Cuba needs power projects – Sherritt CEO

Cuba needs power projects – Sherritt CEO
Toronto-based Sherritt has talked to the government about possible new
investments in the longer term.
Liezel Hill (Bloomberg) | 27 January 2015 11:40

The head of Sherritt International Corp., the biggest foreign investor
in Cuba, said industries from mining to infrastructure are ripe for
development as the island nation moves tentatively to open up trade with
the U.S.

The Toronto-based company, which has been mining nickel in Cuba for two
decades and generates about 75 percent of its revenue there, has talked
to the government about possible new investments in Cuba over the longer
term, Chief Executive Officer David Pathe said.

"There's huge opportunities for infrastructure in Cuba," Pathe said in
an interview in Bloomberg's Toronto office. "There's still a big
power-generating deficit in Cuba, and there are other resource
opportunities."

U.S. and Cuban diplomats concluded what both sides called encouraging
talks last week on restoring ties after the two countries unexpectedly
said last month they would begin steps to normalize relations after a
half century of U.S. trade and travel restrictions.

There are other ore bodies and "quite vast" nickel reserves on the
eastern end of the island where Sherritt has been operating, and the
Cuban government has indicated it's interested in foreign investment in
mining, Pathe said.

"We've talked to them about things that we might be able to do there
over the longer term," he said. "There could be more interest from
international companies."

Progressive Opening

For now though, it's business as usual for Sherritt. The company will
only see significant benefits if the U.S. president succeeds in getting
Congress to lift the full trade embargo. Pathe doesn't see "anything
happening quickly" on that, or on lifting the 1996 Helms-Burton Act,
which among other things restricts Sherritt executives and directors and
their families from entering the U.S.

There will be "a continued opening," Pathe said of Cuba. "What could
happen over a course of years is that this just occurs progressively."

The embargo has added a layer of challenges for Sherritt. It's meant no
metal sales to U.S. customers, no Caterpillar Inc. trucks at its mines
in the country, and definitely no trips to Disney World for Pathe and
his family, who've been banned from visiting the U.S. under Helms-Burton.

On the other hand, Pathe said the regulatory climate in Cuba has been
stable at a time when other countries have raised taxes and royalties,
squeezing profits for mining companies. And while decision-making in the
country can be frustratingly slow, investors can succeed if they can
convince government officials they can bring value to the country, he said.

Building Trust

"They've lived under the embargo for 50 years, which has led them to be
very resourceful," Pathe said. "They're very skilled negotiators and
will negotiate exhaustively."

A big part of succeeding on the Communist island is building
relationships with local authorities, Pathe said.

"It's not all about commercial outcomes," he said. "It's about who can
they trust, who do they believe in and who will be a good partner."

Some foreign companies will probably want changes in the Communist
nation before they invest, said Tomas Bilbao, executive director of the
Cuba Study Group, a Washington-based organization that backs a loosening
of sanctions.

"Foreign investors are going to be looking to Cuba to make much more
substantive reforms if it is to attract foreign investors, especially
U.S. foreign investors, and those include of course contracts, rule of
law, and especially labor reforms," Bilbao said by phone last week.

Madagascar Nickel

While Sherritt gets most of its revenue from Cuba, for the past few
years investors have been most concerned about a new company mine
halfway across the world. Sherritt's Ambatovy nickel and cobalt
operation in Madagascar, which started output last year, has been a drag
on the company's shares as it fell behind schedule and budget during
construction.

Sherritt has dropped 65 percent in the past five years in Toronto
trading, compared with a 24 percent decline in the Standard & Poor's/TSX
Composite Materials index.

The shares, which rose to C$2.19 on Monday, also have been buffeted by
the 25 percent slump in nickel futures on the London Metal Exchange in
the past eight months. The company's adjusted earnings missed analysts'
estimates in the first three quarters of 2014.

The Ambatovy mine, a joint venture with partners including Japan's
Sumitomo Corp. and Korea Resources Corp., uses a uncommon method to
extract the metals from ore, and similar facilities owned by other
companies have struggled to meet targets.

Convince Street

Sherritt is convinced that won't be the case at Ambatovy, Pathe said.
The company is using its own patented process that's been running
successfully for decades at its Moa joint venture with the Cuban
government, he said.

"This is the year that we will demonstrate to the world that the
Ambatovy project is the great long-life, low-cost nickel and cobalt
producing asset that we've been trying to convince the street that it's
going to be," he said.

Once that's accomplished, the company will be ready to consider the next
steps to grow its nickel business, potentially through acquisitions.
While that could mean more spending in Cuba, the company also will
consider entering a new country or region, Pathe said.

Sherritt would rather buy operations that are in or near production than
start from scratch on a new-mine project, Pathe said. The company also
is interested in partnering with others on potential acquisitions, he said.

'Greater Exposure'

"There is capital out there that is looking to get greater exposure to
resources and hasn't been able to figure out how to do it," he said. "If
we can prove what we believe we can do on Ambatovy, it makes us quite an
attractive partner from a technical perspective and an operating
perspective."

Sherritt has slimmed down and simplified its structure in the past year,
selling Canadian coal assets, cutting staff and even putting its
head-office building up for sale. The company is now focused on the
nickel business, Pathe said.

Sherritt's stock has nine buy recommendations from analysts, three holds
and no sell ratings, according to data compiled by Bloomberg.

Sherritt has agreed to sell its mid-town Toronto building to a
"long-term real estate investor," he said, and will announce details of
the transaction in its fourth-quarter earnings, which are scheduled for
release Feb. 12. Sherritt plans to move its headquarters into Toronto's
financial district, which Pathe said is emblematic of a cultural change
meant to engage more with the investor and broader economic communities.

"I think Sherritt for a long time has been seen as a bit insular and on
the outside of the mainstream," he said. "Moving our head office back
downtown is part of that cultural shift."

To contact the reporter on this story: Liezel Hill in Toronto at
lhill30@bloomberg.net

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