Tahoe Resources (NYSE: TAHO) is set to become one of the largest silver miners in the world, with annual production at its Escobal mine in Guatemala expected to produce 18 million-21 million ounces of silver this year and average roughly 20 million ounces per year over the life of the mine. Tahoe Resources' Escobal mine is estimated to rank third in the world in annual silver production, behind only BHP Billiton's (BHP +1.23%) Cannington mine and Fresnillo's Fresnillo mine. Of the primary silver producers traded in the U.S., only Pan American Silver (PAAS +4.51%) will produce more silver in 2014, with production estimated at 25.75 million to 26.75 million ounces.
Escobal achieved commercial production in January and has ramped up throughput to its target rate of 3,500 tonnes per day. The successful ramp-up allowed Tahoe Resources to produce 4.1 million ounces of silver in the first quarter, which is still in line with management's guidance of 18 million-21 million ounces as production in the first half of 2014 was predicted to be lower than the second half. Net earnings for the first quarter were $24.8 million on revenue of $89.9 million. All-in sustaining costs, net of by-product credits, were $10.25 for the first quarter, making Tahoe Resources a very low-cost producer.
In reverse order
Tahoe Resources is currently working on a feasibility study based on throughput of 4,500 tonnes per day. The feasibility study will establish proven and probable reserves and further define an option to increase throughput from 3,500 tonnes per day to 4,500 tonnes per day. The study is expected to be completed later in 2014. Investors should be aware that Tahoe Resources made the decision to proceed with mine construction at Escobal on the basis of a positive Preliminary Economic Assessment, and did not proceed to a Feasibility Study, which normally forms the basis for a decision on whether to proceed with a project. The Preliminary Economic Assessment showed that Escobal hosts an indicated silver resource of 367.5 million ounces at 422 grams per tonne average grade, which is quite a high grade.
Typically, projects that go this route carry a lot more risk of economic failure, as there is uncertainty with the level of recovery of minerals and the cost of recovery. While Escobal carries higher risk because a feasibility study wasn't undertaken prior to construction, investors should feel encouraged by the positive first-quarter results. Furthermore, Tahoe Resources' has strong backing with its majority shareholder Goldcorp owning about 40% of Tahoe Resources' stock.
One-trick thoroughbred
Tahoe Resources is entirely dependent on success at Escobal as it has no other property interests. This is not necessarily a bad thing, because having a high-grade, low-cost mine that will produce 20 million ounces of silver per year should allow Tahoe Resources to earn lots of money for its shareholders. With only one resource to worry about, Tahoe Resources can focus its efforts on optimizing operations and costs at Escobal without having to spend lots of money on exploring and developing new mines.
Tahoe Resources has stated that it plans to issue a dividend in the latter part of 2014. With the price of silver remaining relatively low compared to the last few years, this may be a challenge; however, there is no reason Tahoe Resources shouldn't be able to issue a dividend in 2015 as it pays off debt. At the end of the first quarter, cash and cash equivalents stood at $39.9 million, with debt of $74.3 million and negligible long-term liabilities.
Foolish bottom line
Tahoe Resources is set to join the ranks of the largest silver miners in the world. While Tahoe Resources carries more risk than other silver majors, first-quarter results look positive. Even though Tahoe Resources looks poised to become one of the largest low-cost silver producers in the world, investors may want to wait until the feasibility study is completed later this year before making any investment decisions. A positive feasibility study coupled with a dividend issued would make Tahoe Resources a very attractive investment.
