Tahoe Resources (TAHO, Financial) has made a smart move by acquiring Rio Alto. The combination of the two companies will have several benefits for Rio Alto shareholders, including instant open premium along with upholding introduction to potential value creation by significant equity participation, superior financial strength and impressive generation of free cash flows, allow improved dividends thus enhanced returns during Shahuindo construction.
The acquisition will also allow for an exclusive outstanding mine with a strong reserve base of excellent-grade and robust discovery possibilities to maintain long-term operations, adding operational abilities, expanding established know-how in underground mining, enlarged trading liquidity, superior value proposition and unique capital markets profile.
The way ahead
The combined company greatly expands the returns for both company shareholders along with improved overall mine productivity. The company’s average consensus gold equivalent (kozs) production growth with very low capital risk for the prospective period of fiscal years 2015 to 2017. The combined prospective gold equivalent production for Tahoe and Rio Alto is seen to be the lowest among its competitors.
The average forecasted consensus gold equivalent production of Tahoe for fiscal years 2015 to 2017 is seen to be the lowest among its peers and the production should further be negatively affected by the government of Guatemala’s decision to increase the mining taxes.
Andrew Kaip, an analyst with BMO Capital Markets has identified that the tax hike lowers the net present value of Tahoe by approximately 11% at spot metal prices, and earnings per share are estimated to fall 15%. The analyst also expects that this rate hike would have wider impacts for foreign direct mining investment in the country.
Daniel Earle, an analyst with TD Securities finds that Tahoe also gives a 7% net smelter royalty (NSR) tax along with the royalty. Therefore, a total 17% NSR royalty/tax structure is believed to be the most troublesome situation in the global mining industry.
Both the analysts suggest a negative impact on the company’s production in the country and would further avoid any key mining investments in Guatemala. Also, the company expects to maintain the current monthly dividend of $0.02. The joint venture of the two companies is seen to be delivering superior dividend just below Goldcorp and, hence, excellent shareholder returns.
Conclusion
Overall, the investors are advised to invest into Tahoe Resources Inc. looking at the impressive company valuation with trailing P/E and forward P/E ratios of 18.15 and 15.38 respectively indicating lower cost of the stock. The PEG ratio of 1.88 depicts healthy company growth. The profit margin of 25.92% signifies healthy company profits. Further, the solid growth efforts of the company are supported by a robust balance sheet with total cash of $80.36 million and total debt of $49.80 million only.
