Reposted by request.
In the offer by THO we, the SH´s are told that THO SH´s will have 74% of the new business and LSG SH´s will get 26%.
Below are the valuation calcs I did showing
LSG SH's should get AT LEAST 52-57% of the combined business with THO and THO shareholders only 43-48%. It’s also why I believe LSG SH´s should not accept this deal. I have no confidence in the LSG board, given they support this and have provided only a very one dimensional motivation to its SH´s. I fail to understand why major shareholder would see any benefit either.
Let’s take full step back and analyze it all. If you dont want to read all of tech stuff, plse just look at my last table and the kicker at the bottom! I did some calculations and comparisons. References include the 2015 Q3 MDA for both Co.´s, both Co´s 2016 guidance, Tahoe´s fancy new corporate presentation on their website, and last months Shahuindo 43-101 report on Sedar.
(sorry about the tables, the formating on this site sucks)
| Au/Ag Ratio | | 79.7 |
| Gold price 09 Feb 2016 | $/oz | 1191 |
| Silver price 09 Feb 2016 | S/oz | 14.94 |
| Copper price 09 Feb | $/lb | 2.0815 |
| Zn price 09 Feb | $/lb | 0.7731 |
| Pb Price09 Feb | $/lb | 0.8244 |
| Discount on base metals to account for TC's/RC´s | % | 25% |
| CAD$ : US$ | | 1.3938 |
Let´s compare 2016 F/C production. Straight from THO´s presentation. LSG is portrayed as the little guy (I converted all production to AuEq ozs).
| | | THO | LSG | Combined |
| Silver | koz | 20,400 | - | 20,400 |
| or expressed in Gold Equiv | koz | 256 | - | 256 |
| Gold oz | koz | 254 | 175 | 429 |
| Gold & gold equiv | kozEq | 510 | 175 | 685 |
| | | 74% | 26% | 100% |
Okay okay, so the number the deal uses comes from this. They are comparing production estimates.
But we are in the business of producing earnings, not ounces. But before we get there, lets talk oz. a bit more.
Now for Mineral Resources & Mineral Reserves. Here THO have been quite cunning.
First we have this, and again it seems like a no-brainer. (I converted all Ag & base metals into AuEq using the price assumptions above).
| M&I Resources (inclusive of reserves) | | THO | LSG | |
| Escobal Au & AuEq. | koz | 5,885 | | |
| La Arena Au & AuEq. | koz | 6,005 | | |
| Shahuindo Au & Au Eq. | koz | 2,667 | | |
| Timmins West | koz | | 690 | |
| Bell creek | koz | | 690 | |
| 144 Gap | koz | | 300 | |
| Whitney | koz | | 710 | |
| Gold River | koz | | 120 | |
| Juby | koz | | 1,090 | |
| Vogel | koz | | 130 | |
| Marlhill | koz | | 60 | |
| Fenn-Gib | koz | | 130 | Total |
| TOTAL | | 14,557 | 3,920 | 18,477 |
| % SPLIT | | 79% | 21% | 100% |
Thats a fair whack of gold equivalent oz in the combined - I must confess! And at first glance it would seem the LSG SH´s are getting a better deal here, no? No, Not really.
Because when you factor in the
Inferred resources LSG the story looks very different (see below). THO has little exploration upside to give apart from its new Shahuindo project....Remember Inferred resources arent real ounces; they might not be economic, but they do give us a glimpse of potential upside.
So we could see it as a measure of the upside the two companies present. And then, LSG still have all that upside still to be realised in 144 SW, the remodeling that still needs to happen with latest DDH results etc. Here is how it looks (including the 144 gap update on 8 Feb) with a total for all resources MRMR & inferred together:
| Inferred Resources | | THO | LSG | Combined |
| Escobal Au & AuEq. | koz | 177 | | 177 |
| La Arena Au & AuEq. | koz | 72 | | 72 |
| Shahuindo Au & Au Eq. | koz | 2,791 | | 2,791 |
| LSG inferred | koz | | 6,290 | 6,293 |
| Subtotal | koz | 3,040 | 6,290 | 9,330 |
| | | 33% | 67% | 100% |
| MRMR from above | koz | | | |
| TOTAL Au & AuEq. MRMR | koz | 18,106 | 10,385 | 28,491 |
| PERCENTAGE SPLIT | | 64% | 36% | 100% |
Hmmm. Thats 36%, 10% MORE than what was offered, only on the upside potential demonstrated by Inferred resources. But again,
shareholders like LSG because of its earnings per oz, not only how many ounces we mine. The answer then would be to look at Revenue-costs. In particular COC and AISC, seeing as this is a good standard from which to compare.
