Tahoe Resources Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov.13.13 | About: Tahoe Resources (TAHO)

Tahoe Resources (NYSE:TAHO)

Q3 2013 Earnings Call

November 13, 2013 11:00 am ET

Executives

Ira Mark Gostin - Vice President of Investor Relations

C. Kevin McArthur - Chief Executive Officer, President and Director

Mark Sadler - Chief Financial Officer and Vice President

Ronald W. Clayton - Chief Operating Officer and Executive Vice President

Analysts

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Andrew Kaip - BMO Capital Markets Canada

Michael J. Gray - Macquarie Research

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Benjamin Asuncion - Haywood Securities Inc., Research Division

Chris Thompson - Raymond James Ltd., Research Division

Operator

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Tahoe Resources Third Quarter 2013 Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Ira Gostin, Vice President, Investor Relations. Please go ahead.

Ira Mark Gostin

Welcome to our earnings call for the third quarter of 2013. We will present our third quarter results followed by a brief question-and-answer session as time allows. On the call from Tahoe, we have Kevin McArthur, President and CEO; Ron Clayton, Executive Vice President and Chief Operating Officer; Don Gray, President of Minera San Rafael in Guatemala; Mark Sadler, Vice President and Chief Financial Officer; Brian Brodsky, Vice President, Exploration; and Edie Hofmeister, Vice President and General Counsel.

There is no webcast for this call. However, you can find our November corporate presentation and updated photographs at our website, www.tahoeresourcesinc.com.

This call will contain forward-looking information within the meaning of applicable Canadian securities legislation and forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995, collectively referred to as forward-looking information. In particular, this call and our presentations describe potential future events related to underground development feeding the mill at 3,500 tonne-per-day rate, the company's cash resources being sufficient to bring the mine into production in early 2014; the anticipated budget and timeline for a completion of the 4,500 tonne-per-day expansion; and Tahoe strategy to develop the Escobal Project.

Forward-looking information is based on reasonable estimates based on management's experience and perception of factors that we believe are relevant and reasonable. Additionally, investors are cautioned that our May 2012 Preliminary Economic Assessment or PEA is considered preliminary in nature and includes mineral resources, including inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. Mineral resources that are not mineral reserves have not yet demonstrated economic viability. Due to the uncertainty that may be attached to mineral resources, it cannot be assumed that all or any part of mineral resource will be upgraded to mineral reserves. Therefore, there is no certainty that the results concluded in the PEA will be realized. Our forward-looking statement, cautionary note and technical disclosures are on SEDAR as well as our website.

That all said, I would like to turn the call over to Kevin McArthur.

C. Kevin McArthur

All right. Thanks, Ira, and thank you, everyone, for attending this morning's call. First of all, my apologies, but I need to be out the door in 1/2 hour to catch an airplane. So I'll be here for the first few questions. I'm sure Ron Clayton will finish up the call.

I'll start by thanking our construction and operating teams at Escobal for a huge amount of accomplishments over the last months. And knowing, in particular, all of the things, I know they have overcome amazing odds in getting us to the commissioning stage and they're now continuing to work tireless long hours ramping up to 3,500 tonnes per day.

Ron Clayton will be providing details on that progress in just a few minutes. We did get a late start largely due to the social upsets we witnessed in the area when we received our last permit in April. And in essence, we lost 3 months when you add it all up, but it looks like we've done a good job making up that lost time and should have it all made up by the end of the year. Fully expect to be in commercial production in early 2014 as we originally predicted all the way back in 2010.

We're continuing to witness amazing community support for the project and, as we all know, it's not all about jobs and tax creation, which, of course, are very important in this industry. We have training partnerships in the communities that we're supporting; regional agricultural initiatives, infrastructure projects and sustainable business investments, we are making. These CSR programs are bearing real fruit, and I'd like to say that true social license is not purchased, but rather it is earned through long-term dedication by our team and consistency in the communities and in our stakeholder relationships.

Yesterday, in our press release, we announced our 2014 budget forecast. We expect to produce between 18 million and 21 million ounces of silver during the year, which matches what we had said earlier in our PEA. I might add, this is not coming by high-grading the mine, but by producing at the 3,500 tonne-per-day rates as we've expected. This is an amazing achievement. This comes 6 years after the first discovery haul, 3.5 years after our company's IPO, 2 years from the start of construction and, of course, only 6 months after receipt of that last permit.

