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LAWRIE WILLIAMS: Implications for silver of Tahoe’s Escobal shutdown

The world’s second largest primary silver mine has been shuttered at least temporarily.  Tahoe Resources’ somewhat controversial Escobal mine in Guatemala is to be closed for perhaps three months – possibly for longer - while court hearings are under way.  In a statement to shareholders, Tahoe (NYSE: TAHO) says that  the Supreme Court of Guatemala has issued a provisional decision in respect of an action brought by the anti-mining organization, CALAS, against Guatemala’s Ministry of Energy and Mines (“MEM”).  The action alleges that MEM violated the Xinca Indigenous people’s right of consultation in advance of granting the Escobal mining license to Tahoe’s Guatemalan subsidiary, Minera San Rafael.  The provisional decision is in respect of a request by CALAS for an order to temporarily suspend the license to operate the Escobal mine until the action is fully heard.

Tahoe is putting a brave face on the decision, but problems may run rather deeper given a long running dispute over the mine and opposition to it.  Escobal has effectively been closed for a month already due to a blockade of the main access road by protestors.  Guatemala has not proved to be a particularly mining-friendly nation and there are accusations of irregular dealings by the company over the award of the original mining license, as well as over dealing with mine opponents in the past including a serious shooting incident involving mine security personnel. 

On the other hand, Escobal is a very significant revenue producer for the country and has single handedly moved Guatemala up from an ‘also ran’ to the world’s 11th largest silver producer and Escobal to the world’s second largest individual silver producing mine, after Fresnillo’s Saucito mine in Mexico,  according to the latest figures from The Silver Institute.  There could thus be some strong financial pressures to get the mine back into operation.

Last year Escobal produced 21.2 million ounces of silver. Measured and Indicated mineral resources for the deposit totalled 368 million silver ounces at an average grade of 323 grams per tonne, with significant quantities of lead, zinc and gold.  Proven & Probable Reserves are put by the company at 23.7 million tonnes at an average grade of 351 g/t silver, containing 267.5 million ounces of silver.   It has been a highly profitable operation for Tahoe and the likely dent in its earnings should the closure be prolonged could be large indeed hence a major dip in the share price following news of the Guatemalan court’s decision.

In 2016, Escobal produced around 2.4% of global silver output, not an insignificant amount but hardly enough to make a major difference to the global supply/demand balance which is already seen as being in a small deficit, but it could be sufficient to temper any further decline in the silver price.  The Silver Institute, with its figures provided by GFMS, puts global new mined silver production at 885.8 million ounces, but total supply at 1,007.1 million ounces (including scrap etc.) as against demand of 1,027.8 million ounces.  However the Institute also estimates identifiable above ground silver bullion stocks as being 2,590.9 million ounces.  Silver over the past few days has been looking a little stronger after its recent disappointing performance, but we somehow doubt that the Escobal closure alone will have any real price impact, but any major movement in the silver price will likely be driven by the performance direction of the gold price.

12 Jul 2017 | Categories: Silver

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