Seeking Alpha's Articlehttps://seekingalpha.com/article/3957520-tahoe-resources-taho-ceo-kevin-mcarthur-q4-2015-results-earnings-call-transcript?auth_param=pr64p:1be3q14:e04e59e228df17b4533c681d8172626e&uprof=45&dr=1 Tahoe Resources' (TAHO) CEO Kevin McArthur on Q4 2015 Results - Earnings Call Transcript Mar. 10, 2016 4:33 PM ET
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Tahoe Resources Inc. (TAHO) perator Thank you for standing by. This is the conference operator. Welcome to the Tahoe Resources Q4 and Year End 2015 Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I’d like to turn the conference over to Ira Gostin, Vice President, Investor Relations. Please go ahead.
Ira Gostin Good morning and thank you for joining us. We actually have the entire senior management team here, but specifically Kevin McArthur, CEO and Executive Chair; Ron Clayton, President and Chief Operating Officer; Mark Sadler, Vice President and Chief Financial Officer; Edie Hofmeister, Vice President, Corporate Affairs; and Tony Makuch, CEO of Lake Shore Gold is joining us.
During the call, we will be discussing forward-looking information that involves unique risks concerning the business operations and financial performance and conditions of Tahoe.
Use of the words 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 notes, and technical disclosure are all posted on SEDAR, as well as our website and within our MD&A, which is also on our website and SEDAR. 2015 financials and MD&A are now on our website and SEDAR and can be accessed. There is no webcast or slide deck for this call.
So, with that, I will turn it over to our CEO and Executive Chair, Kevin McArthur.
Kevin McArthur Thank you, Ira and thank you everyone for attending this call. I’ve a few brief remarks and then I’ll turn it over to Ron Clayton and Mark Sadler to provide yearend details. We had a fantastic year in 2015.
We produced cash flow of $1.09 per share or almost $226 million and adjusted earnings of $0.48 per share. Our mines operated at record production levels at very low costs and we permitted Shahuindo finish the construction and started ramping up operations. All of this are on time and within our capital guidelines.
We finished the year with over $108 million in cash and we also paid off $50 million in debt. We established a revolving credit facility of $150 million, which remains untapped and we returned $49.7 million to shareholders through a monthly dividend, this is about half of our adjusted earnings.
So we’ve stated that our goal was to get this company lean and mean last year and we did just that. We closed one office, we eliminated positions that we judged were not needed, our board and senior executives took pay cuts and we are one of the few companies in this space able to preserve our monthly shareholder dividend.
Tahoe’s accomplishments would be a great head line on its own, but combined it should tell you that we had one heck of a good year. I also wish to add that we received numerous awards during the year reflecting our high standards of governance and our focus on corporate social responsibility programs in the field and improved within communities. And we would always welcome stakeholders to visit and see the zones of prosperity in Guatemala and prudent to help to develop.
Finally, last month we announced the plan to merge with Lake Shore, there will be a plan of arrangement. This adds a long-term low cost set of operations in the world class [indiscernible] in Canada. We’re very excited by the short-term project pipeline at Lake Shore and we look forward to communicating more about this after we close in early April.
With that I’ll now turn it over to our Chief Financial Officer, Mark Sadler.
Mark Sadler Thanks, Kevin. We continue to focus on strengthening our balance sheet and as Kevin mentioned we ended the year at just around $108 million in cash, we had $77 million in working capital and just under $49 million in debt. Also as Kevin mentioned, we’ve not drawn on the $115 million revolving credit facility and we’re currently restructuring some of the Peruvian to provide financial flexibility during the expansion of Shahuindo.
The company sold 173,868 ounces of gold in dore from La Arena and had a realized price of $1,126 per ounce. Total 2015 revenue on gold dore sales was 196 million. 2015 sales of Escobal consisted of 20.2 million ounces of silver in concentrate, 9,793 ounces of gold and approximately 9,800 tons of lead and just over 13,000 tons of zinc.
