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Tahoe Resources Inc. (NYSE:TAHO)

Q2 2014 Earnings Conference Call

August 13, 2014 10:00 ET

Executives

Ira Gostin - Vice President, Investor Relations

Kevin McArthur - Vice Chair and Chief Executive Officer

Ron Clayton - President and Chief Operating Officer

Mark Sadler - Vice President and Chief Financial Officer

Brian Brodsky - Vice President, Exploration

Edie Hofmeister - Vice President, Corporate Affairs

Don Gray - Vice President, Operations

Charlie Muerhoff - Vice President, Technical Services

Analysts

Matthew O’Keefe - Dundee Capital Markets

Michael Gray - Macquarie Capital Markets

Geordie Mark - Haywood Securities

John Kratochwil - Canaccord Genuity

Operator

Thank you for standing by. This is the conference operator. Welcome to the Tahoe Resources Second Quarter 2014 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Ira Gostin, Vice President, Investor Relations. Please go ahead, Mr. Gostin.

Ira Gostin - Vice President, Investor Relations

Good morning and welcome to our second quarter 2014 earnings call. There is a slide deck to go with this call. We are not doing a simulcast, but you can follow along when Mr. Clayton starts his presentation. Those slides are available at www.tahoeresourcesinc.com/earnings.

Management on the call this morning include Kevin McArthur, Vice Chair and CEO; Ron Clayton, President and COO; Mark Sadler, VP and CFO; Brian Brodsky, Vice President, Exploration; Edie Hofmeister, Vice President, Corporate Affairs; Don Gray, Vice President, Operations; Charlie Muerhoff, Vice President, Technical Services.

As a reminder, we will be discussing forward-looking information that involves unique risks concerning the business operations and financial performance and condition of Tahoe. Forward-looking statements include, but are not limited to statements with respect to future metal prices, the estimation of mineral resources, the timing and amount of estimated future production, cost of production, capital expenditures and cost and timing of the development of new deposits. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different from those expressed or implied by such forward-looking statements. Accordingly, you should not place undue reliance on forward-looking statements. Our forward-looking statement, cautionary note, technical disclosures are on SEDAR as well as our website. I gave you the address for the slide deck again, that’s tahoeresourcesinc.com/earnings.

And with that all, I will now turn it over to our CEO, Kevin McArthur.

Kevin McArthur - Vice Chair and Chief Executive Officer

Okay, thanks Ira and thank you everyone for attending this morning’s call. I am sure as you noted in our press release, the ramp up and optimization at Escobal were completed as planned this quarter. The Guatemala team really stepped up with a strong performance in accomplishing their goals. We managed our balance sheet during the quarter positioning the company to establish our first dividend by year end with a nice cash cushion at that time and robust free cash flow to build on that year end balance.

Finally, we have clearly established Escobal as a model project for Guatemala, in which to us was very important. We are already among the top taxpayers in the country. We have commenced very important royalty contribution for the local and regional economies, but have established very impressive programs to grow local infrastructure and to provide local training, education and healthcare. In so doing, we are following through with our responsibilities to balance the needs of our employees, shareholders and communities, which is what we have been saying since day one. So, we are very pleased with our progress.

And with that, I will turn the call over to Mark Sadler, Tahoe’s Chief Financial Officer.

Mark Sadler - Chief Financial Officer

Thanks, Kevin. As stated in yesterday’s press release, we finished the quarter with earnings of $36.1 million or $0.25 per share on revenue of $104.7 million. Year-to-date earnings amounted to $0.42 per share, pretty good for first half year production of a brand new startup. The cash flow before changes in working capital was $58.9 million or $0.40 per share and $0.71 per share year-to-date and we ended the quarter with $51.5 million in cash balance.

You will note that our free cash flow was not as strong as expected during the second quarter given our earnings at only $11.6 million and there are couple of good reasons for this that I would like to just touch on. First of all due to strong production in June we build a fairly sizable inventory of concentrate at the mine that was not sold by the end of quarter. Virtually, all of the June inventory has been shipped and sold by mid-July. We won’t normally carry significant amount of inventory but due to variations in production and shipping schedules there will be fluctuations from time-to-time. And this fluctuation happened to speak right at end of Q2.

Secondly, we have built an unusually high accounts receivable, which increased by over $20 million during the quarter to $33.1 million due to timing of shipments at the end of the quarter. Approximately 25% of the receivable balance was collected in the first few days of July which means free cash flow associated with that really landed in the third quarter. Fluctuations from period to period in the receivable balances will be normal due to our shipping schedule and vessel rotation in the future. And third, a significant portion of the operating cash flow was used to pay down liabilities related to completion of construction. All of these post-completion cash legs are now behind us. We expect to return to a more natural balance in this process by end of the third quarter and we expect to realize our projections for free cash flow by year end. So all is well if you understand what’s behind our free cash flow number.

