TORONTO - Algoma Steel's shareholders would be left with nothing and an undetermined number of the troubled steelmaker's 3,900 employees would be laid off under a restructuring plan, unveiled Wednesday, that aims to cut company costs by $150 million a year.

Shares of Algoma, Canada's third-largest integrated steel producer, plummeted when it was revealed the plan, if approved, would leave current shareholders with nothing.

The steel producer's stock closed down 60 per cent at 11 cents on the Toronto Stock Exchange.

The Sault Ste. Marie, Ont., company, in bankruptcy court protection from creditors since April, said its plan gives secured bond-holders three-quarters of a restructured Algoma's shares and allows the company "to continue to operate as a viable North American steel company."

It said cost reductions will result in $150 million in cash savings next year and by the same amount in 2003.

But to achieve that goal, the restructuring would require layoffs and concessions on "wage and benefit reductions, reduced vacation, pension benefit changes and manning reductions" from the union representing the company's 3,900 workers.

At a news conference in Sault Ste. Marie, the union said the plan provides a basis for a successful plant but it wouldn't accept the proposal.

"The plan, as tabled, tilts the process too far in the direction of protecting the investments of the New York-based note-holders and away from the goal of putting Algoma Steel on a solid and secure financial footing for the future," said Doug Olthuis, area co-ordinator for the United Steelworkers of America.

Previous reports suggested the workforce would be trimmed by 800 to 1,000 people. No figures were included in the plan but the company is still discussing the possibility of layoffs with the union.

From a new collective agreement with the union, Algoma (TSE:ALG) is seeking $60 million in savings next year, $45 million in 2003 and $35 million thereafter, excluding savings from changes to pension benefits. The contract would run until July 31, 2004.

Olthuis said the union's objective was to reach a plan that involves no job cuts but he wouldn't elaborate on how the multimillion-dollar cost reductions could be achieved without layoffs.

He acknowledged, however, that the cost reductions were "close" to the range that union advisers said were needed to help Algoma stay afloat.

The union also criticized Ottawa's "apparent disinterest" in the restructuring, contrasting it with the U.S. government's establishment of loan guarantees for restructuring steel companies. Algoma said it wants Ottawa to take part in employee retraining.

Algoma's proposal is similar to the revival plan unveiled in the early 1990s for its predecessor, Algoma Steel Corp. Ltd. Aided by the Ontario government, that deal gave Algoma's employees majority ownership of the company by issuing new shares but left its major shareholder at the time - Hamilton's Dofasco Inc. - with an investment loss of hundreds of millions of dollars.

The workers' stake has dwindled below 50 per cent since then, but they would lose out if current shares are cancelled. Meanwhile, holders of the $600 million in mortgage bonds, including interest, would receive new notes valued at $150 million plus 75 per cent of the shares in the new company.

Employees would get 20 per cent of the stock this time - in exchange for concessions in a new collective agreement - and the remaining five per cent would go to unsecured creditors.

"It looks like history is just repeating itself," said one industry observer who asked not to be named, adding that the cost cuts may not go far enough.

While the plan may prevent immediate collapse, Algoma's future remains uncertain and is tied to the health of the North American economy.

Without a recovery in the industrial sector and a reduction in cheap imports that have squeezed prices and put many steelmakers in the red, Algoma - which has lost nearly $357 million since 1999 - could collapse.

The plan is also contingent on negotiations with the union and the province on the Pension Benefit Guarantee Fund. Algoma's plan to restructure retiree benefits would reduce projected pension plan costs by about $20 million a year from 2002 through 2006, the company said.

The union wants more detail from the province on its role in pension restructuring. The company plan has about 8,000 pensioners.

Hap Stephen, the company's chief restructuring officer, said more discussion is required to get approval.

"As of today, we don't have anybody in full agreement on the plan," Stephen said in an interview. "We've put the plan out there. We'll see what happens and carry on with discussions."

Asked if the bondholders were receiving too much consideration at the expense of shareholders, Stephen was unapologetic.

"When the creditors aren't being paid in full, the shareholders don't get paid," he said.

One observer close to the discussions said the plan goes too far in appeasing creditors.

"Why should they get any money back? They blew it," the source said of junk bond buyers in 1995 who bet that the steel industry would continue to thrive as in the mid-1990s.

Stephen said the new notes shouldn't leave Algoma in trouble since the company doesn't have to make cash interest payments for at least two years.

Highlights of Algoma Steel's proposed restructuring:

- SAVINGS TARGET: $150 million in cash savings next year and by the same amount in 2003 through cost reductions.

- LABOUR COST CUTS: Seeks $60 million in savings next year, $45 million in 2003 and $35 million thereafter, excluding savings from changes to pension benefits, in new collective bargaining agreement. Plan does not mention where savings would be achieved, nor number of layoffs.

- OWNERSHIP: Existing shares would be cancelled, leaving shareholders with nothing. Of new shares, current noteholders would receive a 75 per cent interest; employees would have 20 per cent; unsecured creditors five per cent.

- CREDITORS: Holders of $600 million in mortgage bonds, including interest, would receive new notes valued at $150 million plus 75 per cent of the common shares.