(Updates throughout, adds SGF comment, analysts' comment)
By Lesley Wroughton
TORONTO, Jan 28 (Reuters) - Noranda Inc. said on Tuesday it will close its Magnola magnesium plant in Quebec until prices improve and take a C$630 million ($410 million) fourth-quarter charge, a move that analysts called a "black eye" for the company.
Over the past year Noranda, one of the world's largest producers of zinc and nickel, has slashed production and closed low return operations as it strives to return to profitability and ease its heavy debt.
The temporary closure of Magnola, a C$1.1 billion project that began in 1998, would improve operating results and cash flow by about C$100 million in 2003, Noranda chief executive Derek Pannell told a conference call.
Pannell said the shutdown would eliminate a large negative drag on profits in 2003 and 2004 and end uncertainty about the impact of the magnesium market on Noranda.
The company said it would also boost its liquidity and reduce debt by issuing C$300 million in preferred shares to its biggest shareholder, Brascan Corp. .
Analysts said the announcement on Magnola was a "black eye for the company" but nevertheless positive news for cash flow. They questioned if Noranda could continue paying a dividend, which has long attracted investors to the company.
Pannell said on Tuesday that Noranda's commitment to paying a dividend remained unchanged.
"Noranda has been paying this dividend for years and years and a lot of investors are there because of the dividend, so the question is if you take away the dividend it essentially puts a sharp fall in the share price," said Michael Fowler, a mining analyst for Desjardins Securities.
Magnola was the company's first attempt to enter a once promising magnesium market, using its own technology to extract the lightweight metal from waste tailings and provide a full service to alloy customers, especially in the auto industry.
Magnola's recent output had reached about 60 percent of its 58,000 tonne a year capacity.
Pannell said the company had been unprepared for sweeping changes in the industry, brought on by rising low-cost production in China, which sells below the cash production costs of most Western producers and caused prices to fall.
Chinese producers supply about 50 percent of the world's magnesium, which has forced the closure of many Western plants over the past few years, he said.
"Increasing production in an already depressed and oversupplied market is not a sensible alternative. By taking the decision to stop funding (Magnola), we could immediately plug a major cash drain at Noranda," Pannell told analysts.
He said he would consider any "sensible" offers for Magnola, especially from its partner Societe generale de financement du Quebec (SGF), which owns 20 percent of the plant.
SGF, a provincial investment agency, said it was examining its options, including Noranda's proposal to operate the plant's casting-house section using purchased metal and to expand Magnola's presence in the magnesium alloy market by introducing specialized alloys.
Pannell said Noranda will help customers find alternative sources of magnesium to make Magnola's shutdown orderly.
He said the closure could be completed before the end of the first quarter and would last for at least a year, but could be longer if magnesium prices do not improve.
The C$630 million charge represents C$2.64 per share for 2002, Noranda said, adding that it expects to record a C$28 million after-tax charge in 2003 for costs incurred to shut down the plant.
The book value of its magnesium business will be C$300 million after the writedown.
Pannell said demand for magnesium could increase and the company would then review its position on Magnola.
"If prices do improve we could then consider restarting the facility, but for the time being we see a temporary shutdown for at least one year, a period which could be considerably longer if prices do not improve," he said.
Shares in Noranda closed down 41 Canadian cents at C$14.55 on the Toronto Stock Exchange on Tuesday. ($1=$1.53 Canadian)