Our total cash costs, net of byproducts, have come in a little higher than what we had projected originally in the PEA. As many of you know, a lot of this has to do with the power cost, which are higher, temporarily. And we've also budgeted quite conservatively until we get operational experience under our belts. I'd like to point out that the all-in sustaining cost for 2014 is projected at less than $10 per ounce, which is remarkable in this industry. And this is according to the proposed World Gold Council standards, so it is calculated net of byproduct credits. And one word of caution, it does not include the federal income tax.

Sustaining and expansion capital for 2014 amounts to $30 million to $35 million. It's just about what we projected last year. It includes $19.3 million for underground development, completion of our ventilation raises and the tailings facility expansion in order to get to the 4,500 tonne-per-day rate by 2016. Corporate G&A, excluding $7.8 million in noncash stock option expense, amounts to $25 million to $30 million. Now this includes $13 million in Guatemala City G&A. And, in that, is $9.6 million in Corporate Social Responsibility programs. Just a note about this G&A cost, this figure certainly appears high and it certainly is when comparing to our peers. But it does contain over $5 million in 2014 spending that we consider onetime events related to infrastructure costs and also what I'd like to call social license costs. Now these numbers will go away in 2015, as regional infrastructure improvements are completed and as our royalty kicks in. And then, we can ask these communities to get on with some of these projects and continuation of these projects with royalty monies.

Finally, the exploration budget for 2014 comes in at $5 million to $10 million. This only includes surface drilling as our underground drilling programs are carried in operating budgets. A fair amount of our effort, especially early in the year, is focused on underground infill drilling programs. Our goal is to complete a resource update in the third quarter, calculate proven and probable reserves for the first time, and to complete a feasibility study for the 4,500 tonne-per-day expansion program.

Before turning the phone over to our executive team, I want to make one more comment about our corporate strategy. Our task, first and foremost, is to deliver Escobal and to responsibly produce around 20 million ounces per year at a low cost over a very long period of time. We currently have an 18-year mine life and we expect we'll improve on that with our next update, a feasibility study. Our second task, of course, is to repay shareholders, as I have spoken often about. After all, everyone on this end of the call is a reasonably large shareholder, so we are aligned with you on the phone. I expect the company will be discussing this subject in the coming months and given a decent metals price environment and a successful startup, we'll have more to say about this subject later on in 2014.

So with that, I will now turn the call over to Mark Sadler, our Vice President and Chief Financial Officer.

Mark Sadler

Thanks, Kevin. The highlights for the third quarter of 2013 were summarized in last night's press release. So I won't spend the time to repeat those this morning, but just basically to say that those, our performance was basically in line and comparable to previous periods and also in line with our expectations.

Now that we're commissioning the plant, we expect the operating results and the cash position in the future to change in future months, reflecting our transition in the business. For just a minute, I'd like to talk about what we're focused on in the short-term, and that's largely the concentrate sales and activities with our customers. The concentrate shipments and sales commenced in October and we have sales agreements with 3 of our major customers to sell both lead and zinc concentrate as we commission the plant and beyond when the full production is reached. Those customers are currently accepting aspect materials with high silver content. In addition, contracts have been agreed in principle with other customers and will be executed once the expected concentrate grade is achieved and is sustainable. We're implementing our marketing plan in phases to match the ramp-up of operations, and expect the plan to be fully implemented by 2004 -- early 2014.

So we're very pleased with the progress and we continue to watch our cash balance very closely, and to manage the company on this one important measure over the short-term. As Kevin stated, we got a late start, so the expected revenue for the rest of the year is coming a little bit later, and at a lower silver price than we budgeted last year. We have maintained a dialogue with our bank and they have indicated that expanding the credit facility is possible if needed. We'll continue to monitor the cash balance with the bank to ensure that adequate funds are available to complete the commissioning should anything unexpected happen.

So with that brief update, I'll turn the time over to Ron Clayton, our Chief Operating Officer for an Escobal update.

