Noranda to idle troubled Magnola

Noranda (NRD-T) reports that it will temporarily shut down its 80%-owned Magnola magnesium plant in Danville, Que., and take an after-tax charge of $630 million against fourth-quarter earnings.

The move will affect 380 workers.

Noranda’s CEO, Derek Pannell, said “The shutdown could be completed before the end of the first quarter, and would last for at least one year but could be longer if magnesium prices do not improve.”

As a result of shutdown costs, Noranda will also take a further $28-million after-tax charge in 2003. In the end, the company’s magnesium business will have a book value of $300 million. Noranda figures its plan will improve operating results and cash flow by around $100 million a year.

Pannell told a conference call on Jan. 28 that his company would consider offers for Magnola, especially from its partner, Quebec government-owned Socit gnrale de financement du Qubec (SGF), but it not does plan on selling any assets to further increase its cash flow.

In the meantime, Noranda and SGF, which owns the remaining 20% of Magnola, are considering the possibility of keeping the operation’s cast-house section running on purchased metal and expanding Magnola’s presence in the magnesium alloy market with the introduction of new specialized alloys.

Noranda cites growing, low-cost Chinese magnesium production for its decision. The company says, Chinese producers, which are providing more than 50% of world supply, are selling below Western cash production costs and depressing prices.

Says Pannell: “”on the basis of the current price and our expectations of future trends, both for pure magnesium and alloys, we have come to the conclusion that continuing to operate the plant in its present form is uneconomic and the wrong decision for the company.”

Magnola’s closure comes as little surprise. The over-budget operation has lagged well behind schedule from the get-go. Originally, start up was slated for the first quarter of 2001. That was later pushed to the fourth quarter of 2002, and late last year, Noranda said it expected commercial production to begin in the first quarter of 2003.

The latest delay was the result of an electrolyte leak in one of Magnola’s 24 electrolytic cells, some of which were damaged. Noranda also reported continued blockages in the magnesium chloride transport system.

In late November, Noranda reported that 23 of Magnola’s 24 electrolytic cells were running at 70% of capacity, and the company lowered its forecast of full-year 2002 magnesium production to 25,000 tonnes from 55,000 tonnes. The plant, the first of its kind, employs proprietary technology to extract magnesium from serpentine tailings.

During the third quarter of 2002, Magnola produced 7,168 tonnes magnesium. In all of 2001, the operation cranked out 9,339 tonnes of pure magnesium and magnesium alloy.

At last count, the project’s capital cost was expected to hit $1.1 billion in total, whereas the original estimate was $733 million.

Noranda also announced that it has received a commitment from Brascan (BNN.a-T) to buy about $300 million worth of a new series of preferred shares with a dividend rate of 8%. Noranda will redeem the shares from the net proceeds of any future public equity offering.

Brascan, which has a 40% stake in Noranda, will take a $225-million portion of Noranda’s writedown. Brascan confirmed previous cash flow guidance of $3.75 per share for 2002 and $4.25 a share for 2003.

Brascan CEO, Bruce Flatt, said in a separate statement, “The easy route would have been to carry on with our investment as it exists today. Our support, however, allows Noranda to build from strength on its solid base in nickel, copper, aluminum and zinc.”

Smelter woes

Adding to Noranda’s misery, a fire on Jan. 25 put a stop to silver operations at Noranda’s Brunswick lead smelter in Belledune, New Brunswick.

The fire, which was contained to the silver refinery did not impact on the lead operation. The smelter’s manager, Thompson Hickey, said the cause of the fire is not yet known.

Late last year, Noranda announced that thanks to low treatment charges and the generally weak forecast for lead, it would shift the smelter to an eight-month seasonal basis, shutting down for four months each year, beginning in July 2003. The move will reduce annual lead production by 22%.

The smelter will also stop custom smelting third-party concentrates in 2003, but will continue to treat lead concentrate from Noranda’s Brunswick mine and external sulphate residues.

Noranda plans to trim the operation’s current staff of 470 people by about 15% through attrition. During shutdown, staff and hourly employees will be laid off; a skeleton crew will remain to handle care and maintenance.

In the end, annual lead production is pegged at 78,000 tonnes (currently 100,000 tonnes) and silver production will be more than halved to 5 million ounces (down from 12 million oz.) Overall costs are forecast to drop by 10%.

The fire at Brunswick comes amid a 7-month-long strike at the company’s Horne copper smelter in Rouyn-Noranda, Que. The smelter has been operating at 70% capacity since June, when 510 unionized employees walked off the job. An end to the strike, which hinges on job security, subcontracting, as well as health and security at work, is nowhere in sight.

Horne’s full-year 2002 anode copper production is forecast at 148,000 tonnes, down from an earlier estimate of 186,000 tonnes.

Noranda recently confirmed reports that it has been looking at maximizing “synergies” at its Ontario and Quebec operations and those of its 59%-owned subsidiary Falconbridge (FL-T). Horne is poised to lose significant concentrate feed as several mines in the Abitibi region are to close over the next three years. No decision has yet been reached, but Noranda points out that it has never threatened to close Horne, though changes are required to ensure the smelter’s viability.

The strike at Horne has also taken a bite out of copper cathode production at Noranda’s CCR refinery, outside Montreal. CCR’s output for 2002 had been revised down to 248,000 tonnes since the strike began. Capacity in 2001 was 360,000 tonnes.

Elsewhere in Quebec, Noranda put a padlock on its 46-year-old Gasp copper smelter in Murdochville, Quebec last May. Three hundred jobs were lost. Residents have since launched a $15-million lawsuit against Noranda and the Quebec government. The residents claim that Noranda lured them to the town and encouraged them to buy houses. The 156-member group holds the government partly responsible for the smelter’s closure.

Noranda said it already offered around $15 million worth of compensation, including premiums and early retirement packages. The company also said it offered residents 65 on the dollar for their houses before the mine closed.

After slipping $1.10 in early trade in Toronto on Jan.28, Noranda’s shares recovered slightly trading 44 lower at $14.52 late in the afternoon. Brascan shares were off 23 at $31.40.