Troubles keep dogging Tahoe in Guatemala, Peru

Toronto-listed shares of Tahoe Resources (TSX: THO; NYSE: TAHO) are worth half of what they were a year ago, and the company is facing challenges at assets in Central and South America.

The latest trouble spot was a strike at its La Arena mine in northern Peru that began on April 22 and ended May 3.

In addition, Tahoe reported a fuel spill last month at La Arena from one of its diesel storage tanks.

Requests for comment were declined, but in a press release Tahoe noted that the striking union at La Arena represented 65% of the mine’s workforce, and, as a result, production was “not expected to be materially and adversely impacted.”

Tahoe said the strike involved a disagreement over profit sharing, which is paid by all mines in Peru in strict accordance with the country’s labour law.

“The company recently paid the workers its annual profit sharing, as defined by Peruvian labour law,” management reported in a news release. “However, the La Arena Union has indicated that they want to be compensated a higher amount of profit sharing than has been established in the labour law.”

Tahoe recently resolved the strike and said the “concerns raised by the community of [Caserio La Arena] have also been addressed.

“The discussions were completed independently with both groups, and it was agreed by all parties that operations at La Arena should resume as soon as possible, as this is in the best interest of all stakeholders,” the company said.

The Calaorco pit at Tahoe Resources’ La Arena gold mine in northern Peru, 480 km northwest of Lima. Credit: Rio Alto Mining.

The open-pit, heap-leach mine, 480 km northwest of Lima, produced 195,600 oz. gold last year at total cash costs of US$599 per oz. gold, net of by-product credits, and all-in sustaining costs (AISCs) of US$837 per oz., net of by-product credits.

The fuel spill at La Arena reported on April 9 happened when a contractor overfilled one of the diesel storage tanks. Although the fuel spilled into the containment facilities, the containment drain valve had been left open by the fuel vendor due to continuing rains, and as a result between 300 and 500 gallons of diesel fuel left La Arena’s containment facilities, the company reported.

Tahoe noted that it “successfully contained the spill through the construction of dams, the placement of absorbing materials, and disposed of the recovered fuel in accordance with legal requirements.”

The incident was reported to the Agency for Environmental Assessment and Control and to the Supervisor of Investment in Energy and Mines.

“The company immediately began conducting extensive inspections of the surrounding areas from the operation,” it said in a news release, and “initial inspections confirm that the spill was contained within our property and did not reveal any reported impact. However, we continue to monitor the situation closely.”

La Arena is not the company’s only troubled operation.

In Guatemala, Tahoe’s flagship Escobal silver mine has been shut down since July 2017. A blockade of a municipal road 16 km away that leads to the mine is also a challenge for the company.

In addition, the company’s annual export permit to ship metal concentrate from the mine has expired.

The difficulties began in July 2017, when Guatemala’s Supreme Court suspended Escobal’s mining licence until it could hear an action brought by Calas, a non-governmental organization, against Guatemala’s Ministry of Energy and Mines (MEM).

Calas alleged that MEM violated  the Xinca Indigenous Peoples’ rights of consultation before a licence was granted to Tahoe’s flagship mine.

Workers in the mill at Tahoe Resources’ Escobal silver-gold-lead-zinc mine in Guatemala. Credit: Tahoe Resources.

The Supreme Court reinstated the mining licence in September 2017, but the court also ordered MEM to conduct consultations with the Xinca within a certain geographic area and report results of the meetings back to the court within a year.

In October 2017, a helicopter carrying supplies to Escobal was attacked by small-arms fire from the ground and the pilot made an emergency landing, after a bullet pierced the tail of the aircraft near its rear rotor blade. The helicopter was being used to supply material for the company to keep its environmental mitigation commitments when the pilot was forced to make the emergency landing.

In March, the Constitutional Court of Guatemala asked for more information on the case, which Tahoe says includes: an anthropological study of the surrounding communities to establish the indigenous population in San Rafael las Flores and several surrounding communities; a third-party review of the Escobal environmental impact study and the study’s mitigation measures; and a third-party review of the MEM consultation process that led to the first mining licence in 2013.

No material revenues have been recorded from Escobal since July 2017, and during the second half of the year, the company spent $24.9 million, or 8¢ per share, on care and maintenance.

Despite the challenges in Guatemala during the second half of last year, the company reported earnings of $81.8 million in 2017, or 26¢ per share.

Ron Clayton, Tahoe’s president and CEO, said at the time that he expected 2018 “will be a pivotal year for the company,” and management remained “optimistic that based on legal precedent, the Guatemalan Constitutional Court will issue a favourable ruling reinstating the Escobal mining licence.”

At its Shahuindo mine — a shallow, open-pit, heap-leach operation, 30 km north of La Arena — the company expects to expand to 36,000 tonnes per day by the end of 2018.

For the year, Tahoe expects Shahuindo will produce 80,000 to 110,000 oz. gold at cash costs of US$750 to US$800 per oz., net of by-product credits, and AISCs of US$1,050 to US$1,100 per oz., net of by-product credits.

The Shahuindo project in Cajabamba, Peru. Credit: Sulliden Gold.

It forecasts La Arena will produce 160,000 to 180,000 oz. gold at cash costs of US$650 to US$700 per oz., and AISCs of US$950 to US$1,050. Its Timmins mine, which it acquired in April 2016, should produce 160,000 to 175,000 oz. gold this year at cash costs of US$800 to US$850 per oz., and AISCs of US$1,050 to US$1,150 per ounce.

By 2019, Tahoe says, it should produce half a million ounces of gold a year, up from the 400,000 to 475,000 oz. it expects to produce in total this year.

In the first quarter of 2018, Tahoe reported a net loss of US$6.9 million, or 2¢ per share, compared with earnings of US$74.7 million, or 24¢ per share, in the first quarter of 2017.

It produced 90,900 oz. gold during the three months ended March 31 at total cash costs of US$793 per oz. and AISCs of US$1,158 per oz. gold.

At press time, Tahoe’s shares were trading at $6.43 per share. The share price has ranged between a 52-week low of $4.75 (February 2018) and a 52-week high of $12.98 (May 2017).

Matthew O’Keefe of Cantor Fitzgerald has a “buy” rating and a one-year price target of $8.60 per share.

“Tahoe’s current resource base includes 403 million oz. silver and 5 million oz. gold, or over 10 million oz., on a gold-equivalent basis,” he said in a research note after the company released its first-quarter results, adding that the company also has more than 8 million oz. gold in exploration projects at its Timmins operations in Canada (the Timmins West mine and Bell Creek mill), and 5.1 million oz. gold and 5.8 billion lb. copper at its La Arena II porphyry project in Peru.

“While Escobal makes up around 40% of our net asset value, or $3.10 per share, the market has largely discounted it from Tahoe’s valuation,” he notes. “We expect production at Escobal will resume later this year, returning much of that value to the stock price. As such, we see now as a good entry point to buy Tahoe stock.”

Andrew Kaip of BMO Capital Markets has an “outperform” rating and a $8.50-per-share target price, while Geordie Mark of Haywood Securities has a “sell” rating and a $5.50-per-share target price.