Globe & mail : Mr. DilaneyWell back in the GTA after the long weekend ... this article is O/T , but thought it offer some insight on Mr. Dilaney .
Maverick shifts gears -- again
Ian Dilaney's Cuban adventure laid the groundwork for his latest contrarian project: Canada and its coal
By WENDY STUECK
Saturday, July 2, 2005
TORONTO -- On a warm spring day, the view from Ian Dilaney's office window includes a hazy layer of smog.
The pall is a visible reminder of the Ontario government's election vow to shut down the province's coal-fired electricity plants.
The pledge, originally promised by 2007 and recently put off until 2009, was based on the assumption that coal is a relic, a dirty, old-fashioned fuel best consigned to history's slag heap.
But in his office, Mr. Dilaney, executive chairman of Toronto-based Sherritt International Corp., tells another story. He is convinced the humble fuel will play an essential role on the North American energy scene. In fact, he's betting on it, as proven by a series of transactions over the past few years that have given Sherritt a 50-per-cent stake in the Luscar Energy Partnership, Canada's biggest thermal coal producer.
It's a classic contrarian move, the kind for which the restless 61-year-old deal maker has become known over the past few decades.
And it's how Mr. Dilaney, best known for his bold and contentious investment foray into Cuba, has shifted his focus to Canada. More than half of Sherritt's assets, based on dollar value, are now in his native country. And while earlier bets on Cuban metals as well as oil and gas are driving sales and profits, he is looking to Canadian coal production as the next big thing.
Most of Luscar's coal, dug from mines in Alberta and Saskatchewan, is sold through long-term contracts to nearby power generation facilities. It's a business that provides steady, reliable cash flow. But the real appeal, according to Mr. Dilaney, is using cheap, abundant coal to replace scarce, expensive natural gas in industrial applications, using "coal gasification" technologies that will make coal as clean and efficient as its higher-priced competitor.
That hasn't happened yet, but if and when it does, Mr. Dilaney will be sitting on heaps of coal that could become much more appealing, and expensive.
Sherritt shareholders who signed on a decade ago for the company's aim to become "the Canadian Pacific of Cuba" might be confused.
Mr. Dilaney is unapologetic.
Sherritt "does not lend itself to easy analysis," Mr. Dilaney says.
"A lot of what we have done over time, is that any time you think the sum of the parts is greater than the whole, you look for a way of busting it up.
"In fact, we have busted it up four times. And P.S. -- stay tuned."
Things have never been straightforward at Sherritt.
Back in 1990, the former Sherritt Gordon Mines Ltd. was a Canadian fertilizer company that came into play when U.S. gold producer Newmont Mining Corp. put its controlling stake in Sherritt up for sale.
Eric Sprott, then running boutique brokerage outfit Sprott Securities Ltd., snapped up the stake and resold it to Canadian institutional investors -- many of whom threw their weight behind Mr. Dilaney when he took a run at Sherritt, which he won in a proxy battle.
Mr. Dilaney was already well known on the corporate finance scene, having run a brokerage firm as well as holding company Horsham Corp., where he was president and CEO for three years before he left in 1990.
Sherritt seemed a dubious prize. Its fertilizer arm was generating cash flow, but not enough to keep the business afloat. A metals refinery in Fort Saskatchewan, Alta., was closed because of a lack of feedstock.
At the time, the only two places in the world with a surplus of nickel and a shortage of refining capacity were Russia and Cuba. Talks with Russian interests went nowhere. But by 1991, Sherritt had struck a deal to buy metal from Cuba, an arrangement it cemented through a joint venture in 1994.
The Canadian-Cuban partnership made sense for both parties: Sherritt was hungry for metal and Cuba, reeling from the disappearance of billions in financial aid after the collapse of the Soviet Union in 1991, was desperate for hard currency.
One party, however, was mightily displeased. The United States, which imposed a sweeping trade embargo on communist Cuba in 1961, watched with consternation as foreign investors, including Sherritt, moved into the country.
Slammed by U.S. critics for daring to do business with a communist dictator, Mr. Dilaney launched a company to do just that. In 1995, the former Sherritt was split in two, with one arm holding the fertilizer business and the other set up to focus solely on Cuba.
In 1996, the Helms-Burton Act came into effect. The legislation opened the door to lawsuits against companies that "traffic" in property confiscated in the Cuban revolution of 1959, and to this day prohibits Mr. Dilaney and other Sherritt executives from setting foot in the United States.
Through it all, Mr. Dilaney chomped on Cuban cigars, trumpeted the potential of the Cuban business scene and said one should never back down from a fight.
It's a trait that he's still known for.
"Ian is very much a 'screw you' kind of guy," says long-time acquaintance Jeff Green, chairman of Toronto-based Paradigm Capital Inc.
The Cuban controversy made Sherritt too hot to touch for bank-owned brokerage firms but was a bonanza for independent firms that stepped up to fill the gap.