During the second quarter as Kevin mentioned we took some additional steps to manage our balance sheet. We plan to pay down $25 million of our $75 million debt facility by September and roll the remaining $50 million out to June of next year. This debt facility carries an interest rate of LIBOR plus 6% and what this accomplishes is it enables us to carry a cash balance of a little over $100 million through the year end assuming the silver price $20 per ounce giving us enough cash resources as the balance – as the Board considers a future dividend program.

With respect to marketing although it’s not fully implemented, we continue to expand our concentrate sales program. And during the second quarter we shipped approximately 15,000 tons of concentrate and just under 24,000 tons of concentrate since we have commissioned the mill. The concentrate produce of Escobal continues to be very high quality with little or no content of penalty elements and the smelters are pleased with the quality of concentrates they have received thus far. So, I am happy to report this company is very healthy and we are hitting our operating and financial targets.

And now I would like to turn it over to President and COO, Ron Clayton.

Ron Clayton - President and Chief Operating Officer

Thanks Mark and good morning to everybody. I am going to be discussing the slides in conference call presentation that Ira referred to earlier. But first I would like to congratulate the Escobal team for a wonderful startup on another great quarter. As you can see from the throughput on Slides 4 and 5, they have done a terrific job in overcoming issues we encountered early and are now operating the plant consistently above the design throughput rates. Average throughput for June and July combined was 3,750 tons per day. The team has made similar advances in executing the mine plan and improving mill performance which resulted in 5.8 million ounces of silver in the second quarter and 9.9 million for the year. Slide 6 shows the monthly silver production through the second quarter.

Slides 7 and 8 both show the estimated revenue on a daily, monthly and cumulative basis. The flat dash line on Slide 7 is the estimated daily cash out the door cost with the company based on our budget. This $600,000 per day excludes the 2013 accrued liabilities for construction that were paid down during the first half that Mark just discussed. During quarter one the margin per day on an as produced basis was approximately $300,000. In Q2 that margin has grown to $600,000 per day $1 increase in the silver price would result in approximately $55,000 in the – additional margin per day. This clearly demonstrates that Escobal is delivering cash flow as predicted and the positive impact of silver price increases can have.

Year-to-date, the average grade processed is 607 grams silver per ton versus the plan and budget of 595 grams per ton. The original mine plan was designed to access the heart of the central zone early in the mining sequence and consequently grade will run higher than the resource average over the first several years of operation. Over a very small population of data the actual silver grade is running approximately 1% better than our resource model, that’s really good news. While per ounce unit costs are all inside our guidance and expectations per ton unit costs have trended a little bit higher than planned. With year-to-date mining costs at $43.71 per ton and our total production costs at $97.11 compared to the budget of $92.37. Our focus has been on commissioning our ramp up activities over the last nine months.

We are now turning to plant and cost optimization. With further improvements in mine and mill throughput rates, as demonstrated in June and July and most of the startup issues behind us, looking forward, we expect to see unit operating cost per ton trend downward. Performance-to-date supports our continued confidence that we will deliver on our guidance of 18 million ounces to 21 million ounces of silver production at a total cash cost of between $5.65 and $6.25 per ounce and all-in sustaining cost of under $10. Also, we still expect our sustaining and expansion capital for the whole company to be under $45 million for 2014.

Feasibility study is scheduled for completion in September. The primary objectives of the feasibility study will be the support declaration of our first proven and probable reserves and confirm the final cost of expansion to the 4,500 ton per day. Based on the work completed to-date, we expect proven and probable reserves to result in a revised mine plan and resembles the May 2012 PEA. A new drilling not included in the previous resource estimate is likely to result in increased tonnage of lower grade material to new areas, that was included in the previous PEA mine plan. This material is expected to extend the mine life slightly and be mined in the last few years. Bottom line is we don’t expect significant differences in the estimated cost to complete the expansion or in the life of mine plan consistently producing 20 million ounces of silver from Escobal for as long as possible remains our goal.

The paste line expansion is on track for construction and completion in the third quarter and commissioning in the fourth quarter of this year. The tailings filter project remains on schedule for commissioning in the first quarter of 2015. All projects are on budget and will be ready in plenty of time to support the production plan. Mine development is currently focused on footwall laterals that support production from the second mining from at the 1,190 level and initial access to the East zone. (Indiscernible) is on schedule to ensure that we will meet the long-term production schedule.

In summary, second quarter commercial operations met or exceeded our expectations. Development and project work is progressing as scheduled to support the long-term production plan. Our CSR programs and performance are benefiting and supporting our communities, employees and shareholders. This combination gives us high confidence that our production and cost guidance and goals for the year will continue to be achieved. We now look forward to improving efficiencies as we deliver on our promises for this world-class mine.

I think with that operator, we are ready to take questions. Operator?

