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NEWS: Tahoe Resources and Rio Alto Mining Combine Creating a Leading Intermediate Precious Metals Producer

Feb 9, 2015

Tahoe Resources Inc. (Tahoe) (TSX:THO)(NYSE:TAHO) and Rio Alto Mining Limited (Rio Alto) (TSX:RIO)(LMA:RIO)(NYSE:RIOM) are pleased to announce that they have entered into a definitive agreement (the Arrangement Agreement) to combine their respective businesses (the Transaction) and create a new, leading intermediate precious metals producer with several value-enhancing growth opportunities.

The combined company offers shareholders significant low cost production from the world-class Escobal silver mine in Guatemala and the established La Arena gold mine in Peru, in addition to long-term sustainable growth fueled by the development of the Shahuindo gold project with first production expected in early 2016. With strong operating margins and low capital risk, the combined company will boast industry-leading free cash flow generation, superior financial returns and a strong balance sheet with zero net debt. In addition, the combined company will benefit from a top-tier management team focused on delivering long-term shareholder returns.

Under the terms of the Arrangement Agreement, all of the Rio Alto issued and outstanding common shares will be exchanged on the basis of 0.227 of a Tahoe common share and C$0.001 in cash per Rio Alto share (Exchange Ratio). Upon completion of the Transaction, existing Tahoe and Rio Alto shareholders will own approximately 65 percent and 35 percent of the combined company, respectively.

Based on the closing price of Tahoe’s common shares on the Toronto Stock Exchange (TSX) of C$17.64 on February 6, 2015, the offer implies consideration of C$4.00 per Rio Alto share which represents a premium of 22.1 percent to the closing price of Rio Alto shares of C$3.28 on the TSX on February 6, 2015 and a premium of 20.3 percent based on the volume weighted average prices of each respective company on the TSX for the 20-day period ending on February 6, 2015.

Highlights of the Transaction

Key investment highlights of the combined company include:

  • A leading precious metals producer: Combines one of the world’s largest and highest grade silver mines with an established gold operation in Peru, a world-class mining jurisdiction, providing the combined company with a strong growth platform.
  • Superior financial performance: Strong cash flow generation and industry-leading return on equity to drive shareholder returns and provide the financial flexibility to fund growth initiatives.
  • Significant low-cost production: 2015 production guidance of 18-21million ounces (mozs) of silver at total cash costs of US$6.35-US$8.25/oz and all-in sustaining costs (AISC) of US$9.75-US$11.50/oz and 210-220 thousand ounces (kozs) of gold at net cash costs of US$570-US$600/oz and AISC of US$730-US$765/oz expected to yield operating margins in excess of 50 percent based on consensus commodity price forecasts.
  • Long-term sustainable growth: Growth to be driven by the completion of the Escobal mine expansion from 3,500 to 4,500 tpd and the planned 2015 construction of Shahuindo, with potential for continued exploration success across the combined asset base.
  • Highly experienced management and Board: Complementary management team with strong cultural fit and a rich history of substantial shareholder value creation and proven expertise in the construction and operation of both open pit and underground mines.
  • Strong balance sheet: Zero net debt and one of the lowest debt-to-equity ratios in the mining industry.
  • Attractive dividend policy: The Company plans to continue the monthly dividend policy of US$0.02 per share subject to Board of Directors approval.
  • Enhanced capital markets presence: Combined US$3.25 billion market capitalization is expected to appeal to a broader institutional shareholder base, increase analyst coverage and improve share trading liquidity.

Management Team and Board of Directors

The management team and Board of Directors of the combined company will draw from the expertise of both companies. Kevin McArthur, current Vice Chair and Chief Executive Officer of Tahoe, will act as the Executive Chairman of the Board and Alex Black, current President and Chief Executive Officer of Rio Alto, will become the new Chief Executive Officer of the combined Company upon completion of the business combination. Ron Clayton will remain President and Chief Operating Officer of the combined company. The senior management team consists of the following:

Mark Sadler VP and Chief Financial Officer
Eduardo Loret de Mola COO – Peru Operations
Tim Williams VP Operations
Brian Brodsky VP Exploration
Edie Hofmeister VP Corporate Affairs

Upon completion of the transaction, the Board will initially be comprised of nine directors, with six directors from Tahoe and three directors nominated by Rio Alto.

