Sherritt's Cuban Connection (en anglais seulement)

It is every baseball fan's dream: catching a ball as it sails into the stands at a major league stadium. That dream came true last June for Ernesto Melendez, Cuba's Minister of Foreign Investment, during a visit to the Toronto offices of Sherritt Inc., a multinational conglomerate based in Fort Saskatchewan, Alta. After the Cuban official attended an annual meeting that highlighted Sherritt's growing nickel mining and oil production in Cuba, Melendez accompanied its chief executive officer, Ian Delaney, to a Blue Jays game at the SkyDome. Late in the game a pop fly dropped into the Cuban's hands as he sat a few rows behind third base. "I couldn't have arranged anything that would have cemented our relationship that well," says Delaney. Furthermore, word of Melendez's feat spread quickly in government circles in Havana, where baseball is a passion. Now, Delaney notes, "every time I see [Cuban leader] Fidel Castro, he teases me about how poorly the Jays are doing."

Outings like that - and almost five years of frequent business trips to Havana by Delaney and other senior Sherritt managers - helped the company to generate an $80-million profit in 1994, on sales of $921 million. Sherritt has also blossomed into a stock market darling - shares were trading at $14 on the Toronto Stock Exchange late last week, up from a 1994 low of $10.50. But despite all the positive results from a carefully cultivated Cuban connection, those ties have now landed the company in the centre of a political storm in the United States that could blow Delaney's ambitious corporate strategy off course.

That storm broke last week when the U.S. Treasury Department acted on its earlier threats to blacklist Alberta-based nickel mining, refining and marketing ventures that are jointly owned by Sherritt and Cuba's General Nickel Co. S.A. The trade action makes it illegal for that venture to do business with American firms; Sherritt's other divisions are free to do business in the United States. Sherritt received advance word that those sanctions were coming as part of an ongoing U.S. effort to drive Castro from office - and to placate the powerful lobby of expatriate Cubans living in the United States.

The American embargo will not have an immediate impact on Sherritt's profits, according to analyst Sam Kanes of Toronto-based ScotiaMcLeod Inc. But, he warns, "in the long-term, some U.S. measures may hurt the company's ability to raise money in the United States." Currently, Sherritt does all of its financing in U.S. dollars, in part because it deals in commodities such as oil and nickel, which are priced in that currency on the world market. However, Sherritt will not have to change the way it runs its metals business: the company respects the U.S. boycott of Cuba and sells metals from Cuba only in Canada, Asia and Europe. In an interview with Maclean's, Delaney said: "The U.S. sanctions are really just an irritant to us."

In the past, few "irritants" have slowed Delaney's forward thrust. Nearly five years after seizing control of Sherritt in a hostile takeover, Delaney and partner Bruce Walter have transformed a once-sleepy operation. As well as becoming one of Canada's largest fertilizer companies, Sherritt has oil and gas production in seven countries. It also churns out the metal slugs that the Canadian Mint turns into coins and the ultra-pure nickel and cobalt that are required to fashion artificial hip joints. When Delaney and Walter arrived on the scene, the company had been a fixture in Canadian mining for almost 70 years, most of them as a subsidiary of U.S. mining giant Newmont Mining Corp. of Denver. When Newmont sold off its 33.5-per-cent investment in Sherritt to Canadian institutional investors in 1988, it was wobbling towards insolvency.

Before laying siege to Sherritt in 1990, Delaney spent 18 years on Bay Street, including a stint as president of Toronto-based Merrill Lynch Canada Inc. and three years at the helm of The Horsham Corp. of Toronto, a holding company controlled by millionaire entrepreneur Peter Munk. After leaving Horsham and scouring the street for a business to acquire, he won the backing of Sherritt's major shareholders and ousted the company's management through a vote at a special meeting. It is a route to the executive suite that had never previously been taken in Canada. Recalls Walter, "No one in Canada had ever won a proxy fight like this. It represented a significant bet of our own capital - plus Ian's reputation." He adds, "One thing that kept us going was the fact that so many people said it couldn't be done."

