4Silver Investing News (SIN) recently had the chance to speak with Kevin McArthur, president, CEO and director of Tahoe Resources (TSX:THO5,NYSE:TAHO), about his company’s flagship Escobal project, located in Southeastern Guatemala.
In the interview below, McArthur discusses when the company plans to reach production, the benefits of operating in Guatemala and where he thinks silver prices are headed. He also discusses Tahoe’s new corporate social responsibility (CSR) initiative.
SIN: Can you start by giving our readers a brief overview of the Escobal project? Why should investors be excited about it?
Kevin McArthur (KM): The company is building the Escobal project to world standards; our goal is to build a world-class mine that we will operate responsibly. It will produce 20 million ounces of silver per year. The attributes of this deposit are such that we believe we will be leading the industry in free cash flow per share, earnings per share — eventually, our goal is to lead the industry in dividend yield also. We think we can demonstrate organic growth and also deliver community sustainability. In doing so, we’ll be able to deliver long-term shareholder value, which is basically what this business is all about.
Specifically, the deposit is set apart from silver deposits around the world for four main reasons. Number one, it’s very high grade. It’s got silver, lead7, zinc8 and gold9, but the silver itself amounts to over 350 million ounces in the measured and indicated category at over 400 grams per ton. It’s also got very wide veins, so we can put very large equipment into the underground operations and drive the unit cost down. Because of grade and width, we believe that our cash cost will be the lowest, or at least in the lower decile or quartile of cash costs for silver mines. Second, it’s got geologic prospectivity, which I touched on earlier — it continues to grow, so we believe we’ll continue to add value over time. Third, it’s in an area where there’s excellent infrastructure. That is very important in this business. We’re not 4,000 meters up in the Andes and we’re not way up in Northern Canada in Nunavut — we’re in Guatemala. There’s paved road access, we’re an hour and a half from the capital city of Guatemala, there’s water, there’s power and there’s a nearby community, so we don’t have to establish a camp to live in. As I mentioned, the elevation is moderate. We’ve got a management team there on the ground. Most importantly, the mine is almost complete. We’re just starting our commissioning activities now and we expect to be in production — at least early production — in the fourth quarter of this year, with revenues exceeding costs by next year. We’ll have that, we hope, on a sustainable basis. This will be a fabulous mine.
SIN: It sounds like you’re moving quickly toward commercial production. What are the things that need to happen before you get there?
KM: A lot of those things have been done. We’ve derisked the project to a great extent and we understand the deposit. The biggest hurdles we had were getting our permits on a timely basis, but we’ve received all of our permits and established all of our derisking milestones according to the schedule that we posted in 2010. So we’ve been hitting our timelines nicely.
The construction of the mill and underground development of course is usually a horse race. We had a real advantage in that we were permitted for underground development back in February 2011, so we were able to drive 5×6-meter declines into the mining areas at a very early stage. Infrastructure and mill construction has gone on since 2011. We’re currently ready with the mine, and we’re very close to mill completion — as I said, we have now started the mill commissioning activities.
Our next challenge will be those commissioning activities, getting the mill up and running in time to hit our goal of full-scale production early next year. We’ve done the derisking along the way and basically completed all of the technical work, so we feel pretty good about it.
10
Fine ore bins.
SIN: The Guatemalan government recently announced a two-year moratorium on granting new mining and exploration licenses. My understanding is that Escobal will be unaffected, but your press release11 on the topic says you’ll be pulling back on some “regional work.” Can you talk about that situation a bit?
KM: First of all, it’s only a proposal for a two-year moratorium. The president proposed that Congress approve it. The reason is so that the Energy and Mines Ministry can devote its time to working with Congress on a revision to the mining law. This is a revision that’s been contemplated for some time. They’re considering approving the royalty that we’re already committed to paying through our agreement with the president — our royalty on the minerals we produce is 4 percent plus an additional one percent to outlying communities. The revision is also aimed at encouraging community participation in the approval of mining projects and for assurances on the closure of mines. So there are a variety of things that are being looked at under the new mining law.
The two-year moratorium hasn’t been approved yet, but we think that it will be. Essentially, the Energy and Mines Ministry is not processing new applications at this point. But as you stated, we are not affected by it because we have licenses in and around our property where we can do exploration that we would anticipate will grow the resource over time and will add to mine life. But we have a 2,000-square-kilometer area where we have regional concessions, some of which haven’t been approved yet, that we’re not going to able to do work on until we have approval. So we’ll have to halt our plan to commence regional work until the situation gets resolved.
SIN: Leaving aside the moratorium, what would you say are the advantages/disadvantages of working in Guatemala?
KM: There are some great advantages. First of all, you’ve got to go where the precious metals are, and Guatemala has very good geology and a very good business environment for mines. I think Guatemala is a little bit misunderstood in terms of the business environment, but it’s a very positive place to do business. As I said, we received our permits and have received positive support from the government in permitting the mine and also great support from the business community in establishing this brand new company in a very short period of time. So there are very solid advantages to Guatemala on the business end.
It’s also a fully-functioing democracy. There were 30 years of civil war that ended in the ‘90s, and since then there’s been a good democratic government in place with peaceful transfer of power to a new president and congress every four years. The democracy in Guatemala works very well. As I said, I believe because of the noise that comes out of Guatemala it’s misunderstood, but we have found it to be a very good place to operate.
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Crusher.
SIN: Ira [vice president investor relations at Tahoe] mentioned that your focus is on long-term share price appreciation, and it looks like things are going well so far. With many companies struggling, how do you account for your success? Is there a particular strategy you’re living by in these markets?
KM: We look to be a high-grade silver miner with underground mines and intend to continue growing the company with that kind of profile. A lot of us on the team worked for Glamis Gold — I was the CEO — where we delivered shareholder value by looking for assets that were unusual in terms of all of the attributes I’ve described Escobal as having. We were always looking for a 15-percent hurdle rate on any business propositions we made, including acquisitions and mine expansions, and we didn’t use our stock to buy assets unless we got an adequate rate of return. During Glamis’ years from 1999 to 2006, we built five mines, and our share price moved dramatically during that time period because we made smart decisions and always demanded a rate of return that was higher than what other companies would demand.
We have internal models for hurdle rates and the way we operate, making sure that we always balance all stakeholder issues. And when I say stakeholder, I mean shareholders, employees and communities. We feel that if we find the right balance between what shareholders need, what our employees wish and what communities require, we will be a successful operator. Finding that right balance, we feel, is key to a successful mining company.
SIN: Recently there has been some speculation that silver prices have hit bottom13 and are set to head upward. What is your opinion?
KM: Well, I’m a little bit biased here, but I came out of retirement to run this company and I felt that silver was a good metal to be associated with. There’s always supply-demand issues regarding precious metals, and the one advantage that silver has over gold is that there’s a fair amount of industrial demand that doesn’t go away. