Investing in Cuba: Canada Colludes with Vampires & Zombies

The Motley Fool/ By Nick Slepko

Some on the Internet like to speculate that OfficeMax (NYSE: OMX) is the “largest property claimant in Cuba,” due to (now merged) Boise Cascade owning Cuban Electric Company before the utility had its assets seized by Castro. Regardless, OfficeMax is unlikely to be the tip of the sword when it comes to settling up with a Free (or at least freer) Cuba.

The future of Cuba does not bode well for foreign companies already established on the island.  Like Juan of the Dead (2011), Cuba’s first horror film (and most expensive private production to date), undead claims will rise and infect the island until they have devoured all of its nascent vitality.  Reviewers note that in the zom-com, “Hilariously, throughout the film, the government-controlled radio keeps referring to the flesh eaters as ‘U.S. funded political dissidents.’”  The joke may not be far from the truth.

Just as islanders fight the zombies with slingshots instead of shotguns, locals will be out gunned by an invasion of international attorneys in a likely Pay the Pigs scenario.

 

Time and time again everyone from Paul Ryan to Barack Obama have denounced the embargo on Cuba only to reverse themselves once they got into power and decided the fight wasn’t worth it.  Even prominent Cuban-Americans like former Secretary of Commerce Carlos Gutierrez signed on to the embargo despite a well-known and outspoken history against it when he was Kellogg’s man in Mexico prior to ascending to the company’s CEO position.  Al Gore’s defeat in Florida after taking the opposite side of the Elian Gonzalez affair has reinforced the perception that the Cuban-American vote is critical (though Obama carried Florida without it, and it is notable that Gore also failed to carry his own home state of Tennessee.)

Cuba embargo hardliners still exert enormous influence on US foreign affairs.  As long-time US-Cuba trade consultant Kirby Jones, President of Alamar Associates, points out:

The policy today is arguably tighter than it was twenty years ago.  Now you’ve got Helms-Burton, Clinton gave away executive prerogatives, and the embargo now has to be lifted and changed by Congress...We still have tens of millions of dollars publicly budgeted for regime change, [the US Office of Foreign Assets Control] is going around fining banks around the world for doing business in Cuba – Obama’s levied more fines than Bush did and is fining banks that do business with us…So, yes there’s travel down there, but the fundamentals haven’t changed.

Recently, the Wall Street Journal reported:

Since the Cuban operations of big multinationals are relatively small, regulators won’t punish Americans who buy shares, says [Erich Ferrari, a sanctions compliance attorney]. A Treasury spokesman said that the department would only get concerned if the company’s primary business was with Cuba or if an American investor took a controlling interest in the company.

When contacted OFAC did not offer any guidance on what would constitute "primary business" for a company to qualify, nor did it clarify if it would be illegal for a US citizen to own shares in such a company.  However, in Kirby Jones’ experience it shouldn’t be a problem, “…as long as the American does not exercise financial or management control, and the company’s business is not just with Cuba.  Over the last fifty years, that law has not been tested much (if at all) and could be a substantial loophole.”  Tom Herzfeld, manager of the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA), differs in philosophy and experience:

...I thought [investing in Sherritt International (TSX: S)] violated the spirit of the embargo and would have offended many people that were investors in our fund...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.

As a result of its Cuba dealings, Sherritt executives and their families have been barred in the past from entering the US under the same laws that designate terrorists, drug dealers, and other undesirables.  The company has spent a pretty loonie dealing with the fall out of US reprisals, and if any shares with Cuba exposure are likely to trigger sanctions on a typical American shareholder, it would most likely be those of Canada’s coal king.  (Though it has yet to happen.)  The company’s various subsidiaries and joint ventures produce 10% of the island’s electricity, 43% of its oil, and they have been among Cuba’s top foreign investors since the demise of the Soviet Union.  Moreover, after tourism, Sherritt’s Moa Bay mining operation is the largest foreign exchange earner for Cuba and the cash it holds in Cuban banks are a significant source of (legitimate) liquidity (such as there is) for the country.

At one point, it was estimated that up to a third of the company’s shareholders were American nationals, so it would seem that shareholders have more to fear from the Ghost of Christmas Past (and Christmas Yet to Come).  In fact, the coal in Sherritt’s Canadian stocking may not be enough to offset potential loses for a company on the naughty list.  Previous claims from those that had their property expropriated, and future penalties from the US and (all-too-common) Cuban officials’ perfidy are a great risk to investor capital.  Nevertheless, when Sherritt first entered Cuba in the 1990s it was a company on the verge of collapse and its gambit has paid off for those that invested in the leadership of (now-Chairman) Ian Delaney – described by Business Week as “Fidel’s favorite capitalist”.  The post-Castro era on the other hand is problematic.

In 1996, then-CEO James Moffet (now Chairman) departed from mining major Freeport-McMoRan’s (NYSE: FCX) usual silence (outside the courtroom), when he candidly expressed his views on Sherritt capitalizing on assets that once belonged to Freeport:

People paid nothing for this asset. [The Castro regime] just took it over…I think Sherritt ought to look at it and say how would they feel about it (if it happened to them)…Whatever happens here, people need to be thoughtful, because this is a deal where it may be [Sherritt's] oxen in the ditch at some point later on…

Freeport is a far more influential force in the world than Sherritt, especially when its political activities and accomplishments are compared to the small investments Sherritt has made in domestic think tankers, a few elected federal politicians, and a handful of lawyers.  While Sherritt’s political maneuvering has (usually) kept it off the infamous “Specially Designated Nationals” list of the Treasury Department, its three Moa subsidiaries are listed as SDNs and there has been no indication that Freeport, let alone, the old, but still kicking, Cuban emigres have become any less likely to forgo their claims to property expropriated by Castro.  Still over half of Sherritt’s USD 1.3 billion assets in Cuba are directly subject to the 1960 claims, and even the newer undertakings are likely to be linked in someway by legal entrepreneurs capitalizing on a highly-politicized atmosphere.

However, speculation and interest in Freeport’s Cuba claims may be misplaced.  Afterall, it wasn’t resource interests, but the farm lobby that successfully outmaneuvered congressional hardliners to create the first substantial cracks in the embargo.  Moreover, at the time of its nationalization, Freeport’s activities in nickel mining were just as substantial as its extraction of the island’s ammonium sulfate (fertilizer).  In 1994, the sulfur and fertilizer business was spun off and eventually became part of American fertilizer giant Mosaic (NYSE: MOS). According to OFAC, since at least 2005 Mosaic has been licensed to conduct activities in Cuba – though sanctions (and Sherritt’s operations) likely prevent them from engaging in the kind of activities Freeport conducted in the 1950s.  Still, when Freeport dumped its less profitable fertilizer business in the ‘90s, it was unclear if their Cuba claims went with it. (Neither Freeport nor Mosaic would comment officially on any Cuba-related questions.)

Part 2 >>