Nickel and energy producer Sherritt International Corp. (S) is poised to fend off an attack by activist shareholder George Armoyan, helped by the soaring price of the industrial metal.
Nickel has risen 32 percent this year, propelling Sherritt to top performer among its Canadian base-metal peers, as Armoyan has sought to convince investors to replace three of the Toronto-based mining company’s nine directors with himself and two others.
“I think for George, the worst thing that could have happened was nickel prices went up,” David Taylor, the Toronto-based chief investment officer of Taylor Asset Management Inc., said by telephone last week. “He would have had a much better chance if this stock was still hovering around three bucks.”
Sherritt, which closed today at C$4.68 in Toronto, has advanced 26 percent this year on an Indonesian ban on nickel-ore exports. The threat of wider economic sanctions on Russia for President Vladimir Putin’s annexation of Crimea and skepticism of his efforts to defuse tensions in eastern Ukraine also lifted the price of the stainless-steel ingredient. Nickel generated 50 percent of Sherritt’s first-quarter sales, the company said yesterday in its earnings statement.
“The nickel price has taken the urgency out of his story,” Taylor said. Armoyan is “fighting an uphill battle.”
Armoyan has been publicly agitating for changes in the board since late last year when, as chief executive officer of Halifax, Nova Scotia-based Clarke Inc. (CKI), he requested a special meeting of Sherritt shareholders. Since then, Armoyan has likened Sherritt to a “private club” run for the benefit of the directors and called for the removal of CEO David Pathe.
“Sure, nickel’s up. But do people just want to rely on higher commodity prices to bring about operational efficiencies and proper business execution?” Armoyan said in a phone interview last week. “You just don’t want to leave it to chance.”
Clarke, with a market value of C$157.2 million ($143.4 million), is focused “on acquiring undervalued or underperforming businesses with hard assets” and working with management to improve operations, according to a presentation on its website.
The nickel price and Sherritt’s rising shares aren’t the only challenges facing Clarke, which controls about 5.2 percent of Sherritt, ahead of a shareholder vote on May 6.
“The dissident has not made a compelling case for change at board level at this stage,” ISS, a unit of MSCI Inc. (MSCI), said in an April 21 report. The deadline for proxy voting is tomorrow at 5 p.m. Toronto time.
Sherritt also has fought back directly, portraying Armoyan as a rogue shareholder, unqualified to be a director of a mining and energy company with diverse operations and sensitive relationships with governments in developing countries.
Armoyan says Sherritt’s board is criticizing him and Clarke’s other nominees, Ashwath Mehra and David Wood, to divert investor attention from its own failings.
“I’m not a saint,” Armoyan said. “But am I willing to align my interests with those of shareholders? Yes. That’s what I do.”
Indonesia, the world’s largest nickel-ore producer, moved Jan. 12 to ban exports of unprocessed ore as it tries to become a manufacturer of higher-value products rather than just a shipper of raw materials.
In recent weeks, U.S. and European threats against Russia for its actions toward Ukraine fueled speculation that Moscow-based OAO GMK Norilsk Nickel (MNOD), the world’s largest refined nickel producer, would be drawn into a widening of sanctions.
The U.S. on April 28 imposed sanctions on seven Russian officials and 17 companies linked to Putin’s inner circle. Norilsk wasn’t among them.
Shares of Sherritt, with mining and energy assets in Cuba, Madagascar, Spain and Pakistan, struggled until December amid depressed nickel prices and the delayed start of commercial operations at its 40 percent-owned Ambatovy nickel project in Madagascar.
“Shareholders have been generally disappointed with the performance of the shares,” Ray Goldie, a Toronto-based analyst at Salman Partners Inc., said April 16 in a telephone interview. Sherritt shares plunged 56 percent in the three years ended in December.
Some of that disappointment has faded amid rebounding nickel prices, Sherritt’s sale of coal assets and expectations the company will pay down some of its C$3.4 billion of total debt.
This week the company completed the C$946 million sale of its coal businesses in Canada to two buyers. At least three investment banks have upgraded their ratings on Sherritt since the company gave analysts a guided tour of the Ambatovy nickel project at the end of March.
The stock has seven buy and three hold recommendations with a 12-month price target of C$5.95, the average of nine analysts’ estimates according to data compiled by Bloomberg.
“We have strong momentum,” Sherritt Chairman Hap Stephen said in a April 16 telephone interview from Toronto. “We have a strong board working well with management and doing a great job dealing in what are very complex jurisdictions.”
Still, Sherritt posted a first-quarter net loss of C$48.2 million, or 16 cents a share, compared with a profit of C$23.1 million, or 8 cents, a year earlier, the company said yesterday. Higher debt-financing expenses because of weakness in the Canadian dollar versus the U.S. currency contributed to the loss, the company said.
Some investors believe there’s a constructive role for Armoyan to play at Sherritt even as the company seeks to cut costs, reduce its debt and better align the interests of shareholders, management and directors.
“Since George has become involved, Sherritt has changed its tune on a lot of things,” said Michael Formuziewich, who helps manage about C$2.2 billion of assets, including more than 12 million Sherritt shares, at Leon Frazer & Associates Inc. in Toronto.
“Having a dissident shareholder like George on the board will help keep them on their toes a bit better,” Formuziewich said by phone.
The company declined to comment, referring instead to an April 9 statement in which it said many of the initiatives that Clarke has sought to take credit for were under way “well prior to Mr. Armoyan’s arrival on the scene.”
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