The company realized a price $15.15 per ounce of silver and $1,100 per ounce of gold sold in concentrate. Those prices include provisional price adjustments throughout the year. Total sales revenue for the year was 324 million and we collected $312 million of cash from current and prior sales. There were 870 tons of lead concentrate on hand at Escobal, yearend and this is down from approximately 2,200 tons of lead at the end of September.
There were also 300 tons of lead in trans at the yearend for which revenue had not yet been recognized, and the NSR value of that material was approximately $4.7 million. That’s about half of the terms and about half of the value was basically in trans at the end of September. I mentioned it’s [ph] our effort to minimize finished goods inventory and to get metal to market as quickly as possible, this notch has been flexible in helping us manage fluctuations in the type of concentrate produced and we’re pleased with the mix of customers that we’re currently selling to.
As discussed in the MD&A, at year end we reversed approximately $18 million in royalty expense due to several changes during 2015 from 1% royalty to 10% and then back again, so 1% statutory and 4% voluntary royalty on applicable sales in Guatemala. The impact was a significant reduction in cash cost per ounce of silver after byproduct fell extremely in fourth quarter. And although the quarterly unit costs were unusually low, the annual costs were in line with expectations.
This year was a great year for the company even though the results have been somewhat overshadowed by a non-cash impairment recognized in accordance with generally accepted accounting principles. Per policy, impairment testing was carried out on all assets during the fourth quarter. As a result of that analysis, we recognized $153 million in an after-tax impairment charge on the Peruvian assets, $69 million of La Arena and $84 million of Shahuindo.
Now the impairment is largely due to $100 per ounce reduction in our long-term gold prices assumption from $1,300 last spring at the time of the Rio Alto acquisition to $1,200 at year-end. Now, life of mine plants that were created as part of the annual budgeting processing in November were utilized for that impairment testing. Details regarding price assumptions, discounts rates and carrying values are discussed in most of the financial statements in the asset valuation section of MD&A.
In future periods, the impairment will be assessed at each balance sheet date to determine if that impairment loss is actually decreased. If so the impairment will be reversed to what the carrying value of assets would have been had the impairment not been recognized and any reversal will actually flow through the P&L.
I’ll now turn the call over to President and Chief Operating Officer, Ron Clayton.
Ron Clayton Thanks Mark and I’d like to add my welcome this morning. As Kevin mentioned, we had our bang appear last year and I would just like to highlight a few things operationally that happened.
Our team in Guatemala delivered on nearly every goal for the second year in a row of production. 20.4 million ounces of silver produced at a total cash cost per ounce of $6.16 and all-in sustaining cost of $9.11, is an industry leading performance.
Our capital cost were below guidance at approximately 35 million for both sustaining and expansion capital. Mine development is well advanced with two mining fronts operating in the Central Zone and a third mining front in the East Zone that is well into the development or development stage.
We completed our expansion project during the year and will support [indiscernible] in the new backfill plant around operating wells. The new backfill plant is providing the opportunity for additional cost reduction by reducing the amount of cement in the backfill as a result of better mixing.
One of the primary goals of our operating team with Escobal in 2015 was to reduce operating cost per ton and they delivered, dropping mine cost, production cost, that’s mining, milling, and SG&A from $96 a ton averaging 2014 to $79 a ton in 2015.
Moving on to our operation in Peru, La Arena set a new record gold production with full-year total of just over 230,000 ounces in dore. Production cost per ton were as expected at $10.11, while our total cash cost per ounce of $551 was well below guidance and our all-in sustaining cost of 733 per ounce for the year was also in the lower end of our guidance.
The team at La Arena achieved the milestone of more than 3 million man hours without lost time to accident recently, a truly great milestone. I congratulate the guys down there for that. We expect that 2015 will be the biggest production year for La Arena as the ore grade will begin to decline as we predicted in our 43-101 technical reports.
