Court Battle Over Tahoe Resources’ Escobal Mine Continues

A court ruling is expected in the next few months; until then, Tahoe will be unable to mine at its Guatemala-based silver mine.

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A hearing regarding Tahoe Resources’ (TSX:THO,NYSE:TAHO) Escobal mining license is scheduled for Monday (August 28), with a court ruling expected to follow in a few months.

The company announced the news on Friday (August 24), also stating that the Guatemalan Constitutional Court has upheld a lower court decision to provisionally suspend its mining license for Escobal. Escobal is one of the world’s largest silver mines, and Tahoe’s share price fell 20 percent on Friday on the news.

The situation has been developing since May, when CALAS, a non-governmental organization, filed a claim against Guatemala’s Ministry of Energy and Mines. CALAS alleged that the ministry violated the Xinca indigenous people’s right of consultation before it granted the mining license for Escobal.

The country’s lower court provisionally suspended Escobal’s mining license in July, and Tahoe said at the time that the suspension would remain in place until CALAS’ action was “fully heard.” Tahoe also said that it would “take all legal steps possible to have the ruling reversed and the license reinstated as soon as possible.” As mentioned, last Friday’s Guatemalan Constitutional Court decision upholds the suspension.

Tahoe also said on Friday that protesters continue to block the mine access road to Escobal. The company said it continues to work with Guatemalan government, community leaders and others to resolve the situation peacefully, but acknowledged that “the road blockage shows no signs of immediate resolution.” Its share price continued to fall on Monday, and was down over 1 percent during mid-morning trading before making slight gains in the afternoon.

In a recent note, CIBC said the court’s decision on Friday diminishes chances for immediate resolution. The bank said that to be conservative it is modeling a restart of operations for July 2018 instead of January 2018. Even so, the firm also notes that it does not foresee any liquidity issues as Tahoe’s balance sheet remains solid, with a quarter-end cash balance of over $190 million and minimal debt.

According to the bank’s analysis, “the exclusion of Escobal negatively impacts net cash [but] the company will maintain a decent size net cash balance of at least ~$56 million even in the event of no restart of Escobal in 2018.” CIBC plans to take a “wait-and-see” approach to the story, and has lowered its price target for Tahoe from $7.50 to $7.

Earlier in August, Tahoe announced that it would suspend its quarterly dividend of $0.02 per share and defer its full-year production guidance due to the suspension at Escobal. The company’s share price entered oversold territory last week, dropping to $29.98 on the Relative Strength Index on Friday.

In July, the firm entered into an agreement with a syndicate of lenders to increase its revolving credit facility from $150 million to $300 million, with a $50-million accordion feature and an extension of the term to July 19, 2021. However, under the terms of the agreement Tahoe is limited to borrowing a maximum of $75 million while its Escobal mining license remains suspended. The company noted that it will be in default if its mining license remains suspended as of April 1, 2018.

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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.

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