The proposed Board of the combined company will consist of the following:

C. Kevin McArthur Executive Chairman
Alex Black Director
Tanya Jakusconek Director
A. Dan Rovig Director
Paul B. Sweeney Director
James S. Voorhees Director
Drago Kisic Wagner Director
Kenneth F. Williamson Director
Dr. Klaus Zeitler Director

Kevin McArthur, Vice Chair and Chief Executive Officer of Tahoe, said, “The combination of Tahoe and Rio Alto is designed to create a stronger and better positioned company going forward. In addition to diversifying our asset base into one of the most attractive precious metal producing regions in the world, this transaction establishes a strong platform for future growth.”

“As a larger combined entity with expanded management capabilities, we will remain focused on strong operating performance and plan to deliver superior financial returns to our shareholders over the near and long term,” added Mr. McArthur.

“Escobal is truly a world-class silver mine, and we believe this transaction represents a logical combination of two complementary, low cost asset bases that will continue to generate strong free cash flows into the future,” said Alex Black, President and Chief Executive Officer of Rio Alto.

“In addition to Tahoe’s attractive dividend policy, this transaction positions our shareholders to realize superior returns as we become part of a larger and more diversified intermediate precious metals producer in the Americas with enhanced cash flow generating capability. We are highly excited about the prospects of the combined company,” he added.

Benefits to Tahoe Shareholders

  • Establishes a significant operating presence in Peru, the second largest global silver producing country and largest gold producing country in Latin America.
  • Enhanced production from a multi-mine producer with immediate high-margin gold production and near-term organic growth.
  • Strengthens Tahoe’s ability to provide superior shareholder returns through internal and external growth initiatives and through its leading dividend policy.
  • Addition of significant exploration potential across all projects; large ~55,800 hectare land package in a prolific mining district.
  • Adds open pit mining and heap leach capabilities to core operational strengths.
  • Enhanced trading liquidity and capital structure will support increased financial flexibility.

Benefits to Rio Alto Shareholders

  • Immediate up-front premium, while maintaining exposure to future value creation through meaningful equity participation.
  • Enhanced free cash flow generation and financial strength.
  • Access to an attractive dividend to provide increased returns during the construction of Shahuindo.
  • Adds a unique world-class mine with a robust, high-grade reserve base and strong exploration potential to sustain long life operations.
  • Expands operational capabilities, adding proven expertise in underground mining.
  • Increased trading liquidity, enhanced value proposition and capital markets profile.

Board of Directors’ Recommendations

Both Companies’ Boards of Directors have determined that the business combination is in the best interests of their respective shareholders based on a number of factors, including fairness opinions received from their respective financial advisors. Each company’s Board of Directors approved the terms of the proposed Transaction and recommends that their respective shareholders vote in favor of the business combination.

Scotiabank has provided a fairness opinion to a special committee of independent directors (Independent Committee) of Rio Alto. GMP Securities L.P. has provided a fairness opinion to the Board of Directors of Rio Alto and BMO Capital Markets and Raymond James Inc. have provided fairness opinions to the Board of Directors of Tahoe.