We are very focused on exploration for additional oxide options in the near vicinity of La Arena as well as advancing our understanding of the sulfide project. We are optimistic that these efforts will be successful in extending La Arena’s mine life.
Our teams in Peru achieved a number of additional milestones of baseline [ph] 10,000 ton per day mining plant [ph] were constructed at Shahuindo meeting our schedule for the start of commissioning in late December. We spent approximately 72 million compared to our forecast of 70. We continue to commission the mine and process facility and expect to meet commercial production criteria in the second quarter of the year.
We also completed a new 43-101 technical report for Shahuindo that increased proven and probable reserves from 1 million to 1.9 million ounces. The study assumes that all our production beginning in 2018 will require crushing and agglomeration. The study recommends that we are well under testing program designed to optimize operating costs by blending orders that don’t require crushing and agglomeration with orders that do in an effort to reduce the cement usage without decreasing recovery.
We expect to be in a position to optimize and planned and order equipment in the third quarter, in the meantime we are making additions to the process facility, constructing leach pads and advanced stripping and mining to accommodate the production at 36,000 ton per day rate recommended in the study. We expect to produce approximately 70,000 ounces of gold in 2016 and expect to begin ramping up from 10 to 1000 tons a day to 36,000 tons a day in 2017 reaching the milestone in 2018.
The other very exciting thing at Shahuindo is the exploration success. We’ve published a number of drill holes and the technical drill hole that were completed after the cut-off date to be included in the new resource estimate and we continue to see ore grade oxide intercepts in drilling outside and adjacent [indiscernible] pit outline, more to come on this later in the year.
On the political front, we have presidential elections coming up on April 10
th in Peru, Keiko Fujimori will - likely to be a run-off election as one of the other candidates based on recent polls. We also do not see any of the likely winners of the final election as harmful to the industry. The recent election and changes to the political scene in Guatemala at this early stage appear to be slightly positive and we are seeing some positive changes in the country and are hopeful this trend will continue.
Total capital spending for the company in 2015 was approximately 140 million, right at the bottom end of our guidance, production at the upper end of guidance, while costs were below the lower end of our guidance for the year. Looking forward we expect that our operations will continue to meet or beat guidance, under promise and over deliver is our motto.
We will also be focused on exploration in our head wind [ph] with the goal of creating new value organically for our shareholders communities and the employees. I want to take the time to thank the entire Tahoe team at both operations and renal for contributing to a fantastic year and also I want to mention that we are looking very forward to working Tony Makuch and his team at Lake Shore Gold. And we think we’ve added another leg to our stool that has a very similar culture and we’re excited about it.
So with that operator, I think we are ready to take questions.
Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Steve Parsons of National Bank Financial. Please go ahead.
Steve Parsons Yes, thank you very much. Good morning to all. On Shahuindo would you be able to provide some more detail on the field test currently underway to test for crushing and agglomeration. I’m aware of the reason, I just want to sort of get feel for how far along this test to date and when you would expect the results to be released or would they be released in and around the time you are expected to make a decision on the way forward, sounded like that was going to be Q3.
Ron Clayton Yeah, I think that’s, I think before we get it out, that will be Q3. They are advancing pretty well; I think we have a good handle right now on what is going to have to be agglomerated and what isn’t. We are updating the geologic model and that’s probably the key to all this, to understand the distribution of the fine particles compared to the coarse particle in the gross term. So we should have that stuff to appear in the next quarter or so and then begin to do the final design work and should have some amount in the third quarter.
Steve Parsons That’s good okay. And also with respect to the expansion and I guess requirements for the agglomeration circuit and the crushes - is crusher and agglomeration circuit going to go in no matter what just add flexibility to the mine or we just later -
Ron Clayton Yeah.
Steve Parsons Okay.
