Last week, I spoke at the Cambridge House Resource Investment Conference and met with all sorts of miners, developers and explorers.
When I get the opportunity to attend events like these, I look forward to sharing my findings with you here in Uncommon Wisdom Daily.
However, many of these companies are too small, and their stocks too thinly traded, to be profiled here. And I’ve learned that many readers don’t always follow my directive to “do your own due diligence before buying anything.”
I will always, always ask you — before spending a dime of your hard-earned money — to ensure that investments we discuss are not only right for you, but that you buy them at the ideal time. Our common goal is for you to capture the biggest move — and a move to the upside, at that.
Please keep that in mind, because I’ve found a company that I can’t wait to tell you more about. I’ll also share a video interview with one of the company’s top brass in just a few moments.
A Silver Developer with Polish
Unlike many of the smaller players in this field, I found one developer that is both quite liquid and has a lot of potential. While I am NOT recommending it as a buy right now, for reasons that I’ll make plain, this is a stock to put on your watchlist.
When the time comes, you can weigh the pros and cons and make the choice if it’s right for you. That company is Reno, Nevada-based Tahoe Resources (TAHO on the NYSE; THO on the Toronto Stock Exchange).
Let’s start by looking at a chart …
Technical Outlook: Waiting for a Pullback
There are three important things I need to point out on this weekly chart of Tahoe Resources …
- You can see that Tahoe has rallied up to overhead resistance from a longer-term downtrend, where it banged its head. Unless it can break above that overhead resistance rather quickly, it is probably going to pull back. I have drawn some support lines on the chart, and potential buyers could look to pick up the stock on a pullback to support.
- On the bottom of the chart, I have a line that measures how Tahoe is performing compared to the iShares Silver Trust (SLV), which holds physical silver. Tahoe was outperforming but now it is not, another indicator that Tahoe is primed for a pullback.
- See that huge spike lower in June? Remember this when I talk about “cons” later. Silver stocks can be very volatile, and Tahoe proves that rule.
So, if Tahoe pulls back, why would you want to buy it? I’ll give you the pros and cons.
The Pros: Tahoe Is Sitting on Rich Rocks
Tahoe is developing a world-class project: Escobal in southeast Guatemala. It is a silver-lead-zinc-gold deposit.
In May, the company released a preliminary economic assessment (PEA) for the project, which has indicated silver resources of 367.5 million ounces at an average grade of 422 grams per metric ton (g/t).
That is some rich rock.
Indicated silver resources stand at 367.5 million ounces at 254 g/t average grade, with another 50 million ounces inferred. Throughput of run-of-mine ore will initially reach 3,500 tons per day (t/d), with the potential to expand to between 4,500 t/d and 5,500 t/d.
So how much will it cost to build the mine? Escobal, which will be an underground mine, is already more than 50% built. Capital expenditures for the mine and milling operation will total $326.6 million, with mill commissioning scheduled to start during the second half of 2013.
It is expected that, unless there are delays, Escobal will enter commercial production during the first quarter of 2014.
The PEA forecasts that Escobal should produce 20 million silver equivalent ounces a year for the first 10 years. Mine life is estimated at 20 years. However, exploratory work continues, and they haven’t found the end of the resource yet. Full operating permits are expected to be granted before the end of 2012.
The company has $271.1 million in cash — enough to finish the mine and bring it to production.
The average production cost at Escobal will run a little over $4.70 an ounce. At $18 silver, the project should pay back the cost of building the mine in 2.3 years. At $25 silver, it should pay back the cost in 1.5 years, because annual free cash flow would be $300 million per year.
Silver is now currently trading around $34 an ounce. The company has calculated that, at $35 per year, it will have free cash flow of $485 million per year, or about $3 per share.
Tahoe is trading at 3.35 times book value — a bit rich for a producing mine. But the upside does seem to be quite good, once the project is de-risked.
My target price for the stock is $32, because I’m expecting the price of silver to soar next year, and that should drag Tahoe’s stock up with it.
In Toronto, I talked to Ira Gostin, V.P. of investor relations for Tahoe Resources. You can watch a video of our chat here — simply click on the image for your video to begin playing.
So, after I’ve told you all these wonderful things, and you’ve watched this video with Mr. Gostin, why wouldn’t you want to run out and buy Tahoe right now?
Well, I’ll give you two reasons …
The Cons: Potential Correction and Political Risk
The price of Tahoe isn’t the only thing that looks like it is poised to pull back. I strongly believe we will see the prices of gold and silver correct this month.
The likelihood is that these are just hiccups in a much bigger bull market, but my view is, why not wait for a pullback? That would be an opportunity to buy good miners and developers on the cheap.
In fact, imports of gold by India, the world’s top buyer, fell 56% in the second quarter, according to the World Gold Council. And Standard Bank said in a report this week that weak bullion demand has been in place since mid-September and is the most-severe in more than a year.
I actually find this bullish, because we had all this weak demand and prices went up. It tells me that the central banks are probably buying hand-over-fist. Still, it’s a cautionary note, and just the kind of thing that could put a temporary cap on rising gold prices and send the price of the yellow metal skidding lower on more bad news.
The second, bigger problem is political risk.
Remember how I told you to make a note of how the price of Tahoe swan-dived in June? That’s because on June 28, the government of Guatemala said that it was considering acquiring up to 40% of all mining and exploration companies in the country.
There’s really no way to put a positive spin on such a development, though many mining analysts tried. The only positive thing that could happen is for Guatemala to abandon the idea.
And guess what? That’s exactly what Guatemala did!
In August, the Guatemalan government told news agencies that the proposal was withdrawn from a package of constitutional reforms.
So, Problem Over, Right?
Well … for now.
The government could always include the 40% takeover in another legislative change later this year. Governments can do that … they’re sneaky that way.
So, if you did buy shares of Tahoe Resources, you would have to do it with full knowledge that it could blow up in your face if the government does a share-grab later on.
Or … you could wait for some kind of political hiccup to send prices lower and then buy, figuring that things would probably smooth out down the road.
These are the choices that precious metal investors must wrestle with every day. Political risk is rising around the world. The chance of being left behind in gold’s next move higher is also rising by many measures.
If you’re doing this on your own, I hope you make the right choices. And do your due diligence!
I’ll be giving my Global Resource Hunter subscribers the benefit of my own insight, with my recommendations on what to buy, when to buy it and, most importantly, when to sell it. To be among the first to get this exclusive information, click here to start your risk-free trial membership today!
All the best,