Your Next Offshore Investment Bonanza?

Published on 18 April 2009

Offshore investment is getting a bad name lately, but that’s the tax-avoidance variety. There’s another potential investment offshore, and a few elite investors are already licking their chops at the prospect. I’m talking about Cuba.

On Monday, the Obama administration lifted restrictions on Cuban-Americans who want to travel and send money to their island homeland. This is a calculated break with a half-century of U.S. policy of isolating communist Cuba.

Now, investors and politicians alike are wondering when the rest of America’s obsolete cold-war-era policies toward Cuba are scrapped. After all, China is run by oppressive Communists, and we do business with China. Venezuela is run by bellicose militants who hate us (Hello-o-o, Hugo Chavez!) and we do business with Venezuela.

The only reason Cuba is still isolated is to mollify sugar growers in Florida and a few wing-nuts … two political groups that are fading in influence with each passing hour. Their protests were drowned out by positive reaction to the White House’s move — a fact that will only embolden President Obama to further open the door to Cuba.

At the same time that President Obama lifted restrictions on Cuban-Americans, he also allowed U.S. telecommunications firms to seek business in Cuba. The broader U.S. trade embargo remains in place … for now.

What Happens If The Financial
Restrictions Fall Away?

Sure, tourism in Cuba will boom. Cuba is just 90 miles from the United States and an ideal destination for American tourists. We’ll probably see some U.S. hotel and construction companies get a piece of that action, and it would be a boon to the cruise-ship industry.

But the opportunities that excite me the most are the natural-resource variety.

Cuba is rich in cobalt, nickel, manganese, iron ore, chromium and copper. And oil. Did I mention the oil?

Cuba’s domestic oil production has surged in the past two decades.

CRUDE OIL: Since the 1990s, Cuba’s domestic oil production has surged thanks to applications of new technology to old fields. According to the Cuban government, Cuba currently produces around 65,000 barrels of oil per day, nearly 50 percent of its consumption.

Foreign companies are responsible for most of this production and Havana is currently seeking additional foreign investment to raise production to 100,000 barrels per day by the end of the decade.

More interesting is the discovery of potential deep water oil and gas reserves off the northern coast of the island.

Cuba said late last year that oil reserves in its part of the Gulf of Mexico are twice as big as U.S. estimates — totaling some 21 billion barrels. Earlier this month Manuel Marrero Faz, a Cuban government oil adviser, seemed to tell Bloomberg News that Cuba wanted to work with U.S. oil companies:

“We are open,” said Marrero Faz, noting that Chinese, Russian and Angolan companies are in talks to explore areas about 100 miles off the U.S. coast. “We’re very close to each other. We’re neighbors. Why not do business?”

Cuba divided its 112,000 square kilometers of the Gulf of Mexico into 59 exploration blocks when it opened up to foreign companies in 1997. Six companies (from Canada, India, China, Spain and Norway) signed up for 16 of the blocks. Oil exploration is undertaken in conjunction with Cubapetrol (Cupet), the state oil firm.

And then there are the other resources …

NICKEL: Cuba produced 70,000 metric tonnes of nickel for export in 2008 — nickel accounts for 50 percent of the island’s export earnings in recent years — making nickel Cuba’s most important export. But plunging nickel prices are also making the nickel mines in Cuba nearly unprofitable, and Cuba could soon cut production.

Could Cuba benefit from a foreign partner who could bring in new technology and efficient mining methods? It sure worked in Mexico.

And it would be worth it. Cuba’s National Minerals Resource Center reports that eastern Holguin province has 34 percent of the world’s known reserves, or some 800 million metric tonnes, of proven nickel plus cobalt reserves. There are an additional 2.2 billion metric tonnes of probable reserves.

Speaking of cobalt …

COBALT: Cuba supplies 10 percent of the world’s cobalt, which is critical for making super alloys used in aircraft engines and other products.

Cobalt is considered a strategic metal by the U.S. government — that means it is defined as a commodity whose lack of availability during a national emergency would seriously affect the economic, industrial, and defensive capability of the USA.

The U.S. is almost completely import dependent for its supplies of cobalt AND consumes about 20 percent of world production. So do you think a deal with Cuba for cobalt would be in America’s best interests? Heck, yeah!

MANGANESE: Next to iron, manganese is the most essential mineral in the production of steel. You cannot produce steel without adding 10 to 20 pounds of manganese per ton of iron.

Therefore, it is essential for America’s national defense, and it was certified as a strategic mineral in 1987. And like cobalt, we import almost all of our manganese. France, Gabon and Brazil supply manganese to the U.S.

Too bad the U.S. has sold off its strategic manganese stockpiles to the bare walls. Guess who is sitting on a nice supply of manganese, closer to our shores than any of our other suppliers? You only get one guess, and that should be “Cuba.”

How To Get In On The Opportunities
Of The Cuban Treasure Trove

I could go on, but you get the picture. Cuba is an underdeveloped treasure trove of natural resources close to our shores. That’s not to say there aren’t potential pitfalls.

Corporations that deal with the Cuban government have experiences that range from China-esque (awkward) to Venezuela-esque (downright raw deals).

But, as with China, it’s probable that the more business we do with Cuba, the more the country will open up, and the more dependent on trade with us they will become — and therefore, they’ll be more eager to get more partners by enforcing and obeying contracts.

Here are some companies that are already making deals in Cuba, or could soon …

Sherritt International (S on the TSX, SHERF on the pink sheets in the U.S.) is a Canadian company that is the largest foreign investor in Cuba.

Sherritt produces approximately two-thirds of Cuba’s oil and also owns a 50 percent interest in Cuba’s Moa nickel and cobalt joint venture at Moa Bay. This project includes mining, processing and refining operations.

Sherritt is a nutshell example of the good and bad of investing in Cuba. Sherritt’s shares keeled over in January after the Cuban government said it would scrap a production-sharing oil contract and pay $140 million in compensation, including $60 million to Sherritt’s Cuban subsidiary.

The loss of the oil field, known as Block 7, means the company’s Cuban oil production will fall 25 percent to about 23,500 barrels per day for 2009.

Sherritt has also faced missed payments from Cuba, but chief executive Ian Delaney said in February the government has agreed to pay off the $162 million it owes Sherritt over the next five years.

Some other ideas …

Repsol (REP on the NYSE). This Spain-based oil company is hard at work developing oil resources in Cuba. Repsol is exploring offshore oil blocks that already show signs of oil.

Petrobras (PBR on the NYSE) is also exploring for oil in Cuba in partnership with the Cuban government.

A more outside bet, but still worth considering, is Freeport-McMoRan Copper & Gold Inc. (FCX on the NYSE). This company mines and produces copper, gold, and silver, along with other minerals, all over the world.

And interestingly, FCX owned the Moa Mine before it was confiscated by Fidel Castro in the revolution. I think FCX might have some institutional history in know-how that might be very useful in developing Moa — and a deal between the U.S. and Cuba has the potential for a partnership as some form of reparations for the confiscation.

If you want to hedge your bets by moving outside of natural resources Cruise ship operator Royal Caribbean (RCL on the NYSE) and rival Carnival (CCL on the NYSE) will probably soar if and when travel restrictions to Cuba are lifted for everyone.

And remember — U.S. telecoms can bid on projects in Cuba now. That means Verizon Wireless, owned by Verizon Communications (VZ on the NYSE), Vodafone Group Plc (VOD on the NYSE) and AT&T Inc (T on the NYSE) all stand to gain.

There is risk in any Cuban trade. But it could also be the next offshore investing bonanza.

All the best,

Sean