Ron Clayton Yeah. Steve I think the better way to think about that is - the answer to your question is yes, but I think the better way to think about that is, there is definitely better than half of the orders going to have to be agglomerated. So yes, there will be crushing and agglomeration equipment put in and it will be designed to handle peak periods of 36,000 tons per day or maybe even bigger than that. This is really a question about optimizing the operating cost.
Steve Parsons Excellent, okay.
Ron Clayton And the 43-101 study is, I think pretty accurate, slightly conservative view of what we think the world is going to look like.
Steve Parsons Very good, that’s it for me. Thank you.
Operator The next question comes from Cosmos Chiu of CIBC. Please go ahead.
Cosmos Chiu Thanks hi, Kevin, Ron and team and thanks for hosting the call. A few questions here from me, maybe first off, I am entirely new to the story here, but in terms of cash cost per ounce in 2015, could you explain to me how you were able to be even at the lower end of guidance by what I would consider pretty healthy margin as I think as recent as about two months ago you’ve talked about cash cost coming in at the lower end of guidance I’m just wondering what hadn’t been factored into guidance?
Ron Clayton Hi, there is couple of things, the diesel fuel prices are significantly below what we’ve been willing to put in our forecast to the tune of almost probably $0.80 a gallon and I think that’s across the board one of the bigger things that’s helping us be well below guidance. A few more ounces in particular at Escobal the royalty rate was lower than what was in the original guidance and great efficiencies. And obviously at Escobal we had more ounces than there have been most people would count on.
Cosmos Chiu Great, maybe switching gears a little bit under proposed acquisition of Lake Shore Gold, certainly since the news came out earlier last month I believe there has been some market confusion in terms of the potential treatment of the Lake Shore Gold converts. Could you maybe clarify first in terms of how we should look at it, model it, how you look at it and model it given the some of the change in control provisions and certainly some of the redemption and provisions as well.
Ron Clayton Yeah Cosmos, as far as the convertible it is about CAD103 million that matures in September 2017. The convertible strike price is CAD1.40 that if you convert that over to Tahoe that’s CAD 9.54. So we are well about the convertible strike price. When we spoke to Lake Shore our view was that that would convert to shares and in the acquisition analysis we’ve always considered that as converting to shares in terms of our share counts and our analysis of the merger. One factor is that we can force conversion at CAD1.82, which is CAd12.41 in Tahoe stock price and as with the 20 day rewop [ph] hits these numbers we can force conversion to share at a 5% price discount. So we could - if the current share prices continue on into the year, we would have the possibility of forcing that conversion which of course saves quite a bit of interest money counterbalanced by more shares that we would be paying a dividend for. So we will be analyzing that soon after the transaction and we are not - we haven’t had that discussion at the board level regarding exactly what our intent would be, but I can tell you that we’ve always consider those as shares so we are take a hard look at it over time - over the next few months.
Cosmos Chiu Yeah, I would agree as well in terms of potential. It looks like it is going to get converted. Maybe one last question from me in terms of Shahuindo here, Ron, maybe if we can tell me - give me some sense of in terms of what is your criteria for declaring commercial production and you know for accounting purposes sure, we start including production into sometime in Q2.
Ron Clayton The answer to the second question is yes. I don’t have memo right in front of me, but basically - actually Mark why don’t you?
Mark Sadler We actually have been reviewing criteria, it ranges from the grade that we are actually mining from the pit to tons moved from the pit, placed on the pad and on recovery and ultimately gold production. And it’s really based on a gold recovery curve which is what we’re analyzing right now and trying to determine when to make that decision in Q2.
Ron Clayton And at this point I would say it’s going to be in the middle of Q2.
Cosmos Chiu Middle of Q2, perfect. Great, that’s all I have. Thank you.
Ron Clayton Thanks Cosmos.
Operator [Operator Instructions] The next question is from Geordie Mark of Haywood Securities. Please go ahead.
Geordie Mark Yeah, good morning guys.
Ron Clayton Good morning.
