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Tahoe and the slippery slopes in Guatemala

Mention Tahoe and you might think of the lake — specifically, the resort on the California-Nevada border that’s popular with skiers.

And although Michael Curran, Toronto-based managing director and research analyst at Beacon Securities, may have hit Tahoe’s slopes, he’s now likely more interested in how much silver Tahoe Resources Inc. (TSX─THO) is going to dig up at its Escobal mine in Guatemala.

In the meantime, he’s reaffirming his “buy” recommendation, as well as his 12-month price target of $24 a share. He writes:

Headquartered in Reno, Nev., Tahoe is a precious metals miner whose main asset is its wholly-owned Escobal silver mine in Guatemala — a mine that went into commercial production in 2014 and that’s capable of producing 20 million ounces a year.

We recently visited Escobal. And we were impressed by what we saw — specifically, the organization of the underground mine, mill and tailings facilities, as well as the quality of personnel.

We left even more confident that over the next few quarters, the mine will successfully complete its current expansion, growing to 4,500 from 3,500 tonnes a day.

But we remain concerned about Guatemala’s recent move to boost royalties on precious metals to 10 from five per cent. The higher levy will also affect most base metals mines.

Our concerns centre on the amount, as well as the process, of the royalty increase.

For starters, a 10 per cent royalty is one of the highest we’ve seen anywhere.

And we expect it will hurt the development of mines — especially those with low-grade deposits.

Moreover, we’ve typically seen a more transparent process regarding royalty hikes than what Guatemala seems to have done.

That’s because before raising royalties, a government will usually seek feedback from various stakeholders: mining companies, municipal governments, along with both informal and semi-formal mining organizations.

Admittedly, Escobal, as a high margin mine, can sustain the higher royalty. But the way Guatemala has gone about raising it is likely to damage its reputation as a place in which to invest in mining.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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