(Funny, I did not see any comparison in the THO presentation or in the LSG press release - this is devious and decietful). Rationale behind the cost comparison:
To compare apples with apples everything has to be calculated
only on pure oz. produced, either in silver or gold, and use the COC & AISC that are
net of by product credits. But we have a dilemma: Escobal produces mainly silver. Silver oz´s are not gold oz, so we will use the Gold/silver ratio to compare Escobal´'s pure silver production while also accounting for any credits byy using costs including by product credits.
Its seems fair to include Shahuindo, which is not yet in production but is going to produce around 150koz Au/yr at a stated COC of $683/oz. Capex for that project is split into initial and sustaining. For the purposes of our comparison we will ignore all startup capex and only consider the sustain for Shahuindo ($141M), which when divided by 10yrs (of full production) is $14.1M and divided again by 150koz projected production and added to the COC comes to an AISC of $780/oz.
Importantly, the THO operations then need to be weighted by their respective Au equivalent production (excluding by products), and Escobal´s silver production needs to be converted to gold equivalent along with associated costs
including by product credits to cost per AuEq. To get an equivalent weighting, I used the 9M performance from the 2015 Q3 MD&A, and similarly weighted Shahuindo for only 9 months of a typical year.
Lakeshore´s And Tahoe´s unit costs are easy obtained from the 9 months performance to Q3 2015 from their respective MD&A and Lakeshore's only have to be weighted by the CAD$ / US$ exchange rate (see my table at top).
So here we go:
First the production numbers of pure metal excluding by products
| For weighting purposes | | |
| Escobal 9M 2015 production | koz Ag | 14,887 |
| Escobal 9M 2015 production | koz AuEq | 187 |
| La Arena 9M 2015 production | koz | 118 |
Then the COC´s and AISC´s including by product
credits:
| | | THO | LSG | |
| COC Shahuindo | $/oz | 686 | | |
| AISC Shahuindo | $/oz | 780 | | |
| COC gold La Arena | $/oz | 548 | | |
| AISC gold La Arena | $/oz | 969 | | |
| COC silver (Escobal) | $/oz | 7.61 | | |
| AISC silver (Escobal) | $/oz | 10.69 | | |
| COC AuEq (Escobal) | $/oz | 607 | | |
| AISC AuEq (Escobal) | $/oz | 852 | | |
| COC Lakeshore | $CAD/oz | | 604 | |
| AISC Lakeshore | SCAD/oz | | 845 | Difference: |
| Production/Exchange rate Weighted COC | $/OZ | 611.51 | 433 | -29.1% |
| Production/ Exchange rate Weighted AISC | $/OZ | 865.69 | 606 | -30.0% |
And..."Oooh! Ouchy!" Suddenly we have the real reason for THO´s interest in our company.
Our unit costs are way lower. But we all knew that. Bet you did not realize by how much! Now we do. NO thanks to our board. Is that deceitful or is it incompetence? They´re clever people you know.
So what does this really mean? Both sets of AISC are pretty competitive in the space, there is no argument there. I will argue therefore that pretty much all the inferred will come through the plant at one point or another. So over the lives of the resources (including inferred) here is what we have:
| For cost comparison MRMR & Inf. | | | |
| (exclusive of by products) | | THO | LSG | Combined |
| Shahuindo Au | koz Au | 4,320 | | |
| La Arena Au | koz Au | 3,408 | | |
| Escobal Ag | koz AuEq | 5,001 | | |
| Lakeshore | | | 10,385 | |
| TOTAL | koz | 12,729 | 10,385 | 23,114 |
| | | 55% | 45% | 100% |
| | | | | |
| Revenues/value after COC | $M | 7,377 | 7,868 | 15,245 |
| Company contribution | | 48% | 52% | 100% |
| Revenues/Value AISC | $M | 4,141 | 6,073 | 10,214 |
| Company contribution | | THO only 41% | LSG 59% | 100% |
Holy Guacamoli! (Or is that holy Guatamali ?)