Transaction Summary

The proposed business combination will be effected by way of a Plan of Arrangement completed under the Business Corporations Act (Alberta). The Transaction will require approval by at least 66 2/3 percent of the votes cast by the shareholders of Rio Alto at a special meeting of Rio Alto shareholders. Officers and directors of Rio Alto, representing 2.3 percent of the Rio Alto common shares, have entered into voting support agreements, pursuant to which they will vote their common shares held in favor of the Transaction. The Transaction is also subject to obtaining approval by a simple majority of votes cast by the shareholders of Tahoe at a special meeting of Tahoe shareholders. Goldcorp Inc., which holds approximately 39 percent of the outstanding Tahoe common shares, has entered into an agreement to vote in favor of the Transaction. In addition, officers and directors of Tahoe, representing 3.5 percent of the Tahoe common shares, have entered into voting support agreements, pursuant to which they will vote their common shares held in favor of the Transaction. In addition to shareholder and court approvals, the Transaction is subject to applicable regulatory approvals and the satisfaction of certain other closing conditions customary in transactions of this nature.

The Arrangement Agreement includes customary deal-protection provisions including non-solicitation provisions, a right to match competing offers and a C$57.6 million termination fee payable to Tahoe under certain circumstances.


Full details of the Transaction will be included in the management information circulars of Tahoe and Rio Alto to be mailed to their respective shareholders by early March 2015. It is anticipated that both shareholder meetings and closing of the Transaction will take place in early April 2015.

Advisors and Counsel

GMP Securities L.P. acted as financial advisor to Rio Alto and Davis LLP acted as its legal advisor. Scotiabank has provided a fairness opinion to the Independent Committee and Torys LLP acted as legal advisor to the Independent Committee.

BMO Capital Markets acted as lead financial advisor to Tahoe and provided a fairness opinion to the Tahoe Board of Directors. Raymond James Ltd. also acted as financial advisor to Tahoe and provided a fairness opinion to the Tahoe Board of Directors. Bank of America Merrill Lynch acted as financial advisor to Tahoe. Macquarie Capital Markets Canada Ltd. and Beacon Securities Ltd. acted as strategic advisors to Tahoe. Cassels, Brock & Blackwell LLP acted as Tahoe’s legal advisor.

Conference Call

Tahoe and Rio Alto will host a joint conference call on Monday, February 9, 2015 at 8:30 a.m. Eastern Time, or 5:30 a.m. Pacific, for members of the investment community to discuss the business combination. The call-in details are as follows:

  • Canada & USA toll-free: 1-800-319-4610
  • Outside of Canada & USA: 1-604-638-5340

A copy of the merger investor presentation is also available on the Tahoe and Rio Alto investor pages at and, respectively. An audio recording of the conference call will be made available shortly after the call on the Tahoe and Rio Alto investor pages.

About Tahoe

Tahoe’s strategy is to responsibly operate the Escobal mine to world standards, to pay significant shareholder dividends and to develop high quality precious metals assets in the Americas. Tahoe is a member of the S&P/TSX Composite and TSX Global Mining indices and the Russell 3000 on the NYSE. Tahoe is listed on the TSX as THO and on the NYSE as TAHO. Tahoe plans to seek a listing of its shares on the Bolsa de Valores de Lima S.A. (BVL).

About Rio Alto

Rio Alto is a mid-tier gold producer focused on optimizing production, exploration and if appropriate, making further acquisitions of precious metal properties in low risk regions of the Americas. Rio Alto is listed in the TSX and BVL as RIO BVL and the NYSE as RIOM.

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Michael Pento: Yellen – Looking For Inflation In All The Wrong Places

By Michael Pento, Feb 9, 2015

In 1958, economist W.H. Phillips wrote a paper that argued an inverse relationship existed between wage inflation and unemployment. The crux of his theory was when unemployment is high wage growth is absent; but when the unemployment rate is low wages rise rapidly. Philips established his theory under the framework of a curve and it was aptly referred to as “The Phillips Curve”. However, many economists wrongly adopted the Phillips Curve by relating it to general price inflation, rather than to just wage inflation. Sadly for Phillips Curve enthusiasts, the high inflation and high employment rates of the 1970’s turned this metric on its head.

