Update: Tahoe Resources' Q2 Earnings

| About: Tahoe Resources (TAHO)

Summary

Tahoe Resources reported strong Q2 production and financial figures, proving to be probably the most profitable silver-focused mining company in the world.

The company's production figures and costs were almost exactly in line with my expectations.

Unfortunately as one of the few profitable silver miners shares trade at a premium despite the risk of mining in Guatemala.

The stock trades at a hefty premium to its DCF even at higher silver prices and I remain hesitant at $27/share.

Tahoe Resources (NYSE:TAHO) just announced its second-quarter earnings figures and they were nothing short of excellent. The company earned $36.1 million or $0.25/share while generating $58.9 million in operating cash-flow or $0.40/share. It produced 5.8 million ounces of silver with cash-costs at just $5.65/oz. and all in costs of $8.04/oz. with both figures net of by-products making the company's Escobal project one of the most efficient silver mines in the world.

This outstanding performance, however, comes at a price. When I last wrote about Tahoe Resources in March I argued that the stock traded at a 64% premium to the value of its discounted cash-flow. This figure was arrived at using essentially the production costs that the company achieved in the second quarter with 20 years of production and an 8% discount rate and a silver price of $21.50/oz. While I used an 8% discount rate I made sure to emphasize that I was only being so generous in order to make an a fortiori "sell" case. Because the mine is located in Guatemala--a high-risk mining jurisdiction--I would make a "buy" decision based on a much steeper discount rate--at least 12%.

Investors are assigning so much value to Tahoe because they believe that management will be able to reinvest the cash-flow from Escobal into either expanding the project or in another project, and given how efficiently management was able to bring the Escobal Project into production they believe that this is a risk worth taking. Now there is nothing wrong with betting on management and growth, especially when a company has a history of achieving these things, but there comes a point at which the market is simply assigning too much value to the company, and I think we have exceeded this point.

So as great as the company is, and as solid as these financial results are I would urge investors to take profits.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.