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June 17, 2015

#Tahoe Resources ($THO) CAD 16.78 (- $ 1.71 or 9.2%) - #Goldcorp $GG sells its entire holding of 25.6%

M&A unlikely near term, dividend looks safe. 

Goldcorp announced its selling its entire holding in Tahoe Resources for close to CAD 1 Bio. Tahoe Resources is gearing up to full production on its first class silver mine in Guatemala (Escobal mine), which is the 3rd largest silver mine in the world. 

In full swing the mine should produce 20 Mio. ounces of silver annually over the first 10 years. Tahoe Resources also bought lately the La Arena gold mine (220,000 ounces per year) in Peru with the takeover of Rio Alto Mining.


 Comment from SCOTIABANK: 

- Goldcorp Divesting of Tahoe Stake – We Are Not Concerned on Imminent M&A:  Goldcorp (G-CN/GG-US, SO, US$28.00, Tanya Jakusconek) announced its intention to sell its 25.6% stake in Tahoe Resources Inc. for ~C$998.5 million in a bought-deal offering - a secondary offering by Goldcorp of 58,051,692 Tahoe common shares priced at C$17.20 apiece.   There will likely be a lot of speculation and concern this morning with respect to Goldcorp going after a major acquisition (ie. Detour Gold – unlikely in our opinion), especially in the context of the company also announcing last Wednesday that it had increased its credit facility from $2 billion to $3 billion and extended the term to June 10, 2020 (the unsecured, floating-rate facility bears interest at LIBOR plus 120 points when drawn, based on Goldcorp's current BBB+ rating). 


WHY are we not concerned about imminent M&A?  In recent discussions with Goldcorp CEO Chuck Jeannes – we believe they are focussed on their balance sheet right now.  Any additional liquidity will be earmarked to pay down debt (de-lever) and to buttress the company's industry leading and impressive ~488M per annum dividend (currently a 3.60% yield – see below how this compares with peers).  Consequently, we think the current dividend is indeed safe.  Realistically, the Tahoe block was always deemed non-core – so the secondary offering really came as no surprise to us.  


The Bottom Line:


Goldcorp has added ~$2.0 Billion of Additional Liquidity in the past 7 days in Order to:


1)     Pay Off its $1.14 billion drawn down (as of quarter-end March 31, 2015) on its current $3.0 billion revolving credit facility

2)     Maintain its unrivalled 3.60% Dividend (which was put into place assuming a $1,200/oz gold price environment)

3)     Maintain its BBB+ Rating (important for the company)

4)     Possibly maintain flexibility in the event of opportunistic M&A (but unlikely to be anything of significant size like a $3.0 billion+ takeover of Detour Gold (a close analog to its previous attempt to acquire OSK))


Recall comments made by Goldcorp CEO Chuck Jeannes at Scotiabank's Senior Gold London Conference two weeks ago:


·         Goldcorp confident they will replace reserves this year; good operational momentum through rest of year given a focus on execution through . G should do $500M in FCF this year that will serve to pay down the dividend (that is ~$488M)

·         Goldcorp has also turned inwards to look at the next projects in its internal growth pipeline: the company focusing on HG Young in the Red Lake Camp, Borden Lake (i.e. that came via the Probe acquisition), the Copper/Gold skarn at Peñasquito and El Morro.


- & Now With $2.0 Billion in Additional Liquidity for G – We Are Reiterating our "Buy Goldcorp" Thesis…

- Time to Buy Goldcorp?  We Think so… Here Are Three Reasons Why:


1)     Trading Below NAV (now at a screamingly cheap 0.89x – see below) and Near 52 WL (G is trading at just 11% above its 52WLs!! - see scattered charts below for relative valuation and share price performance). 

2)     Pays US$140/oz in Dividends or a 3.6% Yield (Safe in Our View)

3)     We think Operational performance improves through 2015 and finishes strong following a mediocre Q1.  We believe they will meet 2015 guidance.




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