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CIGARS, SUGAR, AND NICKEL—BUT MOSTLY CIGARS As you might guess, cigars are a major foreign exchange earner for Cuba, and the only one, other than tourism, that has a future here in my opinion. In fact, there are only two other industries here that have what could be only charitably described as a present: nickel and sugar. The nickel mines in Oriente Province, run by Sheritt-Gordon, are totally uneconomic at current prices, and only kept in production because they employ people and generate foreign exchange. But keeping them running is serving to make the country poorer, not richer; it’s equivalent to an individual borrowing money to keep the doors of a failed business open, instead closing it down and getting a job. And nickel prices, for reasons I’ve detailed in the recent past, aren’t going anywhere. The sugar situation is equally pathetic. Sugar is trading at less than $.08 a pound, and even with workers paid the equivalent of $20 a month, the sweetener has to be a financial disaster. In the case of Cuba that’s partly because, using oxcarts, machetes, and other medieval technology, the workers aren’t worth much more than that. There are only
two areas where Cuba has a competitive advantage: tourism and cigars.
Cigars have enjoyed a renaissance over the last decade, I suspect partly as a reaction against politically correct anti-smoking propaganda, and partially as a response to the long-lived economic boom. The last time cigars were so in favor was the 1920’s, an ominous sign of the times. Good cigars signal market tops because they’re expensive; you can’t get a hand-rolled stogie for less than $3 anywhere, and $5 to $10 is more typical. People don’t send that kind of money up in smoke when the market’s down, or they can’t make the mortgage payment. Machine-made cigars feature ground up filler held together with some kind of glue, and a paper binder; they may be cheap, but they’re not worth smoking. Cuba has historically cranked out about 100 million cigars a year, but Castro ordered that be increased to 150 million (the current level) and then 200 million to meet the demand. I think there’s been some diminution of quality, which evidences itself in cigars that don’t draw well and wrappers that come undone easily, among other things. What’s likely to happen is that Cuban production will peak just as the world enters the Greater Depression and people stop smoking cigars because a) they can’t afford them and, b) they don’t want to be characterized as an undeserving and malevolent rich person. The popularity of cigars is as cyclical as the popularity of stocks. I, however, don’t include myself among the potential ex-smokers. Besides, I’m deserving and benevolent. What is a good cigar? That depends to a large degree on what you like. Personally, I prefer a mild smoke in the shape of a panatella (relatively long and thin). The premier Cuban brand is the Cohiba, which is what Fidel used to smoke before he gave it up about 10 years ago. They’re excellent smokes, but at about $15-$20 each in Cuba (and upwards of $50 in most other countries), not really worth it. My own choice is the Rey del Mundo, which sells for about $4.00 in Havana, and to my taste is actually superior. Two tips: Beware of buying cigars on the street in Havana; you’ll pay $60 a box for phony Cohibas that are completely unsmokable garbage. Get a good humidor; if cigars are allowed to dry out they can be totally ruined, and have to be thrown out THE FUTURE The $64 question
with regard to Cuba is: When will the US embargo come down, so Americans
can vacation and invest? Notwithstanding my earlier comments on the embargo,
its lifting will send the island into a spectacular boom. And there’s plenty
of evidence it’s going to happen soon:
PROPERTY I’m pretty familiar with the Caribbean, and I’ll give you the bottom line. There are a few bright spots that are friendly, pretty, progressive, and upmarket (e.g., the Caymans, Tobago, Saba, St. Eustatia), but on the whole the place is very expensive, racially charged, and regressing economically. Very little merits consideration for a vacation, much less an investment. Cuba, however, is a special situation. Prices are extremely low. The place is completely undeveloped and in dire need of capital. The population has been isolated from the rest of the world for almost 40 years, and even around Havana it’s going to be years before they learn to resent tourists. Tourism to Cuba has been growing almost exponentially (from about 500,000 in 1992 to perhaps 3 million in 2000), and that’s going to continue. But things will really explode when, and this is absolutely inevitable, the place becomes legal for Americans. At that point millions of gringos will pour in annually. Why would anyone go to Florida when Cuba is only 90 miles offshore? The US Government itself estimates 12 million visits from Americans the first year the embargo comes down. But that’s an impossible number, since only a fraction of them could be accommodated with facilities that are even in the planning stages. I look at businesses and real estate from an investment perspective all over the world, and I can tell you that Cuba is all you need to know about to make an absolute killing for at least the next generation. There are various places in Africa, Asia, and South America, many of which I’ve discussed here, that may have more of some desirable things and less of some undesirable things. But there’s no place that has the mix that Cuba does, plus one overwhelmingly huge factor: It’s right on the doorstep of the US. The good news is that Cuba is all an intelligent