About four weeks after shareholders overwhelmingly voted in favour of the deal, Pan American Silver Corp. (TSX:PAAS) closed on its acquisition of Tahoe Resources Inc. late last month.
The US$1.1 billion purchase is significant. Had it completed last year, it would have ranked as the second-largest deal on Business in Vancouver’s list of B.C. mining mergers and acquisitions of 2018, and it will no doubt rank in 2019.
“The new Pan American Silver will hold some of the best silver mining assets in the world, and will have the financial capacity to be able to invest in growth of those assets,” Siren Fisekci, Pan American’s vice-president of investor relations and corporate communications, told Business in Vancouver late last year. She said the company would not participate in an interview this time.
The deal makes Pan American the largest publicly traded silver company by free float – the portion of shares that are publicly traded on the market, in this case the Toronto Stock Exchange.
The Vancouver miner also got to double its silver reserves for what was considered a bargain. The arrangement valued Tahoe Resources shares at US$3.40 each – a figure that is 87% below the stock’s US$27.18 peak in 2014, the year its largest asset began commercial production.
“The precipitous decline in Tahoe share prices came about as a consequence of social and political action in Guatemala, which caused them to lose their social and political licence to operate,” explained Rick Rule, president and CEO of Sprott U.S. Holdings Inc., a global alternative asset manager with a focus on precious metals. He was previously a long-term Pan American shareholder.
“It is … uncertain at this point how that might be resolved,” Rule said.
The mining licence of Minera San Rafael SA, a subsidiary company in Guatemala, has been suspended since July 2017. It operated the Escobal silver mine, considered by industry to be one of the top mining assets in the world. Unaudited financial results show Pan American produced 24.8 million ounces of silver last year across six individual mining projects. In 2016, its last full year of production, Escobal alone produced 21.2 million ounces of silver concentrate.
"It's worthy of the effort," explains Randy Smallwood, president and CEO of Wheaton Precious Metals Corp., one of the world's largest precious metals streaming companies.
“The fact that Pan American is having to grow by acquiring projects where there’s obvious issues on permitting and operations sort of underscores how tough it is to find good silver projects," he said, adding that Escobal exemplifies well the importance of social licence.
Production at Escobal remains at a standstill as Guatemala’s Ministry of Energy and Mines completes a Constitutional Court-ordered consultation with local Xinka Indigenous communities around the mine site. It is a process that should have preceded the project’s initial approval, as required under the International Labour Organization’s Indigenous and Tribal Peoples Convention (ILO 169), which Guatemala has ratified.
Escobal wasn’t Tahoe’s only asset but is widely considered its most significant. Rule says he sees potential for Pan American to sell off Tahoe Resources’ other assets in Canada and Peru, thereby ultimately lowering the cost of the transaction and freeing the company to focus on the community, social and political issues surrounding Escobal.
“The upside associated with being able ultimately to resolve those issues unblemished … by the alleged community ill will towards Tahoe, I think, justifies the risk of paying up for a world-class asset that was in fact shut down,” he said.
Pan American says it will rely on 25 years of experience in Latin America to reopen the mine.
Unlike other jurisdictions in the region, Guatemala has a mining industry that is relatively young. Like other jurisdictions, development has faced resistance, and while a consultative process has been laid out by the country’s top court, it won’t necessarily be smooth.
According to social justice organization Earthworks, more than 500 members of Xinka communities recently marched through Guatemala City to protest delays and non-compliance with the consultation process.
Earlier this year, the president of the Xinka Parliament, which represents more than 16 communities and half a million people, said that prior to the transaction, Tahoe Resources personnel had been reaching out to people who did not represent the broader Xinka community in what he says was an effort to feign dialogue.
“We have not been in any dialogue with them given they have demonstrated their bad faith throughout the process,” Aleisar Arana Morales told BIV by email. “We do not trust them.”
The community is closely monitoring how consultation progresses.
“We, as Xinka People, can determine whether the process is appropriate or not,” explained Xinka Parliament legal counsel Quelvin Jiménez. “If it is not adequate, we can denounce that situation before the Supreme Court of Justice, and if do not we agree with the decision issued by the Supreme Court of Justice, we can appeal to the Constitutional Court to denounce the non-compliance.”
This month, the centre for conservation studies at the University of San Carlos of Guatemala released a case study of the mine’s broader social, environmental and economic impacts. It was published in partnership with a religious environmental advocacy group and Virginia Tech, with financial support from Oxfam International.
Among its findings is that 60% of the population around the project lives in poverty, and that the largest investments of project royalties between 2014-2018 have been on construction, offices and hiring – areas case study coordinator Guadalupe Garcia Prado says should be supported instead by the national budget.
Half of the royalties invested in health went to building a cemetery, and 3% of royalties addressed water access and quality. Garcia Prado called the lack of royalty funding on major issues “really worrying.”
She said it exacerbates inequality issues and contributes to mining resistance.
“A lot of the social rents flow to the centre, while the costs are borne by the localities,” Rule said.
Despite years of legal and social challenges, Pan American has described the Tahoe transaction as an opportunity for a fresh start in southeastern Guatemala. Rule agrees.
“I think that Pan American will benefit from, if nothing else, the ability of political and community actors to say that they won. I think this gives everyone a chance to stand down.”
Asked if the current consultation process will be different, Morales said it has to be.
“In fact we are going to fight so that the consultation process strictly abides with international standards and is a totally different consultation process … in which all our concerns and doubts are resolved so that we can actually make an informed, free and mindful decision.” •