Ronald W. Clayton

Thanks, Mark, and good morning. I'd like to join Kevin in thanking our construction teams and operating teams for their hard work and great accomplishments. It's amazing that it's just been a very fast 2 years since we broke ground on the plant and now we're up and operating the plant and mine.

Construction on all the major installations was 99% complete at the end of the third quarter. Activities remaining during the fourth quarter include closing out the contracts, completing punchlist items, and the final commissioning of the paste backfill system will be completed once the first stopes are ready for fill later in the fourth quarter. Construction manpower has dropped from a peak in early September of over 1,400 to just under 100 today. As Mark mentioned, we spent about $318 million of the $327 million budgeted for the 3,500 tonne-a-day project, and another $36 million of the $47 million approved for the expansion. The $9 million remaining in the 3,500 tonne-a-day project is adequate to cover the fourth quarter activities and the commitments that we've made.

Work required to complete the expansion projects consist of underground ramp development, ventilation raises and underground dewatering wells scheduled over the next 2 years. Based on our current estimates, we expect to spend an additional $26 million on the expansion or approximately $10 million more than originally estimated. The overrun is primarily due to higher unit costs for ramp development, increases in the scope of both the ventilation expansion and the dewatering wells.

Kevin mentioned that we had just completed our 2014 budget exercise and 5-year planning exercise. While we don't have a great deal of operating experience, we have incorporated into that budget what we've learned during mine development, the last 4 months of mine production, our recent experience in the cost of processing supplies, our view right now of the learning curve costs in the process plant, and our recent experience with diesel power generation. We're budgeting operating cost for mining, milling and site G&A of $91.08 per tonne for 2014, dropping to $68.96 per tonne in 2016. This compares to the PEA numbers of $62.34 in 2014, dropping down to $55, and our May 2013 guidance of $69.18 dropping down to $61.38.

We believe we've been conservative with our budget. Generating power with diesel is the largest driver of the higher estimate in 2014, as well as the cost reduction by 2016. We're actively analyzing lower power cost options, and we expect to adopt and implement an alternative before 2016. Alternative power generation options are connecting to the grid. We have the potential to reduce power production costs by $12 million to $15 million annually or more than $10 a tonne.

Our general and administrative cost estimates are significantly higher than previous estimates due to increases in both cost and scope of our social responsibility programs and security. We've extended training and additional expert oversight on -- in the mill and dry-stacked tailings are raised through the middle of 2014, primarily associated with the late start that Kevin was talking about. Mining costs are expected to be slightly higher than the PEA levels in 2014 and slightly below those included in the PEA by 2016. Again, we believe our budgeted costs are conservative, and we're working to take advantage of the opportunities to deliver better results than we've estimated. I'm quite optimistic that we're going to be able to do this, and our people are very engaged in it.

As Kevin mentioned, the mill construction was approximately 3 months later than our internal schedule and that's consumed much of the flexibility that we built into the ground plan. Fortunately, our operating people have really risen to the challenge. I would characterize the first 5 weeks of startup and commissioning as typical for a floatation plant of this size using dry-stacked tailings deposition, and everything is progressing quite well. During the first 2 weeks of October, throughput was held low as unit operations and operating parameters were adjusted from the design settings to accommodate what we were actually seeing in plant performance. We also addressed tailings material handling issues, flow problems and a number of physical and programming modifications were required. I would not consider any of these issues to be unusual to encounter during a startup. As improvements were realized in each of the unit operations, throughput and head grade were increased. During the remainder of the fourth quarter, we'll focus on tweaking the reagents to continue to improve recoveries and concentrate quality, which are very near our expectations. Right now, we'll also be focused on tailings stiffening and filtration performance, which we expect these improvements will allow us to increase the production to the 3,500 tonnes-a-day by the first quarter.

