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Why This Under-$5 Gold and Silver Stock Plunged 23.1% in August

By Neha Chamaria – Sep 4, 2018 at 9:37AM

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Tahoe Resources’ troubles took a new turn last month, making its turnaround even more elusive.

What happened

Shares of Tahoe Resources (NYSE: TAHO) can't seem to find a bottom. The gold and silver mining stock tumbled 23.1% in August, according to data provided by S&P Global Market Intelligence, hitting multiyear lows.

From a big quarterly loss to yet another blow to its flagship mine to a protest at another mine to some contract workers getting abducted (yes, you read that right), Tahoe Resources' problems spiraled out of control last month.

So what

To start, when Tahoe reported its second-quarter earnings on August 1, one number that stood out was nil silver production. The miner's key silver mine, Escobal in Guatemala, was mothballed last year after the suspension of its license following a legal embroglio involving the Ministry of Energy and Mines. When fully operational, Escobal produced nearly 20 million metric tons of silver annually between 2014 and 2017.

As a result, Tahoe suffered a loss of $15.6 million in Q2 compared with a profit of $33.5 million in the year-ago quarter. The miner's gold production was decent at 103,000 ounces, but its all-in sustaining cost soared nearly 15% to $1,060 an ounce.

The key takeaway from Tahoe's earnings report? There are no signs of its flagship mine, Escobal, restarting anytime soon.

A shocked man staring at falling stock price charts.

Image source: Getty Images.

In fact, just weeks after its earnings release, Tahoe announced a layoff of 200 employees at subsidiary Minera San Rafael, which runs the Escobal mine. With that, Tahoe has now laid off 70% of its workforce at the mine. The miner even reported an incident of abduction of 12 security contract workers at Minera San Rafael later in August. While the workers were released, the event reiterated how unconducive Guatemala is for any mining company. It's unfortunate that Tahoe depends almost entirely on the region for its business.

To rub salt in its wounds, Tahoe suspended operations at one of its gold mines, La Arena in Peru, starting August 31 after a protest by locals.

Now what

Tahoe Resources is expanding its gold production and expects to produce 500,000 ounces in 2019. The miner also remained cash flow positive in Q2 and ended the quarter with cash and cash equivalents of $69.7 million. That's not too bad, but with Escobal's fate in limbo, losses piling up, and disruptions cropping up at some mine or another at regular intervals, Tahoe could soon face a liquidity crunch.

In short, there's no visibility whatsoever in the mining company's future, especially given its huge stake in the troubled Guatemala, making Tahoe Resources a stock to avoid at all costs.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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