Question-and-Answer Session

Operator

Yes. (Operator Instructions) The first question is from Matthew O’Keefe of Dundee Capital Markets. Please go ahead.

Matthew O’Keefe - Dundee Capital Markets

Hi, good morning. Congratulations on a very impressive quarter. I just had a question though looking at the grades we have seen some pretty decent grade variation in the first three quarters. We have seen 483 grams a ton and 551 grams a ton and now 657 grams a ton. Are we – should we expect this to be the grade, the mining grades to be this variable or are we aiming for something smoother and consistent over time?

Ron Clayton

I actually think Matt, over time that’s you are going to see those kinds of variations, but I guess what I would point back to is year-to-date, the grades 607 grams is the way you have budgeted 595. So, on average, our prediction, our ability to predict this is pretty good.

Matthew O’Keefe - Dundee Capital Markets

Okay. So, we should keep on that guidance as far as grades go?

Ron Clayton

Yes, for the rest of this year.

Matthew O’Keefe - Dundee Capital Markets

Okay, great. Thanks.

Kevin McArthur

Matt, I just wanted to add that we are because of the dimensions of this Escobal deposit. We put the declines right into the Central zone. And so we are right in the heart of the ore body into the best piece, which is very good of course from a payback standpoint. And so you see that grade profile over the 18-year mine life in our PEA, you see for the first 10 years, it is quite high grade and then it starts to falloff in the later years. There is nothing unusual here and you will see variations, because what we mine what we come to and Ron’s team has scheduled out every single stone throughout the life of mine and has a very good handle on where the grade is and where it will come from over the 18-year mine life.

Matthew O’Keefe - Dundee Capital Markets

Right. And as you alluded to, we don’t expect much of a change in that with the feasibility study?

Kevin McArthur

No, not really.

Matthew O’Keefe - Dundee Capital Markets

Great.

Kevin McArthur

No. Our goal in the feasibility study is to maintain 20 million ounces per year for as long as we can as the foundation to the company.

Matthew O’Keefe - Dundee Capital Markets

Right, excellent. Thanks. I may just have one more question, the mill throughput, I mean, impressive June and July, nice consistent increases well above nameplate, is that a sustainable rate for the – under the existing configuration or is that more just testing its limits?

Ron Clayton

That’s sustainable. It started out as a test and the test proves that it was sustainable.

Matthew O’Keefe - Dundee Capital Markets

Okay, great. Thanks. That’s it from me.

Operator

The next question is from Michael Gray of Macquarie Capital Markets. Please go ahead.

Michael Gray - Macquarie Capital Markets

Hi, good morning. Michael Gray. Yes, guys. Could you elaborate on the CSR program, the impact you have had in the local communities and that’s the cash contribution in the countries a little bit more? And also you are still trying to get the power to say it eventually for maybe a bigger expansion down the road, I appreciate you can go to 4,500 tons per day, but maybe just talk about some of the opportunities and challenges to the north and when we might see some visibility on that power being I guess equation dealt with?

Ron Clayton

Thanks. I will just take those kind of in the general order. And if I miss something, you can remind me what I missed. First off, we continue to work on the power line project, but I guess I would backup and tell you that we have got 15 megawatts of capacity right now and that will take us well beyond 4,500 tons a day. I can’t tell you what it would take us to, because I am not sure what we would go to at this point yet, but we are using about 9 megawatts right now on an average basis. So that will kind of give you a feel.

Michael Gray - Macquarie Capital Markets

Okay.

Ron Clayton

It’s not a constraint is the big point I am trying to make there for something even above 4,500 tons a day. Having said that, we are continuing to work on different options for getting line power in there, I think we are probably still ways away from being able to talk much about that, but we are encouraged by what we are seeing. We would be by the way looking for about the same capacity total, a little less than I guess than the math that there is plenty of capacity available on line power. In terms of the overall CSR programs, we just continue to see more and more support as we paid the royalties as we continue with programs as we work with more people. We are getting lighter and lighter spread support and positive reactions. Of course, the community has been pretty prosperous and happy. So, there is really no issues there. In general, you referred to the issue up north, really nothing moving on that front. We have – of course we have a lot of employees up throughout that way. We have a generally good relationship with the community, but no changes really in the relationship with that Mayor.

Michael Gray – Macquarie Capital Markets

Okay, thanks very much guys.

Ron Clayton

Thanks, Michael.

Operator

The next question is from Geordie Mark of Haywood Securities. Please go ahead.

Geordie Mark - Haywood Securities

Hey, good morning, gentlemen. Yes, it’s very good. That’s excellent. Just like to follow on with an early equation on average grade expectations to hit grade in 2014 or ‘15. Just taken as an average of course, would we look to the PEA for guidance for average grades for this year and next?

