Investing in Cuba: Canada Colludes with Vampires & Zombies (part 2)
Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
[continued from part 1]
In 2007, nickel and cobalt derived from Sherritt International’s (TSX: S) Moa Joint Venture with Cuba accounted for around 60% of the company’s revenue. Since then, Sherritt has diversified into Canada’s largest coal producer. Over the last few years, coal went from the company’s smallest portion of revenue (7%) to its primary source in 2011 (53%) – and while Cuba still accounts for all of Sherritt’s metals income, metals now contribute less than a third to the company’s annual revenue – sort of.
Sherritt’s recent annual report states less than 18% of its total revenues are derived from Cuba, but by calculating the revenues based on the information given for the activities related to Cuba it appears closer to 43%. (When asked directly about the breakdown of its Cuba operations, the firm’s representative only referred generally to the website and annual report.) Moreover, when considering Sherritt’s own EBITDA calculations, coal is only a third of earnings, while its combined activities (metals, power, oil and gas) in Cuba still account for approximately 65% of earnings.
While Sherritt hopes to double its metals output over the next couple years with its joint ventures in Ambatovy, Madagascar and Sulawesi (Celebes), Indonesia, hope is an elusive commodity for those involved in Cuba. Sherritt holds a 40% share in the Ambatovy Joint Venture – which backers have announced will be the, “world’s biggest lateritic nickel mine by 2013-2014." However, environmental impact statements and other public documents indicate that the company’s estimated share will result (at best) in significantly less than what it currently derives from Cuba (31% less nickel, 41% less cobalt). Numbers for the smaller, less immediate Sulawesi Joint Venture are still pending feasibility studies.
Sherritt is exactly the kind of complicated stock commodities guru Jim Rogers eschews because the company seems to be getting in the way of the actual play. For those that like Sherritt for its sector and activities, they might just want to get a piece of the Rogers International Commodity Index (NYSEMKT: RJI) – or even focus on Rogers' agricultural or metals sub-indexes.
More disconcerting for Sherritt’s future as it rapidly tries to diversify away from its Cuba holdings should be the likely impact regime change of any kind will have on its position in Cuba. Without deeper concessions, and assuming it survives vampire communism’s twilight saga, Raul Castro’s accidental Gorbachev moment is likely to be succeeded by either a nationalizing Evo Morales-type (who still observes May Day every year in Bolivia with a celebratory confiscation), or an Aung San Suu Kyi-type which will want to review confidential contracts signed on behalf of the people by their oppressors.
Maybe Sherritt will get lucky and only have to forfeit something symbolic, like the power grid it operates in Cuba (less than 3% of its current revenues). Something similar (though significantly more than symbolic) happened in Bolivia recently with four private utilities when Morales wanted to show his constituents he still had what it took to take. More problematic is that Sherritt is unlikely to get a pass by someone like Ms. Suu Kyi who well may have the political and moral authority to move Canadians to action. In Burma/Myanmar, Chevron (NYSE: CVX) and Total (NYSE: TOT) were publicly praised by the Nobel Laureate reformer and were cited as “responsible investors,” that, “were sensitive to human rights…”
In the other land, Sherritt has contributed almost nothing to Cuba in terms of charity (despite the glossy photos in its annual report). Furthermore, the company’s intense collusion with Cuban authorities is in no doubt by observers, least of all the locals. In addition to minor marketing activities and EUR 83 million paid for hydrocarbon spot contracts in 2010, Total has also recently been rumored to be courting concessions in Cuba. Chevron (much to Exxon's consternation) has successfully come to an accommodation with Chavez in Venezuela and, when the time comes, could easily usurp Sherritt’s oil and gas activities.
Meanwhile, the massive profits Sherritt has enjoyed for over three decades have in part come from paying the incredibly low fixed wages set by the Cuban regime. Furthermore, a review of its corporate social giving in Cuba indicates it is far below what other major primary resource companies like Chevron and Total devote to pacifying local communities. The average Cuban is also unlikely to appreciate the money the company has spent on US and Canadian lobbying efforts to maintain the status quo on the island.
In signs of bungling yet to come, when Sherritt was asked to comment on the moral implications of its involvement in Cuba, the company spokesmodel was silent. (He didn’t even attempt a half-hearted spin on the often valid argument that trade is more effective than a unilateral boycott.)
Disputes a few years back that saw Sherritt briefly forced out of Cuba as well as having its assets frozen temporarily with all the other foreigners indicate that the company is still not as secure in its current arrangements as it portrays. Sherritt will make an easy target for re-nationalization by Cuba’s next authoritarians, and is also unlikely to have its operations blessed by a liberal reformer either. Even a corrupt pragmatist will see the additional profit to be gained by processing its raw materials closer to home (perhaps either in Venezuela or the US) rather than shipping everything to Alberta as is done currently.
The company’s future lies in reducing its Canadian coal costs and applying its metals expertise to new markets before its Caribbean ride runs out of flume, and a finlandized Free Cuba directs its courts to begin working with Americans to resolve outstanding claims. Whether they can also hide behind their Canadian legislative shield indefinitely is also in doubt. As Canada’s Financial Post observed:
During the Trudeau era, Canada had an ardent love affair with the Castro regime. The dictatorship has since become less fashionable in left-liberal circles, although radical environmentalists such as David Suzuki continue to celebrate the island’s small carbon jackboot print. One suspects that [Conservative Prime Minister] Stephen Harper never had pictures of Che Guevara on his dorm wall.
Even though Harper hails from the same area as Sherritt there do not appear to be any links between his administration and the company. Moreover, the Canadian Left has definitely lost momentum on Cuba, and it is unlikely they would be able to resurrect the failed parliamentary response to Helms-Burton proposed by descendants of Loyalists that fled the American Revolution. (Largely a political stunt, the Godfrey-Milliken Bill called for sanctions against US individuals and entities which had acquired Loyalist property confiscated by the American government in the late 1700s.)
Regardless of the increasingly unfavorable political games, Sherritt itself has announced that it expects its Cuban nickel and cobalt output to decrease by 2% and costs to increase 33%. Moreover, technological changes that have reduced the value of nickel and sliding prices for cobalt may hamper Sherritt’s Cuban twilight and transition.
Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.