Tahoe Resources Inc. (TSX:THO)(NYSE:TAHO) stock lost nearly one-third its value in one trading day on July 6 after the Supreme Court of Guatemala suspended the mining licence for Tahoe’s primary mine, Escobal. Yes, you read that right. Tahoe’s flagship mine has to stop operations right away.
Tahoe’s background and the court ruling
To be fair, Tahoe was always a risky bet given its dependency on Guatemala — a region with a history of social and political unrest. Mining at Guatemala was never an easy task for any company, which is perhaps also why senior gold miner Goldcorp Inc. (TSX:G)(NYSE:GG) sold off the Escobal silver deposit to Tahoe some years ago. Goldcorp also eventually sold its entire stake in Tahoe. In fact, Goldcorp also announced plans to dispose another of its mines at Guatemala earlier this year, reflecting its caution about region.
Tahoe has had its share of hiccups in Guatemala. Just last month, protesters blocked entry to Escobal, apparently raising a voice against probable seismic activity caused by the mine.
In May, an anti-mining organization CALAS filed a claim against Guatemala’s Ministry of Energy and Mines, alleging it didn’t consult the local people before granting operational licence for Tahoe’s Escobal mine. On July 5, the Supreme Court of Guatemala temporarily suspended the mine’s licence until further review, spooking investors and sending Tahoe’s stock plummeting next day.
Where Tahoe stands now
By Tahoe’s own estimates, the entire process of the court’s consultation with the locals and a reconsideration of Tahoe’s appeal for reissue of Escobal’s mining licence could take six to 12 months. Furthermore, a resolution of CALAS’s definitive constitutional claims could take 12-18 months.
So, as of now, Tahoe is putting Escobal on “stand-by.” Assuming a suspension of mining operations for three months, Tahoe could take a big hit, including the following:
- 5.1 ounces of lower silver production in 2017.
- Additional fixed cost of US$10 million.
- Deferred estimated royalties of US$4 million.
Of course, those numbers could look worse if the suspension extends beyond three months.
What should investors do
Interestingly, Tahoe reiterated that its fixed monthly dividend is US$0.02 per share right after the news of suspension of mining at Escobal came in.
However, Tahoe’s otherwise-lucrative monthly dividend now appear as risky as the company’s prospects given that no one, not even the company, really knows when Escobal will restart operations. Until the suspension, Tahoe was on a solid operational footing, having hit record silver and gold production and cash flows last year and projecting its gold production to rise nearly 36% at the mid-point by 2019.
Needless to say, Tahoe will likely miss that target and suffer declining cash flows. Given the shroud of uncertainty over Escobal, precious metals investors would be better off staying away from Tahoe for now.