Stagflation in the U.S. throughout the 1970’s proved high inflation and high unemployment can–and often do–exist concurrently, thus rendering the Phillips Curve obsolete. This same phenomenon where rising inflation coincides with a rising unemployment rate has also been witnessed throughout the globe. Fittingly, the notion that more people working was the cause of inflation should have found its place in the Wall of Shame of economic theories, sandwiched in between other items falling out of vogue at the time, such as toe socks and the pet rock.

However, the Keynesian economists who held this curve in such high esteem in the 1960’s, were somehow unable to let it go. Therefore, a new metric was created rooted in the Phillips Curve, but conveniently much more ambiguous. They called this metric the Nonaccelerating Inflation Rate of Unemployment (NAIRU). The idea behind NAIRU is inflation and unemployment really only become correlated once unemployment falls below a certain calculated rate. But you have to understand that the Fed’s number for NAIRU is more elastic and flexible than Gumby. And when it does fall below that predetermined rate, as it did from 1996-2000, and inflation (as the Fed measures it) is still absent, the Fed must come up with an excuse for its inaction.

Just to be clear, there is no relationship between unemployment and the overall rate of inflation. As Milton Friedman taught us, inflation is solely a monetary event. It is my view that inflation is caused by a persistent fall in the purchasing power of a currency. The market becomes convinced that substantial currency dilution will occur and the value of paper money falls. Even if everyone able to work became gainfully employed it would not cause inflation. It may lead to rising nominal wages but the increase in products and services provided by these newly employed persons would absorb the wage growth without causing prices to rise. A growing labor force and increasing productivity are the very keys to economic prosperity.

But, the reason it is important to understand the Phillips Curve and more importantly NAIRU, is because this metric is perhaps the most important data point Janet Yellen looks at when making decisions on Fed Policy. When unemployment is higher than NAIRU, as it is now, Yellen sounds like a dove. But when unemployment falls below, as it did in 1996 to 2000, Yellen has shown she’s more ready to tighten policy than other central bankers.

Ms. Yellen has an unfounded fear that too many workers will hyper inflate our deflating worldwide economy. However, inflation and unemployment are both declining in tandem. I defy any adherent to the Phillips Curve or NAIRU to glean the correlation between a falling unemployment rate and the rate of inflation.

It was the Fed’s initial belief back in 2010, when the unemployment was just south of 10 percent, that a change in monetary policy would be necessary once the unemployment rate reached 6.5%. However, since inflation and the economy have not picked up, they have since moved the new target to around 5.4%. With unemployment currently at 5.7%, we are getting dangerously close to Ms. Yellen’s line in the NAIRU sand.

The problem is, while Janet Yellen is busy tinkering with the Phillips Curve–in a pernicious attempt to determine how many Americans she will allow to find work–she is missing the crumbling economic fundamentals all around her. The flattening yield curve, plummeting commodity prices, and weakening U.S. and international economic data; all show that the asset bubbles created by central banks are popping. Once again, the Fed is applying faulty models to the wrong economic fundamentals.

However, if unemployment continues to fall Ms. Yellen will be forced by her own passionately held doctrines to raise interest rates into a deflationary cycle. I welcome this move, along with and the overdue and inevitable consequences that it brings. But I also understand the Fed will unwittingly be doing the equivalent of parking a car on the train tracks. Ms. Yellen will even have to ignore the fact that the falling unemployment rate is happening for the wrong reason, as it coincides with a falling labor force participation rate.

Yet again the Fed will be missing what is right in front of them. As usual, it is fighting yesterday’s war with the wrong weapons. This pervasive and protracted incompetence is not just confined to the U.S. central bank. The central banks of Europe, Japan and China also now join the Fed in owning the markets for real estate, equities, bonds and (as a direct consequence) their entire economies. This is why the immense power to determine the money supply and level of interest rates should never have been given to a group of unelected bureaucrats. And is why faith in the money printers to solve our economic problems is soon coming to an end.

This article is written by Michael Pento of Pentoport and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Pentoport, please visit:


Russia: How long until the economy cracks?

