Abitibi-Consolidated is drastically scaling back its paper mill operations, announcing cutbacks in Ontario and Newfoundland.

The company announced Wednesday that it is closing the mill in Stephenville permanently and scaling down operations in Grand Falls-Windsor.

The Stephenville mill, which employs about 280 people, will close in October of this year.

The company blames high energy costs and poor wood supply for the move.

In a move announced earlier this year, the company will also shut down one of two paper machines at its 490-employee plant in Grand Falls-Windsor.

Premier threatens to retaliate

Premier Danny Williams said he's shocked and outraged by Abitibi's decision and promised to pursue every legal option to ensure that the mill in Stephenville stays open.

Williams threatened to pull Abitibi's timber licences for Crown land if it downgrades operations in Grand Falls-Windsor.

The premier said the company was looking for more than $450 million in government subsidies over the next 30 years to maintain its operations. Williams said that demand was insulting and compared it to a ransom.

Despite the tough talk, Williams said he wants to meet with company officials to discuss its plans.

Ontario operations being cut

Abitibi also announced the permanent shutdown of one of two paper machines at its Kenora, Ont., mill in October. The other machine will be idled for an indefinite period, the company said. The Kenora plant employs about 390 people.

The company also said it is in the process of selling a 50,000-tonne mill and 200 square kilometres of timberland in northwestern Ontario.

The cutbacks come as Abitibi reported a second quarter loss of $43 million (9 cents a share), compared with a loss of $79 million (18 cents a share) recorded in the second quarter of 2004. Abitibi said its sales for the second quarter were $1.45 billion, compared with $1.44 billion a year earlier.

The company said the permanent closures at Kenora and Stephenville will result in pre-tax asset writedowns of approximately $75 million and mill closure costs of approximately $35 million in the company's third quarter results.

Shares of Abitibi were up 16 cents at $6.11 on the TSX.