Embattled Tahoe sells out to Pan American
In a deal that highlights the importance of social licence in mining, Vancouver’s Pan
American Silver Corp. announced Wednesday it will purchase Tahoe Resources
Inc., seizing the moment to buy a company whose stock has been in freefall amid ongoing controversies in the communities in which it operates.
Under the terms of the US$1.1 billion deal, Pan American will pay up to US$275 million in cash and an additional US$800 million in shares. That values Tahoe shares at US$3.40 — a 35 per cent premium on its 20-day volumeweighted average price — or 0.2403 of a Pan American share per Tahoe share.
Pan American said in a press release that the acquisition would create the largest silver company in the world, and pointed to its own track record of building mines and operating in Latin America — an area where Tahoe has been beset by violent conflict and legal challenges.
But early reaction to the deal was negative. By midday, Pan American’s shares had fallen more than 12 per cent. Meanwhile, some Tahoe investors were incensed that the company negotiated a sale when silver prices are soft, and when its stock is down as it struggles to restart operations at its flagship mine in Guatemala.
“I think Pan American is buying it very cheap,” said John Tumazos, of Very Independent Research, an investor and analyst.
Pan American’s chief executive Michael Steinmann noted there was risk involved in taking on a company whose flagship asset is sidelined.
“I’m very confident that we can bring that mine back to running,” Steinmann told Financial Post.
Tahoe’s Escobal mine in Guatemala produced 20 million ounces of silver per year at below-industry-level operating costs before being shut in July 2017. Steinmann noted the mine has enough silver to operate for more than another decade, plus “enormous” exploration potential.
But the CEO acknowledged it will take time to address local communities’ concerns, which relate to the environmental and social impacts of the mine.
“It always has been and always will be very important to engage with the community, understand their needs and address that,” he said, adding that he travelled to Guatemala as part of his due diligence.
If the deal closes as expected in January 2019, Steinmann will inherit a company embroiled in legal disputes in three countries.
In Guatemala, the Constitutional Court issued an unappealable ruling in September that suspended operations at Tahoe’s Escobal silver mine, and halted its exploration work, ordering the company to consult with surrounding Indigenous communities that oppose the mine.
Meanwhile, in Canada, Tahoe faces personal injury claims from several Guatemalans, including one who claims to have been shot in the face by its security forces while protesting Escobal. Lawyers are closely watching the case, which uses a novel legal theory that could, if successful, create new liabilities for Canadian mining companies that operate abroad.
In Reno, Nev., where Tahoe’s corporate headquarters is located, a gaggle of investors filed federal securities fraud claims seeking class-action status after the Escobal mine closed in 2017. The suits accuse management of failing to disclose the extent of its conflicts with Indigenous communities in the Central American country.
“It has been obviously a drag on Tahoe, for sure,” Steinmann said about the legal problems.
But he added that Tahoe has operational gold mines, one in Timmins, Ont., expected to produce as much as 175,000 ounces in 2018, and two in Peru, expected to produce as much as 270,000 ounces combined.
Its Peru operations, however, have also faced resistance. In September, 80 to 100 protesters forced Tahoe to temporarily suspend mining for eight days, demanding unspecified compensation for the dust and noise created by the mine — but the company said it was complying with the law. Also, a pipeline carrying cyanide and gold-bearing solution may have leaked into a creek, the company said, blaming the incident on attempted theft.
As part of the deal, Pan American promised to pay Tahoe shareholders an additional US$221 million if it restarts mining at Escobal within the next 10 years.
Tahoe’s board and senior management, which controls 1.7 per cent of the company, already entered support agreements for the merger.
There is also overlap between the two companies’ shareholders. For example, the investment management firm Van Eck Associates Corp. holds a 14.6-percent stake in Tahoe and a 13.6-per-cent stake in Pan American, making it one of the largest shareholders in each company, according to Bloomberg data.
Tumazos, who also owns shares in both companies, said he didn’t see any synergies, and added that Tahoe had been mismanaged.
“I think that the timing of the sale is the pinnacle of that,” he said.
Despite saying Tahoe is undervalued in the deal, Tumazos thinks many shareholders would vote to approve it.
“They’re probably going to vote for it, because the two companies are worth more without the Reno headquarters,” he said.