Elliot Lake liability prompted Rio Algom sale, analysts say

When RTZ sold its 51.4% stake in Rio Algom (TSE), the British resource conglomerate said it was unloading the asset to avoid competition with other North American interests particularly Kennecott.

But a number of analysts interviewed by The Northern Miner say the competition factor was only a minor consideration in RTZ’s decision to sell 22.5 million Rio Algom shares to an underwriting team led by Gordon Capital.

They believe potential liabilities relating to the decommissioning of Rio’s Elliot Lake, Ont., uranium mines pose a much more pressing concern.

RTZ’s failure to find a single buyer for Rio Algom indicates that possible suitors may have felt the same way, says Raymond Goldie, a base metals analyst at Richardson Greenshields of Canada in Toronto.

“There may have

been a longer-term concern about the lack of clarity in the Canadian government’s environmental requirements,” he told The Northern Miner.

Last year, Rio Algom set aside $80 million to cover site restoration costs at discontinued operations. As neighbor Denison Mines (TSE) is facing debts and reclamation liabilities of $190 million for its own uranium operations at Elliot Lake, analysts expect Rio to be stuck with similar costs when its Stanleigh mine shuts down in 1996.

But the final amount will depend on the outcome of discussions between Rio Algom and the Ottawa-based Atomic Energy Control Board (AECB), a federal agency established to monitor radioactive materials in Canada.

“What matters to us is that the mine tailings are left in a state that provides the maximum safety for the folks who live in the area (near the mine),” said Hugh Spence, AECB public information chief.

“We are a regulatory authority and we are not going to be swayed by complaints over costs,” Spence added. In a telephone interview, he says any recommendations will go before the Federal Environmental Assessment Review Office (FEARO) and a public hearings panel.

Although no final decision has been reached, he said Rio Algom is leaning toward minimizing both acid generation and radiation exposure by flooding its mine tailings.

Meanwhile, any potential liabilities relating to Elliot Lake won’t affect the company in the immediate future, says base metals analyst Thomas Komlos of Levesque Beaubien Geoffrion, who is more interested in strategic direction now that Rio Algom is without a controlling shareholder.

In the short term, Komlos says Rio Algom shares should benefit from any future increases in the price of copper, which jumped to US$1.11 per lb. recently on the spot market after averaging US$1.06 per lb. in 1991.

The prediction is based on the fact that while revenues from uranium production have declined to $140.3 million in 1991 from $266.2 million in 1990, copper-molybdenum revenues have remained comparatively steady at $115.3 million. Rio’s exposure to copper will increase in 1994 when the US$290-million Cerro Colorado copper project in Chile comes into production. The project is being developed for startup in 1994 and should reach targeted capacity of 44,000 tons annually just as the Stanleigh mine is winding down.

Over the next four years, Rio is scheduled to deliver three million pounds of uranium to Ontario Hydro under long-term price contracts with the utility.