Will Sherritt
International come to regret dealing with Communist Cuba? CEO Ian Delaney
doesn’t think so
The sun is rising over Old Havana, but the man
standing at the balcony rail is in the shade. He gazes out over the city’s
crumbling rooftops but seems oblivious to the sun-washed beauty of the harbour.
His stare is blank, disengaged. He will give only his first name, Rodolfo. He
is the operator of the camera obscura. One of many curiosities in the old port,
the centuries-old technology uses a system of mirrors to project a 360-degree
view of the exterior onto a bowl-shaped interior screen. Fidel Castro
reportedly had the camera installed to ensure that he could see all parts of
Havana from a protected vantage point. It’s now a tourist attraction.
“I was a teacher,” says Rodolfo. “I was earning less
than 20 convertible pesos [around $25] a month. Then, last summer, I got on with
Sherritt. With a bonus, my salary bumped up to 50 convertible pesos a month.”
Unfortunately, his prosperity was short lived. Earlier this year, the project
was cut. “If you know anyone at Sherritt, please talk to them,” he says. “Get
them to start it back up.”
The camera obscura is now Rodolfo’s principal source
of income. With a monthly salary of 16 convertible pesos, he is one of millions
of Cubans who are barely hanging on. Last year, the country’s agricultural
sector was knocked out, due to a particularly fierce hurricane season. That,
and collapsing markets for Cuban commodities—primarily nickel, oil, and
gas—plunged the island into its toughest economic crisis in a generation. With
deficits soaring and cash reserves low, the government is delaying payments on
profit-sharing agreements with foreign investors, even going so far as to
cancel the one to which Rodolfo alludes. This has forced a difficult balancing
act on Ian Delaney—Cuba’s biggest outside investor, Rodolfo’s former employer,
and the man known on Bay Street as Fidel Castro’s favourite capitalist.
Delaney is ceo and chairman of Sherritt International, a
multi-billion-dollar commodities conglomerate based in Toronto. Eighteen years
ago, he made a deal with the Cuban Communist leader. He’d get mining rights;
Castro would get the foreign exchange he needed to keep his economy going.
Since then, Cuba’s economy has been bolstered in no small part by Sherritt’s
investments. In addition to providing capital and jobs, Delaney’s company built
power plants, and it now supplies the island with 60 percent of its gasoline.
As for Sherritt, in 1995 it booked assets of $677 million; the figure now tops
$10.1 billion. Approximately one-third of that value derives from Cuba, thanks
to the company’s preferred access to Cuban resources, and the global
commodities boom of the past decade.
Ian Delaney is a tall man in his mid-sixties, with an
ice-blue gaze that belies his gentle demeanour. (His other Bay Street moniker
is the Smiling Barracuda—a nod, supposedly, to his genial yet aggressive style
of deal-making.) He spends much of his time on airplanes, but right now he’s in
his office at the top of a nondescript building at Yonge and Summerhill in
Toronto, talking about how he first met Castro.
“In good times,” says Delaney, waving his hand
dismissively, “everybody’s your friend. Everybody makes big bets in good times.
It’s when you are both about to careen off the edge—that’s when you really get
to see the colour of the other guy’s eyes, eh? ” He laughs. “But we made a bet
on [the Cubans] and they on us, and it’s worked out really well.” Until now,
that is. Currently, Cuba is buying as much as 80 percent of its food abroad,
which helps explain why the island spent $14.5 billion (US) on imports in 2008.
Unfortunately, in that same year revenue from exports fell to just $3.8 billion
(US) as a consequence of the world economic downturn.
In 2006, Fidel, who was suffering from poor health,
began passing control of the country to his younger brother, Raúl, known to
Cuba watchers as the more pragmatic of the two. Many thought the new leader
would respond to the financial crisis by further opening up the country’s
economy. Instead, he has clamped down, imposing austerity measures over the
spring and summer. Cubans are now rationing basics such as electricity and
fuel, and this past summer Raúl slashed economic growth projections for the
rest of 2009 from 6 to 1.7 percent.
