Tahoe Resources (NYSE:TAHO) shares hit an all-time high of $23.18 on Friday morning. Furthermore, the company’s stock has been performing incredibly well, having outperformed its peers in the silver mining sector. Last year, the company’s shares were flat while the price of silver plummeted 34 percent and the Global X Silver Miners ETF fell over 50 percent.
The reason for this outperformance is quite simple: Tahoe Resources just began production at its enormous Escobal silver mine in Guatemala. The mine is going to produce a lot of silver — 20 million ounces per year — with very low production costs. Cash costs are expected to be just $6 per ounce. Even if we take into consideration sustaining costs and taxes, the mine is expected to be one of the lowest-cost silver mines in the world. Given this, investors have fled to Tahoe Resources in lieu of other silver miners, many of which are struggling to turn a profit, despite the fact that the company has yet to begin producing.
But as appealing as all of this sounds, I would hold off on investing in Tahoe Resources and wait for a lower entry point for several reasons. First, the stock has simply run too far. If the company is able to produce silver at $12 per ounce including all costs, then it will generate about $180 million in annual cash flow. While this is a lot, keep in mind that the company is valued at $3.3 billion, which means the shares are trading at over 18 times expected cash flow. This isn’t horribly expensive, but it isn’t cheap, either.
Second, the mine is located in Guatemala, and locals have protested the mine. This has not been a major issue up until now — however, investors need to keep it in mind as a tail risk that can seriously damage the company. Tahoe Resources is, in essence, the Escobal mine, and if local opposition shuts down the mine, even temporarily, this can be a huge blow to Tahoe Resources’ cash-flow as well as investors’ favorable perception of the company.
Finally, Escobal just began producing. Large mines often stumble out of the gate. Production probably won’t reach full capacity and the expected level of efficiency for several quarters. Investors in Detour Gold (OTCMKTS:DRGDF) know all about this. That company recently began production at its large Detour Lake mine in Ontario, Canada, and the company has had to raise capital, and it has seen production costs come in far higher than expected.
While last year was a terrible year for nearly every gold and silver mining company’s stock, Detour Gold shares fell particularly hard given its problems from $20 per share to $2 per share. I’m not saying that this is going to happen to Tahoe Resources, but there is a significant risk that as a large mine, Escobal will not perform as expected toward the beginning of its life.
With these points in mind, it follows that investors should probably wait for the stock to pull back before taking a position. The shares are not really over-valued, but there is a lot of downside risk that I don’t believe investors are pricing in. If the shares fall I will likely be buying, especially if they fall on news that Escobal production is less plentiful and more costly than expected.
This should be a great stock to own longer term, but it isn’t one worth buying at an all-time high.