WEQ revisited

Small-cap dividend play WesternOne Inc ($WEQ.CA) named its new CEO this week and the market applauded. On Sept. 1, current Ritchie Bros CEO Peter Blake will succeed interim CEO Robert King at the helm, the company announced May 26. Blake is currently CEO of Ritchie Bros. Auctioneers ($RBA.CA), the global equipment auction house that grew from a $250-million market cap to a $2.5-billion MC in just 10 years under his stewardship. He replaces former CEO and company founder Darren Latoski, who died of cancer in September.

Peter Blake, WesternOne’s next CEO

WesternOne is a “pickaxe” company that supplies the mining/oilpatch/shipyard industries with modular buildings and workforce housing (through its Britco division) and also has an equipment-rental business. Its customers are large companies and governments – one current Britco project is a $100-million contract for northern Alberta workforce housing for Devon Energy.

Securing a CEO of Blake’s calibre is a coup for WesternOne, which currently has a market capitalization of about $250 million. Stellar Q1 results didn’t hurt either – for the quarter ending March 31, WesternOne revenue was $117 million ($77M a year ago) and net income was $2.4 million, or 8 cents a share ($700K, 3 cents a year ago). Corporate overhead declined.

This month’s news has propelled the stock back above the $8 mark, near 52-week highs. For the past year, WEQ has traded in a tight band between $7 and $8.10. I no longer hold WesternOne in my portfolio, but investors looking for a high-yielding small-cap stock with positive growth prospects – especially investors who are levered to risky junior mining stocks – may want to take a look. WEQ yields 7.5% at current prices ($8.05) and had a payout ratio of 69% in the first quarter.

This is not investment advice, do your own due diligence.

Related reading:
Rebalancing, Part 2: Signs of life | World of Mining
RIP Darren Latoski, WesternOne CEO | World of Mining

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NEWS FLASH: Sherritt insider buying

One of the main beefs activist investor George Armoyan has with Sherritt executives and board members is their lack of “skin in the game.” Armoyan recently failed to get his slate of directors elected to the board of the underperforming nickel producer, but his Clarke Inc. still owns about 5% of Sherritt’s outstanding shares, and he’s been making money on that stake.

The good news for Sherritt shareholders: On Thursday, Sherritt CEO David Pathe filed a public market purchase of 6,700 Sherritt shares at $4.42 (in a spousal RRSP account he has control or direction over), according to Canadian Insider.

The bad news: Including Thursday’s buy, Pathe still only owns 76,038 Sherritt shares (or .03% of S.O.), according to our friends at INK Research. That hardly aligns his interests with those of shareholders. It was Pathe’s declaration that Sherritt was on the hunt for acquisitions in late December – after the sale of its coal and royalty business – that prompted Armoyan to go public with his concerns, after months of behind-the-scenes negotiations with Sherritt.

I don’t currently own Sherritt stock, although I’m watching it closely given the run-up in the nickel price and the fact their Ambatovy nickel mine in Madagascar is up and running. Sherritt was also recently a BNN top pick of a money manager named Jim Huang.

Related reading:

A proxy loss, but Sherritt shaken | World of Mining

Sherritt International wins solid victory in proxy fight | Financial Post

Sherritt and Clarke: Nickel for your thoughts | World of Mining

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Peregrine Diamonds: (Barely) buried treasure on Baffin Island

by James Kwantes, World of Mining

Peregrine Diamonds released its maiden resource estimate for Chidliak Wednesday, and it sparkled.

The diamond exploration company led by Eric Friedland reported an NI 43-101 compliant inferred resource of 7.47 million carats of diamonds in 2.89 million tonnes in its CH-6 kimberlite pipe, to a depth of 250 metres. The kimberlite is open at depth. More tonnage below 250 metres in CH-6 as well as in two other kimberlites, CH-7 and CH-44, has been targeted for exploration.