CNN Money, Feb 8, 2015

Russia is skating on thin ice: Cheap oil, Western sanctions and years of mismanagement have sent its economy into a deep freeze.

Now everyone is wondering when the ice will crack.

As things stand, Russian GDP is expected to shrink by 5% (or more) this year, inflation has soared to 15%, the ruble is trading near record lows, consumer and business sentiment is on the slide, and its companies are shut out of financial markets in the U.S. and Europe.

Escalating violence in Ukraine could lead to new international sanctions, and there’s little sign of a significant rebound in world oil prices.

So just how long can Russia avoid complete economic meltdown?

Much will depend on how fast it burns through its remaining stash of foreign currency. Last year it spent $134 billion trying to prop up the ruble, bail out struggling companies and contain the crisis.

That splurge cut its international reserves to about $376 billion, more than enough to finance a year of imports if necessary, but the lowest level since the depths of the global financial crisis in March 2009.

Russia needs reserves for imports, but also to service $600 billion worth of foreign debt — most of it held by Russian companies and banks.

Depending on who you ask, the crunch could come by the end of this year, or it could hold out for another 12 months beyond that.

Philip Uglow, chief economist at MNI Indicators, says Russian reserves could sink to a critical level six months from now, though the first half of 2016 is more likely.

“Countries under pressure can burn through reserves very quickly,” he said. “It could be staring down the barrel of default, much like in 1998, sooner than expected.”

Other experts think Russia’s cash buffer could keep the nation afloat for another two years, even if oil prices stay at current levels and the conflict in Ukraine drags on.

Then again, no one can predict the future. And if oil prices surge back this year, some of Russia’s economic problems will fade.

“With so many moving parts, coming to a view as to how long reserves might last for is almost impossible,” wrote Neil Shearing, chief emerging markets economist at Capital Economics.


Is China Preparing for Currency War?

Bloomberg, Feb 5, 2015

China has entered the global monetary-easing fray, along with more than a dozen other economies, after its central bank surprised investors by cutting reserve requirements 50 basis points to spur lending and combat deflation. But Beijing may be raring for an even bigger and more perilous fight — in the currency markets.

Reducing the amount of cash that banks are required to set aside (to 19.5 percent), as China has just done, is largely symbolic — a don’t-panic-we’re-on-top-of-things reassurance to international markets and local property developers. Still, the move is also an inflection point. China is in all likelihood about to loosen monetary policy considerably to support economic growth. If global conditions worsen, China’s one-year lending rate, now at 5.6 percent, could head toward zero.

At the same time, something else is afoot in Beijing could have even greater global impact. The central bank is cooking up measures to widen the band in which its currency trades. People’s Bank of China officials say it’s about limiting volatility as capital zooms in and out of the economy. Let’s call it what it really is: the first step toward yuan depreciation and currency war.

As China grapples with its slowest growth in 24 years, President Xi Jinping is under pressure to stimulate the economy. Yet that would run afoul of his pledges to curb runaway debt and credit (the latter jumped about $20 trillion from 2009 to 2014). What better way to gin up growth without adding to China’s bubbles than by sharply weakening the exchange rate? A cheaper yuan would boost exports and buy Xi more time to recalibrate growth engines away from excessive investment and debt. “The real economy desperately needs a weaker yuan,” says economist Diana Choyleva of Lombard Street Research.

The question is, does the rest of the world? Any significant drop in the yuan would prompt Japan to unleash another quantitative-easing blitz. The same goes for South Korea, whose exports are already hurting. Singapore might feel compelled to expand upon last week’s move to weaken its dollar. Before long, officials in Bangkok, Hanoi, Jakarta, Manila, Taipei and even Latin America might act to protect their economies’ competitiveness.

China may be feeling increased urgency as it looks around the Asia-Pacific region. On Feb. 3, Australia surprised markets with a 25 basis-point rate cut, a step that Christy Tan at National Australia Bank says “stoked speculation of a currency war.” That move, she says, might have been what prompted the PBOC to suggest that it’s “preparing possible responses” to shifting financial dynamics.

