The case of deep value investing: Sherritt

The case of speculative buy on Sherritt:

1. Sherritt is dirt cheap, trading around 0.4 times book value.
2. The company has declared a dividend increase in 2013, indicating the management team is confident about the cashflow of the company going forward. Cashflow of the company will improve once Ambatovy is commercialized and start bringing in profits. 
3. There is significant value if the management team decide to split up the company or buy back shares.
4. Possible rebound of metal prices in the future if the global economy speeds up later in 2013 and early 2014.

Favourable facts:

• Nickel mine Ambatovy will be commissioned in 2013, without the heavy capital spending related to this project, Sherritt will have cashflow available for other projects. 
• The stock is undervalued, trading at roughly 40% of its book value. (book value $9, shares are trading around $4) Institutional shareholders are urging Sherritt to unlock value. 
• Insiders are buying the shares
• Company is cash flow positive, with matured assets in oil, electric utilities, coal and nickel. 
• 4% dividend yield. Sherritt just raised its dividend in 2013 -- indicating they are anticipating better cashflow in the future.

Unfavourable facts:

• -Soft nickel prices -- nickel prices nearing lows last seen in 2008-2009, analysts are downgrading the outlook of this metal. http://www.metalprices.com/p/NickelFreeChart
•  Ambatovy went over budget. Its not as profitable as it was proposed when they started the project several years ago.
• Sherritt's bad track record in creating shareholders value
• With substantial investments in Cuba, American investors are staying away from this company
• Analysts have price target of $5.00 to $9.00. Analysts are downgrading the company -- this is a trend following the slump of metal prices over the last 12 months.
• Possible asset writedown --- following trend of weak metal price. 

Work cited:

(1) Institutional investors requesting Sherritt to buy back shares:

Takota Asset Management's open letter to Sherritt's management:

"Sherritt has the necessary capital available to fund a buy-back programme, as confirmed by CEO David Pathe's comment in the recent 2012 annual report when he says that the "company is well positioned to capitalize on opportunities as they become available".

There is no question that Sherritt's share price is currently heavily discounted relative to the intrinsic value of its business. Insider reports show that members of the Board and management have been buying shares at current prices or higher. Now the question is why has the Board not also committed shareholder capital to this opportunity?"

http://www.newswire.ca/en/story/1160183/takota-asset-management-today-issues-open-letter-to-board-of-directors-of-sherritt-international

(2) Comment by Sherritt CEO in its Annual Meeting:

 As reported by Bloomberg News, Mr. Pathe stated that Sherritt “can do any number of things, whether it’s sales and refocusing the business, or restructuring ourselves in some way. There are an infinite number of options”. He also acknowledged that having “different businesses in different locations make [Sherritt] a harder story to tell”. This point, in our view, emphasizes his desire to both simplify the company and reduce the complexity of financial reporting.

(3)

Checked the insider reports. Insiders have been buying the stocks and there are no insider selling in the last 12 months.

(4)

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