Debt costs squeeze Noranda – Hemlo may go on the block

Toronto-based Noranda (TSE) may begin selling off core assets including Hemlo Gold Mines (TSE) if cost-cutting measures fail to contain the company’s $3.9-billion long-term debt. Senior executives at the resource giant’s four operating groups are already being ordered to reduce spending in 1991 as part of the debt-control process and analysts believe tougher steps could follow.

As indicated by heavy losses within Noranda’s forestry division, the company is particulary sensitive to high interest rates and a strong dollar at have sent the Canadian economy into a recession.

In order to prevent the company’s long-term debt from climbing any higher, group executives are being told to “defer some longer-term projects, and conserve cash,” said Graeme Coxon, Noranda’s manager of financial analysis and planning.

“We want to trim capital spending from $1.4 billion in 1990 to the point where the debt stays steady,” said Coxon who claimed that final figures are still being worked out.

Because of Noranda’s heavy emphasis on natural resources and manufacturing, every 1% fluctuation in interest rates means a $20-million change in net earnings. Each 1 cents move in the dollar adds or subtracts $23 million to Noranda earnings.

News that Noranda had paid out $359 million by Sept. 30 just to service its debt has sparked speculation on Toronto’s Bay Street that the company may consider selling core assets.

Brokers say the cash-strapped Bronfman family that controls Noranda through Brascade Resources would be tempted by a $15-per-share offer for 50.8% owned Hemlo Gold.

While Hemlo Gold’s rich, low- cost Golden Giant gold mine at Hemlo, Ont., is on target to produce 440,000 oz. this year, the company’s limited growth potential has driven the share price down to $9.88.

Rumors regarding the possible sale of Hemlo Gold to South Africa- backed Minorco have been fuelled by speculation that Hemlo President John Harvey will announce his resignation in the near future. Harvey was unavailable when the The Northern Miner called his office.

Ernest Nutter, an analyst at Dean Witter Reynolds (Canada) Inc. in Toronto, says such a sale would make sense because Noranda could raise “an awful lot of money” by selling its 44.4 million Hemlo Gold shares and still remain in the gold business. (Of the 882,000 oz. gold produced last year by Noranda, almost 350,000 oz. were extracted as a byproduct of other metals.)

Although Hemlo Gold’s 38% stake in Central Crude (TSE) also gives the Noranda affiliate exposure to two of the most promising gold projects in eastern Canada, Central Crude will have a tough time making an impact on the bottom line at Noranda, says Nutter.

But even though a current debt to equity ratio of 0.57-to-1 is at the upper end of what Noranda considers a comfortable level, Coxon indicated that core assets won’t be offered for sale unless the economic situation deteriorates significantly.

“Instead, the operating groups are being encouraged to conserve cash,” he said.

While Noranda Minerals was the most profitable Noranda division during the first nine months of this year with earnings of $187 million, it will be expected to bare its share of capital spending reductions.

Engineers within the minerals division have been asked to present a list of projects that could be cut back, says a Noranda source who asked not to be identified. The Freewest Resources (TSE) and Moss Lake projects in Ontario should be unaffected by any budget cuts, the official said. But Noranda may cut back on development of the Montanore project near Libby, Mont., where Noranda and partner Montana Reserves are spending $25 million to drive an 18,000-ft. adit toward a deposit estimated to contain 142 million tons of grade 2.10 oz. silver per ton and 0.78% copper.

Meanwhile, as long as there is no further deterioration in world metal markets, Coxon expects Noranda to report per-share earnings this year of 60-80 cents. That compares with $2.19 per share in 1989. Noranda’s 187.2 million issued common shares traded recently at $16.25 in a 52-week range of $14.13-24.50.