Castro’s Favourite Capitalist- by Rachel Pulfer (Walrus Magazine, December, 2009)

The Walrus is a Canadian general interest magazine which publishes long form journalism on Canadian and international affairs, along with fiction and poetry by Canadian writers. It launched in September 2003, as an attempt to create a Canadian equivalent to American magazines such as Harper’s, The Atlantic Monthly or The New Yorker.

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.

It was 1991. The Cuban leader was navigating the collapse of the Soviet sugar market, which had been worth as much as $3 billion annually to his country. The loss would precipitate Cuba’s “período especial” — a time when food shortages meant the average Cuban lost twenty pounds. Some survived on fried grapefruit skins; others reared pigs in their bathrooms for protein.

“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.”

Proxy fights — in which one shareholder convinces others to throw out existing management — gained notoriety during the ’80s, when takeover kings Ronald Perelman and Carl Icahn prowled Wall Street, but they have always been relatively rare in Canada, where most large publicly traded companies are protected by entrenched interests or by regulation. Nevertheless, Sherritt’s vulnerability made it a target, and Delaney’s 1990 coup marked him as an assertive force in Canadian industry.

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.

On a personal level, Delaney began to enjoy his most favoured capitalist status. He framed the letter from the US State Department, which he still keeps in his Toronto office. (The downstairs boardroom is decorated with cartoons lampooning the US trade embargo.) He also started getting to know Fidel. “We hosted a cocktail party down there in one of those protocol houses in Havana,” he says. “Castro arrived at 10:30 p.m. There must have been a hundred people there; he got around to talk to every one of them.” As host, Delaney accompanied Castro, but by 2:30 in the morning he was ready to drop. “My back is killing me. My arches have collapsed. I desperately need to go to the bathroom, and he’s still firing along.” Eventually, Castro looked at his watch and realized the time. “So he’s heading for the door. But on the way out, he taps one of his senior ministers on the shoulder and says, ‘Hey, I feel pretty good. Let’s go wake up some ambassadors!’ ”

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.

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