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Railway to lose main customer if mine closes.

Railway to lose main customer if mine closes

The Algoma Central Railway may be in for a rough ride if an iron ore mine in Wawa closes and half of the line's freight dries up.

"It would put the railroad in a difficult position," said Len Savoie, president and chief executive officer of ACR.

Without the Wawa mine there would not be sufficient volume on the line to make it a viable operation, since it is just breaking even now, he said.

"The loss of half our volume would make it a losing proposition."

Savoie believes government must decide at that time whether or not the railway is a vital part of the Algoma region. If it decides the railway is vital, he said the government must then decide whether to take it over or subsidize the operation.

There have been talks with the government over the past two years on the future of the system.

The railway has become a social responsibility and it is hard for a profit-making private company to seek government subsidies to keep a money-losing operation running, explained Savoie.

"No one ever complains about massive subsidies for (government-owned) Ontario Northland every year."

A plan has been implemented by the Wawa mine's owners, Algoma Steel, which provides certainty that it will continue supplying iron ore until 1992. Production beyond that point hinges on the outcome of experiments currently being done to reduce costs and improve the competitive position of the mine.

An announcement on the future of the mine is expected in the next year.

Savoie said ACR is looking at other potential developments which could utilize the 300-mile line, which was originally built to bring raw materials to Sault Ste. Marie and finished products to the CN and CP main lines.

New markets might be developed with silica sand, which is used in glass, kalan clay and white paper, or a phosphate deposit in Kapuskasing.

In 1988 and again in 1989 the ACR sought permission from the National Transportation Agency of Canada to transfer its rail division to a wholly-owned subsidiary company which would have the railway as its sole business. It felt a separate company could more readily face the challenges and meet the needs of the community.

The action generated a number of interveners, including the rail unions, which objected to the application.

After public hearings in Sault Ste. Marie, the agency declined the application for a second time in December.

The company does not plan to pursue the matter. As stated in its annual report, "While the objective was desirable, we believe our efforts are more productively spent managing the railway."

While the rail side of the company has been stagnant for 20 years, the marine side has been growing during the same time period.

It currently has 12 self-unloaders and six bulk ships.

The company's marine division and ULS Corporation have entered into a pooling arrangement whereby ACR's six bulkers and the 10 bulkers of ULS have been pooled into a 16-vessel fleet.

The key factor behind the move was Dofasco's closure of the Sherman and Adams mines. The closures will mean about two million additional tons of iron will be carried annually on the St. Lawrence River.

Savoie said the pooled arrangement will be more efficient.

While iron ore is important, the most important cargo for ACR ships is grain. "The ore is really a back-haul for grain," Savoie explained.

In the last two years grain shipments have been poor through the Seaway, since more of the product has been moving through the west coast. Most of the major customers for grain are located in that direction.

The U.S.S.R., the major customer of grain coming through the Seaway, has been suffering from a shortage of hard currency and pays for grain by trading goods.

"There isn't that much we need from Russia," noted Savoie.

In addition, he noted that government subsidies favor the west coast, since shipments by rail are subsidized.

Also, the West hasn't had bumper crops in the past few years, meaning that the western ports can handle the shipments.

"If there is a big crop, the West couldn't handle it all," said Savoie, explaining that the Seaway would become an overflow route.

The performance of Algoma Central Properties Inc., the company's real estate subsidiary, is expected to continue its gradual improvement in operating performance during 1990.

The first phase of the State III expansion of Station Mall officially opened last August, adding 21 new stores. The second phase opened in March, adding another 24 stores.

The mall contains 456,000 square feet of leasable floor space and is the largest enclosed shopping centre in Northern Ontario.

All other properties, including the office tower, apartment buildings and a Holiday Inn building in Sault Ste. Marie are continuing to turn in satisfactory results.

After nine months of 1989 the financial results of the company compared favorably with the results for the same period of 1988.

However, during the fourth quarter the fortunes of the company changed.

Reduced operating income for the fourth quarter of 1989, only $1.5 million compared to $5 million for the same period in 1988, coupled with an increase in interest expenses of $3.4 million produced a fourth-quarter loss before extraordinary items of $1.4 million.

During the latter three months, the combination of a labor-related work stoppage by Canadian Coast Guard personnel and earlier-than-normal heavy ice conditions in the St. Lawrence Seaway brought most of the company's vessels to a virtual standstill and resulted in reduced operating income for that period.

Consolidated revenue for 1989 was $149.8 million, up 4.7 per cent from the $143.1 million reported the previous year.

Each of the company's three main operating activities attained increases.

For the marine division, a substantial increase in revenues from the self-unloader portion of the fleet more than offset a decline in bulker revenues. This was the second successive year that bulkers, which are primarily dedicated to grain, suffered low-capacity utilization because of the small quantity of Western Canadian grain shipped due to the drought of 1988.


The rail division's revenues were 4.3-per-cent more than in the previous year, primarily because of an increase in the movement of sintered iron ore to the steel mill in Sault Ste. Marie.

The opening of the expansion to the Station Mall shopping centre part way through 1989 was the main contributor to a 3.6-per-cent increase in real estate division revenue during the year.

Income before extraordinary items for the year ended Dec, 31, 1989 was $4.9 million ($1.27 per share) compared with $7.6 million ($1.97 per share) for 1988.

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Title Annotation:Focus on Sault Ste. Marie; closure of Wawa mine may shut down Algoma Central Railway
Author:Bickford, Paul
Publication:Northern Ontario Business
Date:May 1, 1990
Previous Article:International border is good news and bad news for Sault Ste. Marie.
Next Article:Airport seeking proposals to develop excess of land.

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