Cuba

Last month I visited Cuba as the guest of Miramar (MAE.V, C$5.75) and, in effect, the Cuban government. The trip was worth the trouble it took to fly in via Mexico City (direct charters can be had from Miami, but are really only available to those with family on the island). It's entirely legal for Americans to visit, but illegal to spend money while you're there. And it's imprudent to have the necessary visa stamped in your passport; it might provoke your own government to be much less friendly than that of the Cubans.

What I want to do in this article is assess the prospects for Cuba in general, and the mining industry there in particular.

Whither Cuba?

The big question, of course, is: What happens after Castro, and when will the Bearded One step down? It's dangerous to form an opinion based on a trip of only a few days. But I prefer to draw my conclusions from even limited personal exposure rather than rely on the opinions of reporters writing in the popular press.

Sometimes watching just one incident in person can be a better gauge of reality than a secondhand construction from dozens of press clippings written by journalists with an ideological ax to grind. And, having visited over 100 countries and lived in seven, I've had more practice at it than most.

You may recall the scene from the movie The Godfather, where Michael Corleone visits the Republic in the late 50s, during the Batista regime, to determine whether his family should invest there. All reports were enthusiastically optimistic, but he begged off after witnessing a street fight in which one of Castro's rebels didn't hesitate to sacrifice himself to take out a couple of soldiers. Michael concluded that if Castro's people were that motivated, they were certainly more than just opportunistic bandits. The point stuck with me, and it's rare that I get serious about putting my money down before sizing things up personally. You never know what you'll find, if anything, by snooping around on the spot. But I'm always on the alert for something that gives me a clue I should be zigging instead of zagging. That's part of the difference between a tourist and a traveler.

The first thing that struck me was the lack of anything resembling economic activity. No construction, no shops. Little traffic (some American cars from the 50s, some primitive Ladas from Russia, but mostly Chinese-made bicycles). The only restaurants were populated by Canadian and European tourists. Havana is in a time warp. Quiet, no activity.

But neither is it repressed. The block committees that assured political correctness in the bad old days are gone; it's no longer a Stalinist society. It's just poor. And burned out, the way an addict might be after coming down from a really long cocaine binge. And, especially, puzzled. I think that's the real key, and it bears some explanation.

Why the Cubans love(d) Fidel

Look at the three decades following Castro's revolution from the point of view of the average Cuban. Things seemed to be going so well for a while during the '60s and '70s.

After the revolution in Cuba, everybody was adequately, if simply, fed. Beggars, prostitutes, and the Mafia disappeared. Education and medical care became available to all. The average Cuban, understandably, approved of these changes, and saw his society as riding the wave of the future. Those who fled the country were widely viewed (in many cases quite accurately, considering the country's history, and the nature of the pathologically corrupt Batista regime) as leeches, exploiters, and unpatriotic bad apples. Good riddance to them, as well as the heavy sprinkling of real criminals who joined them in the export of the Marielitos. At the same time, Cuba was hosting thousands of disaffected children of the American bourgeoisie who reassured the workers and peasants of their righteousness, as they showed solidarity by helping cut cane.

Meanwhile, the imperialists appeared to be in full retreat on all fronts during the '60s and '70s. At home, the U.S. government had to bring in the National Guard to quell scores of gigantic race riots. The Kennedy-King-Kennedy assassinations, the Symbionese Liberation Army, the Manson Family, the Chicago Seven, Watergate, the Weathermen, Carlos the terrorist, high inflation, the collapse of the dollar, ballooning deficits, and a hundred other traumas made it seem like the U.S. was on its last legs domestically.

America's defeat in Vietnam by sandal-clad peasants provided evidence it was no more than a paper tiger militarily. Even better, socialism seemed ascendant everywhere-particularly with Chile, Nicaragua, Afghanistan, and Grenada tumbling like dominoes. The Cuban army was on the move in Angola, and looking elsewhere in Africa. Movies like Red Dawn put forth the prospect of taking the show on the road to America itself.

Inundated by propaganda that put all this into Marxist perspective, it made good logical sense to believe Castro was riding the wave of the future. It was a great time to be alive and a revolutionary communist.

The party's over

It's hardly necessary to point out what went wrong with Fidel's vision. But it is important to see things the way the average Cuban did (and does), in order to figure out what will happen next.