Geordie Mark I have just some questions around Escobal, the mining rate looks like it was running around at 3,750 last quarter tons a day. I’m just wondering was the pace line, I guess as outlined in MD&A is completed now as of March. So just wondering have you expect - where you project the mining rate to list up to and what’s your average sort of mill rate throughout the year. Second, easy one just the actual fuel price you received last year in expectation of this year and expectations for total drawing on-site power and those are the questions thanks.
Let me see if I can remember all of those and on this one you may have to remind us, but milling rate in the fourth quarter averaged 4,065 tons per day, so far this month we are running at 4,600 tons a day. We can run the mill at just about any rate we want to between say 3,500 tons a day all the way up to 5,000. We are designing that around the grade that we are bringing in to the mill and we are continuing to target that 5 million ounces a quarter, 20 million ounces a year. So the rate is going to fluctuate, the milling rate is going to fluctuate with the grade that we’ve got in front of us. And that really fluctuates with the technical or geotechnical design for the self-sequencing rate. In terms of power draw, I think we are drawing around 10 megawatts on average when we have start-ups in the mill that can jump up to 13. I wouldn’t expect that to change much. If you help me Geordie, I can’t remember the rest of the questions you asked.
Geordie Mark You know it’s just the actual fuel.
Ron Clayton Yeah, 2015 average diesel price was 234, February actual still at six, I think we got something like 260 in the budget.
Edie Hofmeister 260 in the budget.
Geordie Mark And in terms of -
Kevin McArthur Hey Geordie, this is Kevin, I just I want to make sure that people understand that’s. We’ve stated it before and I just want to make sure you understand the mill will be just mill at the rate depending on the grade were in the mine sequence, so that we produce 5 million ounces per quarter, roughly plus or minus. Our goal is 20 million ounces per year and we could easily tune this mine up to produce 25 million ounces if we wanted to, but what will happen over the long run is that that will cause fluctuations in our production that doesn’t make sense to us. We want Escobal to be a solid foundation to the company and produce at a fairly steady rate and we don’t want to do things, that is going to cause problems for the long-term.
So when you see these fluctuations on a monthly or quarterly basis you can read into that that there is - they’re grade related depending on where we are in the sequent, how much is coming out of the East Zone, where exactly we are mining at and this is a plan that has been optimized and we’ll go into some zones with higher rate and of course we have to manage our concentrates that we are producing also, so there’s a lot of variability here. I can tell you that the mineral is very capable of higher rates and we’ll just manage it that way. The other question you asked Geordie that I have an answer to that I think is the new phase plant is up and running. We actually waited till January to commission it, we could’ve done that late last year. But this was a better opportunity production wise forced way until January until we had some other downtime to take that went very well, the plant’s running great and what it really does for us giving some opportunity to reduce some cost.
Geordie Mark Great and thanks for the detail here, I appreciate it.
Operator This concludes time allocated for questions on today’s call. I’ll now hand the call back over to Kevin McArthur for closing comments.
Kevin McArthur Hey, operator thanks. And thank you all for the questions. Just one more message that I’d like to close with and that is that lower than desired level prices and a few extraneous events outside of our controls have caused our shares to underperform for the last 12 months or so. Truly believe that those events are behind us. I’ll remind our shareholders that our shares have doubled in price since 2010, so our long-term shareholder value strategy is intact. We have excellent, very responsible operations, we have growth, a strong balance sheet, amazing cash flow and we look forward to closing the merger with Lake Shore in early April. We welcome Tony Makuch and his team to Tahoe. We expect continued growth to resources, production and cash flow per share and of course what that means is to continue paying a meaningful and sustainable dividend. The long-term goal here is to maximize long-term shareholder value into the future and we measure that by shareholder returns and long-term share price. And we’re working hard on this, I think we’ve got it right and we’re looking forward to 2016.
Well, thank you everyone for attending this call. I appreciate it very much. Operator we can now disconnect.
Operator This concludes today’s conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.