Tahoe looks for milestones at Escobal

Controlling one of the world’s richest silver deposits, Tahoe Resources (THO-T) is looking towards another year of milestones as it works to put its Escobal project in Guatemala into production.

The company is targeting 2014 to achieve commercial production, at which point it will produce more than 20 million oz. silver a year for the first five years with a 3,500-tonne-per-day, high-grade underground mine.

Early last year the company secured environmental approval for an underground exploration program that includes the development of two declines, an access road and a power line into the property. In late 2011, Guatemala’s Ministry of Environment approved the company’s environmental impact statement, which allowed Tahoe to apply for an exploitation permit that would open the door to full-fledged development. It expects to receive the permit before mid-year.  

With the early permits already in hand, the company managed 750 metres of decline development and initial surface development in 2011, and expects to have underground development completed in time for mill commissioning in the second half of 2013.

So far the company has spent or committed US$141 million towards the project, and expects the full cost of the mine to be US$327 million. Following a $348-million initial public offering in June 2010 and a $352-million equity raise in late 2010, the company is already fully funded for the project, with $350 million in cash and equivalents at the end of 2011.

Based on a 2010 preliminary economic assessment, Tahoe expects to mine over an 18-year mine life 22.7 million tonnes grading 415 grams silver per tonne, 0.47 gram gold per tonne, 0.71% lead and 1.22% zinc, for 298.4 million contained oz. silver equivalent. At US$18 per oz. silver and US$1,100 per oz. gold, the after-tax net present value (NPV) was  first calculated at US$1.73 billion using a 5% discount rate, and the after-tax internal rate of return was 51.4%. 

In January the Guatemalan government and the Chamber of Industry agreed to voluntarily increase royalty rates, with gold and silver royalties increasing from 1% to 4% net smelter return (NSR), and base metal royalties going from 1% to 3% NSR. Goldcorp (G-T, GG-N), with its controversial Marlin gold mine in the country, agreed to a slightly higher 5% NSR on precious metals. The voluntary increase let President Otto Perez Molina boost royalty payments much faster than going through a planned reform of the mining code.

For Tahoe, the royalty change shaves US$100 million off the base-case NPV of the project, which  comes in at US$1.63 billion NPV in the base case at a 49.4% IRR. With a US$35-per-oz. silver price, the NPV jumps to US$4.1 billion and the IRR to 89.2%.

The company is looking to improve the financials this year with an upgraded resource and a new scoping study based on a 5,000-tonne-per-day mine, with both studies expected out in the second quarter. 

With 2,000 sq. km of land in Guatemala, Tahoe is busy with regional exploration on numerous targets. Last year the company spent $10 million on exploration work both at Escobal and regionally.

Tahoe’s share price climbed $1.02, or 5%, to $23.11 on its latest project update. Shares climbed from a 52-week low of $13.78 in early October and now trades at its highest levels since a brief spike to $25 last April.

The company was created as a spin out of Goldcorp in 2010. The newly created company, led by former Goldcorp CEO Kevin McArthur, bought Escobal from Goldcorp for $505 million — of which 40% was Tahoe shares. Goldcorp controls 41% of Tahoe’s 143.1 million outstanding shares.