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Tough sell for Noranda

00:00 EDT Tuesday, July 29, 2003

Noranda Inc. plans to raise up to $500-million through the sale of common shares as part of a financial restructuring, but yesterday it weathered a flurry of downgrades by mining analysts in reaction to its dividend cut last Friday.

"It's going to be a tough sell," one analyst said of the proposed equity sale. Noranda's decision to slash its quarterly dividend rate to 12 cents a share from 20 cents was a surprise as most analysts were caught looking for a cyclical recovery.

Although metal prices, which have been depressed, are recovering, Noranda's problems stem from a remarkable split in the base metal mining industry, said Raymond Goldie, a mining analyst with Salman Partners. The smelter and refining business is suffering at the same time as base metals have been rising, he said. Mr. Goldie does not currently have a rating on Noranda's shares.

A lack of copper production from new mines has forced smelters and refineries to bid aggressively for mineral product to process, causing the fees they charge mineral producers to drop, he said. Recently, the Ok Tedi mine in Papua New Guinea agreed to have its copper treated in China at 3 cents (U.S.) a pound, down from a more normal rate of 20 cents a pound, he said. China is increasing its smelter capacity to use up extra hydroelectricity it has available.

The market conditions and lack of copper availability might force Noranda to close its Horne copper smelter in Quebec, Mr. Goldie said.

In its zinc business, Noranda is contractually committed to supply metal to its CE Zinc refinery in Salaberry-de-Valleyfield, Que., as part of an agreement with the Noranda Income Fund, even when it might be cheaper to process the metal elsewhere, Mr. Goldie said.

According to the latest information filed with Inc., an on-line investment information service company, there were no "buy" or "outperform" ratings on Noranda. However, there were seven "hold" ratings, four "underperform" and one "sell" ranking.

Bloomberg News, which also tracks analyst recommendations, had three "sell" or "reduce" ratings and two sector "underperforms," along with seven "sector perform," "hold" or "neutral" ratings. But there was one "buy" rating.

David Charles, a mining analyst with Griffiths McBurney & Partners, upgraded Noranda to a "buy" from a "hold" because Noranda's financial condition will be helped by the proposed share sale. He maintained his12-month price target on the shares at $14 (Canadian).

The shares of Noranda rose 28 cents yesterday on the Toronto Stock Exchange to $13.03 to give a yield of 3.7 per cent.

"I don't see a huge amount of downside," Mr. Charles said.

The average price target on the shares was $13.86 a share, according to

Brascan Corp., which owns about 40 per cent of Noranda , has agreed to acquire up to $300-million of the share issue, leaving $200-million to sell to other investors.

BMO Nesbitt Burns Inc. reduced its price target on Noranda to $12 from $14.50 a share as a result of the dividend cut. At that price, the yield on the shares should provide some price support, said Victor Lazarovici, BMO Nesbitt Burn's financial analyst. In the past, the high dividend "offset investors' concerns of weak financial results, poor asset quality and an over-leveraged balance sheet," he said.

"We do not believe that yield-oriented [retail] investors will find the shares attractive until the yield is in the 4-per-cent to 4.5-per-cent range, which implies a price of $10.67 to $12 a share," he said.

TD Securities Inc. lowered its target price yesterday to $12 from $13.

Noranda has been burdened with debt, if its preferred shares and convertible notes are accounted for as debt instead of equity. On that basis, Noranda's consolidated debt to total capitalization is closer to 60 per cent, compared with 51 per cent claimed by the company, said Canaccord Capital Corp.

Noranda said last week that it intends to borrow about $300-million (U.S.) to repay debt coming due. Between 2003 and 2005, Noranda has $2.15-billion (Canadian) in debt repayments scheduled and needs to maintain its investment-grade rating, Canaccord said.

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