This Gold Rush Just Lawyered Up

Summary

• Down 39% in just one week.
• Lawsuit over Escobal Mine could cripple Tahoe.
• Who said mining for gold was easy!

Tahoe Is Badly Hemorrhaging - Should We Call The Doctor or Priest!?

Risk means more things can happen than will happen”

~ Elroy Dimson

The Knife Catcher here, giving you the up to the minute falling knife report, providing the sharpest coverage of falling or fallen knives in the financial markets. How sharp you ask?! Ginsu cut-through-can sharp! Ok, hyperbolized title sequence aside, Tahoe Resources Inc (NYSE:TAHO) has taken a nose dive dropping around 39% this past week after the Guatemalan Supreme Court issued a provisional decision to suspend Tahoe's license over their flagship mine Escobal. I hear some close to the scene overheard the pilot screaming Bonsai!

(Chart Source: Charles Schwab)

I’m going to explore the who, how, and why of this sharp decline and why I’m still a shareholder in this badly bleeding but not dead yet, precious metals company.

Tahoe Resources Inc., develops and operates mines across the Americas. Tahoe’s mines primarily produce gold, silver, copper, lead/zinc, precious metals, natural gas and petroleum. The company has interests in Guatemala, through the Escobal Mine, Northern Peru, through La Arena and Shahuindo, and various mines and mining projects in Ontario. The company is currently headquartered in Reno, Nevada and has 2,820 employees.

Tahoe was one of those stocks I acquired earlier this year in my search to continue to diversify my portfolio outside the typical REIT, Dividend Aristocrat, and DGI track. At that point after doing my research, I thought I had discovered a stock that was primed for a come back, and surprisingly enough, most of the analysts covering the stock agreed in this consensus; but the market had still yet come around. I was expecting to sit back, wait, and enjoy the modest monthly dividend yield the company paid out, until I was holding onto a two to three bagger, before cashing some of my chips in. I also found the idea of investing in a mining company that had operations in the Americas exciting and adventurous, prone to potential growth due to the sometimes, less than strict regulations (non-sequitur: Indian Jones I and III are movies I could watch ad-infinitum) -- but boy did I get that wrong.

I Thought Suing Was Only the American Way

Where there is a will there is a lawsuit."

~ Addison Mizner, American Architect

America, arguably the wealthiest and most advanced country in the world, has the highest number of lawyers per capita at 1/300. Funny enough, the crown for lawsuits or litigations per capita is worn by Germany and the US is fifth. Apparently the stereotype of Germans being fiercely rigid and dogmatic in their operational efficiency, also leads to suing any of those who fall outside the lines (for any Germans reading this, that statement is not based in any factual studies, just a comical observation). So, after I heard an anti-mining organization, CALAS, brought a case against Guatemala’s Ministry of Energy and Mines (“MEM”), that was going to be heard by the Supreme Court, I was shocked (Guatemala is no where near the top of the list). I mean I’m almost impressed that the courts have that much independence, that they would allow such a case to be heard and completely disrupt a profitable enterprise that also fills the coffers of the Guatemalan government. According to the documents, CALAS alleges that MEM disregarded and violated the Xinca Indigenous people’s right of consultation prior to granting the Escobal mining license to Minera San Rafael, a Guatemalan subsidiary of Tahoe. The important thing to note, is that currently no Xinca representative or community is participating in the lawsuit being carried out by CALAS.

Ron Clayton, President and CEO of Tahoe Resources Inc., commented after the suspension was put into effect:

We are extremely disappointed in the Court's ruling suspending the license because we believe that there are no indigenous communities affected by Escobal's operations. While the lack of indigenous communities in our area makes ILO 169 inapplicable, there is nevertheless extensive documentation evidencing that an ILO 169 consultation process was in fact conducted in the area of the mine. We are acutely aware that an adverse ruling could have a significant adverse impact on our shareholders, partners, employees, vendors and community populations, as tax and royalty payments, along with purchases of operating supplies will be suspended during any period that the mine is not operating. Escobal is our flagship mine which has been designed and operated to meet the highest environmental standards and we will make every effort to remove any suspension and bring Escobal back into operation as soon as possible. We remain committed to protecting our employees' livelihoods, as well as those livelihoods of the Company's suppliers and the thousands of Guatemalan families that benefit from the responsible operation of the Escobal mine."

There’s no silver-lining here, probably due to the approaching silver shortage, so it makes analyzing the positives harder, and trying to eek out any resemblance of a bull case near impossible. So far six firms have downgraded Tahoe: RBC Capital, BMO Capital, TD Securities, Credit Suisse, Raymond James and Macquarie. RBC has downgraded it from outperform to sector perform based on their assumption the Escobal operations resuming by the fall. However, prior to the current news, Tahoe and the industry was in comeback territory and it's important to remember that going into this torrential rain.

The Company Outlook Prior to Suspension

Tahoe was looking like a shiny silver dollar prior to the suspension and litigation, and why I initially invested in it. Analyst Matthew Miller, CFA at S&P Global, predicted a rise in precious metals for a number of reasons. The Trump Presidency, and the uncertainty of certain proposals and policies would continue to spur demand for gold and more safe haven investment strategies. Brexit, and the uncertainty of the Eurozone and diminishing Pound also would push towards demand in gold and precious metals. Also the increased demand from growing economies like India and China, has forecasted strong headwinds for the industry.

Tahoe had a 1.9 analyst’s rating, which was higher than Apple mind you, from 13 analysts. Its P/E ratio compared to the sector was enviable, and painted a picture of deep value.

(Chart Source: S&P Global)

Tahoe also had impressive CAGR and total revenue YoY growth. It completely blew its competitors out of the water in terms of the average 3 year CAGR as you can see in the charts below:

(Chart Source: S&P Global)

Tahoe’s first quarter numbers were positive, revenues increased 90% to $251 million, and net income increased 98% to $74.7 million. Short interest as of 6/15 was 2.4%, but this number will probably rise dramatically. However with the stock battered so low, I’d be curious to see how shorts react, in so much as the stock has already been reduced significantly, that they may determine alpha would be best sought elsewhere. The yield has since been raised to 4.66%, and the company has said they plan on continuing with their monthly payouts. The payout ratio prior to the suspension was 56.88%, so a dividend cut or suspension is still a possibility depending on the case being dismissed or not.

Gold Mining is a Tough Racket

People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”

~Peter Lynch

Apparently prospecting for gold and silver isn't all it’s cracked up to be. I’m going to have a chat with James W. Marhsall and his false advertising for this so called “Gold Rush”. There is no clear answer, and no advice that I can instill, to make any decision you as a current shareholder or prospector should undertake. Personally, I think history and the realities of money and industry will win out here, and Tahoe will be back in business towards the end of this year. Pessimistically, it could stretch to next year, where the stock will continue its path towards Kamikaze status, until most of us are jumping out of the way. I’d still probably continue to buy up shares on the downturn, but will stop once it hits around 7% of my total taxable portfolio; to where I’d hopefully have the ability to re-balance once the stock bounces back. My cost basis is now hovering around $7/share and my allocation is standing at 3.5%, so while the sharp decline has definitely cut me, I do have a lifetime supply of gauze and bandages just for these occasions -- I am The Knife Catcher after all!

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May your falling knives never cut too deep,

Remy Kouffman AKA The Knife Catcher

Analyst’s Disclosure: I am/we are long TAHO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.