Guatemalan court suspends Tahoe’s licence for Escobal

The Supreme Court of Guatemala has suspended Tahoe Resources’ (TSX: THO; NYSE: TAHO) flagship Escobal silver mine until it can hear an action brought against the government’s Ministry of Energy and Mines (MEM) regarding the company’s mining licence.

A non-government organization called CALAS alleges that the MEM violated the Xinca Indigenous Peoples’ right of consultation in advance of granting the Escobal mining licence to Tahoe’s subsidiary, Minera San Rafael.

By midday on July 6, Tahoe’s shares had plummeted $3.27 — or 30% — to $7.49, on nearly 7 million shares traded, and some analysts were cutting their share price targets. At market close, Tahoe’s shares had fallen $3.57 — or 33% — to $7.19, on 9.8 million shares.

The company says that all consultation obligations relating to permitting the Escobal licence were met, and it will take all legal steps possible to have the ruling reversed and the licence reinstated.

“We are surprised and naturally disappointed by this decision,” Ron Clayton, Tahoe’s president and CEO, said on a conference call. “The ruling comes as a surprise because we continue to believe there is no legal basis for the claim, since we do not believe the legal standards for an injunction were met. We don’t operate in Xinca territory. In fact, it is our understanding that no Xinca representative or community is participating in the CALAS lawsuit against MEM.”

The company “can actively pursue a remedy in the courts,” Clayton added, emphasizing that the current ruling “is a temporary order only,” and “not a permanent revocation of the licence.”

Depending on the timing of court rulings and appeals, and assuming that Escobal is suspended for three months, Clayton said Tahoe can’t confirm previously issued production guidance for 2017, and will reevaluate its earlier multi-year guidance.

Tahoe calculates the impact of a three-month suspension would be 5.1 million oz. silver production deferred to a later date, and incurred fixed costs of US$10 million. Sales and operating costs associated with the deferred production would be incurred in future periods. Sustaining capital of US$12 million would also be deferred, planned exploration of $0.5 million would not be incurred, and US$4 million in royalties and US$5 million in taxes associated with the delayed production would not be incurred.

Tahoe Resources’ Escobal silver mine in Guatemala in 2015. Credit: Tahoe Resources.

The company says the Supreme Court that issued the provisional decision is the initial trial court in the country for constitutional actions filed against MEM, and appeals are heard by Guatemala’s Constitutional Court.

“Based on a prior ruling by the Constitutional Court involving consultation obligations with respect to a large natural resource project, the company says its operating licence should remain in effect while any additional consultation is completed,” the company says.

Tahoe plans to appeal the decision to the Constitutional Court and ask for the Supreme Court to reconsider its ruling. Tahoe says that the Constitutional Court could rule on the appeal within two to four months, and that the company will seek to have the licence reinstated. Tahoe will also file a motion for reconsideration with the Supreme Court to resolve CALAS’s definitive constitutional claim, noting the definitive constitutional claim and appeal process could take between 12 and 18 months.

The last official census shows the San Rafael community as 9.6% non-indigenous and with no Xinca community presence, Tahoe said in a news release. “Despite the fact that the Escobal mine is not located in or impacting any indigenous communities of Guatemala, the company understands that MEM held a consultation process that complied with the requirements set forth in the International Labour Organization Convention 169.”

“We are aware that the impact to our shareholders, employees, vendors and community population could be significant,” as tax and royalty payments will be suspended when the mine does not operate, Clayton noted on the conference call. “We are doing everything in our power to get our mine back in operation, as soon as possible.”

During a question and answer session with analysts on the conference call, Clayton said Tahoe’s balance sheet “is very, very strong.”

Elizabeth McGregor, Tahoe’s vice-president and chief financial officer, confirmed the company has been in touch with its lenders since the news came out. “They are supportive … and have indicated that we can build flexibility [into the credit line] and continue access.”

Even with a shutdown of Escobal, Tahoe would meet the financial covenants of the loan, she added. “There is a clause that indicates that if we shut down Escobal for 30 days that would put us in default, and we’re working with lenders on an amendment that would give us flexibility to go beyond the 30 days … our lenders have been pretty supportive. Most likely, we would get that resolved in the next couple of weeks, before we would fall into a default on the current facility.”

When asked about the company’s capital allocation plans going forward, Clayton said “anything that’s truly discretionary is going to be reviewed pretty hard,” but added its plans for its Shahuindo gold mine in Peru and a shaft project at its Bell Creek gold mine in Timmins probably would not be affected.

“I don’t think the two major projects we’re doing at Shahuindo and the shaft at Bell Creek are discretionary,” he said. “Those are important projects, and, at least at this point, we can go forward in the kinds of time lines in the press releases with those projects.”

After the call, Cosmos Chiu of CIBC said in a research note that Escobal represents 62% of Tahoe’s net asset value and more than 50% of the company’s cash flow. Chiu cut his target price from $13 per share to $8.50 per share.“Despite a cash balance of US$165 million at the end of second-quarter 2017, we believe Tahoe will need to cut a combination of its capex, exploration and/or dividend if the Escobal suspension lasts more than three months.”

Chris Thompson of Raymond James lowered his target price on Tahoe to $10.75 per share from $15.75 per share. The mining analyst now models a 12-month suspension of operations, with production starting again in the third quarter of 2018, and says the company will incur standby costs of US$30 million while the mine is suspended.

He also cut his company-wide 2017 production estimate from his earlier 746,000 equivalent oz. gold to 575,000 equivalent oz. gold, while his previous forecast for all-in sustaining costs of US$975 per oz. has been raised to US$1,050 per ounce.

Thompson says that to keep Tahoe’s planned growth capex, it will have to raise money to offset forfeited lost revenue and standby costs at Escobal.

“Without raising funds we see Tahoe depleting its current cash reserves in late fourth-quarter 2017 at our base-case metal assumptions, and using spot metal prices (US$1,225 per oz. gold and US$16 per oz. silver), we see cash reserves dropping below zero in mid-fourth quarter 2017,” he writes.

“We model Tahoe drawing $50 million on the line of credit in third-quarter 2017 and another $60 million in the second quarter of 2018 to keep its current capex plan, and repay the outstanding $35-million credit facility,” he says, which is due April 2018.

Andrew Kaip of BMO Capital Markets assumes a six-month delay in production on a preliminary basis, and noted that the increased uncertainty had caused him to cut his target price from $14 per share to $11.50 per share.

Until now, Tahoe’s previous 52-week low was $9.58 per share in March 2017, while it reached a 52-week high of $22.13 per share in August 2016. The company has 312 million shares outstanding.

Several law firms are already filing class action lawsuits against Tahoe on behalf of its shareholders.