Tahoe’s Q2 earnings 
beat expectations

Tahoe Resources (TSX: THO; NYSE: TAHO) shares rose nearly 6% on the back of solid second-quarter earnings, leaving investors and analysts cheering.

The Reno, Nev.-based producer with operations in Guatemala, Peru and Canada, reported adjusted earnings of US$57.9 million, or US19¢ per share, beating the average analyst estimate of US14¢ per share.

The beat resulted partly from strong silver production driven by high silver grades from Tahoe’s flagship operation in southeastern Guatemala.

Located 70 km by road from Guatemala City, the Escobal mine churned out 5.7 million oz. silver, along with gold, lead and zinc by-products, compared to 4.5 million oz. a year ago. Silver grades were up 21% to 509 grams per tonne. All-in sustaining costs came in at US$8.16 per oz. silver.

A worker operates a jumbo drill underground at Tahoe Resources’ Escobal silver mine in southeastern Guatemala. Credit: Tahoe Resources.

“Escobal is one of the world’s largest silver mines and is truly a great mining operation. We achieved record production at the mine during the first half [of 2016] producing 11.4 million oz. silver,” Kevin McArthur, Tahoe’s CEO and executive chair, said on a conference call.

Tahoe now expects to reach the top end of its 18 million to 21 million oz. silver forecast. It has trimmed its silver total cash cost and all-in sustaining cost targets both by US$2 to US$5.50 to US$6.50 and US$8 to US$9 per oz. silver.

Meanwhile, its gold guidance stayed the same at 370,000 to 430,000 oz. gold. All-in sustaining costs, net of by-product credits, should range between US$950 and US$1,000 per oz. gold.

For the three months and six months ended in June, Tahoe’s gold operations churned out 109,687 oz. and 167,168 oz. gold. All-in sustaining costs were US$973 per oz. for the second quarter and US$930 per oz. for the half year.

Almost half of the second quarter’s gold output came from the La Arena mine in northern Peru, which poured its one millionth ounce in May.

The open-pit heap leach mine delivered 50,864 oz. at all-in sustaining costs of US$880 per oz. This was better than Raymond James analyst Chris Thompson’s estimates of 46,900 oz. and US$1,005 per oz. gold.

Some 30 km north of La Arena, Tahoe kicked off commercial production at its 10,000-tonne-per-day Shahuindo operation on May 1. Shahuindo churned out 16,945 oz. gold, including 5,816 pre-commercial oz., at all-in sustaining costs of US$997 per oz. gold.

Given the operation’s performance to date, Tahoe will install the crushing and agglomeration circuit from 2018 to 2017.

Construction will occur in two stages, with the first designed to push throughput to 12,000 tonnes per day. The second stage should add 24,000 tonnes per day of capacity, Tahoe president and chief operating officer Ron Clayton says.

Tahoe intends to commission the first stage in March 2017, with the second stage slated for commissioning in early 2018. The total cost for the circuit should range between US$75 million and US$80 million.

Tahoe’s Timmins mines in Ontario — Timmins West and Bell Creek — delivered a combined 39,167 oz. at all-in sustaining costs of US$1,087 per oz.

Tahoe received the Timmins mines through a $945-million, all-share acquisition of Lake Shore Gold in April. The deal follows the company’s $1.2-billion acquisition of Rio Alto for the La Arena mine and Shahuindo project last April.

“We did these deals at the right time when the market was down and when valuations were low,” McArthur says. The acquisitions have helped Tahoe build its gold business with low-cost production, resulting in improved cash flows, he adds.

Cash flow provided by operating activities before changes in working capital totalled US$116 million, or US38¢ per share, in the second quarter. Revenues were US$228.3 million on sales of 5.2 million oz. silver and 106,465 oz. gold.

Meanwhile, Tahoe has advanced underground ramp and sublevel development at both Timmins West and Bell Creek. It also is also deepening the shaft at Bell Creek to increase production and the mine’s life. The shaft project should cost US$80 million and take two and half years to complete.

Both the projects in Timmins and the development work at Shahuindo should contribute to Tahoe’s goal of increasing gold output to “over 500,000 oz. per year by 2020,” McArthur notes.

In July, Tahoe acquired a 2% net smelter return royalty on Bell Creek’s production from Goldcorp (TSX: G: NYSE: GG). It also signed a letter of intent to buy the remaining 30% of the Whitney project that it currently doesn’t own from Goldcorp. Whitney has pit and underground potential, and sits 4 km from the Bell Creek mill.

Given the company’s strategy of  growing its assets, Tahoe has shuffled its management.

Effective Aug. 16, Clayton will become president and CEO, while McArthur will continue as executive chair. Tahoe’s vice-president and treasurer Elizabeth McGregor will become vice-president and chief financial officer (CFO), while current CFO Mark Sadler will take on the role of vice-president of project development.

Tahoe exited the second quarter with US$151.7 million in cash and US$67 million in debt. It paid US$18.4 million in dividends during the June quarter.

“Our investment thesis for Tahoe remains firmly intact, satisfied by the company offering a unique combination of fully funded organic growth, ongoing free cash flow generation, a strong balance sheet, and a healthy dividend yield,” Thompson says.

Tahoe shares closed Aug. 10, up $1.20, or 5.9%, at $21.66. Thompson has a $22.25 price target and “outperform” rating on the stock. BMO analyst Andrew Kaip has bumped his $22.50 price target to $23 per share and reiterated an “outperform” rating.