I’ve been asked about Tahoe Resources and the political risk in Guatemala. I don’t own the stock and don’t have plans to buy it, but I did recommend it some years ago, so I’m willing to share my current thoughts. For more in-depth guidance on what I’m actually buying, please subscribe to the Independent Speculator.
Tahoe Resources (TAHO, THO.TO, US$5.05, C$6.52, 312.8M shares, US$1.5B enterprise value)
Summary
Tahoe is a mid-tier producer with mines in Peru, Canada, and Guatemala. It’s well known for the flagship Escobal silver mine in Guatemala, which has one of the largest and highest-grade silver-gold-lead-zinc deposits in the world. The La Arena and Shahuindo mines in Peru are low-cost, bulk-tonnage gold mines. The Canadian mines are the Timmins West and Bell Creek gold mines, acquired via a merger with Lake Shore Gold.
Things were going well for this emerging producer even during most of the resource bear market from 2011 to 2015. But then last year, a legal challenge in Guatemala shut Escobal down. To make matters worse, the La Arena mine in Peru was hit by a strike last month. Fortunately, that was resolved in about two weeks. The shutdown in Guatemala continues, however, with no end in sight.
This US$5 stock was a US$26 stock back in 2014, so it’s fair to ask if it might be an undervalued, contrarian opportunity.
It might well be, but I was in Guatemala a few months ago, and my pilot didn’t want to go near Escobal. Another chopper had taken gunfire near the mine a few weeks before. Not good.
On the other hand, I’ve been told by sources that Tahoe actually has strong support at the local and national levels. The trouble is due to a vocal minority. Once they started the legal gears of banana republic bureaucracy rumbling, there was nothing that could be done to stop them. According to this view, it’s just a waiting game.
Could the legal proceedings go against Tahoe? Of course they could.
I’m reasonably sure the company is not at fault. It did everything the government asked it to do. That leaves the politics of envy. Some group didn’t get as much cash as another, so they are claiming they weren’t properly consulted.
Key Analytical Points
- Tahoe is losing money. The company reported a loss of $6.9 million in Q1 2018, compared to earnings of US$74.7 million in Q1 2017. That’s actually not bad given the major hit to the top line, while the company is spending money to keep Escobal ready to restart operations quickly once the legal dispute is resolved. But a loss is a loss, and the two-week shutdown of Shahuindo last month won’t help Q2 be any better.
- Guatemala can’t be predicted. In my experience with this sort of situation, it doesn’t matter in the least whether Tahoe did everything right. The decision will not be a matter of law or justice. It will be political. That’s hard to predict. Fortunately, Tahoe has one very strong card to play: the government is missing out on a huge amount of tax revenue. But even if Tahoe has its rights reinstated in the end, what nobody can say for sure is how long that will take.
Conclusion
History: Back in my Casey Research days, I recommended shares in Tahoe when it acquired profitable Peruvian producer Rio Alto. That changed the company from a one-trick pony entirely exposed to political risk in Guatemala to a multi-jurisdiction producer with one of the richest silver mines in the world. The markets went against us, however, and we stopped out of the trade. We were never able to take profits on the speculation, so readers of my past work should have exited the position.
My current take: I’m not a buyer.
I could be tempted if things in Guatemala go Tahoe’s way and Escobal can start up again. I’d make a lot more, of course, if I bought now and waited for the good news. But that good news is simply not a sure thing—and even if it were, it could be years coming. If I wait until after the legal dispute is resolved, I miss out on bigger gains, but I also take on zero Guatemala risk.
My take would be the same on any other Guatemala play that’s languishing because of the cloud over Tahoe.
Would I sell if I owned shares? Maybe. Even if the company eventually wins in Guatemala, there’s still a lot that can go wrong while waiting. Even without more strikes in Peru, the company may keep losing money every quarter until Escobal starts up again. I’d prefer to redeploy in a profitable silver producer.
It’s a pity, because this company does have some great people and assets. It’s played by the book and done things right. It does not deserve what’s happening to it.
But that doesn’t make it a great speculation—and I’m only interested in great speculations.
Important Reminder: I am not making any recommendations in this service. I’m simply saying what I would do.