Diamonds recovered from the CH-6 400-tonne bulk sample. The largest is an 8.87-carat gem valued at $36,000. (Peregrine Diamonds photo)


At an average diamond value of $213/carat, that adds up to about $1.6 billion in value for just the first 250 metres of a single kimberlite, one of seven that have “economic potential,” according to Peregrine.

News of a resource estimate in the billions based on high-value diamonds in a rich kimberlite pipe just below surface – albeit in the middle of nowhere – resulted in a 6.5-cent (16%) gain for the stock. Peregrine shares can be volatile, as the chart below shows, and holding them frustrating, as I can attest. If past patterns hold, the stock will drift down until further news that moves the needle.

1-year chart for PGD (Yahoo Finance)

Here’s the new corporate presentation. One interesting nugget in the list of significant shareholders – below Robert Friedland at 18.6% and Eric at 16% – is De Beers at 2.3%. Given the history, I didn’t realize the former granddaddy of diamonds continued to hold any position.

In a conversation with John Kaiser at the Cambridge House resource show in January, the Peregrine fan told me he wouldn’t be surprised to see De Beers eventually take another run at Peregrine. However, the list of potential suitors is long, thanks in large part to the Canadian disruption of the De Beers cartel.

Disclosure: I own Peregrine Diamonds shares because I think Chidliak will become a diamond mine. However, I don’t know if or when that will occur, and financing a mine could be very dilutive to existing shareholders. The stock can be very volatile. Please read my disclaimer.

Related reading:

Chidliak grade gives Peregrine Diamonds an “A” | World of Mining

Diamond partners Peregrine, De Beers no longer dancing | World of Mining

Chasing the carat: The Friedlands go diamond-hunting | World of Mining

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A proxy loss, but Sherritt shaken

by James Kwantes, World of Mining

When the votes were counted Tuesday, activist investor George Armoyan had lost his bid to shake up Sherritt’s board.

But Armoyan, whose Clarke owns 5% plus of Sherritt’s outstanding shares, got a round of applause on enemy territory – Sherritt’s annual meeting in Toronto – after talking up Sherritt’s potential and progress toward enhancing shareholder value, according to this Financial Post report by Peter Koven.

If Sherritt’s stock continues to rise, George Armoyan gets the last laugh. (Halifax Chronicle-Herald photo)

The conciliatory speech was the velvet glove to Armoyan’s iron fist – his months-long campaign to force accountability on the chronically underperforming company through an infusion of new blood on its board.

After months of behind-the-scenes negotiations between Armoyan and the Sherritt board, the dissident shareholder criticized Sherritt CEO David Pathe publicly for musing about an acquisition after the sale of Sherritt’s coal and royalty business was announced in December. An acquisition seemed like a curious choice indeed for a debt-riddled company that has had trouble turning a profit on existing operations.

Until Armoyan launched his proxy fight, the stock had been a horror show by almost any metric. But with ownership of less than .25% of outstanding shares, executives and directors have little “skin in the game” – a situation that persists despite this week’s endorsement by voting shareholders. Hoping for change to come organically under these circumstances seems like a stretch.

Year-to-date, buoyed by a sharp increase in the nickel price and pricked by the sharp criticisms of Armoyan, Sherritt stock is up about 19% (Clarke shares are up 14%, including an 8% rise Monday after a robust Q1 report).

Armoyan told the Financial Post he plans to remain an active and involved shareholder. “I’m not the smartest guy in the world. (But) I’m the most persistent son of a bitch you’ll ever meet,” Armoyan said.

Sounds like he’s just what the doctor ordered for Sherritt.

Disclosure: I was recently stopped out of Sherritt shares and no longer own the stock, although it’s on my radar. I own Clarke shares. This is not investment advice; do your own due diligence and please read my disclaimer.

