Castro's Capitalist

Canada's Sherritt cleans up in Cuba

On a balmy evening last September, Ian W. Delaney, chairman of Canada's Sherritt International Corp., hosted a glittering reception at Havana's Palacio de Convenciones. The next day, Sherritt would be the first capitalist company to hold a board meeting in Cuba since Castro's revolution took hold in 1959. Among those at the party were the British and Canadian ambassadors, much of Cuba's Cabinet, and Vice-President Carlos Lage Davila. But the celebration was capped by Fidel Castro, who toasted Delaney and his board as being "brave" for defying the U.S.

It was a tribute to Sherritt's status in Cuba. While dozens of companies have invested in the island, Sherritt is by far the biggest player and the only major Western company focused solely on the communist nation. Sherritt's flag flutters outside the island's biggest nickel mine, at Moa, while Sherritt rigs are reviving output from old oil fields. Now, armed with $675 million in fresh capital--a huge sum for a country with a gross domestic product estimated at $7 billion--Delaney says he wants to make Sherritt a "proxy for Cuban economic development." He declares: "This country is the best investment opportunity in the world."

Delaney is making a bold but calculated bet. And he's placing himself at the center of the latest face-off between Washington and Havana. That clash has escalated to the World Trade Organization, where Europe is challenging Washington's Cuba policy as a violation of international trade rules. With Cuba still hurting from the cutoff of Soviet subsidies six years ago, Castro is counting on foreign companies to revive Cuba's economy. Joint ventures are a key plank in his effort to prop up Cuba through limited economic reforms.

Meanwhile, Washington has a new Public Enemy No.1. "Ian Delaney has made a deal with the devil," fumes Marc Thiessen, aide to Senate Foreign Relations Committee Chairman Jesse Helms (R-N.C.). Last summer, Delaney was among the first to be barred from entering the U.S. under the Helms-Burton Act, which tightens sanctions against foreigners investing in Cuba.

So far, the U.S. moves have only emboldened Delaney. "We occupy the moral high ground in Cuba," he says. He is backed by Canadian and European institutional investors who snapped up $506 million of Sherritt high-yield debentures in November. "Cuba's assets are incredibly cheap, and the potential return is huge," says Frank Mersch, vice-president at Toronto's $11.2 billion Altamira Management Ltd., which holds 11% of Sherritt.

Cuba's need for capital, technology, and markets created the opening for Sherritt. Castro is offering foreigners deals with rates of return up to 80% a year, analysts say. Delaney, who is called the "smiling barracuda" for his bottom-fishing, predicts he'll quadruple his Cuban assets, to more than $2 billion, within five years.

MUTUAL PROBLEM. The lanky Delaney, 53, met Castro after winning control of Sherritt Inc. in a 1990 proxy fight. Sherritt was nearly insolvent, Delaney recalls, because its Alberta refinery was shut for lack of nickel feed. He approached Castro, whose "financial condition was [just] as desperate," he says, and got a nickel-supply deal in 1991.

In 1994, that contract blossomed into Cuba's most ambitious joint venture, a 50-50 deal between Sherritt and General Nickel Co., a company under the Ministry of Basic Industry. The venture mines nickel and cobalt in Cuba, refines them in Alberta, and sells them in world markets except the U.S. While Sherritt contributed its Alberta refinery, Cuba kicked in its Pedro Soto Alba mine at Moa, built in 1958 by a predecessor of New Orleans-based Freeport-McMoRan Inc., plus 50 years of reserves.

Moa was operating at just 54% of capacity when Sherritt came into the picture. Equipped with 1950s technology, it was also "run by the world's worst managers," says Delaney. Sherritt shipped in new equipment and set to work transforming the plant's authoritarian, Soviet-era culture through retraining.

The results at Moa proved startling, even to Sherritt. Output is 26,000 tons, twice that of 1994. This has been achieved with fewer than 10 expatriates at the mine, which employs 1,680 workers. Six of Moa's eight division managers are Cubans, as is the CEO, RaPound l de la Nuez. Sherritt, which lost $12 million on its metals business in 1993, earned $30 million on sales of $147 million from its half of the joint venture in 1996.

With the credibility won from the Moa turnaround, Delaney pitched the idea of creating a "Canadian Pacific of Cuba." He wanted to be designated a preferred investor, just as Canada's Parliament had tapped the railroad a century ago to mobilize European capital for Canada. In November, 1995, Cuba granted Delaney's request in a letter offering him "a diversity of investment opportunities" and "advantages."

To insulate it from U.S. retaliation, Delaney then split up Sherritt Inc., putting the Cuban operations into the new Sherritt International. He sold off the rest of the operations, including a fertilizer unit that did business in the U.S.

Now, Delaney's goal is to diversify far beyond nickel. Sherritt is expanding in oil, where it has nearly tripled production of old fields since 1993 through advanced technology. The company plans to invest in modernizing sugar production and in upgrading transportation and communication infrastructure.

But the most "fantastic" opportunity is tourist-oriented real estate, Delaney says. Cuba has large stretches of undeveloped beaches. Once the embargo is lifted, Delaney figures property prices will soar. He wants Sherritt to become an "umbrella developer" of vacation communities similar to those that line Florida's west coast.

Ultimately, Sherritt's prospects may hinge on how long Castro hangs on. If he lasts a few more years, Delaney could reap huge profits. Mersch, who invested in Sherritt Inc. shortly after Delaney won control, says subsequent restructuring produced a fivefold return on his own investment. This time, he predicts "a ten- to twentyfold return."

That may sound outlandish. But for all the U.S. blustering, savvy investors believe Cuba is a solid bet. The best time to get in is now, they argue, when there's no competition from Americans. Current investors wager that a post-Castro government won't act against them, for fear of scaring off new money. If so, the irony of the U.S. embargo is that it may end up enriching foreign investors while strengthening Castro's hand. As the largest foreign player, Sherritt stands to benefit most, meaning Ian Delaney gets the last laugh.

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