Ron Clayton

Yes, that’s good for now and I don’t expect the feasibility to change that much for those two years. Overall and Kevin said this a minute ago, I think the new plan will probably flatten out those first few years that we are in the PEA and extend that 20 million a little bit longer out into the mine life. And then we will tax some lower grade stuff on to the very back end, but generally the PEA is a pretty good guide.

Geordie Mark - Haywood Securities

Excellent, thank you. And just maybe one quick follow-up in terms of the Q-on-Q changes to the increase in the mining cost and processing cost, any particular underlying cause for those increases, wage inflation or?

Ron Clayton

No, no, not at all. Probably the biggest things as we talked about a lot of commissioning and startup issues back in the first quarter, few problems with some stopes, just general getting through the startup issues with the filters, little bit higher maintenance cost, things like that that I think are all really related to startup and commissioning. And we just saw heavier load of that in the second quarter and the first quarter.

Geordie Mark - Haywood Securities

Okay.

Ron Clayton

Those are all things that I think we will see come back down and be in line with what our guidance was.

Geordie Mark - Haywood Securities

Right, okay. So, you would expect maybe that to come down by year end to that 2014 budget?

Ron Clayton

Yes, sir.

Kevin McArthur

Yes, you have got to understand mine startups, which we have done a few of in our careers are heavily involved in the ramp up and you just throw everything at it to get your ramp up to work right. And we have got consultants in the field, helping with training of our mill people. As Ron mentioned, the issues with the paste plant to all of these things generally end up following into the bottom line number in terms of cost. So, our focus has been production – well, just let me just say I want to add safety first, but then production. And as our ramp up has improved, now Ron and Don and their teams are going to be fine tuning the cost. So, it’s a natural progression during a mine startup. Thank you.

Geordie Mark - Haywood Securities

Great, thank you very much.

Ron Clayton

Thanks, Geordie.

Operator

(Operator Instructions) The next question is from John Kratochwil of Canaccord Genuity. Please go ahead.

John Kratochwil - Canaccord Genuity

Hey, guys. Good morning. Congratulations again on fantastic results out of the gate. I have two questions here. The gold recovery, last two quarters has been tracking around the 66% mark, but the PEA back – way back was looking more around the 75% for gold recovery, are there opportunities to bring that recovery rate up?

Kevin McArthur

Yes, thanks, John. This is Kevin. Just a quick note and then I will let Ron answer this question. And one must remember that 85% of our revenues are silver and just as rough numbers, 5% gold, 5% zinc, 5% lead. And so the importance of gold, lead and zinc recoveries are secondary to us, during the early stages, once again during our ramp up and we will be focusing on these other issues. So, Ron, over to you in the gold price.

Ron Clayton

Yes. So, we have noticed that. We have been doing some test work and I must reemphasize what Kevin just said, it’s kind of been a side issue at this point. I think there is a 5% recovery loss on 5% of the revenue is not as important to us as getting an extra 2% or 3% off of the silver, okay. So, we are working on it, but we haven’t been putting a whole lot of focus to it. We don’t have an answer yet, but we will get there. Okay.

John Kratochwil - Canaccord Genuity

Okay.

Ron Clayton

And I am just – while we are here I am going to address one other question that’s going to come up, somebody could say the exact same thing about the zinc. We have really been more focused on making sure that the zinc concentrate is very high grade and zinc in very clean, because that has a bigger impact on our revenues and a few percentage points of zinc recovery, okay.

John Kratochwil - Canaccord Genuity

Okay, yes, fair enough. And my other question has to do with this throughput as you go through the paste plant, the expansion commissioning in Q4, would you expect your throughput rates to potentially come up or do you still need the filter at the end to really get the rates up?

Ron Clayton

Probably, the next bottleneck will be the filters, but we don’t right now know that number is probably north of 4,000, but probably not south of that.

John Kratochwil - Canaccord Genuity

Yes, okay.

Ron Clayton

Yes, the pace right now is not a bottleneck and by the time we get that upgrade put in there it should never be the bottleneck.

John Kratochwil - Canaccord Genuity

Okay. And the filter press expansion you set kind of Q1 timeline?

Ron Clayton

I think the construction will be done late Q1 and commissioned in early Q2.

John Kratochwil - Canaccord Genuity

Okay fair enough. Again congratulations on the quarter. Thanks a lot guys.

Ron Clayton

Thanks John.

Operator

There are no more questions at this time I will now turn the call back over to Ira Gostin.

Ira Gostin - Vice President, Investor Relations

Okay. Thank you so much for joining us. Our financials and MD&A are on our website as well as SEDAR and the last slide of the earnings call slide deck has some social media links. And thank you very much for attending. We will disconnect now.

Operator

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

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Source: Tahoe Resources' (TAHO) CEO Kevin McArthur on Q2 2014 Results - Earnings Call Transcript

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