We put in the press release, the mill performance in October, about 33,700 tonnes of the 393 grams-per-tonne silver was the mill feed grade. Throughput average is a little over 1,000 tonnes a day or approximately 31% of the design capacity, and it steadily increased to an average of 1,655 tonnes per day over the first 10 days of November. We're continuing to make great strides in this regard and we see huge improvement everyday. Concentrate production during October was 593 tonnes of lead con and 132 tonnes of zinc con. These were included in the shipments that Mark mentioned earlier. The concentrate grades have gone up from 5% lead and 5,000 grams-per-tonne silver, which is quite low in the first days, to over 40% lead and 30,000 grams-per-tonne silver and 40 grams-per-tonne gold. So we're within about 5% to 10% of meeting that lead grade which is the only spec that we are out on right now. We expect to get the -- that increase to the over the 50% in the next few days, and both concentrates, I expect, will be meeting specifications very soon. Our operating teams have been demonstrating steady improvements and throughput and product quality. All of our key performance indicators are turning in the right direction, up, up, up. And we continue to see this through this morning. We remain very confident that we will achieve initial nameplate capacity of the 3,500 tonnes-per-day level in the first quarter, as we projected clear back in 2010. And we completely expect to produce the 20 million ounces of silver next year. So I'm quite excited about this.

With that, I'm going to turn it back over to Kevin.

C. Kevin McArthur

I think it's time. We'll just move to Q&A, operator, please?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today comes from John Tumazos of John Tumazos Very Independent Research.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Compared to a couple years ago, it looked like you had $50 million, $75 million of extra cash for your startup and now you're beginning to use a credit line. And it looks like there's 4 factors contributing to it. The second phase CapEx to 4,500 tonne-a-day being a little more, the silver price being less, and your operating costs being more. And then maybe there's some 4 things in the G&A and social responsibility or security costs, too. And then all of these things together add up to about $100 million more cash consumption, 2013, '14, '15, where in 2016 you'll have that 4,500 tonne-a-day coming sooner to generate more cash at the same silver prices or offsetting the silver price decline if it were to continue. But could you -- that's -- I think I'm generally understanding what's going on, but could you walk us through the detail a little more? And then afterwards, I have a second question, if I may.

C. Kevin McArthur

John, you've hit the 4 items that, of course, would almost add up to those numbers and then the fifth is the 3-month delay in our own internal figures for our startup. And, therefore, you've got a reduction in the number of ounces and, therefore, a reduction in the net revenues that we would have expected during that period. But I guess I would point out, from an analyst standpoint, the important thing to look at is that on our balance sheet, the DD&A that you would model going forward, is around $840 million, which includes the original purchase price. And this is just about right on the number that we had originally projected. It's a little bit less for the DD&A for the entire project over the project life. So I think we've just about hit our target, other than that, a shortcome of -- a shortfall of revenue, which, of course, doesn't leave our corporate DNA or our valuation. We just haven't wasted our resource during this startup period and, of course, as Ron projected, things are going quite well now and we are producing the amounts of revenues that we had originally intended to. And now, the startup is moving towards a very early 2014 commercial production target, so I think we've pretty much hit everything.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Now in terms of the cost being a little more and the price a little less, how would that influence the dividend that you might institute for 2015, or when you institute a dividend?

C. Kevin McArthur

Well, that, of course, would have a significant influence on the dividend, especially the silver price. Back when silver was $35 per ounce, we were thinking that there was a possibility of paying up to a $2 per share dividend. And at that price, that is totally a conceivable number. At $20 silver, that would be something less, including having to pay back our debt first. So we will be raising that issue with the board. We've had -- we've just had a board discussion about that subject. We definitely intend to be a dividend payer. In fact, our goal is to have the best yield in the industry. So without getting into specifics about what that exact dividend will be, and, certainly, no silver price will have an impact, and our goal will be to -- the essence of our discussion is that we intend to pay a certain amount of our free cash flow and not tie it to silver price specifically, but, as you know, free cash flow will be -- the biggest influence on free cash flow will be the silver price. So you know as much as I know now, we have not instituted that dividend policy, nor will we until we are sure that, first of all, the mine startup has gone well, we're in commercial production and that we're in a good silver price environment. And I expect by our AGM time next year in May, we'll be broaching this subject.

John Charles Tumazos - John Tumazos Very Independent Research, LLC

If I can ask one more, Kevin, and forgive me, the corporate structure where Goldcorp owns 40%, or whatever the swag is of your equity, is not the most common one. It served a good purpose as you're in this construction and launching phase and now, you're growing up and in the silver world, you're definitely one of the big boys. Should we expect that same ownership structure to continue indefinitely? Or is it a goal to buy back some of the Goldcorp stock with your extra cash flow, or is it their goal to sell? Or do you think the company will consolidate and merge with another company?

