Rio Algom is plagued with its potash problems

Potash problems have caught up with Rio Algom Ltd. and have taken a 33% bite from the company’s bottom line in this first quarter.

And it is enough of a bite that Chairman and ceo George Albino warned the annual meeting of shareholders that this year will “not likely be another record year” in terms of sales and earnings.

Net earnings for the three months ended March 31 are $16.2 million or 36 cents per share on revenues of $363.8 million. This is a marked decrease from the $24.1 million or 55 cents per share earned in the same period of 1986 on revenues of $330.6 million.

The profit drop is mainly the result of increased losses incurred by Potash Co. of America (pca), in which Rio holds a 87.8% interest. Rio acquired pca in January 1986 and this is the first time the potash producer has had an effect, adverse or otherwise, on Rio’s bottom line.

And it really is not surprising. Potash selling prices have been weak due to excess world production and weak demand. As if this isn’t enough, pca has had other problems to contend with, namely heavy water inflow at its Saskatoon mine.

The inflow is so serious — currently about 5,000 gallons per minuute– that pca decided “it had no alternative but to vacate the underground workings and save the two mine shafts,” said Mr Albino. Production should restart, possibly in 1988, says Mr Albino, “if studies now under way determine that this is feasible.”

At press-time (April 29) shares of pca were halted from trading on the Toronto Stock Exchange at $8 pending a news announcement from the company. Mr Albino would not comment what that announcement was or when it would be coming down, except to say it would be soon.

pca posted its own net loss for 1986 of $3.9 million or 64 cents per share compared to restated net earnings, before extraordinary charge, of $3.4 million or 4 cents per share in 1985.

One bright side to pca is its Sussex, N.B. operation which reached commerical production last November. Full production is expected to be achieved at Sussex in this year’s third quarter says Mr Albino.

The closure of the Saskatoon potash mine was one disappointment faced by Rio this past year. Another was the withdrawal from its East Kemptville tin project (N.M., Nov 24, 1986). The project is still managed by Rio on behalf of the East Kemptville Tin Corp., which is owned by the banking group that provided finanacing for the project.

Mr Albino says Rio receives a “very small royalty” in return for managing the project, but would not divulge the amount of money received.

Looking at Rio’s other operations, Mr Albino notes that uranium earnings were lower in this first quarter primarily due to the previously announced reduction in deliveries os that uranium earnings were lower in this first quarter primarily due to the previously announced reduction in deliveries of uranium to Ontario Hydro (N.M., May 5, 1986) and a slight decline in price partly due to the weaker U.S. dollar.

Lornex Mining Corp., 68.1% owned by Rio, had higher earnings as a result of reductions in operating costs and other expenses. See page 15 for further details in Lornex annual meeting story

In Rio’s steel manufacturing division, which includes Atlas Stainless Steels, Atlas Specialty Steels and al Tech Specialty Steels Corp., combined earnings this first quarter are ahead of last year’s comparable period, says Mr Albino. The benefits from the rationalization of primary melting facilities at Atlas Specialty Steels in Welland, Ont. and al Tech in the U.D.S.D. are beginning to be realized with a gradual progress in the improvement of unit costs and earnings.

Looking down the road, Mr Albino says Rio is continuing its search for “sound and profitable new acquisitions.” With working capital at the end of 1986 of $713.2 million, the company “could easily handle a $500 million acquisition.”

Both industrial and mining acquisitions are being considered, he says both in Canada or the U.S. A gold acquisition is a possiblity. “We’ve been looking at gold for a number of years and we are still looking,” he says.