Griffiths McBurney & Partners, now GMP Securities Ltd., was a fledgling firm in 1995 when it wound up leading the Sherritt deal.
Eugene McBurney, GMP chairman, says his firm landed the deal after a rival's participation was vetoed by a major shareholder.
Despite the controversy, the deal was a barnburner, something Mr. McBurney chalks up to Mr. Dilaney's track record in spotting hidden treasure. "Ian's strength lies in understanding problematic assets or problematic locations, buying in at a good price and then working on them and growing them," Mr. McBurney says.
A self-described junk collector, Mr. Dilaney always has an eye out for the shiny bit of flotsam that just might turn into the next big thing. Hunting for nickel led him to Cuba. And observations made in Cuba helped influence his bet on Canadian coal and the energy business.
On one trip to Cuba, he spotted idle pumpjacks along the coast. Sherritt got into the oil business. On another trip, he and others started talking about sour natural gas being flared off from oil operations and using it to generate electricity, a plan that would ease Cuba's chronic power shortages. Sherritt got into the power business.
That venture prompted Mr. Dilaney and Jowdat Waheed to look at other ways of profiting from the electricity game.
Mr. Waheed, 42, was named Sherritt's chief executive officer last year. But he's been working with Mr. Dilaney since 1988, when Mr. Waheed was fresh out of business school and when both men were at Horsham.
When Mr. Dilaney left Horsham in 1990, Mr. Waheed left with him.
They zeroed in on electricity supply and demand trends in Canada and the United States, including the role of natural gas. The harder they looked, the more they became convinced that North America "is essentially screwed" for energy.
With that as their guiding principle they weighed investment options ranging from transmission companies to turbine manufacturers. They concluded their best bet was underground.
"The thing we realized was that the most abundant energy source in North America is coal. North America has 40 per cent of the world's coal. And number two -- it's out of favour and it's the cheapest possible asset you can buy," Mr. Dilaney says.
So, Sherritt got into coal.
The jury is still out on whether Sherritt's lumps of coal will become its newest treasure. In general, analysts like the move because it spreads the company's assets outside of Cuba and generates steady cash flow.
But the company's longer-term strategy, which involves the use of coal as a substitute for natural gas, has yet to become a reality.
Sherritt says it's working on projects to demonstrate the potential for coal to replace natural gas in the chemical and petrochemical industries. In the meantime, there are some signs that a continental power shift may already be under way.
Several major American coal producers have announced or are weighing clean coal projects.
As part of its $10-billion Climate Change Plan, the federal government has created the Partnership Fund, which provides for funding of up to $3-billion over the next decade for projects including clean coal facilities.
Research into "carbon sequestration" or capturing carbon dioxide before it makes its way into the atmosphere is under way. Calgary-based oil and gas giant EnCana Corp., of which Mr. Dilaney is a director, is currently running a carbon dioxide capture project at its oil field in Weyburn, Sask., pumping CO{-2} underground in a system that helps tap more oil from an aging field and also tackles the greenhouse gas issue.
Many people believe coal will inevitably play a bigger role in power markets. Nuclear projects are politically risky and even the most optimistic forecasts for renewable sources don't foresee such systems being able to supply more than a fraction of current consumption.
"In the medium term, we think the only viable alternative is coal for electricity," says Brian Gibson, executive vice-president at Teachers.
Mr. Dilaney believes the main driver will be desperation.
"Do you want the lights to stay on in Toronto? Because if you want the lights to stay on in Toronto, or in Cleveland, or in New York, you better figure out how that's going to happen.
"The real issue is, and increasingly it's being understood, is do you want to keep the lights on, do you want to keep the wheels turning, and if so -- where are you going to get the energy?"
A hidden gem?
Sherritt remains a mystery to some fund managers, who say they prefer pure plays.
Others maintain that's missing the point.
Scott Morrison, portfolio manager for the $165-million Empire Financial Small Cap Equity fund, likes Sherritt's growth profile on several fronts, including nickel, and believes the potential of the company's aggressive move into coal has been widely overlooked.
He also likes the company's cobalt production, describing it as a "hidden gem" that gives Sherritt exposure to growth in electronic gadgets that contain the metal.
Some equity analysts and financiers, meanwhile, are waiting for the next corporate move from Sherritt, with current betting focused on the possibility of a coal-based income trust.
A coal-focused trust is a possibility, Mr. Dilaney says. So, he adds, is carving Sherritt's nickel operations into a separate company. Or hiving off its oil and gas holdings into an income trust.
Sherritt's true long-term share performance is hard to measure as a result of the large number of spinoffs and restructurings, but investors who bought at the launch of Sherritt International on Nov. 28, 1995, are sitting on a 162-per-cent gain for an 11-per-cent compound annual growth rate, Sherritt says. The shares closed Thursday at $9.31 and are up 33 per cent in the past 12 months, compared with 18 per cent for the S&P/TSX composite.
An energy giant bets on coal ...
Cheers
The Bridgejumper