C. Kevin McArthur

Yes, I hold frequent conversations with Goldcorp, and I don't want to be in the position of speculating on what they are going to do other than they have been quite consistent in advising me that they feel that the upside in this project is still very exciting. They want to see us, of course, succeed in getting into commercial production and, I guess, establishing a re-rating post that period. And lastly, they don't need the money. And they've got a very strong balance sheet and their free cash flow is right around the corner. So let's call it midterm, middle timing, they really have no need to sell the stock. Long-term, my view is that they will eventually either sell the stock or buy us, one or the other because they do have a good starting stake at 40%. I, of course, prefer the former. And just like when I was the CEO of Goldcorp, we sold Silver Wheaton when we needed the cash to build Peñasquito. And I suspect somewhere along the line, they're going to discover something and need the cash to finance a project and that will be an appropriate exit time. So middle -- medium-term, I don't think there's much there. We'll have to just suffer with that overhang and, long-term, they'll come a resolution, I just don't know what it will be.

Operator

The next question comes from Andrew Kaip of BMO Capital Markets.

Andrew Kaip - BMO Capital Markets Canada

Look, I've just got a question regarding the Guatemala, the in-country G&A. Based on what you said, am I reading it correctly that we should expect next year's G&A to be around the $13 million range, declining thereafter to around the $8 million range once that onetime series of costs are removed?

C. Kevin McArthur

That's correct, Andrew.

Andrew Kaip - BMO Capital Markets Canada

Okay. And is that primarily related to the CSR program being initially front-loaded?

C. Kevin McArthur

It's related to some specific large-scale projects in the country that presumably would be done either with royalties going forward or other means. But 2 of those projects have to do with infrastructure that are related to roads so that we -- our transport of materials in and, of course, concentrates out, we wanted to try and avoid areas where we have restricted travel through towns and trying to assure that we have good road base and safe operating parameters. So we felt that we had to take those steps to improve that infrastructure. We can't capitalize that. That's just an ongoing expense. So that's next year, and then that goes away.

Andrew Kaip - BMO Capital Markets Canada

Okay. And then with respect to the expiration expenses for exploration dollars or a commitment for next year, should we assume that the bulk of that is expensed, or how are you going to deal with that on a financial basis?

C. Kevin McArthur

Yes, we've put that all in as expense in our budget.

Andrew Kaip - BMO Capital Markets Canada

Okay. All right. And then, Ron, you indicated in the release that went out yesterday that you're working on the filtration on the -- in the tailings plant, can you give us some more information on where you are, what are some of the issues that you're confronted with, and what kind of sequence of events are going to take place for you to be able to get those filter presses working as per design?

Ronald W. Clayton

Absolutely. The 2 biggest tricks are teaching people how to properly operate the thickener and getting the mass balance. When you start one of these plants up, as you bring the tonnage up, it tends to kind of slug things down, loads of slurry downstream. And so you got to just kind of gently work your way through that, so that you deliver the right product to the tailings filters. And what I mean by that is the right percent solids which then make those more efficient. So that's one of the things we're working on, is getting the flock in right and getting the thickener operations right. The second piece of it is that I've never done one of these where you didn't do a bunch of work trying to figure out the right filter claws and, invariably, the ones you start with are not the ones that give you the right performance. So we're going through that process of trying different filter claws. We've made some tremendous headway in the last 2 weeks, in particular, in that regard. And so, it's just a matter of working our way through that, Andrew. And we've -- I -- roughly, I would tell you that I think we've probably seen as much as a 50% improvement in the filtering efficiency, just in the last couple of weeks.

Operator

The next question comes from Michael Gray of Macquarie Capital Markets.

Michael J. Gray - Macquarie Research

Just on the power, you mentioned $12 million to $15 million of savings, if you can get alternative power to the diesel. Would it be fair for now then to model $1 per ounce, say, for at least 2014 and into 2015?

C. Kevin McArthur

A reduction? Or an increase?

