Quarterly financials beat estimates but uncertainty at the Escobal mine pushes Tahoe Resources to halt dividend; share price down for the day

Yesterday evening, Tahoe Resources Inc. (T:THO)  reported its second quarter 2017 financial results of US$33.48-million. Daniel Earle of TD Securities found the results mixed. Earnings per share (EPS) beat on lower costs and the company suspended its dividend, which TD securities believes is prudent.  Q2/17 adjusted EPS of $0.11 were above TD estimates of $0.08 (street consensus: $0.09) due to lower costs and expenses generally. Operating Cash Flow of $0.26 was above TD’s estimate of $0.22 (consensus: $0.23) and Haywood Securities estimate of ~US$0.20. However, the company suspended its multi-year guidance given the uncertainty at the Escobal silver mine.

On July 5, the company reported that the Supreme Court of Guatemala had issued a provisional decision to suspend the company’s Escobal mining license.  The company has appealed the decision to the Constitutional Court and a ruling could come within the next three months. The company is are seeking to have its Escobal mining license reinstated during this period. TD securities is accounting for no production from Escobal for one year. The Casillas road block that is still in place, and reportedly shows no sign of immediate resolution. In a note to clients today, Geordie Mark of Haywood Securities notes that both the road block and the provisional decision to suspend the Escobal mining licence need to be resolved prior to operations returning. The Casillas road block is still in place, and there are reportedly no signs of immediate resolution to this situation.

Preliminary production results were released, with the company having reported production greater than 4 Moz Silver (Ag) and  greater than 110 koz Au. Q2/17 total cash costs were not previously reported and were better than we anticipated.   Until further clarity is obtained at Escobal, the company’s 2017 and multi-year guidance has been suspended and certain exploration and capital spending programs are being reviewed. 2017 gold guidance remained unchanged at 375-425 koz Au at total cash costs of $700-$750/oz.

The company has also deferred the La Arena II PEA and an investor day that was planned for mid-September.  La Arena produced 48 koz gold at a cash cost of US$579/oz. Gold production was higher than our estimates (46 koz gold) on placing less (3.2 Mt vs 3.7 Mt) higher grade (0.46 g/t vs 0.43 g/t gold) on the leach pads. Cash costs bettered our forecast of US$670/oz.

Management reported that it views its expansion plans at the Shahuindo and Timmins mines as budgeted and required and that these projects are on track for completion in mid-2018. Shanuindo produced 21 koz gold, which was higher than Haywood Securities estimates of 15.4 koz gold, by placing more (1.3 Mt vs 0.98 Mt) tonnes of lower grade (0.65 g/t vs 0.73 g/t gold) on the leach pad.  Reported cash costs of US$590/oz were much lower than their expectations of US$845/oz.  Timmins Mines produced 41 koz gold that was lower than expectations (44 koz gold) on processing slightly more (356 kt vs 314 kt) lower grade (3.75 g/t vs 4.56 g/t gold) ore. Gold recoveries of 97% were slightly higher than the Haywood estimate of 96%. Cash cost of US$633/oz were marginally higher than Haywood’s estimates of US$632/oz

The company generated positive free cash flow (FCF) of $17 million in the second quarter of 2017, after spending $63 million in total capital expenditures. Haywood expects capex to increase in the second half of 2017.  As at June 30, the company had cash and equivalents of $191 million and $35 million of debt due in April 2018. The company currently has access to $75 million from its undrawn credit facility.

On the year, shares in Tahoe Resources (T:THO) are down from a 12-month high of $22.11 and at time of publication, shares were trading down 25 cents to $6.35 on 3.6 million shares traded for the day, near 12-month lows.  TD Securities provided a recommendation of hold and a high risk rating with a 12-month price target of $8.50. However, TD Securities may want to revise its price target given the uncertainty at Escobal and other brokerages price targets.  Haywood Securities in a note to clients today maintained its hold rating with a price target of $6.75 (revised down from $7.25) with a high risk rating for shares of Tahoe.     Significant upcoming catalysts will be any updates at the Escobal mine which should be expected in the second half of 2017.

Nicholas LePan

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