Uncertainty in Guatemala drives Tahoe to suspend dividend and guidance

Tahoe Resources (TSX: THO; NYSE: TAHO) is stopping dividend payments and company-wide guidance due to the suspension of its flagship Escobal silver mine in Guatemala.

Ending the monthly 2¢-per-share dividend could save the company $65 million in cash a year, the company’s president and CEO, Ron Clayton, told analysts and investors on a conference call.

“As most of you are aware, when we built Escobal, we intended to return part of our free cash flow from the mine to shareholders via a dividend program, while using the rest of the cash flow to fund our growth projects,” Clayton said. “Without that cash flow, the dividend had to be re-evaluated.”

In July, the Supreme Court of Guatemala suspended Escobal’s mining licence until it could hear an action brought by non-governmental organization CALAS against the country’s Ministry of Energy and Mines (MEM) regarding the company’s mining licence.

CALAS filed a claim in the Supreme Court in May alleging that MEM violated the Xinca Indigenous People’s right of consultation before granting the Escobal mining licence to Tahoe’s Guatemala subsidiary, Minera San Rafael.

Tahoe says all consultation obligations relating to permitting Escobal were met, and that the company is taking “all legal steps” to have the ruling reversed and the licence reinstated.

The Supreme Court is the initial trial court in Guatemala for constitutional actions filed against MEM, and appeals from these decisions are heard by Guatemala’s Constitutional Court.

“Based on a previous ruling by the Constitutional Court involving consultation obligations with respect to a large natural resource project, the company says that its operating licence should remain in effect while any more consultation is completed,” Clayton said. “Accordingly, the company both appealed the decision to the constitutional court and asked the Supreme Court to reconsider its provisional ruling.”

But on July 28, Tahoe learned that the Supreme Court had denied the company’s motion for reconsideration. The Constitutional Court appeal is still pending and is expected within the next three months.

“The Supreme Court must still resolve CALAS’s definitive constitutional claim, which could take between 12 and 18 months, during which the company must suspend operations absent a reversal of provisional decision,” Clayton said. “The company understands that to the extent there were any consultation obligations, MEM met those before issuing the exploitation licence to Minera San Rafael.”

Adding to Tahoe’s troubles is a group of protesters near the town of Casillas that have blocked the road connecting Guatemala City to the mine since June 7. The protests “have initially been related to a variety of issues, including unfound claims that mining at Escobar is causing seismic activity 20 km away,” Clayton says. “The company is working with the government, community leaders and others to resolve the situation peacefully and expeditiously. However, the road blockage shows no sign of immediate resolution, and we cannot predict at this time when the road will be cleared.”

Operations were reduced between June 8 and June 19 — dropping lowest on the last day to conserve fuel. The company has over 250,000 oz. silver and concentrate on-site that cannot be shipped until the licence is reinstated.

Care and maintenance costs for Escobal tallied US$5 million in July but could fall to between US$2 million and US$2.5 million per month.

Three class-action lawsuits purportedly have been filed against the company since the Supreme Court issued its provisional decision on July 5. The lawsuits allege that Tahoe made untrue statements of material facts, omitted to state material facts and engaged in acts that operated as a fraud upon the purchases of the company’s stock. The company disputes the allegations and says it will “vigorously defend the lawsuits.”

When asked on the conference call whether the company can take the dispute to arbitration if the courts rule against Tahoe’s mining contract, Clayton said the company is looking into it, along with “what the options are in international law.”

The company has also stopped work on a preliminary economic assessment for phase two at its La Arena gold mine in northern Peru, 480 km north–northwest of Lima.

It is, however, continuing with its two capital projects: expanding its Shahuindo gold mine — 30 km north of the La Arena mine — to 36,000 tonnes per day, and doubled production at its Bell Creek gold mine complex, 20 km northeast of the centre of Timmins, to 80,000 oz. per year.

Tahoe ended the second quarter with a US$190-million cash balance.

Adjusted earnings for the quarter came in at US$33.8 million, or US11¢ per share. Despite curtailed production in June at Escobal due to the Casillas road blockage, Tahoe still produced 4.1 million oz. silver in the second quarter — almost all of it from Escobal — at total cash costs and all-in sustaining costs of US$6.73 and US$10.01 per oz. silver produced, net of by-product credits.

The company’s Timmins mines produced 41,000 oz. gold; Shahuindo, 21,000 oz. gold; and La Arena, 48,000 oz. gold.

While the company can’t reconfirm company-wide, multi-year guidance, it still expects its gold operations will meet this year’s targets of 375,000 to 425,000 oz., and at the lower end of the total cash cost range of US$700 to US$750 per ounce.

Clayton ended the call on an upbeat note.

“The situation in Guatemala is both fluid and complex. But we’ve been there for over seven years, and we have a dedicated management team both in Reno and Guatemala, who are working diligently to resolve the situation. We also have strong teams in Canada and Peru, where we are working to ensure our gold operations remain stable and continue to grow.”

At press time, Tahoe’s shares traded at $6.59 apiece, close to their 52-week low of $6.36 on July 11, 2017, and down 71% from their 52-week high of $22.13 on Aug. 10, 2016.

Andrew Kaip of BMO Capital Markets cut his target price on the stock from $11.50 per share to $7 per share, while CIBC’s Cosmos Chiu and Kevin Chiew trimmed their target on the company to $7.50 per share from $8.50 per share.