Michael J. Gray - Macquarie Research

No. No. Continue to model that as being the diesel.

Ronald W. Clayton

Yes. That's what I'd do for the next 2 years, Michael.

Michael J. Gray - Macquarie Research

Okay. For the next 2 years. And the underground development cost per tonne, can you give us an idea what they are right now and what you see them being going forward, fully serviced?

Ronald W. Clayton

Okay. It depends on what kind of development you're actually talking about, like the main declines, we've seen as high as $6,000 a meter. But we're down averaging around $4,500 a meter for that. I guess the flip side of that coin is that the footwall laterals and things like that were around $3,800 a meter. So on a per tonne basis, I don't remember what that is, but we're going to do about 10,000 meters of development a year.

Michael J. Gray - Macquarie Research

Okay. And the -- can you give us an update on the stockpile size and grade?

Ronald W. Clayton

It's just slightly smaller right now than what we reported. The 100,000 tonnes of roughly 487 grams, I think it's around 97,000 tonnes now because we've been adding into it as well as taking out of it over the last 6 weeks. They were roughly in the same -- they're pretty much at the same spot as we were in terms of what's ahead of us.

Michael J. Gray - Macquarie Research

Okay. And the last question, just the -- once you've commissioned and construction is done, what's going to be the headcount on-site?

Ronald W. Clayton

About 800 people, total. That's employees. There's always going to be probably another 100 or so contractors either working on the tailings facility or just the cleaning people, things like that.

Operator

Our next question today comes from Chris Lichtenheldt of Dundee Capital Markets.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

First, just to -- can you tell us what sort of grade you -- head grade you've been expecting within your next year's guidance of 18 million to 21 million ounces?

Ronald W. Clayton

Yes, I can. Hang on just a second here. I thought I had that right at my fingertips.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

No problem. Maybe we can circle back if you don't.

Ronald W. Clayton

Yes, go ahead and ask your next question. By the time you get that one asked, I'll have this answer for you.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Okay. Perfect. What I was going to ask next is do you have any early indications of how grade reconciliation looks?

Ronald W. Clayton

Yes, we do. We presented something actually to the board yesterday. The tonnage is, give or take, 2% for the blocks. We've actually gone in and mined. The tonnage is about 2% below what we expected to come out of there and the grade is higher. I hesitate to even tell you that number because it's significantly higher right now, and I think that's very much related to 1 stope. Bottom line is that it's good news. It's reconciling very well. In terms of the grades for next year, we're looking at around 500 grams, I think. Let me tell you exactly here.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

It seems to me that would make sense, at least 500 based on your production guidance.

Ronald W. Clayton

Yes, it's actually a tad over 500 grams, average for the year.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Okay. And I think that's part in the PEA. Is that just a change in the mine plan? Or some of that would be direct reconciliation?

Ronald W. Clayton

No. It will. It's primarily a change in the mine plan because we have not adjusted anything based on the limited amount of reconciliation. I mean, that's -- it's great news, but it's a pretty limited number of tonnes and ounces right now, right?

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Yes. Okay. That's fair. And then I guess just secondly, the $91 a tonne mining mill in G&A that you talk about, that will all flow through to the cash cost that you've got it?

Ronald W. Clayton

Yes. So yes.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

Okay. And then I think you said in 2015, it would drop to $69, is that -- did I get that right?

Ronald W. Clayton

Yes.

Chris Lichtenheldt - Dundee Capital Markets Inc., Research Division

And that's largely a function of the power line being...

Ronald W. Clayton

No -- yes, it is. It's about -- it will be about $12 million to $15 million in cost reductions into the -- into those 3 categories for power reduction. And then there's some other things. Like the first half of 2014, we've got a lot of money in there for extra training and expert help in the mill, getting the mill up to speed. Just some things, early things like that we wouldn't expect to go on. But the biggest piece of it is the power costs. Yes, and Chris, just to backup, I've now got a full year booked up here, and it's -- the grade is almost 600 grams a tonne average for the year.

Operator

The next question comes from Benjamin Asuncion of Haywood Securities.

