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 Buy of Pigs
Buy this low priced Canadian stock as a high-risk play on Cuba
by James Passin
When jackbooted thugs kidnapped Elian Gonzalez at gunpoint to the roaring delight of 60% of Americans, I knew that Clinton had successfully eroded any residual appreciation of liberty. I've been to Cuba and seen firsthand the depressing reality of totalitarianism. Apparently, the majority of Americans are too busy nursing margin calls in their daytrading accounts and watching "Big Brother" to care about the systematic subversion of our constitution.
The FBI's ill-named "Carnivore" email bugging system may have caused a short-lived uproar, but no one seems to care that one year's worth of Gore's subpoenaed emails is still missing.
It is clear that the political power of the Miami exiles has peaked. I find it shocking that, in an election year, no one in Washington took the opportunity to pander to the Cuban-American lobby. Rather than criticize Clinton, Bush chose Cheney as his running mate, a vehement opponent of trade embargoes.
With the anti-Castro lobby in disarray, the end of the 40-year-old Cuban embargo is in sight. The House just voted to lift some restrictions on sales of food and medicine to Cuba. Whether Gore or Bush takes the presidency, further softening of the embargo is likely over the next four years. With 52% of younger Cuban-Americans in favor of opening up relations in Cuba, the political currency of the anti-Castro extremists will continue to devalue.
Leisure Canada (LCN:CDNX) is the world's only pure play on Cuba. Leisure Canada is developing three premium real estate projects through a joint venture with the Cuban government. With a US$50 million market cap and low share price, Leisure Canada represents a ground floor speculative opportunity to position your portfolio for the inevitable lifting of the U.S. embargo. As an extremely high risk, long-term play on Cuba, I rate LCN as a Speculative Buy with a three-year target of US$10.
Domino theory
Chinese stocks are currently soaring on prospects for global trade normalization... Russian stocks rose 600% before crashing during the Asian crisis... Visionaries who took early bets on the death of communism made fortunes... Cuba remains the last vestige of communism.
I think the coming grand bull market cycle in Cuba will consist of three massive waves. During the first wave, insiders will take advantage of chaos to snap up a limited supply of available shares. In the second, strategic and portfolio investors will clamor to buy majority stakes in state assets from the Cuban government. And, finally, a flood of retail investors will enter the market, triggering a Cuban asset bubble.
As a contrarian speculator, I want to buy during the "first wave" and sell during the "third wave." This investment strategy requires getting in well ahead of Wall Street. It is my view that the initial wave of a grand bull market cycle in Cuban assets has already begun.
An equity bubble is built on excess liquidity and dreams of riches. This requires an underlying romantic story to capture the imagination of mainstream investors. I can't think of a more powerful story than Hemingway's Cuba...
Spanish conquistadors, French pirates, English colonialists, American industrialists, Sicilian mobsters and Cuban Marxists have made fortunes in Havana...
 Now it's your turn
I have been following Leisure Canada (LCN:CDNX) since I toured the company's properties in February 1999. While I was blown away by LCN's properties, I didn't recommend buying the stock for several reasons. First of all, I am naturally suspicious of all Canadian resource stocks. Secondly, LCN did not have adequate balance sheet cash to begin any of its developments. Finally, the Cuban government had not actually transferred surface rights to LCN's subsidiary.
Despite my initial reservations, I had a very positive impression of LCN's management team. While I have not met CEO Walter Berukoff, I know that he has a long history of successful entrepreneurship in Cuba, mainly in the mining business. Having personally inspected LCN's properties, I can vouch for their existence (you never know with some CDNX-listed stocks). And I can also testify to their breathtaking beauty. When the embargo is lifted, I strongly recommend that you vacation at an LCN resort.
While the stock has fallen by almost 20% over the last eighteen months, both the fundamental and technical case for LCN is compelling. LCN has raised over US$11 million through a convertible debenture and warrant issue. While the dilution will be fairly painful to existing shareholders (when and if all the warrants are exercised and debt converted), I would guess (and this pure speculation on my part) that at least some cheap stock has passed into the hands of savvy Canadian operators — the kind of players who know how to push up stock prices.
There was a classic Brian Hicks-style "volume spike" in mid-May, when a 500,000 share block crossed on an uptick — an extremely bullish technical indicator. After this, and the positive newsflow on US/Cuban relations, I began accumulating a position for my fund in the open market.
The case for tourism
In normal emerging markets, small cap resort/hotel stocks rarely become market leaders. But this is Cuba. Other than tobacco, sugar and nickel, tourism is Cuba's only major hard currency earner. Tourism to Cuba is definitely a growth industry. It has grown at an annual rate of 19.6% per annum in the 1990s — the fastest growth in the Caribbean. Tourist revenues are expected to hit US$2 billion in 2000. When the embargo is finally lifted, there will be an explosion in tourism from the U.S. Millions of Americans will flock to branded, high-end resort destinations...
