THO.TO - another vertical tax loss selling dive...
...albeit with higher political risk, but a world class silver mine with probably all the worst news already priced in. See chart and then latest PR to understand the fuel that tanked THO.TO all the way down to $14 during tax loss selling.
Here is Macquarie's take on royalty increase. They are using $19 silver for 2015 and looks like about $22 long term silver.
Target decrease on higher royalty legislation Event ? We are decreasing our target on Tahoe to $24.25 (was $26.75) on the back of an unexpected higher royalty payment structure. Monday, before market open, Tahoe announced that the Guatemalan Congress has passed legislation on Friday that would increase statutory royalties in the mining law to a total of 10% NSR (9% federal and 1% municipalities). This represents a five percent point increase to the company’s current combined statutory and voluntary regime. ? The legislation must be signed by President Otto Perez Molina in order to become law. We believe management’s current assumption is the legislation will be signed by President Molina and be in effect by early 2015. Once signed, the new royalty payment structure is designed to replace all current voluntary royalty agreements with the local communities. Impact ? Higher royalty = 9% decrease in NAVPS. With a 10% NSR royalty payment structure, our NAVPS decreases by 9% to $23.30 (was $25.62), 2015E CFPS decreased by 11% to $1.04 (was $1.17), 2015E EPS decreased by 13% to $0.88 (was $1.01) and LOM AISC increased by 14% to $10.27/ozAg (was $9.04/ozAg). ? The legislation was introduced “in the eleventh hour”. On Friday, the Guatemalan Congress voted for a broad set of new taxes across most sectors to raise revenue as budget legislation requires a balanced budget. The national debt ceiling could not be moved-up until a deal to balance the Guatemala budget was reached – subsequently another $1bn in debt was approved. We expect the President to sign the legislation later this month before YE14 to have it ready to kick in by the start of 2015 (we also think the taxes are likely to stay). ? Relationships with local communities could be a concern. We believe the company will campaign the government to maintain the ~3% NSR that goes to the local communities (as part of the 10% NSR). THO has established a good working relationship with a number of communities that benefit from the royalty payments and in our view it is important that the communities continue to benefit from the Escobal silver mine. Earnings and target price revision ? Target reduced to $24.25 (was $26.75) on higher expected royalty payments. Price catalyst ? 12-month price target: C$24.25 based on a DCF methodology. ? Catalyst: Escobal site visit (Dec 10-12); FY14 results (1Q15) Action and recommendation ? We reiterate our Outperform rating but decrease our target to $24.25 (was $26.75). While the new royalty legislation hurt most economic metrics by ~10%, Escobal is still a best in class silver mine with low AISC of $10.27.
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