More on Royalty Legislation (Negative)
Tahoe announced that the Guatemalan Congress had passed legislation that would see the net smelter return (NSR) royalty on mining projects increased to 10%.
Analyst Daniel Earle notes that the Guatemalan President, Otto Molina, has approximately two weeks to exercise his veto power to block the legislation before it will become law. Daniel Earle views the proposed fiscal regime as being one of the most punitive in the world
Escobal currently pays a 5.5% royalty (including a 0.5% voluntary royalty to local landowners) – the 7% 'tax' (also an NSR royalty) that the project is subject to would be unaffected, bringing the total royalty burden on the project to an eye-watering 17%
As an exceptionally low-cost operation at the start of its mine life with the highest grades, Daniel Earle believes Escobal can withstand the higher royalty and continue to generate strong free cash flow in the short and mid-term
However, incorporating the royalty our 2015E CFPS decreases by 11%, the change in royalty itself responsible for 11% and the balance from reducing the value of the exploration upside associated with the large (~2,000 sq. km) and prospective land package surrounding Escobal to zero as, on a risk-adjusted basis, Daniel Earle don't see the merit in further exploration in Guatemala outside of Escobal given the odds against finding a deposit that would be economic in the potential new royalty regime
Tahoe's shares closed down 8%, while its precious metals peers traded up 8-10% on average so the stock may be due for somewhat of a rebound
Daniel Earle estimates that the company trades at 1.49x he is maintaining his BUY recommendation, but reducing his target price to $22.00 (from $27.00)