Up until about 1990, when the old Soviet Union started to implode, the Cubans were able to trade sugar to Comecon at artificially high prices, and buy oil, machinery, and other necessities for artificially low prices. The subsidy is estimated to have been worth from US$3-$5 billion annually. Economically, it was a pretty stupid charade, but combined with what could be begged and borrowed abroad, and the capital left over from the old days (e.g., even things as trivial as fixing up pre-1959 U.S. cars that populated Cubas streets and selling them to collectors in recent years - true story), the Revolution was able to stay afloat for a good long time. As Adam Smith observed, and as the U.S. government is also demonstrating, there's a lot of ruin in a country.

Since the demise of the USSR, the Cuban economy's inevitable slide into oblivion has assumed the trajectory of a flat iron thrown out of an airplane. This one-time paragon of economic and political virtue in the eyes of American liberals now sports the lowest standard of living in the hemisphere, with the possible exception of Haiti. Rations are two kilos of rice and one of beans each month, and that's about it. There's no chicken, a one-time staple of Cuban cuisine, because Russian "planners" convinced Cuban "planners" that it made more sense to mass produce the birds in the USSR.

The country is actually on the ragged edge of starvation; I suspect most Cubans now suffer from malnutrition. The government really laid out the red carpet for us at several banquets, but there was no variety in the food available. There was none of the traditional Cuban cuisine, because there's no pork, beef, or chicken available. We had seafood mainly, I suspect, because it was impossible to effectively socialize the ocean. At the few nightclubs, girls aren't interested in being bought a drink, but rather something to eat.

We met an assortment of ministers, including the president of the central bank. They impressed me as sincere and thoughtful, but troubled men. It can't be fun to realize that you've devoted your entire life to promoting an abysmal, terminal failure. Yet, understandably, they don't care to see it that way. They prefer to focus on the educational, medical, and social "successes" of the revolution. But I suspect that these things are going down the drain, as well; let me explain why I put "successes" in quotes.

It's true that almost everyone in Cuba can now read and write, and has access to higher education - a vast improvement, in itself, from the Batista days. As Abe Lincoln - and many ancient societies - proved, it's certainly possible to get an education without the books, pencils, and paper which the Cubans lack. But it's suboptimal in a high-tech world. And it's further compromised when the curriculum is not only suffused with a Marxist worldview, but the teachers are largely cut off from the outside world. The kids can't learn as much when they're hungry and malnourished. A freemarket economy would have done far better than the revolution.

Medical care has improved for the average person as well, if only because the regime cranked out tens of thousands of doctors. But the doctors have very limited medicine and almost no high-tech equipment. I suspect, however, malnutrition aside, that the average Cuban is quite healthy. Not because of the medical system, but because they have a low calorie, low fat diet, and get a lot of exercise. So there's definitely something we can learn from them in this area, although it's not the lesson that Billary seems to be taking to heart.

In any event, as their economy opens further, Cuban doctors (who are now making $2-$3 a month) will emigrate, giving a final coup de grace to the myth of socialist medicine.

Supposedly, socialism has rectified the calcified class structure of pre-Castro Cuba, which was basically one of light-skinned people on top, and dark-skinned ones on the bottom. The fact is, however, that almost all the officials we met were light-skinned; I question that things have really changed. There's certainly no evidence of racial antagonism, but I question that was ever the case in Cuba.

On the whole, almost 35 years of revolution has resulted in marginal, and likely ephemeral, gains in a couple areas, but wholesale devastation everywhere else.

Oddly, because the country really is in a time warp, the Cubans are still in denial about the fact that their problems are due to the nature of socialism itself. Entirely apart from the philosophical objections that can be raised, it is economically impossible for a socialist economy to survive because (as von Mises pointed out) it's impossible for it to calculate prices. Since prices are fixed by fiat, they inevitably wind up consuming two, or three, or ten units of capital to produce something that's worth only one unit. The Cubans still don't understand that.

The major reasons they think things went bad are: 1) the Soviets screwed up (which is true enough, as far as it goes), and 2) that the U.S. government continues to embargo the place (which is nonsense). The fact is that the Cubans have always been able to get whatever they wanted from scores of other countries; the embargo simply gives Castro a great excuse for his continuing failures and paranoia. It has hurt American businessmen, however, who've lost out as Canadians, Europeans, Asians, and other Latins have cherry-picked opportunities in the last few years. Typically, the U.S. government will shoot its society in the foot in order to take a counterproductive action against a perceived enemy.

Opportunities?

There are always opportunities in a place that's been as badly mismanaged as Cuba.

