Contrary to hope, reason, and possibly law, Guatemala’s Constitutional Court has just reversed the country’s Supreme Court decision to reinstate Tahoe Resources’ (TAHO, THO.TO) mining license.
The back-story here is that Tahoe’s Escobal mine, one of the largest and highest-grade silver mines in the world, was shut down in 2017 when a group of locals claimed they hadn’t been properly consulted. Note that the claim isn’t that Tahoe didn’t consult them, but that the government ministry in charge didn’t do it right. The ministry did consult with those it thought most affected, but this group feels it should have been included.
The court has sided with the locals who felt left out, ordering the ministry to consult with them now. It’s hard to say how long that will take. But it’s easy to see that the locals will have their hands out. They’re in a position to extort at will, backed by the government.
This is clearly very bad news for Tahoe shareholders—but it’s almost as bad for all Guatemala plays.
That the government won’t protect gringo companies and their investors is as obvious as it is unfortunate. But also consider that there are more than 1,000 jobs at stake, and a huge chunk of a poor country’s tax revenue. That the government is willing to let that go indefinitely tells us they have no choice.
The decision isn’t based on maximizing economic benefits for all. I’m skeptical that it’s even based on the law. The decision seems based on the political realities on the ground. This indicates a widespread attitude, not just the greed of the locals making demands.
And that—an attitude so pervasive it can force the government to give up one of its single biggest sources of revenue—has direct implications for all investment in Guatemala.
In my prior work, I had recommended Tahoe when it diversified its political risk out of Guatemala. It wasn’t enough. I closed the position when the trailing stop loss I had on it was triggered. I’m very glad now that I followed through on that discipline.
I hate to say it, but if I owned any shares in any other Guatemala plays today, I would exit now.
This setback has country-wide significance. Until Guatemala matures to a level that values investments that deliver long-term value over momentary political expedience, it’s not a country I want to speculate in.
Tuesday, September 4, 12:37pm, EST, 2018