More killing fields for Tiger Woods?
Jibacoa cascades into the sea like a dream of rolling emeralds... Lush, green hills fall into a valley spilling out onto one of the most splendid beaches in the world... I can't begin to describe the magic of the place.
Located on the northern coast of Cuba, halfway between Havana and Varadero, Jibacoa is LCN's first property development. It's a stunning 5.5 square kilometer site. Development plans call for two 18-hole golf courses, six hotels, retail shops, a marina and an equestrian center. Phase I calls for the construction of a hotel under the Meridien flag. I believe Meridien may be interested in acquiring a minority equity stake in the project.
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Investors and company officers inspect Leisure Canada's construction plans on-site.
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LCN has also acquired the Professional Golfers Association (PGA) license for its Jibacoa golf courses through the establishment of a joint venture with PGA Europe. Jibacoa will house Cuba's only PGA-licensed golf courses. This will be a tremendous tourist attraction. Jibacoa will eventually host the PGA's Cuba tour!
LCN has broken ground on Phase I with initial surveying. Heavy construction should commence in late September.
Paradise regained
Crammed into a reconstructed 1940s Russian biplane on the forty-five minute flight from Havana to the island of Cayo Largo, I thought I was facing certain death when my esteemed colleague Chris DeHaemer took the controls. But when our flying Cuban deathtrap landed at Cayo Largo's international airport, I believed I had already entered the eternal splendors of Paradise.
Beneath the warm, turquoise waters, home to some of the most highly rated diving in the world, lie the skeletal wrecks of Spanish galleons and myriad schools of iridescent fish. Back on shore, the Caribbean sun pounds on a white sand beach so fine and cool that it feels like baby powder, while the island's tropical birds sing a siren song of reverse defection.
Welcome to Cayo Largo, the most beautiful beach in the world — and the shining jewel in LCN's real estate portfolio. Cayo Largo is a sand and limestone cay around 45 miles south of Cuba's main island. With its unrivalled natural beauty and international airport, Cayo Largo a is potential cash machine for LCN. Phase I calls for the construction of 500 rooms. I expect it to begin in 2001. In May 1999, Superclubs — the highly successful operator of branded resort destinations in Caribbean — agreed to provide management and technical services.
Cuba Libre?
LCN appears to have done exhaustive due diligence work on its real estate portfolio. To avoid any risks related to the U.S. Helms-Burton Act, LCN has tried to insure that its properties are free and clear of any claims that could be asserted related to appropriation of private property. There do not seem to be any certified claims attached to LCN's three principle properties filed against the Cuban government by identifiable claimants (having discovered a possible material claim against Island of Youth, one of the company's originally planned developments, LCN reached an agreement with the Cuban government to potentially exchange it for another property).
LCN has several layers of protection against potential Helms-Burton claims. First of all, LCN is a Canadian company with no assets in the U.S. Secondly, LCN's Cuban partner has agreed to indemnify the subsidiary against all damages resulting from this type of claim.
Caveat Emptor!
There are lots of risks to the stock. First of all, it's a low-priced, CDNX-listed Canadian stock with resource industry associated directors. If you're an American citizen, you take the risk that interpretations of current or future laws will render even passive, minority equity investments in companies doing business in Cuba illegal. No surface rights have been transferred to LCN, although there have been oral assurances from the appropriate government agencies that these transfers will occur. Even if the transfers occur, LCN will have to finance 50% of all development costs (totaling US$200 million over a ten-year period), which could result in massive dilution to shareholders.
Despite these risks, I view LCN as a reasonably sound speculative play. BancBoston Robertson Stephens owns 19% of the equity. If Robertson Stephens is willing to take these risks, so am I. At US$1.12 per share, LCN is cheap enough! If the embargo is lifted, LCN's US$50 million market cap will look absurdly low in retrospect.
As a long-term, high-risk play on Cuba, I recommend Leisure Canada as a Speculative Buy at current levels with a three- to five-year target of US$10.
For more information, contact J. J. Jennex, Investor Relations, Leisure Canada Inc., 213 West 1st St., North Vancouver, BC V7M 1B3, Canada, tel. 604-990-9599, fax 604-990-9584, email: leisure@leisurecanada.com, or visit the company's website: www.leisurecanada.com.
James Passin manages the Firebird Global Small Caps Fund for Firebird Management and is a Contributing Editor to Taipan. Passin's fund is currently a shareholder in Leisure Canada. The views expressed are strickly Mr. Passin's and not necessarily those of Firebird Management or Taipan.
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