“Essentially, the Cubans are running out of cash,”
says Heather Berkman, a political risk analyst with the New York–based Eurasia
Group. The crunch may partially explain why earlier this year the Cuban state
oil company, Cupet, terminated its long-term oil field production sharing
contract with Sherritt and a Montreal company, Pebercan. The Cuban government
is compensating both parties, but the lost contract effectively liquidated
Pebercan and wiped out a quarter of Sherritt’s net Cuban oil production—not to
mention that it put Rodolfo and many others like him out of work.
Dial back to 1991, when both Castro and Delaney
faced even bleaker circumstances. The collapse of the ussr had caused that
$3-billion hole in Cuba’s balance sheet. Few cars could be found on the streets
of Havana, because scarcely anyone could afford fuel. Castro was getting
desperate.
Delaney, too, was in a tough spot. Together with his
then partners, Eric Sprott and Bruce Walter, he had just won control of
Sherritt in a proxy fight—a victory that at the time appeared hollow. “The only
reason I’d been able to take it over was because it was functionally
insolvent,” he explains. “We had a nickel refinery with nothing to refine.”
His first challenge upon ascent was to reopen
Sherritt’s Alberta metals refinery, which had been languishing for two years
for want of a nickel feed. The best targets seemed to be Russia and Cuba. He
investigated Russia but says he couldn’t get comfortable there. Then, by
happenstance, he was invited to lunch with a group of Cubans who were touring
Canada. Among them was Raúl de la Nuez, formerly Cuba’s minister of foreign
trade. “We were laughing through the whole lunch,” says Delaney. “It was just
rock and roll.” So in January of 1991, he went for a visit.
In Havana, he met Marcos Portal Leon, then the
minister of basic industries, who arranged for him to inspect the nickel
operations at Moa. “So we get on some old Russian jet,” says Delaney, who has
trained as a pilot and asked if he could handle flying duties. When his hosts
said yes, he found himself navigating a Russian-made flight deck covered in
Cyrillic characters he couldn’t read. But they arrived without mishap, allowing
Delaney to inspect a mine that, prior to the 1959 Cuban Revolution, had been
the property of what is now the American mining company Freeport-McMoRan. In
state hands, it was running way below capacity.
The party then flew on to Varadero, where Delaney got
a first-hand view of the country’s nascent resort industry. But he hadn’t yet
bagged the real prize: an audience with Castro. The opportunity presented
itself on his second day in Varadero, over lunch. The group included a member
of Castro’s council of ministers, who asked Delaney how he took over Sherritt.
Delaney started explaining what a proxy fight was, but the man stared back at
him, uncomprehending. Delaney tried again. “A shareholders’ revolution,” he
said, this time getting his point across. “Who were the shareholders? ” the
minister asked. “The institutions—pension funds, financial
institutions—responsible for the savings of workers,” Delaney replied.
He got his audience with Castro soon after. They met
at the Palace of the Revolution, the former law courts in downtown Havana,
which had been erected by the pre-revolutionary dictator of Cuba, Fulgencio
Batista.
“Castro is a very skilful interviewer,” Delaney says.
“It’s sort of a defence mechanism. He wants to control the conversation, and
the best way to do that is to seek your opinion.” Delaney, needless to say, is
the kind of person who always has an opinion. “Later, once I’d gotten to know
him, I realized there is no person of consequence on this planet who has not
had lunch or dinner with Fidel Castro. What am I gonna tell him? So I started
interviewing him.”
The strategy worked, leading to Delaney’s first deal
for Cuban mining rights, in early 1991. Three years later, it bloomed into an
ambitious joint venture: a profit-sharing initiative between Sherritt and Cuban
government–run General Nickel. The venture allowed for nickel and cobalt to be
mined in Cuba, processed at Sherritt’s Alberta refinery, and then sold to
international markets other than the United States. Cuba also threw in the
underperforming mine at Moa.
