establishment and ongoing funding of the Stelco/NSERC Chair in Steel Product Applications. The McMaster University research program on coated steel processes and products, under the direction of Dr. J. R. McDermid, supplements Stelco s own research in this area. An integral part of this initiative is a multi-purpose coating simulator supporting specialized research on galvanizing and galvannealing of Advanced High Strength Steels required by the automotive industry. Stelco is a major supplier of hot rolled bar in coil and straights for the manufacture of helical springs. The continuing growth of our high strength micro-alloyed grade, StelRMM, as a material solution in the production of lighter weight coil springs has provided Stelco with a competitive advantage in the automotive suspension spring steel market. Stelco has implemented a new fuel injection technology at its Lake Erie Steel Blast Furnace which has resulted in savings and improved productivity. New Products Stelco s Cold Rolled & Coated Division continued to support commercialization of recently launched products including a new grade of dent-resistant bake-hardenable steel for automotive applications. Stelco's Bar Division is continuing their development work on the design of new micro-alloyed spring steel grades to satisfy more stringent automotive requirements. This new generation of micro-alloyed spring grade will provide enhanced corrosion resistance while continuing to incorporate higher operating stresses in the design of suspension components. Products and Processes Under Development To meet automotive industry demands for advanced high strength steel, Stelco is developing sheet grades and hot-form die-quench steels. Stelco is also developing stretch-flangeable hot rolled for wheel and frame applications and developing more robust product and process practices for hot rolled impact critical grades for linepipe. Stelco is a major supplier of hot rolled bar in coil form for the manufacture of helical springs. Development of new processing techniques for hot rolled bar in coil form is underway to provide improved surface quality and microstructures for cold drawn automotive helical coil spring rounds. In addition, Stelco is commissioning the hot eye surface inspection technology in both its Hamilton bloom and bar mills. At Stelco Hamilton s BOF, progress continues with the development and demonstration of Techint s Goodfellow EFSOP system for use in BOF steelmaking to improve energy efficiency and decrease greenhouse gas emissions. STELCO INC ANNUAL INFORMATION FORM 12

15 3.5 Economic Dependence A substantial portion of Stelco s business is reliant upon the automotive sector through direct sales into this sector or through indirect sales to the steel service centres that service this market sector. The following table sets out direct steel shipments from Stelco s steel-producing businesses and a percentage breakdown by principal markets: Shipments By Market Sector Consolidated Steel Shipments (thousand tons) 3,536 3,445 Automotive (1) 38% 38% Steel Service Centres Pipe & Tubular Products Construction, Manufacturing, Other Total 100% 100% (1) Excludes the portion of service centres shipments destined for automotive. 3.6 Competitive Conditions The following table sets out Stelco s total consolidated sales and a percentage breakdown by major product group over the past two years: Sales By Product Type Consolidated Net Sales ($ in millions) $ 2,504 $ 2,553 Hot Rolled Sheet 48% 45% Cold Rolled Sheet 9 11 Coated Sheet Bars 8 9 Other (1) 7 7 Total 100% 100% (1) Includes semi-finished steel sales related to slab, billets, and other materials Approximately 89% of Stelco s sales are domestic, with domestic competition coming primarily from Dofasco Inc., Algoma Steel Inc. and Mittal Canada Inc. The Canadian steel market also attracts a significant amount of material from U.S. and other global steel producers. Approximately 52% of overall Canadian steel market demand in 2006 was sourced from producers outside of Canada. Mittal Steel USA Inc., United States Steel Corporation, Nucor Corporation, AK Steel Corporation, Severstal N.A. Inc., and Republic Engineered Products are the main U.S. competitors. 3.7 Environmental, Health and Safety and Human Resource Policies Environment The Corporation s group of businesses is subject to substantial and evolving environmental laws and regulations concerning, among other things, emissions to the air, discharges to water or land, noise control, and the handling, storage, transportation, treatment, and disposal of toxic, hazardous and non-hazardous substances. These laws and regulations can involve federal, provincial, and municipal levels of government. Stelco s commitment is to being an environmentally responsible company. Our ISO registered environmental management system establishes and reviews environmental objectives and targets to: reduce air, water and waste pollution by means of practices, operating procedures and programs; comply with environmental legal requirements and our other environmental requirements; prevent pollution in a cost effective manner; and improve continually. STELCO INC ANNUAL INFORMATION FORM 13

