‘Political noise’: Canadian miner hopes for business as usual after the Castros’ long rule ends
After years of paying down debt and restructuring its operations, a new question mark hangs over Toronto-based Sherritt International Corp: whether the leadership change in Cuba will affect its extensive nickel, cobalt and energy operations located within the tropical island nation.
Sherritt refers to itself as Cuba’s largest foreign investor, and derives most of its revenues from operations there.
Now, as Cuba heads into its first full month in a half-century without a Castro in the presidency — having elected Miguel Diaz-Canel on April 19 — Sherritt has much to lose or gain from any changes in policy or economic reform. Publicly, chief executive David Pathe, who visits Cuba at least a half dozen times every year, is playing down the significance of the transition.
“Our experience has been that the political noise around Cuba, obviously because of its political relationship with the U.S., paints a darker picture than reality,” Pathe told the Financial Post. ”We’ve found it a pretty stable place to do business.”
He said he met Diaz-Canel once at a dinner in Cuba when Prime Minister Justin Trudeau visited, but it was several years ago. By all accounts, Raul Castro hand-picked Diaz-Canel as his successor, and is expected to continue the economic reforms that are slowly opening his country’s small private sector.
Pathe has told investors to expect the status quo, and waited until the end of his earnings call with investors last week to even mention the change. The company stock rose 5.7 per cent on the Toronto Stock Exchange on Monday, but is down 5.4 since the new president took over.
Much of Pathe’s attention has been focused on Sherritt’s reduction of nearly $2 billion in debt during the past four years, and how the expansion of electric vehicle fleets is creating optimistic outlooks for nickel and cobalt — which respectively accounted for 52 and 36 per cent of its revenues in the first quarter of 2018.
About Diaz-Canel, he said, “This is an orderly transition that we’ve been expecting to see there for some time.”
Still, there are changes afoot: On Monday, Toronto-based Millbrook Minerals Inc. announced an agreement to explore for gold, silver and other metals in Cuba with a state-owned mining company. It called it “the first such agreement of its kind,” because it is unrelated to nickel.
To understand how Sherritt came to operate in Cuba 25 years ago is to revisit a bit of cold war history: In the 1990s, the fall of the Soviet Union, a major trading partner, wreaked havoc on Cuba’s economy.
In 1994, sensing opportunity, Sherritt’s former chief executive Ian Delanney cut a deal with former President Fidel Castro to form a 50-50 joint venture, in which nickel and cobalt mined in eastern Cuba was sent to Sherritt’s refinery in Canada.
Although Pathe said the company can’t sell products to the U.S., and he can’t travel there because of his role at the company, the U.S. embargo has had little effect on its business.
Sherritt also provides power for Cuba, and two parties remain on good terms. Cuba doesn’t always pay Sherritt on time for its energy usage, but Sherritt tells investors it always pays: It currently owes $126 million in overdue receivables, down from $132 million in December.
“They’ve got a good reputation in Cuba,” said Jim Lennon, a nickel analyst at Red Door Research, about Sherritt. “They provide employment, and they pay their taxes.”
Still, he said huge changes lie ahead for the nickel market: Currently, about three per cent of the nickel goes to electric vehicle batteries but that number could grow by five to ten times during the next decade.
That may also create new dynamics between nickel producers and nickel refineries and smelters.
Sherritt’s mining and processing facility in Moa, Cuba.
In March, at the Prospectors and Developers Association of Canada conference in downtown Toronto, Mark Selby, chief executive of Royal Nickel Corporation, predicted that for a complex set of reasons, including advances in how nickel can be converted into a form suitable for batteries, nickel producers will have leverage to exact better financial terms from smelters and refineries.
Lennon said there are still many questions about where the nickel for batteries, and for use in stainless steel will come from and how it will be processed. But he agreed there is potential for a shift in leverage toward producers over the businesses that process nickel.
Pathe said he wasn’t familiar with Selby’s discussion, and that he was quite comfortable with Sherritt’s position in Cuba. Through its joint venture with a state-owned company, both sides own 50 per cent of the mines and refinery used to process nickel, he said.
“There’s still lots of ore in Cuba,” said Pathe. “We fully expect to be in the nickel business in Cuba for many years to come.”
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