Activist shareholder criticizes Sherritt International

A Halifax-based investment company that owns shares in Sherritt International (TSX: S) is calling for a change at the Toronto-based company, which it accuses of making “ill-considered acquisitions” and dishing out “inappropriate compensation packages,” among other charges.

Clarke (TSX: CKI) says it represents concerned shareholders that collectively own more than 5% of Sherritt’s outstanding shares. On March 20, it submitted four proposals to Sherritt that it says will better protect the company’s investors. The proposals follow a request in December 2013 for a special meeting that would allow shareholders to vote on removing certain directors on Sherritt’s board.

George Armoyan, Clarke’s president and CEO, stated in a press release that its list of 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.”

In a letter to shareholders on March 31, Sherritt fought back, saying the company “is gaining momentum with a disciplined strategy to pay down debt, cut costs and focus on our core areas of expertise,” but that  “a dissident shareholder with no experience in Sherritt’s lines of business, a poor track record on corporate governance, no credible ideas for creating value beyond what management is already doing and a demand for a veto over potential growth plans threatens to throw a wrench into the company’s progress.”

Sherritt said that despite only recently assembling his stake in the company, Armoyan had “initially requested three board seats and that he be made chairman of the board of Sherritt . . . despite having only a 5% voting position, Armoyan is seeking control of over 40% of your board.”

In Clarke’s first proposal, it urged Sherritt to amend its bylaws so that important acquisitions are approved unanimously by all directors. The investment company also accused Sherritt of having a “dismal track record in capital allocation” and a “lack of consistent strategic direction.” One example, it said, is the company’s coal business, “which was sold, reacquired and sold again, with the recent sale resulting in a $519-million impairment and costing the shareholders approximately $1.75 per share.” It also questioned Sherritt’s decision to abandon the Sulawesi nickel project three years after committing to spend $110 million on the project.

The investment company recommended that Sherritt’s board take the views of shareholders into account when it comes to compensation, arguing that “say-on-pay” for executive management is increasingly accepted as a right of shareholders, and that compensation should be tied to performance. The group pointed out this is particularly important at Sherritt, where in 2012 directors were paid $3.7 million — or an average of more than $400,000 per board seat.

“That is certainly among the highest director compensation in Canada and almost twice the average of the companies Sherritt describes as its peers, most of whom are larger and more successful,” the shareholder group claimed. Clarke also noted that despite a 20% drop in earnings before interest, taxes, depreciation and amortization (EBITDA) and a 24% fall in cash flow from operations in 2012, Sherritt’s CEO earned $2.8 million that year.

Clarke also called on Sherritt’s board to stop authorizing “special perquisites” for directors, claiming that the board paid itself more than $1.5 million in 2012 in compensation for travel restrictions in the U.S. under the Helms-Burton Act, “even though the majority of the current directors have not been restricted from travelling to the U.S.” (Former U.S. president Bill Clinton signed the Helms-Burton Act into law in March 1996 after Cuba downed two American civilian aircrafts. The law extends the embargo on Cuba to foreign companies trading with the island.)

In addition, Clarke said that it is inappropriate for shareholders “to pay travel and other expenses for the spouses of directors and management,” which it called “a luxury an underperforming company cannot afford, particularly when the compensation paid to the board and certain executives is already excessive, and the spouses are not contributing to the direction of Sherritt.”

Sherritt reported a $60-million annual adjusted loss, or 21¢ per share for 2013, compared to adjusted earnings of $103.1 million, or 35¢ per share, in 2012.

The adjusted loss in the fourth quarter came in at $38.1 million, or 13¢ per share, compared with an adjusted loss of $4.6 million, or 1¢ per share, in the fourth quarter of 2012.

Announcing its 2013 financial results on Feb. 19, Sherritt said it had “simplified its asset base, increased its financial flexibility, reduced its cost structure and delivered strong operating performance” in its metals and oil and gas business in 2013.

It also said that it plans to strengthen its balance sheet in 2014 “through debt and additional cost-reduction initiatives while investing prudently in the areas of core strengths — metals and Cuba.”

Selling its coal business for $946 million resulted in a $466.8-million impairment charge at the end of 2013.

In its March 31 letter to shareholders, Sherritt acknowledged that 2013 had been a tough year, with prices for its two main commodities — nickel and thermal coal — reaching new lows. Ramp-up costs to develop its Ambatovy nickel project in Madagascar also contributed to a weaker share price and strained the company’s financial position, it added.

But there was also progress in 2013, as the company produced its highest-ever volumes of finished nickel and cobalt; sold its coal business at a price that “was greater than the consensus analyst estimate value” for the business; and achieved commercial production at Ambatovy — the largest finished nickel and finished cobalt operation for lateritic ore in the word. Sherritt also began a project to cut direct cash costs at its Moa nickel operation by up to 20%; expanded its power-generation business in Cuba; cut its dividend to a “more sustainable” level; and cut its cost structure by eliminating $43 million of costs, deferring another $40 million of capital spending and targeting an extra $33 million in cost reductions for 2014, the company outlined.

“On the strength of these accomplishments and with the additional benefit of improving nickel prices, we are entering a period of opportunity,” Sherritt said. Sherritt added that as part of its renewal process, it is proposing to nominate Timothy Baker, former executive vice-president and chief operating officer of Kinross Gold, and a former senior operating executive with Placer Dome to stand for election at the upcoming shareholders meeting.