February 26, 2018 - 1:26pm EST by
2018 2019
Price: 4.00 EPS 0 0
Shares Out. (in M): 313 P/E 0 0
Market Cap (in $M): 1,252 P/FCF 0 0
Net Debt (in $M): -126 EBIT 0 0
TEV (in $M): 1,126 TEV/EBIT 0 0

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Tahoe Resources (TAHO)                                                                            $4.00 February 25, 2018
Company Description:
Tahoe Resources operates 3 gold mines and one silver mine.
If all the mines were at full production, the gold mines would generate 65% of gross profits and the
silver mine named Escobal in Guatemala would generate 35% of gross profit.
Why Does This Investment Opportunity Exist?
On July 5, 2017 Tahoe Resources stock price closed at USA$8.30. The following day the stock price fell
(33%) to $5.56 per share as Tahoe was ordered by the Supreme Court in Guatemala to close their
Escobal silver mine which generates about $185 million in annual EBITDA. Today Tahoe annual EBITDA
has been reduced to $202 million which it earns from the remaining 3 gold mines. Clearly a re-opening
of the Escobal silver mine would allow Tahoe EBITDA to double within 3 months, and the stock price
could double rapidly as well.
Risk-Reward From Two Scenarios:
Bullish Scenario: In the optimistic case, Tahoe is able to reopen its Escobal silver mine in 2018 and gold
production also grows by 10% in 2019 to 500,000 ounces as mine expansions at the Shahuindo, Peru
gold mine and Bell Creek, Canada gold mine are completed. Tahoe will be able to generate $440 million
EBITDA annually in 2019 with spot gold prices of $1,330 and silver spot prices of $16.50. In the optimistic
case Tahoe is trading at 2.8x EV/EBITDA on 2019 estimates. At a 7.5x EBITDA multiple the stock price
would be $10.50/share. That provides 163% appreciation potential.
Bearish Scenario: In a pessimistic case, Tahoe is never able to re-open its Escobal mine, but expansion at
its gold mines would be completed. This results in 2018 EBITDA of $190 million from the 3 gold mines. I
am excluding the $65 million in additional EBITDA that should be earned in 2019 from the gold mine
expansions at Shahuindo and Bell Creek. On 2018 estimates Tahoe is trading at a 6.5x EV/EBITDA
valuation. The average valuation for 40 public gold mines is 7.5x EV/EBITDA on 2018 estimates.
At the 7.5x 2018 EV/EBITDA valuation Tahoe would trade at $4.56/share, or 14% upside.
At the 7.5x 2019 EV/EBITDA valuation Tahoe would trade at $6.11/share, or 53% upside.
Tahoe’s stock price is trading at its all-time low price.
Even in the bearish scenario where the Escobal mine never re-opens the stock price can still appreciate.
Management just hosted its most recent quarterly conference call last week. They are “very optimistic”
that we will hear positive news about the status of the Escobal mine in the near future. Thus Tahoe is an
event driven investment. One does not need to have an opinion about the direction of gold or silver
The financial forecast for the Bear and Bull Cases are presented below:
The bull case adds one year of growth in 2019 by including $180 million EBITDA from a
re-opened Escobal mine and $69 million more in gold EBITDA from the
mine expansions at Shahuindo and Timmins for a total $440 million EBITDA.
Tahoe Percent Bear Bull
Case Case Percent
USA ---> $3.99 of GM$ 2018 2019 Difference
Gold Production 0.445 0.5
Gold Price/oz $1,330 $1,330
Gold sales 591.9 665
Gold costs/oz 750 675
Gold Margin/oz 580 655
Gold mine gross profits 100% 258.1 65% 327.5
SIlver Production 0 20
Silver Price/oz $16.50 $16.50
Silver sales 0 330
Silver costs/oz $7.50 $7.50
Silver Margin/oz $9.00 $9.00
Silver mine gross profits 0% 0 35% 180
Total Sales 591.9 995
Total Gross Margin Profits 258.1 507.5
Exploration Expense 20 20
G&A 48 48
EBITDA in USA$ 190 440 131%
Gold Only Escobal Re-Opened
D&A 161 161
EBIT 29 278.5
tax rate 26% Statutory Rate 33% 40%
Shares 313 313
Target EBITDA Multiple 7.5x 7.5x
Target EV 1,426 3,296
Target Stock Price USA $4.56 $10.53
Percent Upside 14% 164%
mkt cap in USA$ $1,249 $1,249
EV/EBITDA 6.57x 2.84x
Continue reading onto the next page ……
Let’s Start At The Beginning Of This Legal Matter:
July 5, 2017 Event Supreme Court Temporarily Suspends Mining LIcense
There is a non- government organization (NGO) that is opposed to mining due to how the environment
is negatively impacted. They claimed that the Guatemala Ministry of Mining granted a mining license to
Tahoe without adequately including the indigenous population in the decision. They asserted that as a
result of not following regulations properly, the mining license was illegally issued to Escobal. The NGO
took this case to the Supreme Court which resulted in the Supreme Court ruling in July 2017 that the
Escobal mine would need to be closed until the allegations with the Ministry of Mining were resolved.
August 8, 2017 Event Export Credential Expires
September 10, 2017 Event Escobal Mining License Re-instated
Tahoe appealed this case with the Supreme Court, with a request to operate the Escobal mine while the
indigenous issues were examined. On September 10, 2017 the Supreme Court re-instated the Escobal
license. Tahoe’s stock price rose 33% the next day to $7.00. The NGO responded by appealing this
decision to the Constitutional Court which in Guatemala is the highest court in the nation.
Unfortunately the Escobal mine did not reopen immediately as the “export license” had expired in
August 2017. The Ministry of Mining is in charge of renewing the export license. In a surprise disclosure
the Ministry stated that they would delay reactivation of the export license until the Constitutional
Court ruled on this case.
October 25, 2017 Event - Appeal at the Constitutional Court
In October the Constitutional Court heard the appeal. Normally the court will issue a decision within 5
days of the hearing. Unfortunately, 4 months have elapsed and we are still waiting for the court’s final
February 23, 2018 Event Quarterly Conference Call
Tahoe President Ron Clayton states on the call that he is “VERY OPTIMISTIC” that mining at Escobal will
resume in 2018. He does not provide details.
There are three obstacles to the resumption of mining at Escobal and the export of silver.
First, we are waiting for the Constitutional Court to uphold the Supreme Court ruling that Escobal mining
license is valid.
Second, after a positive ruling the Ministry of Mining needs to reactivate the mine export license for
Third, protestors affiliated with the NGO have blockaded the Casillas Road since June 2017 to prevent
Tahoe from transporting its silver to the ports. President Ron Clayton suggested that Tahoe and the
NGO have arrived at an agreement where the blockade would be lifted.
Comparative Valuation Indicates That Tahoe Is Under-Valued
Ten firms with a market cap range of $500 million to $2.5 Billion that derive most of their profits from
silver mining trade at 7.5x EV/EBITDA on 2018 consensus estimates. This assume a $16.80 spot price for
Forty firms that each produce at least 200,000 ounces of gold per year and derive most of their profits
from gold mining trade at 7.5x EV/EBITDA on 2018 consensus estimates. This assume a $1,300 spot
price for gold. Gold companies with a royalty business model are excluded from this group of forty gold
EBITDA Sensitivity to changes in gold and silver prices
All Tahoe forecasts assume that current spot prices of $1,330/ounce for gold and $16.50/ounce for
silver are maintained in the future.
For every 10% change in gold & silver prices 2019 EBITDA will be adjust by 20%
Tahoe does not hedge prices for its gold and silver production
Where Are Gold and Silver Prices Headed?
Since Tahoe Resources is an event driven investment, an investor does not need a strong view about
gold and silver prices.
I certainly do not have crystal ball that allows me to forecast gold and silver prices.
Nevertheless, rising gold and silver prices would be a positive.
Historically gold and silver prices move in the opposite direction of the USA dollar.
If the USA dollar continues to depreciate, then gold and silver will most likely rise in value.
Gold and silver also tend to be positively correlated with rising inflation.
Central banks have artificially kept short term interest rates at near zero for the past 8 years and
inflation has been subdued.
In 2018 we are finally seeing signs of higher inflation as full employment in the United States is finally
leading to wages rising 3% year over year. Stronger GDP growth driven by the Trump tax cuts may lead
to even faster GDP growth and more upward pressure on wages and inflation.
Country & Taxation Risks:
MINE LOCATION Annual Production
Escobal Guatemala 20 million ounces of silver
La Arena Peru 160,000 ounces of gold
Shahuindo Peru 80,000 ounces of gold
Timmins Canada 160,000 ounces of gold

