The Floodgates of Cuban Mining
Only 120 miles of ocean separates Cuba from the southeastern tip of the United States, but the course of 20th century history has turned these two nations into complete opposites. The legacy of the Cold War and the Cuban Missile Crisis made relationships sour even though prior to the takeover of communism, more Americans visited Cuba than any other overseas nation -- especially during prohibition, when the rum flowed strong. While Fidel Castro has yet to kick the bucket (at the current time of publication), US-Cuban relations took a massive step forward with the Obama Administration announcing a deal that would lift restrictions on US citizens and companies testing the waters in Cuba. That's big news for the mining sector, as Cuba possesses significant mineral wealth that could be of great value to investors once the pair of scissors cut the last roll of red tape.
The history of Cuba ties in closely to mineral wealth. The very first Spanish explorers to set foot on Cuba and neighboring Caribbean islands 500 years ago cared more for gold prospecting than any other aspect of the colonization; only after gold and silver mines had been tapped out did the island colonies have to turn to cash crops like sugar and tobacco. Today, there's not enough valuable metals to merit more than a cursory mining operation, but there's plenty of base metals that hungry markets across the globe eagerly lap up. Only five nations in the entire world produce more nickel that Cuba and only four nations produce more cobalt. While the US-Cuba deal won't be as profitable as it could have been back in the boom days of 2009, when nickel and cobalt traded for three times their current values, it's nevertheless a major investment opportunity in these metals.
The Details Of The Deal
The Obama Administration's deal with Cuba doesn't mean that it's first come, first serve on Cuban mineral rights. Indeed, much of the treaty has speculative rather than immediate value to both nations. It would require an act of Congress to lift the Helms-Burton Act (more commonly known as the Cuban embargo) rather than an executive action. This means that it remains illegal to travel to Cuba, unless you go through Mexico or Canada first, and that American corporate interests must set up shell companies in Cuba rather than directly sell their products. One example: Coca-Cola, which must be smuggled into Cuba (and, for that matter, North Korea) despite the fact that one of the first Coca-Cola bottling plants opened in Cuba over a century ago. This puts American mining interests in a rather sticky situation regarding exploiting the mineral wealth on the communist island. The state controlls nearly all mining operations in Cuba and for the foreseeable future would continue to run nickel- and cobalt-mining facilities even with American investments and infrastructure. Many American mining interests would operate in a similar fashion to how Canadian mining conglomerates drill for semi-precious and base metal. The Sherritt International firm (trading on the Toronto Stock Exchange for $2.19 a share), for instance, enjoys a joint-venture operation with the Cuban government even if they're not allowed to sell the product to American markets. Rest assured, you cannot find a shred of Cuban nickel in an American nickel coin. Sherritt may not represent the best course of action for American companies to follow, however, since the company's value has been tumbling in the past five years. They enjoyed a big bounce with the announcement of US-Cuban relationship normalization, peaking at $2.50 a share, but that's a far cry from the 2011 value of nearly $10 per share.
It's one thing for the Obama Administration to put pen to paper and announce renewal of diplomatic policy, but it's another thing entirely for American interests to set sail from Miami and wash up on the shores of Havana. Luckily, the Cuban government has seen the train coming down the tracks and appears poised to facilitate an embracing of outside corporate (and, particularly, American) interests by changing certain economic policies. First, and by far the most important, Cuba announced they would lower their corporate profit tax rate for foreign entities from 30% to 15%, effectively doubling the return on investment that a company can hope for if they plunge capital into the suddenly market-friendly nation. What's more, new companies putting down roots in Cuba won't have to pay taxes for a full first eight years of their tenure. Since Cuba needs approximately three billion dollars per year in outside investment to maintain a functional economy, they're pushing for more and more breaks for companies interested in setting up shop in the fifth-largest market in North America. Natural resources interests, however, may need to pump the brakes before they enjoy the bulk of these tax deals: existing Cuban policy extracts a hefty 50% corporate profit tax rate on all mining, foresting, fishing, and land development. That unhappy number remains in the tax books, meaning that mining interests need to strike a deal with the Cuban government or resign themselves to fork over half of all the pesos they accumulate in a financial year.
Takeaways: New Markets, New Opportunities
Commodity markets have been humming with the news that Cuba and the US may soon enjoy relationships that more resemble diplomatic policies with Canada or Mexico than those with North Korea. Cobalt spiked by nearly 10% after the announcement of the deal, while nickel rose from about $7 per pound to $7.50. Those flare-ups have largely gone, and both base metals have dropped in value as the hype faded. Today, you can pick up both metals for cheap, but the better option remains holding a long position with either commodity until the announcement by both Americans and Cubans that the mining conglomerates will begin to dig. Cobalt and nickel alike will return to relevance with the elimination of the embargo, but we may be into 2016 (note that it's an election year) before it happens.