Tahoe Resources (TAHO) has shared in the recent PM (precious metals) sector surge. From June 27 to July 23, it rose 25% from its 30-month bottom at $11.81. There are reasons to believe that its strong run is in its early stages. Based on its superb property at Escobal in southeastern Guatemala, 50 miles by road southeast of the capital city and its airport, the site is fully permitted and appears to have strong support from both the local government and community for which it provides potable water, health care, education and jobs as well as from President Otto Perez Molina. Nearing production of its massive resources, TAHO has enormous upside especially as the price of silver (SLV) recovers and will generate large revenues even if bullion price recovery is modest.
On July 10 President Molina held a press conference at Escobal to announce he would ask his parliament to consider a two-year temporary moratorium on additional mining licenses in Guatemala while relevant laws are reviewed. This initiative favors TAHO which already has licenses on 158 sq km of mineral-rich land surrounding its 20 sq km site at Escobal. President Molina's proposal in effect may grant TAHO a temporary monopoly on precious metals development in the country.
Escobal is an immense treasure. It holds 367 Moz silver and 373k oz. gold as well as nearly 347k tons of zinc and 192k tons of lead. Construction of relevant mine components, crusher, tailings filtration and storage, etc. is expected to be completed in the coming months with production beginning during 4Q 2013 and commercial production early in 2014 from the underground mine.
Early in the spring the Escobal site and nearby village of San Rafael las Flores was victimized by armed thugs bussed in from outside the area: the source of the violence is being investigated. Local residents and miners were attacked and one member of an ad hoc police force was killed by gunfire and machetes. The 3,000-person town now has a regular force in addition to a special $12.5 million charitable program funded by TAHO for community and human rights projects. TAHO also is establishing a 5% voluntary royalty program for outlying communities. Escobal employs 665 local residents and has sparked development of dozens of related small businesses in San Rafael. Like First Majestic Silver (AG) at its sites in Mexico (profiled here), TAHO embraces the paradigm of community building and enhancement as part of its productive work.
The government has significant interest in protecting and nurturing development of Escobal and TAHO's surrounding properties. In addition to enhancement of community education, potable water and waste management, the site will generate $50 million/year in taxes for the national government, $15 million/year in royalties to local government and landowners, $17 million/year in wages ($1 million of which will find its way back to the government) and purchase of $25 million/year in goods and services by the mine and its employees. Escobal should be a paradigm of wealth creation and socio-cultural development.
According to its Founder, President and CEO, C. Kevin McArthur, TAHO will complete development and begin generating revenue without exceeding the $326 million it already has raised. With about $6.7 billion in indicated silver resources (priced conservatively at $20/oz.) and $450 million in indicated gold resources (figured at $1200/oz.), TAHO is an impressive company based on the Escobal site alone. It is about 5.7% of the Global X Silver ETF (SIL) and has a consensus 12-month target estimate of $21.57 with Buy and Strong Buy Ratings. In a July 4 report, Dundee Capital identified TAHO and Silver Wheaton (SLW) as the companies "best positioned to survive decline in silver prices to $15/oz." in the unlikely event that occurs. Dundee also cited AG for its "well-run, low-cost assets."
After its IPO in mid-2010, TAHO followed the ascent of silver to $27.50/share in May 2011. As recently as March 2012 it was at $25 and after the May drop and summer basing rose above $21 in 3Q 2012. Like most of the sector, it then began a long, punctuated decline to its June 27 low at $11.81. After the PM surge of the past three weeks, TAHO was down July 24 to $15/share as the entire sector experienced profit-taking and reflected the day's decline in PM prices (gold to $1321/oz, silver $20.12/oz.) and a rising USD. One cannot expect an asset class or sector to rise 20-25% for three weeks without pause. The renewed rise in the sector July 25 with TAHO closing up 2% suggests that the positives for it are intact.
CEO McArthur established TAHO, an American company with its HQ in Reno, NV, in 4Q 2009. Till 2008 he was President and CEO of Goldcorp (GG). Director and Chairman of the Board Dan Rovig formerly was a Director at Goldcorp and Chairman of the Board at Glamis Gold. Director Kenneth F. Williamson was a director at Glamis from 1998 and at GG since 2006 since its merger with Glamis. Most of TAHO's board has worked together at these companies which should optimize development and operational strategies. Director John P. Bell brings high-level diplomatic and financial experience to the Board: he has been Canadian Ambassador to Brazil, an advisor to Canada's Foreign Ministry and a chief negotiator at the 1992 Earth Summit at Rio. Ably led, TAHO is poised to outperform and become a major force among silver producers. My recent articles discuss the global monetary, commercial and industrial context that suggest a significant rise in PM prices and demand for the metals. The context is very good.
Barring an unforeseen problem at Escobal, at present its only site near production, TAHO is a strong buy. Wall Street sentiment on the PM sector surveyed by Bloomberg supports the view in the near term with 15 analysts bullish while 9 are bearish. Moreover, it is unlikely that QE will end given the painful effects that May-June taper talk had on the housing markets and interest rates. But the mid and long-term outlook for TAHO is rooted more deeply than transient sentiments or the vagaries of fiscal policy. Its resources will be sought to help satisfy the enormous demand for silver from industry, jewelry and investors, and it should be a bright spot going forward in volatile markets.
Additional disclosure: I own precious metals companies and diversified funds.