September 10, 2012 / 4:33 PM / 5 years ago

Nordion suspends dividend after arbitration loss

5 Min Read

(Reuters) - Nordion Inc NDN.TO, a Canadian provider of medical isotopes, said on Monday it will suspend quarterly dividends after an arbitration panel rejected its claim for damages from its main supplier, sending its shares into a tailspin.

Nordion had hoped to compel state-owned Atomic Energy of Canada Ltd (AECL) to pay damages or to complete two new reactors that were set to replace the aging National Research Universal reactor in Chalk River, Ontario.

The new reactors, called Maple, were designed to supply Nordion with raw material for its isotopes, but they were mothballed before construction was finished. The panel rejected Nordion's claim, which was based on a 2006 supply agreement with AECL.

RBC Capital Markets analyst Douglas Miehm consequently cut his rating on Nordion shares to "underperform" from "outperform", calling the ruling "about as bad as it gets," and wrote in a note to clients that he had been expecting a decision in Nordion's favor.

"The arbitrators' decision was surprising, but the full terms of the 2006 agreement were never fully disclosed so it was always difficult to be completely confident in Nordion's case," he said.

Nordion said it would stop buying back shares after completing or cancelling its current stock repurchases.

"We are extremely disappointed with the outcome of the arbitration," said Tamra Benjamin, Nordion's vice president for public and government relations. "But regardless of that, we still have a strong business, we've got solid results, we've got good cash flow and margins."

Benjamin said Nordion would need some time to look at the ruling and consider its next steps.

The arbitration decision allows Nordion to continue a lawsuit against AECL, but could substantially reduce its C$1.6 billion ($1.6 billion) claim in that suit. Nordion may also be required to pay some of AECL's arbitration costs, which it said could be material.

In a brief, separate statement, AECL said it would review the panel's decision.

The NRU reactor in Chalk River, Ontario, supplies material that Nordion uses to produce molybdenum-99. Nordion is one of the world's leading producers of moly-99, used in medical imaging.

At issue in Nordion's dispute with AECL are the Maple reactors, which AECL built to replace Chalk River. The reactors did not work properly, and AECL shut down the project in 2008. Nordion has argued that AECL is legally required to complete the reactors.

Nordion's stock was down 37.5 percent at C$6.54 on Monday morning on the Toronto Stock Exchange. Before the ruling, the stock had risen 17.3 percent over the past three months, partly on hopes that the company would win in arbitration.

Supply Problems

Chalk River is one of the few reactors in the world that can supply the material Nordion needs to produce moly-99 at scale. But it has been operating since 1957, and while it is licensed to operate until 2016, its future beyond that is unclear.

Canada closed the facility because of safety concerns in fall of 2007 and again from May 2009 to August 2010, causing a worldwide shortage of moly-99 and encouraging many of Nordion's customers to diversify suppliers.

Nordion is still feeling the effects of the shutdowns in the form of lower prices, and its efforts to secure another supplier in Russia are still being tested. Benjamin said the company is on track to supplement supply by 2016.

Nordion has said that it expects future growth to be driven by its "targeted therapies" business, which includes TheraSphere, a liver cancer treatment. Last week it reported higher quarterly profit as revenue from that segment rose 15 percent.

The Chalk River shutdown spurred a search for alternatives, and Natural Resources Canada funded four groups of researchers in a competition to find a process to manufacture the needed isotopes without a reactor.

Nordion disclosed early in 2012 that was is in talks with one of the research groups on commercializing a new process, but characterized it as a way to supplement production, rather than replace reactors.

Editing by Frank McGurty; and Peter Galloway

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