Tahoe CEO talks post-merger growth strategy

VANCOUVER — It’s been just over a month since Tahoe Resources (TSX: THO; NYSE: TAHO) merged with Rio Alto Mining to create a leading mid-tier precious metals producer, but the new management team hasn’t wasted any time turning its attention to future opportunities. The company has a promising pipeline of organic growth assets in its portfolio, and the cash flow to make waves in the mergers and acquisitions space.

According to CEO Alex Black, who founded Rio Alto, the merger took root during the Denver Gold Forum last September when he had a chance to sit down with Tahoe founder Kevin McArthur. Each company had navigated the prickly process of mine development in Latin America, and both were searching for acquisition opportunities to diversify production streams and jurisdictions.

Rio was operating its open-pit, heap-leach La Arena gold mine in Peru, while Tahoe had just completed its first year of production at the Escobal silver mine in Guatemala.

“We’d wrapped up the Sulliden acquisition last year, and Tahoe had been looking around for opportunities. We haven’t seen the capitulation phase of this cycle where people throw their hands in the air and say: ‘I’m willing to talk.’ There are larger companies that should be selling certain non-core assets that aren’t even willing to discuss those projects yet,” Black explains.

“So when I met Kevin and the Tahoe team, we found we were two groups getting together with similar ideas. It’s really a ‘set-up’ deal to form a new company to take advantage of this market before it turns around. We have lots of organic growth in the form of exploration potential around all our assets, but we can also take advantage of the bad market to try to do other things,” he adds, noting that Tahoe may look at precious metal opportunities across the Americas.

The new company certainly appears to have the balance sheet to pull off more accretive transactions. The merger was valued at US$1.1 billion at the time of the deal, and Tahoe reported cash and equivalents of US$86 million at the end of April. During the first quarter the company generated operating cash flow of $49 million, or 33¢ per share, and returned $8.9 million to shareholders via its monthly dividend.

Tahoe cranked out 4.6 million oz. silver and 56,300 oz. gold during the first quarter, and combined annual production could total 20 million oz. silver and 340,000 oz. gold by 2018. The deal diversifies the company’s production stream, with half of future revenue coming from gold, 42% from silver and 8% from lead and zinc.

The combined strength should help Tahoe develop its US$132-million Shahuindo gold project, 30 km north of La Arena in Peru’s Condebamba River Valley. Initial production could total 100,000 oz. gold per year at all-in sustaining costs of US$826 per oz. First production is expected in the first quarter of 2016, with US$70 million in initial start-up capital.

Capital strength will also help Tahoe pursue more aggressive exploration programs at its operations. The company recently expanded its drilling budget, and expects to pump between US$5 million and US$10 million into the ground this year. Escobal boasts a 20-year mine life, so most of Tahoe’s efforts will advance targets at La Arena and Shahuindo.

“Now that we’ve done this transaction we’ve taken another look at our exploration programs, and we’ve just recently boosted those expenditures. Prior to that Rio had focused on preserving capital for Shahuindo’s development, but now we’ll look at drilling across the portfolio,” Black says.

“At La Arena the most immediate goal is to identify additional oxide potential, but we’ll also spear a couple of holes at depth to look at the porphyry sulphides.”

Black adds that one of his priorities will be nurturing a long-lasting social licence in Guatemala, where the company has had its share of sociopolitical problems over the past few years. Black says the jurisdiction reminds him a lot of Peru before the country emerged as a desirable mining jurisdiction, and that the company is fully committed to help establish Guatemala as a pro-mining country.

In April Tahoe announced it would appeal the court-ordered confinement of a local employee, which is pending the investigation of a 2012 environmental claim. The action was initiated by a local, non-governmental organization (NGO) called “El Centro de Acción Legal-Ambiental y Social de Guatemala,” which has been at loggerheads with Tahoe for the past few years.

“That’s really all part of developing relations in the country, and what I’d like to focus on. It’s wrongful imprisonment, but we’re working in a system that makes it difficult for us to say that. We have a key anti-mining NGO that’s fuelling a lot of this issue,” Black says.

“We’re going to make Guatemala a mining country. It’s similar to the cycle we’ve been through in Peru where we’ve developed in tandem with the jurisdiction. It’s quite interesting since Guatemala can’t really be classified as a mining country, but there’s a big anti-mining push. We’re there for 20 years, so it’s important to set ourselves up for the long-term,” he adds.

Tahoe expects to produce up to 21 million oz. silver this year at all-in sustaining costs between US$9.75 and US$11.50 per oz. Gold production could fall between 160,000 oz. and 170,000 oz., at all-in sustaining costs of US$900 to US$950 per oz.

The company has traded within a 52-week range of $13.19 to $30.15, and closed at $16.61 per share at press time. Tahoe has 224 million shares outstanding for a $3.7-billion market capitalization.

“We have a great talent pool and complementary skills on the technical front. That gives us optionality in terms of the mining environment we’re operating in,” Black says. “Cash flow should be sufficient over the next few years, but we’re also looking at a revolving line of credit with some banks, and we’re looking at project-specific debt at Shahuindo. So from a funding perspective we’re in a great position, and our debt-to-equity level is really low.”