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Activist shareholders target Dominion Diamond

Dominion Diamond Corp. is officially in play as the miner is being targeted by an activist shareholder group and is reportedly studying a potential sale.

The stock jumped 22 per cent to $14.01 on Tuesday as investors absorbed the news. It is still down 33 per cent on the year.

That poor stock performance is a major frustration for the activist shareholders. The group, led by Toronto-based K2 & Associates Investment Management, said in an open letter that the weak share price is a result of “misguided policies and missed opportunities.” They called on the independent board members to undertake a strategic review, and also requested a meeting before the New Year with Daniel Jarvis, Dominion’s lead director, to address the issues.

“It’s hard to dispute the fact that (Dominion) is down considerably more than the mining industry as a whole,” K2 portfolio manager Josef Vejvoda said in an interview.

A strategic review is already well underway on Dominion’s end. Bloomberg News reported that the company has hired Rothschild & Co. to advise on a potential sale. Dominion would need to receive an offer with a massive premium of about 40 per cent just to recoup the shareholder value that has been lost in the last seven months. The company’s current market capitalization is $1.2 billion.

Yellowknife-based Dominion is facing some challenges that are outside its control. The diamond market is stumbling amid a broader commodity downturn, and the company is in a “transitional” year at its Ekati mine in the Northwest Territories. Dominion is mining relatively low-value ore at Ekati until a new pit reaches production early next year.

But the activists think the company has internal problems that can be fixed with regards to corporate governance, overall business strategy, cost containment, compensation policies and a number of other issues. In a filing, the activists said they might offer proposals to Dominion around board composition, capital structure, a go-private transaction and a host of other matters.

Collectively, the activist group control 5.4 per cent of Dominion shares. In addition to K2, Sprott Inc. is also part of the group.

Vejvoda declined to go into specifics until the activists have a chance to meet with Dominion’s independent directors. But he noted that Dominion has more options to create value than most mining companies.

One thing in its favour is a very healthy cash position. The company had US$397 million of cash at the end of October, which equated to roughly 40 per cent of its market capitalization before Tuesday’s rally.

It is understood that some investors are upset about a US$9.8-million payment made to chairman and former chief executive Robert Gannicott, who took a medical leave of absence last year and returned to the board in July. That payment was disclosed in September.

BMO Capital Markets analyst Edward Sterck said in a note that he sees Dominion as a well-run company, but there may be an opportunity to be “more proactive in supporting the share price.” One option he cited would be for the company to buy back stock.

“It seems likely that the group behind the letter may seek to attract additional shareholders to (its) cause and perhaps to put an appointee of its own on Dominion’s board,” he said.

Financial Post