Tahoe set to expand Escobal

VANCOUVER — Tahoe Resources (TSX: THO; NYSE: TAHO) has expanded  resources and tabled an updated feasibility study at its high-grade Escobal silver mine in southeast Guatemala, setting the stage for expanded silver production starting next year.

The underground mine reached commercial production at the start of this year and has yielded 15.1 million oz. silver in concentrate in the first nine months of 2014. 

The new feasibility study looks at ramping up operations from 3,500 tonnes per day to 4,500 tonnes. Tahoe hopes to hit this production level by the end of next year.

Third-quarter revenue was US$90.3 million and earnings were US$20 million, or US13¢ per share, on silver production of 5.2 million oz. at a total cash cost of US$7.02 per oz. and an all-in sustaining cost of US$9.62 per oz., net of by-product credits.

“Sometimes it’s easy for me to forget we only have three quarters of commercial production under our belt,” Tahoe president and chief operating officer Ron Clayton said in a conference call, noting his team is already strategizing how to improve costs and mine performance.

Measured and indicated resources, as calculated by Mine Development Associates (MDA), total 39 million tonnes grading 346 grams silver per tonne, 0.33 gram gold per tonne, 0.72% lead and 1.2% zinc. No measured resources were previously reported for the Escobal deposit, which encompasses 2.4 km along strike and 1.2 km vertically.

MDA used a silver-equivalent cut-off grade of 130 grams per tonne and price assumptions of US$22 per oz. silver, US$1,325 per oz. gold, US$1 per lb. lead and US95¢ per lb. zinc. Contained metals are 434 million oz. silver, 418,000 oz. gold, 281,000 tonnes lead and 467,000 tonnes zinc, with measured and indicated silver oz. jumping by 18% since May 2012. 

Inferred resources tack on 1.4 million tonnes at 224 grams silver, 1.23 grams gold, 0.3% lead and 0.5% zinc.

In the new feasibility study, Blattman Brothers Consulting calculated a first-ever proven and probable reserve of 31.4 million tonnes grading 347 grams silver per tonne for 350 million silver oz.

The net present value (NPV) of the Escobal mine is pegged at US$2.2 billion using a 5% discount rate and metal prices of US$22 per oz. silver, $1,300 per oz. gold, US95¢ per lb. lead and US90¢ per lb. zinc. But at a US$15 per oz. silver price, the NPV drops to US$1 billion.

Average total cash costs over Escobal’s production life are expected to be US$8.01 per oz. silver, after by-product credits.

Tahoe already spent US$28 million in expansion costs over the first half of this year, leaving US$24 million in costs. 

BMO Nesbitt Burns analyst Andrew Kaip views the incremental expansion as a “low-risk approach to near-term production growth.” He forecasts annual saleable production in 2014 of 23.1 million equivalent oz. silver from Escobal at co-production cash costs of US$7.46 per oz.

Expanding Escobal production by another 1,000 tonnes per day would require improvements to the paste backfill plant, another tailings filter, and upgrades on pumps, piping and motors in the process plant. Upgrading major equipment — such as the crushing and grinding facilities — will not be needed, as a higher level of production was expected at the time of initial mine construction. 

Commissioning of the improved paste-backfill plant is planned for next quarter.

In the conference call, Clayton commented that he was “disappointed that we’ve not been able to find further expansion of the Escobal deposit at higher grades.” 

The company sees opportunity for more discoveries in the district that would be close enough to use the existing mill. Clayton says that continuing with regional exploration and mine-optimization efforts will be priorities.

Tahoe’s cash and equivalents at the quarter’s end were US$78.9 million, after the company repaid US$25 million of a debt facility. That leaves Tahoe with US$50 million in debt due in June 2015.

With such a healthy balance sheet, Tahoe has introduced a monthly dividend of US2¢, with the first one payable on Dec. 19, 2014, and says it could fund the remaining mine-expansion costs using cash flow from Escobal.

The miner is on track to reach its this year’s production target of 18 million to 21 million oz. silver in concentrate.

Overall, Tahoe vice-chair and CEO Kevin McArthur said the third-quarter results are a “good start, and great news to shareholders.” 

Shares have traded within a 52-week window of $16.55 and $30.15, and closed at $19.14 per share at press time. Tahoe has 147.6 million shares outstanding for a $2.8-billion market capitalization. In the U.S. shares last traded at US$16.88 within a 52-week range of US$15.63 to US$27.55, for a US$2.5-billion market capitalization.