16 Stelco regularly reviews and audits the operating practices of each business to monitor compliance with the Corporation s health and safety and environmental policies and legal requirements. The Corporation believes that future costs relating to environmental compliance can be dealt with in a manner such that they will not have a material adverse effect on the Corporation s financial position. There is always the possibility, however, that unforeseen changes, such as in the law enforcement policies of relevant government bodies, or the discovery of changed conditions on the Corporation s real property or its operations, could result in an increase in the costs of environmental compliance that could result in a material adverse effect on the Corporation s financial position. In meeting its overall environmental goals and government-imposed standards in 2006, the Corporation incurred operating costs of $62 million ($71 million in 2005) and spent $10 million on capital improvements ($3 million in 2005). Hamilton Steel has a benzene emissions reduction program underway, with spending of approximately $1 million in 2006 ($4 million in 2005) and estimated additional costs of $4 million over the next two years. Health and Safety The Corporation complies with a variety of health and safety legislation administered by provincial authorities in Ontario where its facilities are located. The Corporation does not believe that it is faced with any requirements in respect of health and safety or industrial hygiene that will have a material adverse effect on the Corporation s financial position. The health and safety of Stelco s employees are top priorities at Stelco. Stelco is committed to continued responsibility and excellence in the health and safety of its employees and in protecting and enhancing the environments of the communities where it has operating facilities. The Corporation maintains an internal health, safety, asset integrity, and risk audit system, which is carried out at the corporate level, to determine compliance with legal requirements and Stelco s corporate policies in these areas. Human Resources Discrimination and Harassment Policy The Corporation believes that the human rights of all employees must be protected so as to ensure that every person is treated with dignity and respect. It is the Corporation s position that no individual should suffer from or be exposed to discrimination or harassment at work, based upon that person s race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, handicap, age, record of criminal offences, family, marital or employment status. Harassment is a course of conduct or comment that offends or abuses a person on any of the grounds stated above, where such behaviour is known or ought reasonably to be known to be offensive and unwelcome. In order to ensure the consistent application of this policy, it is both the right and the responsibility of any employee who believes that he or she has been subjected to harassment to immediately report such concerns to the designated representative. All allegations are fully investigated in a confidential manner. The results of any investigation are made known to affected employees. Any employee who, as a result of a full investigation is determined to be in violation of the Corporation s discrimination and harassment policy may be subject to disciplinary action, up to and including discharge from employment. 3.8 Foreign Operations The Corporation has owned minority interests in iron ore producing properties in the United States for many years. These properties are an important source of raw materials for the Corporation s integrated steelmaking units. Although these properties and the operations associated with them are located in a foreign country, the Corporation believes that there are no material risks associated with them by virtue of that fact. STELCO INC ANNUAL INFORMATION FORM 14

17 3.9 Risk Factors Stelco s business is subject to a number of risk factors and uncertainties which may materially and adversely affect its business and prospects, including those listed below. Demand and Pricing The steel industry is cyclical in nature. The demand and pricing for North American steel fluctuates based on many factors, including the strength of the economies in North America, particularly the automotive sector, exchange rates and the influence of steel sourced from offshore. The Corporation cannot rely on selling prices being sustainable in the long term and believes it must take steps to lower its overall costs to compete effectively. Costs Stelco is continuing with its efforts to lower costs in order to ensure its long-term viability including productivity initiatives and the implementation of a simplified organizational structure. Stelco has identified specific cost reduction initiatives, including managed attrition and improvement in maintenance planning which is expected to reduce repairs and maintenance costs, increase throughput and reduce electrical and mechanical delays. These cost reduction initiatives, along with strategic capital spending, are essential to achieving long-term viability. There can be no assurance that cost reduction initiatives will be sufficient to sustain long-term viability. Liquidity Risks Some of the provisions contained in the Corporation s financing arrangements provide for the escalation of lending rates in certain circumstances which, if triggered, could impact the liquidity of the Corporation depending upon the amount outstanding under the particular facility. These agreements also contain provisions (along with the Corporation s long-term debt agreements) which restrict the Corporation s ability to issue additional debt. Supply and Pricing of Raw Material and Energy The Corporation s operations require substantial amounts of raw materials and energy, including coal, iron ore, coke, scrap, natural gas, electricity and other inputs. The price and availability of such raw materials and inputs are subject to market forces where the Corporation does not have ownership interests and, in some cases, to government regulations and, accordingly, are subject to change. Steel Industry Consolidation Stelco could face risks related to cost competitiveness and access to large customers as a result of the steel industry consolidation. Unplanned Repairs or Equipment Outages There can be no assurance that unplanned downtime at any of Stelco s facilities will not have a material adverse effect on Stelco. In addition, the failure of planned outages to be completed as scheduled could have a material adverse effect on Stelco. Concentration of Credit Risk There is a significant exposure of credit risk to the automotive industry as revenues are sourced from either direct or indirect sales to this segment. Although the Corporation has not had significant bad debt expenses in prior periods, deteriorating economic conditions could result in financial difficulties in the customer base that could lead to bad debts. Environmental Compliance The Corporation is subject to substantial and evolving environmental laws and regulations concerned with, among other things, emissions into the air, discharges to water or land, noise control, and the generation, handling, storage, transportation and disposal of toxic and hazardous substances. The Corporation believes that future costs relating to environmental compliance can be dealt with in a manner such that they will not have a material adverse effect on the Corporation s financial position. There is always the possibility, however, that unforeseen changes, such as in enforcement policies of relevant government bodies, or the discovery of changed conditions on the Corporation s real property or STELCO INC ANNUAL INFORMATION FORM 15