I would conclude then that LSG is actually MUCH MORE VALUABLE over the lives of all Tahoe´s projects. And that means that LSG is worth at the very least 52% and more likely 59% of the combined business. Low balling it, to give every benifit of the doubt to THO SH´s would mean the equivalent offer per share could be 1.71/26% x 52% = $3.52
If you think its too high for the stock then look again at the Metal x price - AISC number above. Note that would be the future undiscounted cash flow before tax. We are told in MBA school that the value of a company stock is the NPV of its dividends.. so how much of that undiscounted 6 billion dollars is worth today I dont know, but it must be more than than the $2.40 I have heard being bandied about.
But in case you think its unfair to compare entire resource or have hangups with including inferred numbers in valuations (which is utter BS but lets go with it for the sake of the argument), let´s also compare the valuations on 2016 guidance:
Here LSG board can almost certainly be accused of pulling the whool over the shareholders eyes: Once again, we need to compare apples with apples. So do we use upper guidance or lower guidance? I say we use median guidance because who knows where the production will end up.
The problem is LSG only provided us with upper cost guidancefor 2016. Why is that when on Dec 18, 2014, they annnounced detailed 2015 cost and production guidance including range bound COC & AISC guidance?? I´ll tell you why.
They did it because they knew there was a deal in the books and they wanted us to use ONE number to calculate the valuation. One very, very conservative cost number. And here is how they want us to see it:
| 2016 median PRODUCTION guidance | THO | LSG | Combined |
| Escobal silver | Moz | 19.5 | | |
| Escobal silver in gold Eq. | oz AuEq. | 245 | | |
| La Arena Gold | koz | 180 | | |
| Shahuindo | koz | 67.5 | | |
| Lakeshore | koz | | 175 | |
| Total | koz | 492 | 175 | 667 |
| | | | | |
| 2016 median COST guidance | | THO | LSG | COMBINED |
| Tahoe COC | $/oz | 725 | | |
| Lakeshore COC (upper guidance) | $/oz | | 650 | 705 |
| Tahoe AISC | $/oz | 1000 | | |
| Lakeshore AISC (upper guidance) | $/oz | | 950 | 987 |
| | | | | |
| Revenue - COC (Operating contribution) | $/oz | 466 | 541 | 486 |
| Revenue - COC (Operating contribution) | $M | 229 | 95 | 324 |
| | | 71% | 29% | 100% |
| | | | | |
| Earnings per oz after AISC | $/oz | 191 | 241 | 204 |
| Earnings per oz after AISC | $M | 94 | 42 | 136 |
| | | 69% | 31% | 100% |
And it does not take a rocket scientist to work out that if we had plugged in Tahoe´s lower guidance we owuld have come out at 74% for THO & 26% for LSG or thereabouts. But even using median production and super conservative cost guidance for LSG, we come our short changed by 5%
But what would be a fair comparison? A fair comparison would be if we compared a more realistic cost prediction for LSG. According to their 9M performance in their 2015 Q3 MD&A, LSG had A COC of US$433/oz for the nine months and and AISC of only US$606/oz.
So lets plug those numbers and BOOYA:
| 2016 median COST guidance | | THO | LSG | COMBINED |
| Tahoe COC | $/oz | 725 | | |
| Lakeshore COC (2015 YTD Q3) | $/oz | | 433 | 648 |
| Tahoe AISC | $/oz | 1000 | | |
| Lakeshore AISC (2015 YTD Q3) | $/oz | | 606 | 897 |
| | | | | |
| Revenue - COC (Operating contribution) | $/oz | 466 | 758 | 543 |
| Revenue - COC (Operating contribution) | $M | 229 | 133 | 362 |
| Company contribution to the combined: | | 63% | 37% | 100% |
| | | | | |
| Earnings per oz after AISC | $/oz | 191 | 585 | 294 |
| Earnings per oz after AISC | $M | 94 | 102 | 196 |
| Company contribution to the combined: | | 48% | 52% | 100% |
So there you have it. Its not 26% of the combined business, its 52% that LSG Shareholders should be getting.
Calculated two different ways. I would conclude that: - LSG is actually MUCH MORE VALUABLE over the lives of all Tahoe´s projects. It wins on scale.
- LSG is is actually MUCH MORE profitable over all Tahoe´s projects in 2016. It wins on profitability.
Tony, you clever little man.
It was further pointed out that none of these numbers include the LSG 2016 improvements that have been downplayed for the purposes of this deal:
- That early production from 144 Gap is not included above.
- That the mill should be able to process more ore this year.