Tahoe Resources Acquisition Of Rio Alto Is An Excellent Movehttps://seekingalpha.com/article/2902726-tahoe-resources-acquisition-of-rio-alto-is-an-excellent-move-by-the-company-to-diversify-operations?auth_param=pr64p:1adkap5:a135c1906e2ca19c355b747a62f0a451&uprof=45&dr=1 Summary Tahoe's $1.1 billion dollar acquisition of Rio Alto offers investors important diversification. Tahoe's revenues will now originate from both Guatemala and Peru. Tahoe will now become much more attractive to institutional investors and funds as it no longer has a single point of failure. Tahoe will now have significant exposure to the gold price and will no longer be a silver-dependent producer. Rio Alto's Shahuindo mine offers the potential to add 90,000 gold-equivalent ounces at cash costs of a little over $500 per ounce by 2016. We think the recent announcement by Tahoe Resources (NYSE:TAHO) that it had made a deal to acquire Rio Alto Mining, is an excellent move by the company to add important diversification and despite the initial drop in the share price, investors should be excited about this deal. The deal is an all-share deal worth around $1.12 billion as of Rio Alto's (NYSE:RIOM) pre-acquisition closing price. Upon completion of the Transaction, existing Tahoe and Rio Alto shareholders will own approximately 65 percent and 35 percent of the combined company, respectively. Assuming the deal close, Tahoe Resources will have a market capitalization around $3 billion dollars and will now be a much more diversified company. Tahoe Resources was one of our top five precious metals picks for 2015, but our biggest concern with Tahoe was that it was a very large company with only one source of revenue - its Guatemalan mine. This lack of diversification was emphasized further when the Guatemalan government suddenly raised its royalty tax in late 2014, and caused Tahoe's stock to plummet. Though this new deal to acquire Rio Alto doesn't change everything, it certainly will now allow Tahoe to diversify both its revenues (it will now have gold revenues) and its geography as all of Rio Alto's operations are in Peru. This is critical to any miner that is trying to move from the ranks of the intermediate producers into the ranks of the majors, as a single point of failure can be devastating for a precious metals investor. In fact, we emphasized one of the reasons that Tahoe was attractive was because it offered investors one of the few large silver producers that is able to make a profit at current silver prices - this would make it a blue-chip in the silver mining sector. But we have to note that any fund or institutional investor investing in Tahoe would have to be leery about the fact the company only has one mine and, with a bad government decision, overnight it could be devastated by a political action. So while the profitability, dividend, and size were attractive for larger fund-sized investors, the lack of diversification was not. Based on the most recent quarter (Q3FY14), Rio Alto had revenues of $69 million and net income of around $21 million, which compares to revenues of $90 million and net income of $20 million for Tahoe Resources. As investors can see, Tahoe is now much more diversified in terms of its revenues and income and one government decision can no longer completely halt cash flows. Additionally, Tahoe is acquiring a company that is a cash cow with extremely low gold production costs, so investors will immediately see increased earnings to support the maintenance of the dividend payment. Another benefit for Tahoe shareholders is that Rio Alto also has a relatively new Shahuindo gold property, which Tahoe now steps in with the ability to fund development of the mine. Source: Rio Alto Mining The after-tax IRR of gold priced around $1200 is somewhere between 24% and 33%, and the initial capital required is $131.8 million dollars. The mine is expected to be producing around 90,000 ounces of gold-equivalent annually at very low cash costs of around $552 dollars per ounce, with production expected to start in early 2016. This mine thus is a potential near-term boost that could add another $100 million or more to the new combined company's revenues. Finally, this diversification allows Tahoe to have a bit more leverage when it comes to future negotiations with the Guatemalan government, as the company no longer needs to expand in Guatemala to grow. This may be an important card because despite the government's insistence on raising taxes on mining, it wants to encourage mining investment in the country and bring in much needed revenues - Tahoe can simply spend its development dollars in Peru if the Guatemalan government doesn't offer attractive in-country incentives. Conclusion for Investors While we'll know more of the details about the quality of this acquisition when Rio Alto's management offers its year-end review and conference call and we can get a feel for the company's 2015 outlook, initially this looks like a great deal for Tahoe Resources. Most importantly it will add much-needed diversification to Tahoe's revenue stream and geographical presence, which was the biggest strike against the company. Additionally, Rio Alto has consistently shown profitability and low costs, so Tahoe isn't acquiring some risky developer, but rather a mature company with profitable production. Finally, with Rio Alto's Shahuindo property, Tahoe would be able to increase gold-equivalent production by around 90,000 ounces per year by 2016 (if all goes according to plan) - all with minimal initial capital expenditures. In conclusion, this is an excellent move by Tahoe Resources and we think that despite the initial drop in share price, over time the synergies of this transaction and the lowering of Tahoe's risk profile will be a very big positive for investors. We think this move solidifies Tahoe as one of our favorite precious metal miners for 2015.