THO : TSX : C$19.93
TAHO : NYSE
Tahoe Resources’ key asset is its 100% owned flagship Escobal mine in Guatemala. Escobal is one of the world’s highest grade and largest primary silver deposits. Silver production is expected to ramp quickly and exceed 20mozs per annum for a period of at least 10 years with a stated goal of 20 years. Cash operating costs are forecast to be near or below $5.00/oz of silver net of gold, zinc and lead by-product credits.
Metals and Mining — Precious Metals and Minerals
COMMERCIAL PRODUCTION Q1/14E
We reiterate our BUY rating on Tahoe Resources following the release of Q3/13 results. We believe the key driver of Tahoe’s share price over the next six months will be the successful ramp up of Escobal to full production and we see no major impediments. THO is currently trading at 0.75x NAV, a 3% discount to its large cap peers. We believe THO should trade at a strong premium given the forecast industry leading margins, strong governance and alignment, and overall asset quality.
The ramp-up to commercial production is proceeding well with all major mill components fully commissioned. The key remaining priorities are improving concentrate specs and tailings filtration; fixes have been implemented and appear to be working. The mill operated near 50% of capacity in the first 10 days of November vs. 30% in October. We estimate commercial production in mid-Q1/14.
Guidance for 2014 calls for 18-21mozs silver in concentrate (including pre-commercial production) versus our previous estimate of 15mozs. Cash costs are estimated to be $5.65-6.25/oz versus our previous estimate of $4.02/oz (using the same by-prod prices). The current cash balance of $39 million appears adequate. Our 2014 EPS estimate remains unchanged at $1.00.
Management confirmed the potential for an inaugural dividend; potentially by the AGM in May 2013. We believe an initial dividend of $0.50/share (implying a 2.5% yield) may be achievable in the context of current silver prices. The current short position on THO is 22.5 million shares.
Our C$27.00/share target is predicated on a 0.95x multiple to our forward curve derived operating 5% NAVPS estimate of C$26.32 plus net debt and other assets.