Tahoe eyes the finish line at Escobal

Tahoe Resources’ (THO-T, TAHO-N) investors have something to cheer about as the company received the final mining license for its high-grade Escobal silver deposit in southeast Guatemala — clearing a key hurdle in getting its flagship project into production.

The Vancouver-based junior said construction at Escobal, located 40 km southeast of Guatemala City, remains on track and within budget for mill commissioning in the second half of the year followed by commercial production in early 2014.

This helped lift its shares up 11% to $18.81 on April 4, after gaining 4% to close at $17 a day earlier on the announcement.

Once in production, Escobal should generate 20 million silver-equivalent oz. a year based on 27 million indicated tonnes grading 422 grams silver per tonne, 0.43 gram gold, 0.71% lead and 1.28% zinc. Cash costs are estimated to come under US$5 per oz, net of by-products.

Escobal will start off as a 3,500-tonne-per-day underground operation before expanding to 4,500 tonnes per day over the first three years of production. After which, Tahoe may consider expanding to 5,500 tonnes per day.

To get the mine up and running should cost US$327 million, with the first expansion adding another US$47 million — something Tahoe plans to fund through cash flow from operations. Mine life is estimated at 19 years.

On the permitting news, Raymond James analyst Chris Thompson upgraded his rating to “outperform” from “market perform” and target price to $23 from $21.

“We believe the license removes an overhang on the stock, as its issuance had been delayed and subject to significant controversy from local communities and NGO groups,” he wrote in a note to clients.

BMO analyst Andrew Kaip agreed. “Receipt of the exploitation [permit] is an important milestone that should remove recent permitting uncertainty,” he said. Kaip reiterated his $27 target and “outperform” rating.

Thompson cautions Tahoe — 40%-owned by Goldcorp (G-T, GG-N) which operates the Marlin underground gold mine in northern Guatemala — may still have a “bumpy road ahead” with resistance from some communities and NGOs remaining.  

In early January the firm reported an armed group attacked a security team at Escobal, killing two and injuring several.

While the January ambush is not believed to be linked to local opponents, Tahoe did see protestors on Sept. 17, 2012, attempt to stop the construction of the power line, and a day later stormed onto the property, burning a temporary core shed and vandalizing vehicles and Tahoe’s cement batch plant.

Despite these incidents, Tahoe says it has strong support for its fully-permitted project as it continues to work with the communities. The closest one being San Rafael Las Flores, 3 km to the east, with a population of roughly 3,000.

Ira Gostin, Tahoe’s vice-president of investor relations, notes its current workforce of 600 is 96% Guatemalan, adding it has another 500 local contractors working on Escobal.

The developer reported in its March 2013 management discussion and analysis that its activities at Escobal and financial position have not been materially affected “by the actions of opponents, protestors and anti-mining NGOs”

Tahoe exited last year with roughly US$165 million in cash and has invested a total of US$251 million on the project to bring it to the 70% completion mark by Dec. 31, 2012.