Noranda CEO Derek Pannell says the shutdown could be completed before the end of the first quarter, and would last at least a year — possibly longer if magnesium prices do not improve.
As a result of shutdown costs, Noranda will also take a $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 says his company would consider offers for Magnola, especially from its joint-venture partner, provincially owned Socit gnrale de financement du Qubec (SGF), but that it does not plan on selling any further assets to increase its cash flow.
In the meantime, Noranda and SGF are considering 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 specialized alloys. These considerations are based on growing, low-cost production of magnesium in China. Chinese producers, which account for more than half the world’s supply of the metal, are selling below Western cash production costs and depressing prices.
“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,” says Pannell.
Magnola’s closure comes as no surprise, as the over-budget operation has lagged well behind schedule from the get-go. Originally, startup was slated for the first quarter of 2001; that was later pushed to the fourth quarter of 2002. Late last year, Noranda said it expected commercial production to begin in the first quarter of 2003.
The latest delay was the result of a 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 of last year, 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.
Meanwhile, Noranda has received a commitment from
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 per share for 2003.
Says Brascan CEO Bruce Flatt: “The easy route would have been to carry on with our investment as it exists today. However, our support allows Noranda to build from strength on its solid base in nickel, copper, aluminum and zinc.”
Smelter woes
Adding to Noranda’s misery, a recent fire interrupted silver operations at the Brunswick lead smelter in Belledune, N.B.
The fire occurred in the silver refinery and did not affect the lead operation. Investigators have yet to determine the cause.
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 8-month seasonal basis, beginning in July 2003. The move will reduce annual lead production by 22%.
Also, the smelter will cease 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 maintenance crew will remain.
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 oz. (down from 12 million oz.). Overall costs are forecast to drop by 10%.
The fire coincides with 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, sub-contracting and health-and-safety guarantees, is nowhere in sight.
For 2002, Horne was expected to produce 148,000 tonnes of anode copper, down from an earlier estimate of 186,000 tonnes.
Noranda recently confirmed reports it has been looking at boosting “synergies” at its Ontario and Quebec operations and those of its 59%-owned subsidiary,
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 May. Three hundred jobs were lost at the operation, which is in Murdochville, and residents have responded by launching a $15-million lawsuit against Noranda and the Quebec government. The residents claim 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 has already offered around $15 million worth of compensation, including premiums and early retirement packages. The company says it also offered residents 65 on the dollar for their houses before the mine closed.
After slipping $1.10 in early trading in Toronto on Jan. 28, Noranda’s shares recovered slightly and were trading 44 lower at $14.52 late in the afternoon. Brascan shares were off 23 at $31.40.
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