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Evaluating Tahoe Resources

By Charles Sherwood – Feb 10, 2014 at 10:45AM

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Will Tahoe Resources hit the mother lode?

Tahoe Resources (NYSE: TAHO) announced commercial production at its Escobal mine in Guatemala this January and is ramping up capacity toward its goal of 3,500 tonnes per day. With Tahoe Resources projecting to produce 20 million ounces of silver a year over Escobal's first ten years, Tahoe Resources is setting up to be a major player in the silver industry. 

Tahoe Resources' advantages
One of Tahoe Resources' main advantages is its low all-in sustaining cost, which it estimates will be $8.85 to $9.85 per ounce, making Tahoe Resources a very low-cost producer. This means that even if silver remains in the $20 an ounce range, Tahoe Resources should be able to turn a healthy profit in the near future. With a high indicated resource of 422 grams per tonne, Tahoe Resources has a high-grade deposit which should help keep costs per ounce low. With the price of silver experiencing high volatility over the past several years, a low-cost, high-grade deposit like Escobal should provide Tahoe Resources shareholders with stability even if silver prices continue to fluctuate.

Tahoe Resources' majority shareholder is Goldcorp (GG), with the latter owning about 40% of Tahoe Resources' stock, which should provide a degree of confidence to potential investors. Tahoe Resources' CEO, Kevin McArthur is the former CEO of Goldcorp and is the founder of Tahoe Resources and appears to have done an excellent job of achieving Tahoe Resources' goals regarding meeting projected costs and timelines for mine completion and achieving commercial production.

The risks
In May 2012, Tahoe Resources released a Preliminary Economic Assessment of the project, which shows that Escobal hosts an Indicated silver resource of 367.5 million ounces at 422 grams per tonne average grade. It is important to note that Tahoe Resources decided to proceed with construction of the mine without undergoing a feasibility study, which means that the resource estimates and costs of production are not as certain as if a feasibility study had been completed. Tahoe Resources is currently working on a feasibility study which it hopes to have completed in 2014, based on 4,500 tonnes per day which will be used to calculate the new resource and determine proven and probable reserves.

Investors looking for a more established silver play might want to consider First Majestic Silver (AG -5.66%). First Majestic has five operating silver mines in Mexico and is projecting production of 12.7 million to 13.35 million ounces of silver in 2014. First Majestic also has several silver projects in the pipeline and has a goal of increasing production to 20 million ounces of silver by 2017. With all-in sustaining costs of $15.87 to $16.69 per ounce projected for 2014, First Majestic should be in a good position to remain profitable even if silver prices remain low.

Final thoughts
Despite risks associated with Tahoe Resources' decision to proceed with production without completing a feasibility study, it looks like Tahoe Resources' ramp-up and commercial production achievement have gone smoothly. It will take some time before investors can determine whether Tahoe Resources can meet its projected production and all-in costs; however it looks like the opportunity may be worth the risk. First Majestic Silver Corp looks like a good alternative for those looking for a more established silver producer. If silver prices rise, First Majestic should be able to increase profitability as it possesses a decent all-in cost and is intent on increasing production. 

Charles Sherwood has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

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First Majestic Silver Stock Quote
First Majestic Silver
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