They have a wonderful road system, and it's a pleasure to drive on because there's absolutely no traffic once you're out of Havana. Someday soon, those roads will be filled with rental vehicles from foreign tourists venturing away from the beaches. The government is ambivalent about promoting tourism, however, because it will inevitably "corrupt" the workers and peasants. The rigid currency controls have already been compromised by the fact that a bellboy in a hotel can earn a dollar from one tip-which is about what a doctor or an engineer earns from the State for two weeks' work. Worse, the doctor is paid in pesos, which are almost valueless now, even within Cuba. The fact is, unless a Cuban has relatives sending dollars and goods from the U.S., he's in big trouble. Dollars are actually the main currency in daily commerce.

But once you're out of Havana, even dollars have marginal value, because there's literally nothing to buy. Wally Berukoff, Miramar's president, has taken to giving his workers things like soap, chocolate, and toothpaste, because those things would simply be unavailable to them otherwise. There is literally nothing in the country. That is a hard concept to grasp for anyone coming from the land of Wal-Marts.

It's clear that the government is going to fight a rearguard action against outside influences, despite realizing that the genie is out of the bottle. Two principles, based in Marxist dogma, seemed central to their thinking. One is that large parcels of land aren't to be sold to foreigners; that's already being subverted with long-term leases. The other is that the State should be the only employer, which results in a really perverse piece of doublethink.

A foreign company hires the services of a worker for, say, $600 a month from the state, and the State gives the worker the $600 - only in pesos, at the official exchange rate. Which means about $3 in the real world. So, under the pretense of keeping the foreigners from exploiting the workers and peasants, the government does the exploiting. Of course, this jury-rigged system will collapse, too. And soon.

A counterrevolution?

Will the average Cuban get fed up with this kind of nonsense, and revolt? I think not. There will be an evolution, not a revolution. I just can't see an eruption of violence. The mood is one of disconcertion, puzzlement, and bewilderment - not anger. The Cuban state will prove a nuisance, but will be quietly overwhelmed from 10 million directions. The average citizen has still too many warm and fuzzy feelings about the Revolution to toss it on the garbage heap of history overnight.

The main source of problems will be the Cubans in Miami - those that are politically oriented seem to have a chip on their shoulder - which is quite understandable. I don't think they'll reintegrate easily with their countrymen on the island, the culture clash will be at least as great as that between East and West Germany. They surely won't gain the reigns of power; more likely they'll be resented, and frozen out, as uppity rich cousins for a long time to come.

But none of this is a bad thing for mining companies staking their claims here now. Governments everywhere make it their business to subject the productive elements of society to all manner of inconvenience and harassment. The important thing here is that the trend has turned. Conditions will soon start to improve in Cuba; and its government, which is already toothless, will likely become increasingly irrelevant. There's not going to be any violence or counterrevolution when Castro soon joins the ranks of the departed.

Mining in Cuba

My August 1993 article on Miramar remains an accurate description of the company's two Cuban properties (as well as its Con Mine in Canada's Northwest Territories). If you kept that issue, reread it; if not, write Miramar, and they'll send you a copy. View the following comments as a limiited addendum.

There are three other companies in Cuba at the moment: Carib (CG.T, C$4.95), Republic (RGF.V, C$4.80), and Holmer (HGM.A, C$0.5 1). 1 saw overlays of their concessions on a geological map of Cuba, but that's the extent of my investigation. There's an immense volume of geological work done by the Russians, but it's very badly or ganized; finding what you want is somewhat analogous to looking for a book in a library without the aid of either a catalogue or a filing system. They'll find economic deposits, but my impression is that they've got a lot of prospecting to do before they can start developing, then mining, their properties.

Miramar has the only (apparently) two properties on the island for both copper and gold that are just about in the ready-to-mine stage. This speaks volumes about Miramar's Berukoff. I watched him relate to Cuban officials, and it was most instructive. Whereas others might have read the works of Fidel and Che so they could talk the talk, and schmooze, Berukoff has a disarming tendency to cut to the chase. He's not ingratiating, just businesslike, very candid, and upfront. Excellent qualities anytime, but especially when dealing with folks who tend to be suspicious, and afraid of being taken to school.

The terms under which foreign companies can acquire properties in Cuba are not giveaways. The government retains 50% as a carry interest, they levy a 30% tax on profits, and it's necessary to hire workers from them at inflated wage rates.

On the plus side (at least on Miramar's two properties) the 50% gets you a developed property, conveniently located, with excellent infrastructure. And while the state is exploiting both the mining companies and the workers at the moment, I have a feeling that's going to change; workers will get much more, and employers will pay much less, as the exploitive middleman gets squeezed out.