Looking back, Delaney says the Sherritt takeover was irresistible because it held "a wealth of promise hidden in a snake pit of immediate problems." He immediately set about applying his Bay Street experience with mergers and acquisitions, grafting on new limbs to fill the company's strategic needs. When he took over the company, for example, it had a nickel refinery in Fort Saskatchewan that was shut down because it lacked raw material to process. To remedy that, Delaney's new team of executives quickly met with the Cubans. At the time, the Soviet Union, which had been Cuba's largest nickel customer, was going through a period of political and economic turbulence and was no longer a good market. As a result, nickel from a mine at Moa Bay, Cuba, began arriving in Fort Saskatchewan early in 1991, and Sherritt now holds 50 per cent of a Cuban ore deposit that it expects will supply it with nickel and cobalt for the next 25 years.

At the same time, Sherritt was also vulnerable to the dramatic swings in the price of natural gas, a major component for its fertilizer production. So, in October, 1991, it spent $82 million to buy Calgary-based natural gas producer Canada Northwest Energy Ltd., at a time when the cyclical oil and gas industry was at a low ebb. That deal now guarantees Sherritt access to natural gas at a favorable price.

In his biggest deal of all, Delaney spent $408 million in March, 1994, to acquire the fertilizer division of Imperial Oil Ltd., which the Toronto-based company was shedding as part of a corporate restructuring. The construction of a similar plant would have cost up to $1 billion. According to David Davidson, an investment analyst with Wood Gundy Inc. of Toronto, Sherritt now ranks among North America's lowest-cost producers of fertilizer, nickel and cobalt. In 1994, the company earned $518 million from fertilizer sales, $323 million from metals and $75 million from oil and gas sales, and the stock price has steadily climbed from $6.13 when Delaney took over.

Sherritt's strong financial performance is an issue close to Delaney's heart: the company's executive pay structure uses stock options to ensure that executives reap rich rewards when the company's stock price goes up. Delaney earned a base salary of $270,000 in 1994, compensation that ranks among the bottom 25 per cent of Canadian mining executives. But that year, Delaney exercised stock options that he had accumulated since 1990 and hauled home $4.2 million. He owns an additional stake in Sherritt worth more than $11.5 million based on last week's share price. Furthermore, he and Walter share a controlling interest in computer network builder Plaintree Systems Inc. of Waltham, Mass. Walter is now the chief executive there, and Plaintree's stock has also been a strong performer in the past year, bouncing from $3.75 to $22 before falling back slightly to trade late last week at $16.75 a share.

Unlike many of his Porsche-racing peers, however, Delaney's principal indulgence is his passion for heavy equipment. The 51-year-old Winnipeg native owns and personally maintains a fleet that includes a tractor, a backhoe and a front-end loader on his 100-acre farm in the Hockley Valley north of Toronto. He often spends his Saturdays tearing up boulders and stumps - or moving the driveway. The farm - if not the hobby - is shared with his wife, Kiki, a high-profile Toronto-based mutual fund manager, and their two children; Delaney also has two children from a previous marriage. "I like to build a business during the week, then I like to get my hands dirty building things on the weekend," he says.

But Delaney will have considerably fewer opportunities to get his hands dirty if Sherritt grows according to plan. For one thing, the company is building on its oil and rocks base with ventures in value-added high technology applications for its raw materials, such as rechargeable nickel batteries, metal lubricants for the aerospace industry and ceramic cutting tools. Another high-growth area - despite the U.S. embargo - is Cuba. Sherritt has expanded from nickel mining into oil and gas production, and the Cuban government now buys all the oil that it produces - about 2,800 barrels a day - at the going price on the world oil market. But Delaney says that as production from three offshore oilfields outstrips Cuba's needs, Sherritt may begin exporting Cuban oil. The company is also exploring investments in oil fields in Spain, Italy, Pakistan and Indonesia.

Still, the mounting U.S. political pressure on Cuba - and the uncertain outlook of Castro's regime - could soon become more than just an "irritant." And it may take all the heavy equipment that Delaney can muster to smooth Sherritt's way in the future.

Maclean's July 1, 1995