Balance sheet woes spark Denison to sell L.O.C.

With a balance sheet hurting from the effects of the tumbling price of oil, Denison Mines is, in the words of one Bay Street analyst, “taking a step in the right direction” towards trying to mend it.

It’s an $83.4-million step and with it Denison has agreed to sell its entire 54% stake in Lake Ontario Cement, thus ending a very profitable 25-year old relationship.

“It was a price we could hardly turn down,” President John Fowler te lls The Northern Miner. But at the same time he admits “it is a sad loss.” Before taking the helm at Denison late last year Mr Fowler had been the president and CEO of Lake Ontario Cement.

The purchaser is Paris-based Societe des Ciments Francais, the No 2 cement company in France. It has agreed to make an offer to Denison and to all other shareholders of Lake Ontario Cement to purchase all the outstanding shares — some 4.3 million — at a price of $36.25 per share.

When trading in Lake Ontario Cement was halted on Oct 17 pending news of the agreement, the shares were selling at $30.50 each. In the weeks before any speculation of an agreement hit the street, the shares were trading around the $23 level, with a 52-week high and low of $27.88 and $12.50, respectively.

Societe des Ciments’ offer, worth a total of $155.8 million, is expected to be made on or before Friday, Oct 31, and will be subject to the approval of Investment Canada. Battered by oil prices

Denison has agreed to accept the offer when made. In the past year this company has seen its profit and cash flow drop dramatically. Indeed in fiscal 1985 the company posted a net loss of $157.9 million or $4.55 per share, its first such loss since incorporation in 1960. That loss, however, reflected a $240.8 million write off of its entire investment in Quintette Coal. Without the write off, which was taken at the insistence of the company’s auditors, Denison would have had 1985 earnings of $82.8 million.

The company logged another first when, after 27 years of continuous dividend payout, it did not declare a dividend on its common stock in this year’s second and third quarters. And as oil and gas operations provide Denison with approximately 60% of its operating profit, slashed oil prices were directly to blame. The average price Denison received for crude oil for the first half of this year was $14.12(US) per bbl, about 45% below the average price received during all of 1985. Oil prices have since moved up slightly and now stand around the $15-per- bbl level.

Whether the fourth quarter dividend will be paid out will be decided at an upcoming director’s meeting, says Mr Fowler.

Earnings are still taking a beating in the company’s latest 9-month statement. For the period ended Sept 30, net earnings of $14.9 million were posted on revenues of $512.3 million, down considerably from the $50.7 million netted on revenues of $558.3 million in the same period last year.

Cash flow from operations during the first three quarters of this year are also down. They amount to $104.2 million compared with $152.8 milllion a year earlier.

And after providing for preferred share dividends, both the class A and B participating (common) shares are in the red. These class A and B shares each suffered a loss of 17 cents per share compared with net earnings of 75 cents per participating share for the same period in 1985. Other commodities depressed

It’s not only lower oil prices which are constricting Denison’s profit and cash flow. Just about all the other commodities Denison produces — uranium, coal, potash — are dogged by depressed prices, notes Walwyn Stodgell Cochran Murray analyst James Perrone.

But at the same time there are positives, points out Mr Fowler. Production at the new Denison- Potacan potash mine in New Brunswick is building up to design levels he says and adds all the production has been sold. Though production at the Elliot Lake, Ont., uranium operation is “pretty flat,” the president says, it is on budget. Too, the yttrium plant project, also in Elliot Lake, was completed on budget this past quarter.

Mr Fowler says the $84.3 million realized from the Lake Ontario Cement sale will go to reduce Denison’s long-term debt which stood at $403.9 million at the end of Sept 30 and will also help meet other existing committments, notably the construction of pipeline and field facilities at its Meleiha oil project in Egypt where production is scheduled to start in this year’s final quarter at an initial rate of about 15,000 barrels of oil per day. Production will be gradually increased to about 25,000 bbl per day during 1987. Following example of others

By selling this subsidiary, Denison is taking a page from the book of many other companies which have sold assets to help ease debt problems. For example, Falconbridge has been selling off several of its assets over the past year, Corporation Falconbridge Copper, being the latest. And as witnessed by Canadian Pacific’s sale to Teck of Cominco, which had been in the CP fold for over 80 years, longevity of relationship nor sentimentality is a barrier when it comes to shaping up the balance sheet.

Lake Ontario Cement has been in the Denison fold since 1961 and last year it realized a record profit of $12.2 million, almost double that of its 1984 earnings of $6.3 million.

Mr Fowler says Denison is looking at the long-term strategy. “We are in the energy business,” he explains and adds that its subsidiary Lake Ontario Cement, a producer of cement and concrete products, is not specifically in that business. When asked whether other of Denison’s assets will now appear on the selling block, Mr Fowler replied there are no plans.

The new owner of Lake Ontario Cement has been looking for a Canadian acquisition for some time, says John T. Evans, Societe des Ciment Francais’ legal counsel in Canada. During the past eight years, this Paris-based company has made four other acquisitions in the U.S., he says. And indeed, 40% of its profit of $53 million posted at the end of Dec 31, 1985, on revenues of $1.156 billion came from North America.

Societe des Ciments has no plans at this time to make any changes in Lake Ontario Cement and business will be as usual, says Mr Evans.