Tahoe Resources Looks Cheap, But Beware The Risks

April 13, 2018

Tahoe Resources Looks Cheap, But Beware The Risks

Tahoe Resources (NYSE: TAHO) is a perfect example of the risks when investing in miners. Its stock price has preformed terribly in the last 5 years, and the final blow was when the government of Guatemala suspended operations at its flagship Escobal mine.

Figure 1: TAHO’s stock price in the last 5 years. Source: CNN Money.



The key now is to see whether TAHO is more than Escobal and what the value is of what’s left. Is what’s left worth more than $4.68 or less? The stock could go even lower if there is a negative decision on the Escobal story.

Let’s first discuss what’s going on in Guatemala and then what the value is of the other parts of TAHO.

Escobal Mine

The first thing investors see is that the company isn’t profitable since the Escobal mine has been suspended.

Figure 2: TAHO’s profitability. Source: TAHO.

However, gold sales didn’t drop that much and are even expected to grow in 2018. The key question is whether TAHO will have enough capital to sustain its CAPEX plans in the future.

Figure 3: TAHO’s 2017 CAPEX. Source: TAHO.



However, the company has no debt and has $300 million in available liquidity of which $90 million is in cash.

Figure 4: TAHO’s liquidity. Source: TAHO.

The key is that the gold outlook is very positive even without Escobal, so we’ll see what it is worth.

Figure 5: TAHO’s gold production and expected production. Source: TAHO.

The issue is that the gold operations are expected to be free cash flow positive by 2019. So, we are back to Escobal.

Figure 6: Escobal’s timeline of happenings. Source: TAHO.



Protests began on June 7th 2017. A month later, the Supreme Court suspended the mine. On September 10, the Court issued a definitive decision to reinstate Escobal’s mining license but that ruling was appealed by the Higher Constitutional Court and that is why the company is still waiting for an answer. The latest news is that the Constitutional Court requested additional information from TAHO.

In 2014, the net present value of Escobal was $1.5 billion with gold at $1,300 and silver at $18. The average after tax cash flows for the next 6 years are expected to be at $150 million per year from the mine and then slowly decline form 2023 onward.

Figure 7: Escobal’s cash flows. Source: TAHO.

With the issues going on there, I don’t think there will be much more exploration possibility or expansion but you never know. Let’s put the value of the $150 million cash flows for the next 6 years, and around $60 million for the following 10 years, at $1 billion for now. So, that is the positive upside.

La Arena Mine – Northern Peru

The La Arena mine is in its late stage of life and there is the potential that new drilling in phase 8 will make it live a little bit longer. However, apart from a bit of cash flow, there’s not much to expect there. An interesting project on the other hand in the La Arena 2 mine.

La Arena 2 Mine

The La Arena 2 mine technical report was released in February and shows a net present value of $823.8 million and IRR of 14.7%.

The initial capital needed to develop the Arena 2 mine is $1.36 billion to get around $200 million of cash flows for the 21-year life of mine. If we use a conservative value on the project of 30% of the NPV for an undeveloped project, we get to a value of around $240 million. The fact that there are protests against what is going on at the old mine and abusive behavior show that Escobal isn’t an unique case for TAHO. Further trouble might make the 2.5km open pit mine take a bit of time to go live even though the locals that have jobs now would look for new jobs at the new mine.

Figure 8: Protests for the La Arena mine. Source: La Republica.



Shahuindo

Taho can’t seem to catch a break.

The Shanuindo project that was expected to produce 200k ounces of gold by 2019 is again under protests because a pipe broke due to the heavy rains.

Figure 9: Shahuindo protests. Source: Grufides.

The net present value of the project is $319 million if we assume all things go well. Given that most of the money has been spent, we can expect around $75 million per year up to 2025 according to the technical report.

Timmins Mines

The Timmins west mine has a NPV of $174 million.

The Bell Creek mine is operating and will be extended to produce approximately 80k ounces for the next 6 years. Let’s put another $150 million on that project.

In addition to the above two projects, there is a multitude of other projects that give the opportunity for the area to be mined for a long time going forward especially if we see higher gold prices, but that is another story. Let’s calculate the sum of parts value for TAHO.



Sum Of Parts Value

The Timmins mines can be valued at $300 million even though TAHO paid more than double that, albeit in shares. The Shahuindo adds $300 million, the La Arena 2 mine another $300 million to $800 million depending on how you look at NPVs. So, the cumulative value without Escobal is $900 million, or $1.4 billion if you take the face value of La Arena.

If we add $1 billion for Escobal, we are at a market cap of between $1.9 billion to $2.4 billion. Taho’s market cap now is $1.5 billion. Given the risks from Shanuindo, Escobal, and issues at La Arena, I would expect a bigger discount before jumping in.

As the margin of safety lies at $300 for La Arena plus $300 for Timmins given that Escobal and Shanuindo might be in trouble for longer, that is the worst case scenario. The realistic scenario is that there is a 25% downside to around $1.2 billion if Escobal is permanently closed, while the upside is from 25% to 50% if Escobal is allowed to mine again.

I personally prefer better risk reward investments, but if you’re looking for silver and gold exposure, this might be a relatively good bet especially if precious metal prices increase. But remember, there’s a lot of risk around TAHO.



By Sven Carlin Commodities Gold Miners Investiv Daily Share: