New Millennium sticks to its guns in fight with dissidents

New Millennium Iron (TSX: NML) is in the throes of a full-blown proxy fight, as disgruntled shareholders aim to replace the company’s board of directors at a special shareholders’ meeting in mid-March.

Susan Milton and Greg Chorny are leading the dissident charge. Together with other members of the Milton family, they own 7% of NML, but claim over 20% of the company’s shareholders have expressed support for their concerns and proposed actions.

They argue NML’s board has destroyed shareholder value, and want to replace six NML directors with four new directors, and trim the current nine-member board to seven. They would keep the three directors appointed by Tata Steel, which is NML’s largest shareholder, at 26%.

In a Feb. 17 management information circular, NML urged shareholders to reject the dissidents’ attempts to gain control of the board. It said its board was revitalized in 2015 with three new independent directors, and the board now has “over 210 years of valuable, industry-specific experience.” NML argues the dissidents’ four director nominees lack operating experience in mining, and have no plans for the company’s future.

A day later, the dissident shareholders fired back and said the board’s current level of experience has been “unhelpful in negotiations with Tata or in building a plan to create value.” They also claim current management and directors have done little to preserve working capital, and  highlight an increase in executive compensation.

“The company has been judicious in its expenditures,” Robert Patzelt, NML’s president and CEO, countered in a Feb. 22 interview.

Since joining NML in January 2014, Patzelt has helped restructure the company twice and cut costs, including a 40% staff reduction. Executive compensation is in-line with similar companies, and operating costs are much lower, he contends.

“We are now in a position where the cash preservation activities we’ve engaged in have resulted in us having enough working capital that we have the financial stability to go through 2018.”

The company ended September 2015 with $22 million in working capital. It will release its 2015 year-end results on March 30.

NML shares have declined 86% over the past two years, as the slump in iron ore prices continued. The stock price went from 49¢ on Feb. 25, 2014, to 7¢ on Feb. 25, 2016. Over the same time, iron ore prices have fallen from US$120 per tonne to US$40 per tonne, due to global oversupply and a slowing Chinese economy. Iron ore was trading above US$180 per tonne in 2011.

The concerned NML shareholders, however, say management and the board are to blame for the decline, as well as for diluting NML’s 20% interest in the direct shipping ore (DSO) project in the Labrador Trough to 6%, by not funding Tata Steel Minerals Canada’s cash calls.

Last June, NML said Tata’s cash calls totalled nearly $84 million. Given limited funds and tough capital markets, the junior let its interest slide.

With Tata operating the DSO project, NML has devised a strategy to develop its taconite assets in a lower-priced environment. It launched a prefeasibility level study, called “NuTac,” to re-evaluate its taconite properties in the Labrador Trough.

NuTac will incorporate information from the $50-million Taconite project feasibility study that NML and Tata completed in 2014. The Taconite project comprises the large LabMag and KeMag deposits. NML also has five other nearby taconite deposits. All seven contain known resources totalling 29 million tonnes, including 6.3 million tonnes in reserves.

“NuTac is a re-scope project. It is taking all of the intellectual property and knowledge from our Taconite projects, from our resource developments with DSO and all of our exploration work, and leveraging that and saying, ‘OK, there is going to be a new normal when this market turns around. We are never going back to those $180 iron ore prices. There will be a new series of prices.’”

The NuTac project will focus on producing pellets, with cost estimates expected by mid-year.

“The tide rises and lowers all boats, but what is interesting in this downturn is that the pellet premium spread [over concentrates] has held,” Patzelt says.

“The pellet segment is a smaller part of the overall iron ore market, but it is the highest-value segment,” NML’s vice-president of investor relations Ernest Dempsey notes. The pellet market gives the company versatility by helping it service customers worldwide and not just in China, he adds.

However, the dissident shareholders dispute that with iron ore prices not expected to recover until 2020, NML will likely “run out of cash by 2018.”

In the dissidents’ management information circular, dated Feb. 22, they have proposed initial steps that include halting the NuTac project; further reducing costs and executive compensation; and improving disclosure. They would provide a strategic plan within two to four months after replacing the board.

“They want control of this board. They have a different point of view,” Patzelt says of the dissidents. “We have demonstrated to ourselves, the marketplace and our stakeholders that New Millennium since 2003 has not only grown and survived 2008, and is surviving this downturn, but is also well positioned as a junior company to create value for shareholders.”

Shareholders are set to vote on the proxy contest in a special shareholders meeting in Toronto on March 15.