by James Kwantes, World of Mining

Value investor George Armoyan

Value investor George Armoyan

Resources and resource allocation are at the centre of a boardroom battle between Sherritt International ($S.TO), which mines nickel in Cuba and Madagascar, and George Armoyan, a Halifax-based activist value investor who runs Clarke Inc ($CKI.TO). It’s shaping up to be an entertaining tilt that also presents some investment opportunities.

Armoyan fired the opening public salvo in December, when Sherritt sold its Canadian thermal coal business – including coal and potash royalties – for $946 million. CEO David Pathe told the Globe and Mail that his company was on the hunt for acquisitions. Armoyan criticized that path, advocated a share buyback and proclaimed his intent to shake up the board as he announced a 5.2% stake in Sherritt. Armoyan and his “Concerned Shareholders” group has since launched a proxy battle.

Sherritt’s stock went on a tear last week – it rose 17% to close at $4.14 Friday – as several analysts upgraded their ratings.

The week opened with Sherritt chairman Harold “Hap” Stephen firing back at Armoyan in a shareholder letter and proxy circular. Stephen slammed Armoyan for his lack of experience in mining and international business, and said he “threatens to weaken Sherritt’s governance and disrupt its positive momentum.” The proxy circular also, however, included corporate governance enhancements suggested by Armoyan, including shareholder “say on pay” for executive compensation.

The Sherritt chairman’s outrage is also diluted by his meagre .02% shareholding in the company. And the paltry shareholdings of the current board and management – who are very well-compensated – is one of Armoyan’s central beefs. Sherritt CEO David Pathe was paid $2.77 million in 2012 and directors were paid $3.7 million, more than $400,000 per board seat. That included $1.5 million to compensate for travel restrictions to the U.S. under Helms-Burton – even though the majority of directors have not been restricted from travelling stateside, according to Clarke. (I’m sure the cash came in handy during director visits to Cuba.)

Sherritt directors and management own less than .25% of the company’s outstanding shares. Forget “skin in the game” – that’s skin cell territory. The Clarke proposals “can help transform Sherritt from a private club, apparently run for the benefit of the Board of Directors, into a properly governed public company managed for the benefit of all its shareholders,” according to Armoyan.

The Concerned Shareholders – who now own 5.5% of Sherritt’s shares, according to aMarch 31 news release – are seeking three seats on Sherritt’s board, and on Thursday, Armoyan announced his nominees.

One of them, Ashwath Mehra, is a 28-year metals veteran who was a senior partner at commodities giant Glencore (and its predecessor), where he ran the nickel and cobalt business for 10 years (so much for a lack of mining and international business experience!). Mehra currently runs the Astor Group, a resource advisory and investment business, and sits on the boards of Toronto- and London-listed EMED Mining as well as Venture-listed Fancamp Exploration. The other two are Armoyan and David Wood, CFO of the Municipal Group of Companies, the largest civil contracting company in Atlantic Canada.


Sherritt is a major player in Cuba, where it operates a nickel mine and produces oil and gas, making it subject to America’s ridiculous sanctions against the island nation. Its newest project is the Ambatovy nickel mine in Madagascar, which achieved commercial production in January after years of delays and cost overruns. Sherritt is the operator and owns 40% of the mine (Sumitomo 27.5%, Korea Resources 27.5%, SNC-Lavalin 5%).

When Ambatovy hits full production of 60,000 tonnes of nickel annually, it will be one of the world’s largest nickel mines, supplying about 4% of the world’s nickel annually. An oversupply of the metal has weighed on the nickel price, which has nevertheless moved up sharply this year partly because of Indonesia’s ban on nickel exports. Indonesia is the world’s largest nickel producer.


The stock, which is at about $4 after holding above $15 for much of 2007 and the first half of 2008, has been a horror show. Falling nickel prices, the Cuba factor, Ambatovy cost overruns, uncertain corporate direction – it’s all taken a toll. Even with this week’s rally, shares are only about double where they traded at the cliff’s bottom. If Armoyan wins, I expect he’ll be able to extract further value from company operations. If he doesn’t, executives and directors will surely come out of the bruising experience with a renewed focus on operations, profitability and creating shareholder value.

As of Dec. 31, Sherritt had cash and short-term investments of $651.8 million – not including $793 in cash proceeds from the sale of the coal business – and debt of $2.1 billion.


Clarke shares present an even more interesting value proposition. The investment holding company is flush with cash – about $46.5 million – after selling off stakes in two energy companies and its freight business over the past year. As of March 5, Clarke also held $130.5 million in marketable securities, including the Sherritt stake. A March corporate presentation sheds more light on company operations and assets.

As of March 5, Clarke’s Sherritt stake was listed at $43.9 million. That day, the stock closed at $3.29, which meant Clarke owned about 13.34 million shares at the time. Those shares are now worth more than $53 million, a tidy little gain for a company with a market capitalization of $153 million. Armoyan, who owns or controls more than 43% of Clarke shares, is a sharp operator with a proven track record of extracting value, but Sherritt is his biggest prey yet. Clarke stock is up about 75% in the past year and yields 4.9% at current prices. The company is also buying back shares.


Clarke’s 1-year chart

There were rumblings of shareholder discontent last year, as well – Scott Leckie of Takota Asset Management challenged management and called for share buybacks on the heels of longtime chairman Ian Delaney’s retirement. Delaney, aka the Smiling Barracuda of Bay Street, did have “skin in the game” with a large Sherritt ownership stake. I wonder what Delaney, a contrarian himself with an appetite for castoffs, thinks of Armoyan’s Power Play for control of the company he built.

Disclosure: I own Clarke shares. This is not investment advice and all investors should do their own due diligence. Please read my disclaimer.