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 licence 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 11% to $18.81 on April 4, after gaining 4% to close at $17 a day earlier on the announcement. At press time on April 17, shares were at $14.35.

Once in production, Escobal should generate 20 million equivalent oz. silver per 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 this, Tahoe may consider expanding to 5,500 tonnes per day.

Getting 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 his target price to $23 from $21.

“We believe the licence removes an overhang on the stock, as its issuance had been delayed and subject to significant controversy from local communities and non-governmental organizations (NGOs),” he writes 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 that 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 that 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 reported protestors trying to stop construction of a power line on Sept. 17, 2012, and a day later storming onto the property, burning a core shed, and vandalizing vehicles and Tahoe’s cement batch plant.

Despite these incidents, Tahoe says it is seeing strong support for its fully permitted project, as it continues to work in the communities. The closest community is 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 that 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 US$165 million in cash and has invested a total of US$251 million on the project, bringing it to 70% completion by Dec. 31, 2012.