VANCOUVER — Industry success stories have been hard to come by over the past few years, but mine developers like Tahoe Resources (TSX: THO; NYSE: TAHO) are proving that even tough markets can’t stand in the way of a strong management team working on a world-class project.
On Jan. 14 Tahoe achieved first commercial production at its new Escobal high-grade silver mine located 70 km southeast of Guatemala City, which marks the culmination of a journey that began four years ago.
Tahoe shipped its very first concentrate from Escobal in late September, and to date its mill has produced 5,970 tonnes of silver concentrate, with an estimated net smelter return value of US$54 million. The company has steadily ramped up its throughput levels from around 1,800 tonnes per day in November to 3,000 tonnes per day in early January.
“I’d say this is probably the fifth or sixth time I’ve done this, and I’ve never had one go absolutely perfectly. It’s not all that unusual to find out that things that looked like they wouldn’t work in your pilot plant turn out to be the best solutions when you’re running it, because on a larger scale things just behave differently,” comments chief operating officer Ronald Clayton during a phone interview. Clayton has over 30 years of underground operating experience with companies that include Hecla Mining (NYSE: HL) and Stillwater Mining (TSX: SWC.U; NYSE: SWC).
“The overall metallurgy has performed as expected. The one challenge with this orebody involves getting the last bit of that silver to report to the lead concentrate instead of the zinc concentrate. We’re getting most of it, but that last little percentage is always tricky,” he adds, explaining that Tahoe ended up using a much stronger than anticipated collector in its circuit to deal with a relationship between some of Escobal’s silver mineralization and sphalerite (zinc sulphide).
The company is proceeding with stope development over four sublevels, with several stopes in production on the 1,265 level.
Tahoe reports that primary development has been completed for five years of mill feed, and as a bonus, it has found that the production grades to date have been a bit higher than modelled, with average mill grades hitting 673 grams silver per tonne in early January.
“Everything is in the Central zone at the moment, and it accounts for 70% of the total deposit,” Clayton continues. “The East zone has some nice grades, but it’s a ways off. We’re probably eighteen months to two years from being out there. It’s narrower, it’s more vertical and the wall rock is even harder, or more competent. But it will be a little less productive.”
Metallurgy at Escobal has hit parameters the company established in a preliminary economic assessment dated May 2012. Silver recoveries are sitting at 87%, while lead and zinc concentrates have met “minimum specifications” that have created “strong customer demand” with minimal smelter penalties.
Tahoe reports that optimization of its concentrate grades will continue over the next few months, along with ongoing tweaking at the paste plant.
“Frankly, the smelters we’ve been dealing with haven’t had any issue taking the product at all,” Clayton explains. “The only penalty we had, was when we were a bit high on the zinc percentage in our lead product, but it didn’t make a lot of sense for us to optimize the lead grade and zinc grade in the lead concentrate over optimizing the amount of silver, because that’s what pays the bills.”
In a bid to supplement its working capital Tahoe has drawn another US$25 million from its debt facility, with its aggregate drawdown totalling US$75 million. The company reported a US$33-million cash balance at press time. Tahoe maintains a 2014 production guidance of between 18 million and 21 million oz. silver in concentrate, with most production expected in the second half of the year.
BMO Capital Markets analyst Andrew Kaip — who maintains a stock “outperform” rating and $25-per-share price target on Tahoe — predicts that the company should generate enough cash flow to repay its borrowings by year-end at spot metal prices. BMO Research forecasts 2014 production at Escobal of 20.1 million oz. silver equivalent at co-product cash costs of US$8.41 per oz.
“Underground development work is well advanced to support sustained production rates and processing rates should continue to rise through the [first quarter], as performance issues are sequentially eliminated,” Kaip wrote in a Jan. 14 research report.
Tahoe shares have traded within a 52-week window of $12.44 and $20.64, and jumped 28¢ after Escobal hit commercial production, en route to a $18.26 close at press time.
With 146 million shares outstanding, Tahoe has a $2.7-billion market capitalization.
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