The biggest catastrophic risk for investors in mining is when the mine is expropriated by the
government. The government can do this in two ways. First they can nationalize the mine or
dramatically raise taxes. I have seen this happen in numerous countries in Africa and places like
Venuzuela or Kazakstan. Today the parties in power in Guatemala and Peru are pro-business. Clearly
the risks are higher in these countries versus Canada. I will continue to monitor the country risks, but
for now the risks do not result in my avoiding direct investments in these countries or place a large
valuation discount.
Gold & Silver Prices May Drop:
Tahoe’s profitability would clearly suffer if precious metal prices fell.
We have calculated that every 10% decline in gold and silver prices would reduce EBITDA by 20%.
Fortunately, this event driven investment will hopefully be resolved rapidly with the re-opening of the
Escobal silver mine. Thus we do not have to worry a lot about metal prices.
If ones intention was to own Tahoe shares for a long time then a substantial decline in gold and silver
prices becomes a bigger risk factor.
The good news is that Tahoe has a strong balance sheet with zero net debt. Thus a decline in
profitability would not have a domino effect where a deteriorating balance sheet causes the equity price
to decline even faster.
Production Problems:
Production shortfalls take place in the mining industry.
The key is to have a good mine asset where ore grades do not disappoint to the downside.
The good news is that Tahoe has good assets and a good production track record. As recently as 2017
management provided guidance for gold mine production of 400,000 ounces. By the time the year
ended Tahoe gold production was 12% above their guidance. The observation is that management has
been conservative in forecasting production levels and has a record of achieving their goals.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Constitutional Court in Guatemala upholds the decision of the Supreme Court that the Escobal mining license is valid. 

Tahoe has its export license reactivated and the road blockade is lifted to transport silver to the port for export. 

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