Noranda earnings to drop in 1991

Toronto-based Noranda (TSE) foresees lower earnings and cash flows in its four operating divisions this year unless there are unexpected increases in commodity prices or a drop in the value of the Canadian dollar. Although Noranda has budgeted $140 million for mineral exploration in 1991, the same amount as last year, the resource giant is attempting to conserve cash and stop long-term debt from increasing.

As a result, capital spending is expected to drop by $400 million from last year’s $1.3-billion level and investments will be deferred where appropriate, according to Noranda’s 1990 annual report to shareholders.

Because of a slump in the forest products industry and lower metal prices, Noranda’s net earnings dropped to $120 million or 36 cents per share in 1990 from $442 million or $2.19 a share the previous year.

Although revenues were up slightly in 1990 to $9.5 billion from $9.3 billion a year ago, lower earnings in 1990 reduced cash flow from operations to $983 million from $1.3 billion in 1989.

Even if optimists are correct and Canada emerges from the current recession later this year, 1991 is not expected to be a good year for Noranda.

The demand for products within its profitable mineral division, for example, is expected to weaken and a strategic analysis now under way may lead to the sale of assets.

Much of this activity is geared to stopping Noranda’s debt load from climbing any higher. As long-term debt edged up to $4.4 billion in 1990 from $3.8 billion the previous year, Noranda was forced to pay out $493 million in total interest charges.

However, the company claims that a “historically high” consolidated debt to equity ratio of 0.62-to-1 is “manageable and not unexpected given expenditures over the past two years and present difficulties in the business climate.” Any cash shortfall after capital expenditures and dividends is expected to be financed by increased borrowing under existing lines of credit and asset sales, shareholders were told.

On Dec. 31, Noranda’s consolidated lines of credit exceeded $4.7 billion, of which $2.4 billion was drawn and $2.3 billion was available.

The company also plans to increase its borrowing capacity in 1991 through a combination of private and bank financings.

Meanwhile, the bright light on Noranda’s horizon was its minerals division which reported earnings of $217 million in 1990, up from $150 million in 1989. Noranda attributed the increase to the acquisition in 1989 of a 50% stake in.

Falconbridge, the free world’s second largest nickel producer.

Noranda spent $140 million last year on exploration and with projects like the Lynne base metal property in Wisconsin and Harker-Holloway gold property in Ontario in its portfolio, the company says its mining prospects have never been better. This year grassroots expenditures will exceed $100 million at 490 properties, while capital expenditures will decline by $100 million from the $427 million spent in 1990.

As the demand for Noranda Minerals’ products is expected to weaken this year, the company has sold forward 25,000 tonnes copper for an average of US$1.11 per lb. At year-end, 320,000 oz. gold and two million ounces silver had also been sold forward over five years at average prices of US$457 and US$7.10 per oz. respectively.

Noranda’s 190.3 million issued common shares were trading recently at $17.63 in a 52-week range of $22.88 and $14.13.