In 1995, Delaney proposed a new deal to the Cubans: he
wanted to be designated a “welcome” investor. (He sold the idea to Sherritt’s
board with an analogy to nineteenth-century Canadian parliamentarians, who
offered liberal terms to European investors to secure capital for the Canadian
Pacific Railway.) The Cuban government agreed and sent him a letter outlining
the terms. Delaney later included it in a shareholder prospectus, as proof he
had negotiated secure access to the resources the company needed for the
indefinite future.
At the time, the United States was in the process of
passing the Cuban Liberty and Democratic Solidarity (or Helms-Burton) Act,
designed to stiffen the trade embargo against Cuba. Delaney knew that
anti-Castro forces there wouldn’t approve of Sherritt’s activities, so he decided
to split the company up, placing its Cuban operations under the auspices of
Sherritt International. Then he went to his directors and offered them a
choice. If they were comfortable with being on a US blacklist, they were
welcome to stay. If not, they could move to one of Sherritt’s new divisions.
“Some of them had to leave; they had business
interests in the United States,” Delaney says. “Others just plain old didn’t
want the aggro. But most of them stayed.”
Sometime during this period, he also paid a visit to
Washington, DC, where he informed Canada’s embassy staff that he would be
making Fidel Castro a major business partner. He knew this would not be
popular, given the sensitivity of the subject and Canada’s complex relationship
with the United States. “The trade attaché said, ‘What are you going to do? ’”
Delaney recalls, chuckling. “I said, ‘Raise a boatload of capital, for the
specific purpose of flying in the face of Helms-Burton.’”
Sure enough, in November 1996, eight months after
Helms-Burton passed, Delaney received a letter informing him that he was on a
US State Department blacklist. Along with all directors and senior officers of
Sherritt International and their families, Delaney was denied entry into the
United States.
The company remained enough of a bête noire for
the anti-Castro lobby in the US over the next few years that in 1998, Lincoln
Diaz-Balart, a congressman from Florida, remarked that “Delaney has very
willingly accepted his role as the most clearly identified business figure in
collaboration with the Castro dictatorship. That is a very risky corporate
policy, and I would not want to be in Delaney’s or Sherritt’s shoes once the
Cuban people are allowed to elect their representatives.” In fact, the
consequences of the deal for Sherritt had long since begun to take effect:
before Delaney struck his deal with Castro, more than half of the company’s
nickel had been sold in the United States.
With its new corporate structure in place
and its political course charted, Sherritt International started the next phase
of its Cuban play: diversification. It began to invest in the country’s
fledgling oil and gas sector and built up its utilities business, providing
Cubans with a stable source of electricity and solidifying Sherritt’s position
as one of the country’s best foreign friends. “When people click a light on at
home,” Delaney explains, “we want them to know that a Sherritt plant is
delivering the electricity.” From a business perspective, the results were
spectacular. By 1997, output at Moa alone had increased to 26,500 tonnes, more
than twice its 1994 production. Sherritt had lost $20 million on its metals
business in 1993, but its half of the Cuban joint venture earned $30 million on
sales of $147 million in 1996. In 1997, when most mining companies were hit
hard by low metal prices, its profit jumped by $4 million.
Fun with Fidel aside, doing business in Cuba carries
with it special challenges and risks. For starters, there are ongoing questions
over who actually owns the property Sherritt has been using on the island, and
in particular the Moa operations. The Helms-Burton Act states that the US trade
embargo cannot be lifted until property considered interfered with by the Cuban
government has reverted to its rightful owners. What’s more, it authorizes
American citizens to sue, in American courts, any foreign national or company
that purchased or made use of property nationalized by Cuba after the
revolution. Freeport-McMoRan could therefore, in theory, pursue a claim over
Sherritt’s interests at Moa.
