Sherritt International Corp T.S

Could become take-out candidate

[goldish]

ANALYSIS-Sherritt set to benefit from closer U.S.-Cuba ties

Wed Apr 15, 2009 9:13pm BST

By Euan Rocha

TORONTO, April 15 (Reuters) - Sherritt International's (S.TO) prospects, darkened by a year-long swoon in commodities prices, could brighten considerably if the U.S. government lifts long-standing restrictions on doing business in Cuba.

After falling more than 75 percent in the past year, shares of the Canadian mining and energy company have rallied this week after the White House announced plans to lift some of its curbs on the Communist-run island. [nN13331508] The change in Washington's attitude toward Cuba raises hopes that the United States might eventually lift its trade embargo on Cuba -- a move that could have major implications for Sherritt, which owns oil, power-generation and nickel/cobalt assets in the Caribbean country.

Easing restrictions on Cuba would allow Sherritt to sell its heavy crude, nickel and cobalt in the United States, while also allowing the company to buy U.S. supplies, said Ian Howat, an analyst at National Bank Financial in Toronto.

"What's maybe the most important is the expanded investor base (that Sherritt would gain) in the U.S., once more investors there accept investing in Cuba," Howat said.

The U.S. Congress in 1996 passed the Helms-Burton Act, which allows it to impose sanctions on any non-U.S. companies trading with Cuba. The law also bars the management of companies trading with Cuba from entering the United States.

The U.S. State Department has deemed Sherritt's business interests in Cuba to be a form of "trafficking" under the Helms-Burton Act. Some of the company's top management, along with their spouses and dependents, are therefore barred from entering the United States.

Almost 30 percent of Sherritt's 2008 revenues of C$1.61 billion ($1.34 billion) came from its businesses in Cuba. All of its power and metals business revenues currently originate in Cuba, along with more than 95 percent of its oil output.

Sherritt's shares, which have risen more than 25 percent this week, still trade at a discount to those of most of its peers, and the company has been unable to attract interest from U.S. investors, who are wary of Sherritt's ties with Cuba.

Besides looking to attract investors, Sherritt will likely look to the United States for technology that will allow it to more efficiently tap its heavy oil assets in Cuba.

"They may even find buyers for some of their Cuban (crude) oil assets," said Salman Partners analyst Raymond Goldie, noting that U.S. companies have technology much better suited to tapping the Cuban wells than anything Sherritt has access to right now.

"In the near term, a partial or full removal of existing U.S. trade restrictions with Cuba could provide Sherritt with better access to supplies, equipment, technology and capital," said RBC analysts Robin Kozar and Fraser Phillips.

"Ultimately, normalized relations could open the possibility of Sherritt becoming a take-out candidate," the two analysts said in a note to clients.

OBSTACLES REMAIN

Thus far the Obama administration has only said it plans to ease restrictions on Cuban-Americans who may want to travel or transfer funds to Cuba. It also plans to allow U.S. telecom operators to seek licenses in Cuba. [nN13396346]

That said, Washington is still a long way from ending the trade embargo it imposed on Cuba more than four decades ago. [nN13381846]

"While this is a good start in the normalization of the relationship between the U.S. and Cuban governments, it is not an end to the trade embargo that was initiated in 1962," said National Bank's Howat.

Furthermore, the development of Sherritt's Ambatovy nickel-mining project in Madagascar is facing cost overruns and could be threatened by the political turmoil in the country. [nLU47467]

"Recently they announced the budget for the Madagascar project is going to rise significantly, so that raises the financing issue," said David Whetham a fund manager at Scotia Cassels, which owns about 900,000 of Sherritt's shares.

Still, analysts and investors remain optimistic about Sherritt's prospects. Desjardins Securities raised its price target on Sherritt's shares to C$5.30 from C$4.75, while National Bank has raised its target price on the company to C$5.50 from C$5.00.

"The near-term prospects for Sherritt are good, depending on where you think commodity prices are going to go," said Whetham. "For the long term, the company's got a pretty attractive growth profile."

($1=$1.20 Canadian)

(Reporting by Euan Rocha; editing by Peter Galloway)