What caught my attention was the state of affairs at the Delita Gold property on the Island of Youth - a large island off Cuba's southern coast. The Russians had the property in limited production several years ago, but have since left the scene-and it's a mess. The mill was a jury-rigged affair, cobbled together from old American equipment and bits and pieces of stuff gathered from the reaches of the old Soviet Empire. Words like "safety," "efficiency," and ,,economy" apparently don't occur in the vocabulary of Russian engineers. The plant would have had to be junked anyway, but after being left to rust four years in the tropic sun, it really begged for a trip to a scrap heap.

Nearby there were hundreds of 55-galIon drums filled with ore concentrate --- each containing perhaps $1,000 worth of unrefined gold. But they were just lying there, because this metallurgically complex ore is in need of an autoclave (an expensive, somewhat sophisticated device that simultaneously subjects chemically complex rock to high temperature and pressure) to recover values. Meanwhile, natural weathering is leaching the arsenic, antimony, and other tasty heavy metals into the water table. A giant warehouse, which could serve no useful purpose anyone could determine, lay half-built and deteriorating nearby. The shaft to underground workings lay open, welcoming idle strollers to take a hundred-foot plunge.

This state of affairs is more or less typical of what the Russians have done everywhere, including at home. It's basically a cleanup operation. In fact, the whole island is. Up to 20,000 students, mostly from people's republics in Africa, were housed here to study politics and work in the gigantic citrus plantations created by the "planners." Predictably, it turned into the agricultural equivalent of their mine. Scores of highrise buildings that used to house students are abandoned and deteriorating; a few still have students from garden spots like Equatorial Guinea and Angola camping out because their governments refuse to repatriate them. Most of the citrus trees are afflicted with a deadly blight and have to be burned. The fruit from those that are still alive rots on the ground, from lack of labor to pick it and means to market it. The image of socialists organizing a shortage of sand in the middle of the Sahara comes to mind.

A repeat buy on Miramar

But these are the Cuban government's problems; it actually tends to guarantee that Miramar (and other miners that come here) will be well treated, just because it's in a position to provide employment and cashflow.

Production should start on the Mantua copper deposit by the end of next year, capital should be recovered in two more years, then profits split with the Cubans 50150. At $0.30 production costs, and $1 copper, that means $14 million to Miramar per year -- or about US$0.65 for each of its 22 million shares now out.

Production will start on the Delita gold deposit in 1995 as well, at the rate of about 100,000 ounces per year, and cash costs of about $200. As with the Mantua, the project is 50150 with the government after capital (about $60 million) is recovered (in less than three years). 50,000 ounces to Miramar, netting $200 (at $400 gold) yields $10 million, or US$0.45 a share. I feel that's very conservative, in view of the fact that gold should go far over $400.

Earnings from these projects should make Miramar worth (very conservatively) about US$10 per share. But, as I said in August, it's their Con Mine acquisition, with a probable eight million ounces of reserves and 135,000 ounces of current production that provides-, the real leverage on this company. With the way the company is reducing costs and increasing production, that should be worth over $1 a share in earnings this year by itself.

As you'll recall, I first drew your attention to Miramar at C$1.25, and then did a feature on it at C$3.90 in August. I expected the stock to have moved far higher by now. I suspect the major reason it's only $1.80 higher is that the buyer of the C$45 million private placement last fall is taking profits - a prudent action. The company most recently (December) negotiated the sale of another 100,000 shares at C$5.75.

Do I still think MAE is going to C$20 in this cycle? Yes. It's a core holding based on every parameter by which you can judge a junior gold stock.

I've got to apologize for spending so much time on what's happening in Cuba, as opposed to focusing on specific actions you can take in the markets. But it's all part of the Big Picture. And, for the foreseeable future, my advice (as well as my personal portfolio) reflects the comments summarized elsewhere in this letter.

Incidentally, I was accompanied on this little expedition by some of my closest colleagues in this business; you might be interested in their views on Cuba in general and Miramar in particular. Write to ask for a complimentary copy of their letters containing comments on Cuba: Bob Bishop (P.O. Box 1217, Lafayette, CA 94549), Adrian Day (P.O. Box 6644, Annapolis, MD 21401), and John Pugsley (824 E. Baltimore St., Baltimore, MD 21202). Broker Rick Rule was there as well, and he's a high-grade vein of information on the subject.

Call or write the company for an information package at 213 W. First St., North Vancouver, B.C., Canada V7M IB3, (604) 985-2572, (800) 663-8780, fax (604) 980-0731.

P.S. To fans of good cigars (of whom I number myself): A good Cuban cigar retails for upwards of $10 most places in the world. In Cuba, a Cohiba Elegante goes for $2, and I suspect the locals pay a lot less. Cigars, to be quite honest, are not in short supply in Cuba. And it's considered sociable and politically correct to enjoy one-unlike in the U.S.