The Johnny Depp of Closed-End Funds Talks CUBA (part 4)

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Closed-end fund guru Tom Herzfeld discusses Cuba and his most popular fund, the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA).

[Continued from part 3]

Tom Herzfeld:  Now that Trailer Bridge is out of the picture, we’re actively searching for shippers with shallow-draft vessels that meet our investment criteria.  Recently, I haven’t been too impressed with the performance of our holding in Ultrapetrol Bahamas (NASDAQ: ULTR), but as I look at their fleet and examine pictures of their ships, it seems many of them would qualify as the kind of shallow-draft vessels that would do well with Cuba’s (and the broader Caribbean’s) geography.  The management also seems familiar with Latin markets, but one question I have is what portion of their extensive fleet could be re-positioned from [Argentina’s] Plate River, where many are currently, to take advantage of opportunities in a Free Cuba?

Nick Slepko:  While Trailer Bridge would have benefited from the end of the embargo, Canadian Castro crony Sherritt International (TSX: S) was saved by it.  Sherritt is reportedly the largest private investor in Cuba currently.  Along with a handful of other Canadian and European companies, why isn’t Sherritt included in the Fund’s holdings?

Tom Herzfeld: That was both a political and a financial/economic decision. For a Caribbean fund, I didn’t want to go all the way to Canada to buy a company doing business in Cuba.  Moreover, I thought it violated the spirit of the embargo and would have offended many people that were investors in our fund.  It also didn’t turn out to be a good investment for others.  Even if they had been based somewhere else I probably wouldn’t have bought Sherritt. All of their activities in Cuba are being conducted on properties confiscated by the Castro government.

Last year the Cuban government temporarily froze assets of all the foreign companies in the country, including Sherritt’s, and even now is still only permitting limited withdrawals.

We did buy Freeport-McMorRan (NYSE: FCX).  Theirs are the plants that Sherritt is now operating which were confiscated by Castro.  I believe Freeport has the largest prior claim not only against the Cuban government, but also against Sherritt (I would think).  And we have done very well with Freeport.  We liked the metals play, but it was also a large Cuba play.

Cuban Electic Company is another interesting Cuba play.  When we bought it, it was not restricted from trading.  Cuban Electric was another US company doing business in Cuba whose plants were seized by the Cuban government.  All that was left in the company was cash in a US bank.  We bought its shares for about six or seven dollars a share – the value of the cash they had in the bank.  So, if they ever recover anything on their claim, which was for about $70 per share plus interest, it could be substantial.

Slepko: Well, this is the big question.  It appears that the farm lobbying in the US was the major reason why we got an opening up in trade with Cuba over the last decade despite Congressional hardliners.  I’m curious if a company like Freeport with their substantial prior claim (and they still seem agitated about it) is going to spearhead some of the recovery and reparation efforts when Cuba does open up.  How do you see it playing out?  Is it just going to be water under the bridge, or are people going to want their bridges back?

Herzfeld: While I’ve never seen Freeport talk about their Cuba claim, I think there will have to be some type of compensation to American companies that had property seized. I don’t think Congress will lift the embargo unless the issue has been addressed in some meaningful way.  After all, these are US citizens that had their properties stolen.  I don’t expect anyone to be paid in full, but they’ll have to get at least something.

The defaulted debt of the Republic of Cuba is interesting as it is a relatively small issue and the Cuban government could pay that off.  Unlike the debt issued by Castro, which is agency debt, the Republic of Cuba bonds we own are sovereign debt. Our custodian has our bonds in their vault. There are still 18 years of coupons attached.

Slepko: From reading OFAC-related legislation it appears that if an American owns stock in an entity involved in Cuba, they can technically be fined, or worse – though from discussions with trade and legal consultant it does not appear to have ever been enforced.

Herzfeld: Actually, the US Government is very strict and does enforce the violations. As part of our compliance procedures we have to check all investments to see if they are on the restricted list before purchase.

Slepko:  What about your other mining stock?  Tahoe Resources (NYSE: TAHO) is involved in silver mining in Guatemala – which has a Caribbean coast (a small one) – what got you interested in them?

Herzfeld: Guatemala was one of the Caribbean countries I hadn’t visited. The first time I heard the name Tahoe was when the president of the company was interviewed on CNBC. I was always interested in Guatemala before hearing about them on CNBC, but couldn’t find a good investment until Tahoe opened up. After doing the research, Tahoe felt like a good way to get into that part of the region and while we were following it there was a point when metal prices were down, and their stock was down.  So we had an opportunity to get in at a relatively low level. 

[Continued in part 5]

Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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.

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