It’s also conceivable that Sherritt would benefit in
the event the embargo is lifted, since its history in the country would give it
a powerful comparative advantage and, barring punitive action, it would regain
access to the enormous US market for its oil, gas, and nickel products. In
April, when the Obama administration announced it was lifting travel
restrictions on Cuban Americans going to the island, Sherritt’s stock jumped 25
percent.
The company’s expansion and success in Cuba raise some
important questions about its relationship with the local workforce, however.
Those lucky enough to find jobs with Sherritt remain, by North American
standards, extremely poor. Rodolfo’s salary of 50 convertible pesos, which he
regarded as princely, works out to about $60 a month. Discussing the company’s
policies concerning workers in developing countries, Delaney says, “We have to
be careful we don’t induce inflation. If the average wage is $2 a day, you
can’t just start hiring people for $10 an hour.” He also points to what he
calls Sherritt’s near-perfect record on labour issues, not only in Cuba but
worldwide. “We have one of the best labour management accords in North
America,” he says. “At the conclusion of present contracts, we will have gone
sixty-two years—twenty-two on my watch—without ever losing a person-day because
of a labour dispute.”
Delaney’s claim appears quite correct across the
company’s global divisions, but then labour disputes aren’t exactly encouraged
in Cuba. According to Daniel Wilkinson of Human Rights Watch, the Castro regime
has systematically repressed virtually all forms of political dissent, denying
its citizens such basic human rights as freedom of speech, freedom of assembly,
and the right to organize in pursuit of better wages and working conditions.
Asked about Cuba’s rights record, Delaney poses a
rhetorical question: “Do I like it? No. There is a lot wrong with Cuba, and it
should be doing better.” That said, he continues, those who criticize the
regime should consider the positives as well. “In Cuba, nobody is outside the
system. Everybody gets some rudimentary degree of health care. Can you say that
about Mexico City? ” He pauses. “We do business with all these regimes, and
there is a fundamental level of welfare in Cuba that just isn’t achieved
anywhere else.” In his view, Cuba should not be held to a higher moral standard
than countries such as China and Pakistan, which he believes are more deserving
of censure.
To be certain, engaging the Cuban government on rights
issues isn’t easy, as then prime minister Jean Chrétien discovered during a
state visit in 1998. According to Rollercoaster, a book by former
diplomatic adviser James Bartleman, when Chrétien met with Castro he presented
the Cuban leader with a list of four political prisoners he wanted to see
released. Castro’s reaction was to hiss at Chrétien that he had “never been so
humiliated,” and the dialogue ended there.
Sherritt has become so closely identified
with Cuba that some financial analysts regard the company’s fortunes as a proxy
for the country’s. By 2007, Sherritt had increased its oil production in Cuba
to 30,600 barrels per day, up nearly 4,000 barrels from the beginning of 1997.
Net earnings (profit) had also risen to $370 million, as the global commodities
bubble drove the price of nickel to $17 (US) a pound. The company’s stock
soared to an all-time high of $17.48 (US) in 2007, before nickel crashed back
down to around $7 (US) a pound, leading Sherritt to record a net loss of $290
million for 2008. In July of this year, it reported its half-year earnings:
owing to the cancellation of the contract between Cupet (the Cuban state oil
company), Sherritt, and Pebercan, Sherritt’s net earnings for the second
quarter had sunk from $80 million the year before to $24 million, a decline of
almost 70 percent.
Officials at the Cuban consulate in Ottawa refuse to
comment on why the contract was scrapped, and calls to managers at Pebercan,
which has since ceased all commercial activity, were not returned. But news
reports at the time indicated that the issue was the Cuban government’s failure
to remit payments in a timely fashion.
Delaney characterizes Sherritt’s role in the deal like
this: “Ten years ago, Sherritt and Pebercan began to do some joint venture
projects in Cuba. But the Cubans took Pebercan out. We got sideswiped
inadvertently.” Though his company lost some leases, “In the fullness of time,”
he says, “I don’t think I’m going to care.”
