Market Overview

Tahoe Resources Sell-Off Could Be a Buying Opportunity


A mining exploration and development company, Tahoe Resources (NYSE: TAHO), traded significantly lower on Thursday' after the Mineweb report that the Guatemalan government might takeover up to 40% of the company. Tahoe's key development, Escobal project, is located in Guatemala.

According to the report, the Guatemalan president, Otto Perez Molina, introduced reforms to the country's constitution. As a part of these reforms, he proposed that the government could acquire a 40% stake in companies that are exploiting natural resources in the country.

Mineweb points out that the current constitution states, "It is declared of public usefulness and necessity that there be technical and rational exploitation of hydrocarbons, minerals and other non-renewable resources. The state will establish and facilitate conditions for their expropriation, exploitation and marketing."

Headlines from Reuters confirm this, but suggest that the law would only apply to new projects. Thus, the companies already operating in Guatemala would be unaffected. This is extremely positive news for Tahoe Resources, as it already has a well-established presence in the country. However, Reuters also reports that the Guatemalan government will present these new proposals to the congress on July 9 and the proposal could be modified before that date. Hence, a certain degree of uncertainty remains until the final decision is announced.

Benzinga spoke with a BMO Capital Markets analyst, Andrew Kaip, about today's price action. Kaip noted that the stock initially swung 40% lower, as investors anticipated that the government takeover would remove 40% of Tahoe Resources' market value. In reality, the report states that government could acquire up to 40%. He also pointed out that Tahoe Resources would be compensated in case of government takeover.

Kaip continued by explaining that the compensation would most likely be similar to the compensation models that are used in West Africa, where it is common that governments own 10-20% of foreign companies' mining projects. Because the governments do not usually have enough capital to acquire the stakes in mining projects, they pay these companies back from the interest they collect.

As mentioned earlier, Tahoe Resources should not need to worry about these arrangements, as the latest headlines indicate that the new law would not have an impact on Tahoe Resources. Therefore, today's sell-off could provide a great buying opportunity in Tahoe and other companies that were affected by the earlier report, such as Goldcorp (NYSE: GG), which is down over 5% intraday.

You can follow me on Twitter @TuomoKallio.

Posted-In: Andrew Kaip BMO Capital Markets goldcorp GuatemalaLong Ideas News Global Trading Ideas Best of Benzinga


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