property speculator needs to know for the next generation. The bad news is that the Cuban government is only allowing commercial investment, where it acts as a joint venture partner. The standard deal is that a foreigner puts up 100% of the capital for his 50%; the Cubans put up the property for theirs. The investor is exempt on import duties, and pays no income tax until he’s received 100% of his capital back. This is a fair deal, but it precludes passive investment. A real pity in a country with over 2000 miles of pristine seacoast; priced, when it trades, at only a few hundred dollars an acre. The fact is that around a third of the land in Cuba is still privately owned, and theoretically can be transferred. The problem is finding out what there is, and who owns it. And even if you can jump those hurdles, it will be a real problem getting permission to buy, and transfer title. In other words, it’s completely impractical to try buying land. Too bad, because some beachfront will be a 100-1 shot over the next decade. Overseas Cubans with relatives on the island should get those relatives working on the problem; there could hardly be a more productive way for them to spend their time. A word to the wise. There is, however, one (and only one, to my knowledge) direct play on the success of Cuba as a tourist destination: Leisure Canada. LEISURE CANADA Leisure Canada (LCAN, C$2.50) is the world’s only direct publicly traded play on Cuban tourism and property. The company was founded by Wally Berukoff, who’s been a friend of mine for about 10 years. It’s no coincidence Wally has made most of his considerable wealth in hotels and real estate. LCAN has 22.9mm shares out, of which Wally himself owns 9.46mm (43%), and Robertson Stephens owns 3.9mm (18%), plus 2.9mm warrants exercisable at C$2, plus a $4.5mm debenture convertible at C$2.50. The company currently has about US$3 million in cash, and a burn rate (largely planning and design work) of about $500,000 a year. So far they’ve spent about $10 million getting where they are. THE PROPERTIES Most tourism to Cuba today is of the package tour, low budget variety; LCAN is going strictly upmarket, building five star destination resorts. I’m not sure
it serves much purpose to describe in detail here what LCAN owns in Cuba;
I urge you to get a care package from the company. But this summary will
give you some idea of their scope. There are three near term projects:
The AN-2 , incidentally, is a huge Russian biplane, dating from World War II, featuring a four-bladed prop and seating for about 20. One of the charms of countries like this is lay in the pilot inviting me (with about 50 flight hours) and Ben Johnson (who has his own plane and several thousand hours) to take turns flying it. In Russia, the pilots invited Ben to not only fly, but land, a three-engine jet because they mistakenly believed he flew for United. These properties are simply superb. I’ve seen the development plans for them, and they’re great. The only potential clinker is the financing, starting with US$15 million in 1999. The reason the projects have been delayed for several years is the money; it’s tough for a small company, no matter how excellent its assets, to raise nine figures of capital. But the environment is now much more favorable for Cuba than was the case a few years ago I have confidence they’ll raise the money, but by the time they succeed, the stocks price will reflect that fact; that’s the nature of speculation. THE BOTTOM LINE It’s hard to put a real number on what LCAN is worth now because the future is still in the Blue Sky category. If they build out their properties on time, and sales and rentals are what they should be, then it’s easy to see US$1 a share earnings in four years, with a lot more to come, plus huge appreciation of their assets. If they stay on schedule, we should see LCAN trading at about 10 times its current price within three years. I think it’s likely, because I think Cuba is ready for take-off, and this company is a very direct way of capitalizing on that. But anything can go wrong, despite the fact I know their management well and have a high degree of confidence in them. LCAN is a speculation, but one with relatively low risk and high potential. I’ve owned a healthy chunk of the shares for several years, and have no plans to sell. It’s possible that, even if I’m right and it turns into a proven growth stock, you may be able to buy the shares for less in a couple of years; market values are, after all, primarily a matter of psychology. And shares representing property tend to trade at discounts to what they “should”. But the chances are better that, especially when the embargo comes down, LCAN will go for a wild ride upwards. I think you should buy it. I’d initially hoped to spend New Years Eve 2000 in a suite on the beach at Jibacoa, but it doesn’t look like that’s going to happen, even though they will be breaking ground there in the summer. I don’t think Simon Cooper, the President of Marriott Canada and Senior VP of Marriott International, would have joined their board on Feb8 if he didn’t have confidence in its prospects. Ben Johnson, who runs First Union Securities, would be a good choice to purchase the stock through. If you’re in Canada, I can recommend broker Mina Mohtadi, who was also on the trip. Especially since the stock currently stills trades OTC Toronto, the world’s worst exchange, you’re ill-advised to use your guy at Charles Schwab for a host of reasons. Get a care package from the company at 888-600-8687, or 604-990-9599. On the Web at www.leisurecanada.com More on
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