In February 2009, Cuba committed to paying Sherritt
$60 million (US) in compensation for the failed deal, which it has duly handed
over. It also paid more than $160 million (US) in previously outstanding oil
and gas receivables earlier this year, which Sherritt subsequently invested in
certificates of deposit. Delaney remains confident in his Cuban investment, boasting,
“We have an amazing book of assets right now in Cuba. We’ve still got
twenty-five-year nickel assets, twelve-year oil assets, and fifteen-year power
assets.”
Uncertainties remain, however. Earlier this year, the
Cuban government delayed the visa process for Peter Kent, Canada’s minister
responsible for the Americas, who had publicly announced that he was going to
broach the subject of human rights while on the island. In return, the Canadian
government similarly delayed the visa for Cuban senior cabinet minister Rodrigo
Malmierca, who was coming to Toronto to attend a Sherritt International board
meeting. Ironically, this all took place around the same time as Barack Obama
began liberalizing his country’s Cuba policy. “It’s like the hemisphere is going
in one direction and our PM, flying the flag of anti-Communism in his little
boat, is going in another,” says Mark Entwistle, former Canadian ambassador to
Cuba. “Canada’s trade policy in Cuba traditionally has been engagement but
dialogue. But now the PM has invented something different.” (Kent’s
spokesperson did not respond to requests for comment.)
Given the challenges involved in dealing with the
Cubans, Sherritt has been aggressively diversifying its international holdings.
Its biggest new project is a deal with Japan’s Sumitomo, South Korea’s Korea
Resources, and Montreal-based snc-Lavalin to develop a $4.5-billion mine at Ambatovy,
in Madagascar. The company expects it to yield 60,000 tonnes of nickel per
year, but it is being built in a country that, as Delaney puts it, effectively
has no internationally recognized government. Sherritt struck its initial deal
under a government that was deposed in March, in a military-backed coup mounted
by Andry Rajoelina, a media owner and former disc jockey. In July, the company
disclosed that a French law firm engaged by Rajoelina was reviewing Sherritt’s
right to develop the mine. Though the project is at risk, Delaney points out
that the company’s total financial exposure is a mere $500 million. Of course, this
is provided no further cost overruns occur, on a project that to date has been
plagued by them.
The Ambatovy project, like Sherritt’s Cuban holdings,
has also provoked criticism from activists, although for different reasons.
Madagascar has one of the world’s most diverse ecosystems, hosting about 5
percent of the planet’s species, some 80 percent of them endemic to the island.
The mine will tear up over 1,300 hectares of land, much of it rainforest that
harbours nearly 1,400 species of vascular plants, sixteen types of lemur, and
130 species of amphibians and reptiles.
Delaney acknowledges the dilemma. “[The Ambatovy mine]
is smack in the middle one of the most endangered rainforests in the world,” he
says. “There’s nothing I can do about that; it’s where nature put the nickel.”
But then again, he points out, the local population was burning down the forest
to survive. “There are 20 million people there, living on the edge. So what do
you do? Develop or not develop? ” The choice was to develop, conforming to
standards agreed upon by banks and other creditors, and enforced by—well, that
remains in question.
Whatever the risks, and despite the concerns of
environmentalists, investors have responded positively to Delaney’s strategy,
driving Sherritt’s stock up sharply from a low of around $1.69 a share in March
to $7.64 in early October. Mark Entwistle, the old Cuba hand, believes
Delaney’s unique relationship with the Castros and Cuba will allow the company
to weather the troubles there as well. “Cuba is a long-haul market,” he says.
“To be successful, companies must believe they are investing in a long-term
relationship with an entire nation. I put Sherritt in that boat. They will ride
it through. Nickel prices will go back up, and they will suddenly look brilliant
again—just for being in Cuba.”
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