Benjamin Asuncion - Haywood Securities Inc., Research Division

I think some of my questions have already been answered. I've got 2 left here, though. With respect to the 10 stopes that you said are ready for production and the 10 stopes that are in development, can you give us a sense of what the grades that you're looking at within those ones are?

Ronald W. Clayton

I believe the silver number is well over 600 grams a tonne, like 620, something like that, average.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. And just trying to reconcile what you've spent, so looking between what the accumulative spend was on both the 3,500 tonnes per day, the difference in your comments I'm looking at here, was just under $2 million that was spent, and then based on what you said you spent on the 4,500 tonnes per day, I'm looking at just over $22 million, which kind of brings me to about $24 million. I'm trying to get a reconciliation to the $52 million that's capitalized in PP&E.

Ronald W. Clayton

And you're talking about the last quarter?

Benjamin Asuncion - Haywood Securities Inc., Research Division

Yes. So in your comments, I think you said the cumulative spend on the 4,500 tonnes per day brings you up to $35.8 million, I believe it is. And then you said that your spend on the base, sort of 3,500 tonnes per day, is about $317.9 million, to date as of the end of the third quarter. So that's about $1.9 million. I'm looking at some numbers of about $24.2 million based on those 2 comments, and your cash flow, is you're looking at $52 million net of deposits.

Ronald W. Clayton

Yes. The difference is capitalized operating costs.

Mark Sadler

And you'll see more of that during the fourth quarter as we're commissioning the plant.

Ronald W. Clayton

Right. Yes. Now during the fourth quarter, we're going to have some offsets, revenue offsets for that capital.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. All right. Perfect. And just with respect to touching back on the concentrates. So you think within, I guess, the next 2 weeks, your comments were that you would be kind of up to spec both on the lead and zinc concentrate grades?

Ronald W. Clayton

Yes, I fully expect that to happen before the end of the month and maybe before the end of the week. But I also want to make a comment about that. Our customers have worked very well with us and even though we haven't been quite to the 50% lead or the 50% zinc or lead in the lead, they've been pretty happy to take what concentrate we've been able to make because it's really valuable concentrate with all the silver in it. So it really hasn't been an issue other than at some point, they may not take everything we could make at 3,500 tonnes a day. But they've been very accommodating and it really hasn't cost us much to do that, very insignificant.

Benjamin Asuncion - Haywood Securities Inc., Research Division

Okay. So in terms of the concentrate, we're looking at similar to that that was outlined in PEA, then?

Ronald W. Clayton

Correct.

Operator

The next question comes from Chris Thompson of Raymond James.

Chris Thompson - Raymond James Ltd., Research Division

My question, sorry, Kevin, I want to sort of bother you with more grade questions. You got a sense of grade assumptions as far as the base metals for next year?

Ronald W. Clayton

Well, yes. Let's see. I'm just going to kind of look through some numbers here real quick and I would say, well, I'll give them all to you. Gold grade, you can expect something around 0.4 grams. Lead grade, I would expect something in the 0.75% range. Zinc grade, I'd expect something in the 1.4 range.

Chris Thompson - Raymond James Ltd., Research Division

Okay. And a sense of recoveries there on the silver there?

Ronald W. Clayton

Right. Right now I'd tell you, expect what we put in the PEA or maybe a percent or so better than that.

Ira Mark Gostin

Okay. Anything else?

Operator

There are now no further questions. I'll turn the conference back over to Ron Clayton for any closing comments.

Ronald W. Clayton

Thank you. I want to tell everybody I really appreciate your time this morning and all the great questions. And I want to reiterate what Kevin and Mark and I all tried to say upfront. We're very, very pleased with where we are today. We went through a few tough times earlier in the year and it set us back a little bit on our internal schedule. But we're just very, very confident that we're going to be at that 3,500 tonne-a-day rate and in commercial production in the first quarter, like we've been saying clear back since 2010. So, again, I appreciate your time and we're quite excited about where we are. Ira?

Ira Mark Gostin

Yes. Just thank you, everybody, for attending the call. Just to reiterate, our third quarter financials and the MD&A are on our website, as well as SEDAR now, and you can obtain all those there. And thanks for the time, and we'll disconnect now.

Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.

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Tahoe Resources (TAHO): FQ3 EPS of -$0.11 misses by $0.01.(PR)