Related reading:

Sherritt and Clarke: Nickel for your thoughts | World of Mining

Fight Club, Canadian-style | World of Mining

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An eventful day

And I didn’t have the time to post on today’s Peregrine Diamonds resource estimate news, which moved the stock up 15% (6.5 cents) to 47.5 cents. Please check back tomorrow on that, as well as an update on the Sherritt/Clarke proxy fight.

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Getting things done the Imperial way

by James Kwantes, World of Mining

I recently had the pleasure of interviewing Imperial Metals (III) chairman Pierre Lebel for the Vancouver Sun and my feature on Lebel and Imperial’s Red Chris mine is in today’s Sun business section and online. Red Chris, British Columbia’s next mine, is an open-pit copper-gold mine being built south of Dease Lake in northwestern B.C. Comissioning is scheduled for this summer, with production to follow in the fall.

Lebel is a low-key but high-performing executive who finds a way to get things done. Imperial won Red Chris in a bidding war with Taseko in 2007 and wasted no time taking it from exploration to production, a feat not many mining companies accomplish – let alone in seven years. Red Chris will be Imperial’s third B.C. mine (the company also owns a small Nevada gold mine) and by far its largest, with production for the first 5 years pegged at 88 million lbs copper and 52,700 ounces of gold. Not bad for a $1-billion market cap company.

In the case of Red Chris, getting things done meant clearing multiple hurdles, as well as a foray into the power line construction business. Imperial is building the Iskut Extension to the Northwest Transmission Line, and struck a creative deal to sell it back to BC Hydro.

I didn’t mention it in the story, but Imperial’s share performance hasn’t been too shabby, either. The stock has a 1-year return of about 19% at the time of writing, and a whopping 5-year return of 600% since the financial crisis. Memo to junior mining companies: Imperial has only 75 million shares outstanding. Of course, it doesn’t hurt that the company’s major shareholder is oilpatch billionaire N. Murray Edwards, who also helped finance mine construction and was a key partner to Imperial management, according to Lebel.

Here’s the story.

The piece is Part 2 of a 3-part series on mining in northwestern B.C.

Related reading: Part 1: Quartermain goes for the gold | World of Mining

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A (re-)visit with Pretium CEO Bob Quartermain

by James Kwantes, WorldofMining.com

I first interviewed Bob Quartermain for the Vancouver Sun in December 2011 when his Pretium Resources IPOed on the Toronto Stock Exchange. At $265 million, it was one of the larger IPOs that year, and allowed the geologist executive to purchase the Brucejack and Snowfield properties from Silver Standard, which he’d run for 25 years.

What drew him to the projects? Quartermain talked during the phone interview about the high-grade veins of gold that had been intersected and how he had never seen anything like it in his decades as a geologist and executive.

I revisited Quartermain recently, this time in his office, and wrote about his high-grade northwestern B.C. gold project in my first mining piece for the Vancouver Sun, where I am a story editor. My day job there will now include a part-time role writing about B.C.’s mining industry — its projects and personalities. I don’t anticipate writing much about stocks I own (because of the Sun’s B.C. focus). If I do, I’ll follow the same policy of full disclosure that I do here at WorldofMining.com.

A vast drilling campaign at Brucejack’s Valley of the Kings in the years since that 2011 IPO has turned those high-grade gold hits into a resource estimate of some 8.7 million ounces (in measured and indicated categories).

But the path to delineating that buried treasure has been a rocky one characterized by choppy junior mining markets, a volatile gold price and a resource estimate controversy that temporarily battered Pretium’s stock.

Through it all, Quartermain has his eyes focused on the prize: developing a high-grade gold mine that will employ an estimated 500 people and feed a growing demand for physical gold in China and other rising Eastern markets.


Full story here.

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Fight Club, Canadian-style (Sherritt vs. shareholders)

by James Kwantes, WorldofMining.com

Sherritt and Clarke resumed their very public boardroom battle this week with fresh accusations and countercharges.