For China, Japan represents the biggest provocateur. The 30 percent drop in the yen under Prime Minister Shinzo Abe is slamming Chinese industry. Key beneficiaries of the policy such as Toyota and Sony (both projected huge profits this week) are lowering prices to gain market share abroad, effectively exporting deflation. Abe also gives Beijing political cover to devalue. It would be hypocritical, after all, for U.S. Senators Lindsey Graham and Charles Schumer to bash China for currency manipulation and not Japan.

There’s obvious danger in so many economies engaging in this race to the bottom. It will create unprecedented levels of volatility in markets and set in motion flows of hot money that overwhelm developing economies, inflating asset bubbles and pushing down bond rates irrationally low. Consider that Germany’s 10-year debt yields briefly fell below Japan’s (they’re both now in the 0.35 percent to 0.36 percent range). In a world in which the Bank of Japan, the European Central Bank and the Federal Reserve are running competing QE programs, the task of pricing risk can get mighty fuzzy.

What’s more, Asia’s currency rivalries may be self-defeating. As Raghuram Rajan, governor of the Reserve Bank of India, told Bloomberg Television, “If you’re not increasing domestic activity but depreciating your exchange rate, you’re essentially drawing demand from the rest of the world.”

Risks abound for China. Devaluing, Choyleva says, could expose the economy  to foreign-currency debt, and “the market has no idea about the true size of this exposure.” The real fireworks, though, would be in Asian markets. A competition to ease monetary policy is one thing. A currency war with the world’s biggest trading nation could turn into a crisis.


Rise in Swiss forex reserves suggests SNB still curbing franc

Reuters, Feb 6, 2015

* Foreign currency reserves at end-January 498.398 bln sfr
* Up from 495.130 bln Sfr at end-December
* Rise signals further SNB intervention
* Analyst: reserves indicate 57 bln sfr interventions in Jan

Switzerland’s foreign exchange reserves hit a record high in January, data showed, suggesting its central bank is still actively curbing the franc with interventions one researcher estimated at close to 2 billion francs per day.

The figures are the first to show changes in the Swiss National Bank’s currency holdings since it surprised financial markets in mid-January by scrapping its more than three-year-old cap of 1.20 francs against the euro.

The SNB later said maintaining that policy would have cost 100 billion francs ($109 billion) to defend in January alone.

But Friday’s reserves data suggested that, even without the cap, the bank spent more than half that sum last month keeping a lid on the franc, according to calculations by Ralf Wiedenmann, head of economic research at Vontobel Asset Management.

A spokesman for the SNB declined to comment on possible currency interventions.

The central bank said it held 498.398 billion francs ($541.5 billion) in foreign currency at the end of January, compared with a revised 495.130 billion francs – the previous record high and equivalent to around three quarters of gross domestic product – at end December.

Equivalent reserves, reported in francs but held in euros and other currencies, would have been worth much less given the franc’s surge since the cap was removed on Jan. 15.

The fact they still ticked up in January suggested the bank was still intervening.

Wiedenmann said that, assuming the franc’s appreciation lowered the relative value of the SNB’s foreign exchange reserves by 10.9 percent by end-January, the bank spent roughly 57 billion francs on interventions during the month.

A weekly rise in the cash commercial banks hold with the central bank is a further sign that the SNB has intervened to weaken the franc since ditching the cap.

Weekly paper Schweiz am Sonntag reported last weekend that the SNB was unofficially targeting an exchange rate of 1.05-1.10 francs per euro, which the SNB had also declined to comment on.

IG Bank analyst Laurent Bakhtiari said on Friday it was difficult to assess what the January foreign exchange reserves level meant without knowing what exchange rate the SNB used in its calculation.

“The numbers …at the end of February will give us a better idea,” he said.