Tahoe Resources (THO.TO, TAHO) has announced the suspension of its dividend and company-wide production guidance as the Escobal mining license remains suspended fort the time being as the supreme court has denied a motion for reconsideration and the procedure in front of the constitutional court could take several more months.
The company also reported a total production of 4.1 million ounces of silver as well as 112,000 ounces of gold of which almost 20% was produced at the Shahuindo project in Peru. This resulted in an adjusted operating cash flow of $80M in Q2 (note, this excludes a positive impact of $16M due to changes in Tahoe’s working capital position) and a free cash flow of approximately $14M after taking the payments on finance leases, capital expenditures and interest expenses into account. However, of the $63.5M in capital expenditures, approximately $26M was allocated to the Shahuindo and Bell Creek expansion projects which means the sustaining capex was less than $40M (including exploration expenses).
Cutting the dividend is a very prudent move, as this reduces the cash outflow by approximately $75M per year (although, to be fair, approximately 20% of the shareholders elected a stock dividend which didn’t impact the cash outflow but did increase the total share count). Even though the Canadian and Peruvian operations of Tahoe Resources could continue to cover the dividend, Tahoe is preferring to protect its balance sheet and use the free cash flow from its gold operations to continue to fund the expansion of the Shahuindo gold mine and the construction of the Bell Creek shaft project which should both be completed in the second half of next year.
The current share price could be an opportunity if you think the situation in Guatemala could be resolved soon, and for the time being, the suspension of the dividend is a very prudent move to protect it balance sheet. It also opens the door to reinstate the dividend at a lower monthly rate later on.
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The author has no position in Tahoe Resources but could go long. Please read the disclaimer