A group of battered Sherritt shareholders whose luck is about to change? (Fight Club photo)

Sherritt chairman Hap Stephen opened fire Monday morning with a 7-page broadside attacking dissident shareholder George Armoyan. Stephen spent about 1 1/2 pages defending the existing board and management (“the good news”) and the rest of the letter attacking Armoyan (“the bad news”) – delving into his regulatory past and somewhat checkered record on the topic of corporate governance. By the close of trading Monday, Sherritt stock was more than 9% higher. It held those gains Tuesday, closing at $4.73 (up 3 cents) during a session that saw most mining issues hammered on the TSX.

Sherritt 6-month chart (Google Finance)

Armoyan, the CEO of Clarke who is leading the “Concerned Shareholders” in the proxy fight, responded on the SaveOurSherritt.com website with his own dirty dozen – 12 reasons shareholders should elect his 3 board nominees (himself, David Wood and Ashwath Mehra) to shake up Sherritt. Mehra has a wealth of international metals and commodity experience including 10 years spent running Glencore’s nickel and cobalt businesses.

Clarke stock has had a good 12-month run (up 82%) but has failed to appreciate recently on pace with Sherritt’s move (up 66% from February’s multi-year low). As of March 5 – when Sherritt stock closed at $3.29 – Clarke owned a $43.9 million stake that made up about a third of Clarke’s publicly traded debt and equity, according to a corporate presentation on Clarke’s website. That would have given Clarke about 13.34 million shares at the time, a stake worth about $63 million at current prices. The market capitalization of Clarke, which runs several other businesses in addition to the marketable securities and had $46.5 million in cash as of March 5, is about $150 million.

Clarke 6-month chart (Google Finance)

Sherritt’s 40% owned Ambatovy nickel mine in Madagascar is coming on-stream just as nickel prices are rising, and it has robust oil and gas assets as well as a nickel mine in Cuba. It’s flush with cash after selling the Canadian thermal coal business, including royalties, at the end of last year. Yet the share price as of February was barely above lows plumbed during the depth of the 2008 financial crisis. Stephen’s criticisms of the Concerned Shareholders ring false when looked at through the lens of the stock’s chronic underperformance and the rich compensation levels of existing management and directors, especially when their paltry shareholding is taken into account. The Concerned Shareholders website is SaveOurSherritt.com.

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

Related reading: Sherritt and Clarke: Nickel for your thoughts | World of Mining

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Dissident group sends out an SOS

by James Kwantes, World of Mining

That would be “Save Our Sherritt,” the name of a new website launched by the Concerned Shareholders of Sherritt. The dissident group is led by Clarke CEO George Armoyan, who wants a seat on the Sherritt board for himself and two other nominees, David Wood and Ashwath Mehra. The latter is a mining and metals veteran with international experience, including 10 years running Glencore’s nickel and cobalt division.

A meeting requisitioned by Armoyan’s Concerned Shareholders is scheduled for May 6 in Toronto, where shareholders will vote on the three nominees as well as four resolutions addressing executive and director compensation as well as corporate governance. The Concerned Shareholders group owns about 5.5% of Sherritt’s outstanding common shares, compared to less than a quarter of one per cent combined (yes, you read that correctly) held by current executives and directors. Sherritt produces nickel at mines in Madagascar and Cuba and has extensive oil and gas operations in Cuba as well.

The Save Our Sherritt website has a host of information about the nominees, reasons for the proxy fight, and details of the considerable efforts Armoyan apparently went through with Sherritt’s management and executives before taking his fight public in December. Armoyan’s letter to shareholders is a good summary. The site also contains this chart, one that doesn’t bode well for advocates of the status quo at Sherritt.

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

Related reading: Sherritt and Clarke: Nickel for your thoughts | World of Mining

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Sherritt and Clarke: Nickel for your thoughts

by James Kwantes, World of Mining

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.

Value investor George Armoyan

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 a March 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

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.

Sherritt’s 1-year chart

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

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.

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