Tahoe’s Escobal silver mine poised for start-up

With US$99.2 million in cash on its balance sheet, including proceeds from a US$50-million loan received in June, Tahoe Resources (TSX: THO; NYSE: TAHO) says it is all cashed up to start full production at its Escobal silver mine in southeastern Guatemala in the first quarter of 2014.

“This amount is expected to be plenty to complete the project and bring us into full production,” Mark Sadler, the company’s vice-president and chief financial officer, told investors and analysts on a conference call.  “We’re essentially on budget — as we projected in 2010 — which is pretty remarkable, given the size and scale of this operation.”

Early mill commissioning got underway in late June, and Tahoe expects that initial production of metal concentrates will start in late September.

The company has completed the first five stopes with production drilling advancing in the first three, and Tahoe believes it will have 60,000 tonnes of mill feed stockpiled by the time the mill starts up. (Each of the stopes contains between 30,000 and 50,000 tonnes of mill feed.)

“We can’t declare victory yet, but we are very, very, close — we see the finish line,” president and CEO Kevin McArthur said on the conference call. “This is without any variance from our 2010 estimates, which is impressive.”

So far Tahoe has spent US$315.2 million of the US$326.6 million budgeted for building the 3,500-tonne-per-day project. Another US$14 million has been spent on the project’s US$46.2-million expansion to a capacity of 4,500 tonnes per day.

Andrew Kaip of BMO Capital Markets commented in a research note that the company’s “track record of delivery, time frame to commercial production and superior asset quality” supports his “outperform” rating on the stock and his target price of $17.50 per share, adding that “contingent on smooth commissioning,” he sees the potential for Tahoe to declare commercial production before year-end.

Michael Gray of Macquarie Equities Research has a $21-per-share target price and described the company as his “top pick amongst the new, emerging producers.”

At press time Tahoe was trading at $17.75 per share within a 52-week range of $12.44 to $21.81 per share.

Tahoe reported a net loss of US$15.6 million, or US11¢ per share, in the second quarter. Cash outflow from operating activities amounted to US$15.9 million; general and administrative costs added up to US$4.1 million, excluding non-cash share-based compensation of US$2 million; and exploration expenses to US$1.4 million.

“Things are going well with the company,” McArthur said on the conference call, adding that “project risks have been dealt with.”

“Doing business in Guatemala comes with a few issues, and a lot of noise,” he added, referring in part to non-governmental organizations that have dogged the project. “The business environment and government support is sound, and I might add, our community support is also.”

McArthur pointed out that the company is “doing amazing things in the field,” with over 700 full-time and high-paying jobs — which doesn’t include people involved in construction — and the development of a middle class in the district “that did not exist before our project.”

He continued that “we are expected to be the largest single taxpayer in Guatemala by next year, and our local community budgets will multiply with the royalties that mining brings into the local coffers.”

The company also expects to complete a concentrate marketing agreement in the coming months.

“Rarely do you see such high-quality and high-grade lead and zinc concentrates as those produced by our hundreds of metallurgical tests and bulk-sample tests,” noted chief financial officer Sadler. “The pilot plant was a significant activity for the company, because it allowed us to produce some concentrates on a larger scale and actually provide samples to smelters . . . the response from the smelters has been outstanding, and we’re now negotiating terms with those smelters — and we expect to finalize sales concentrates before year-end.”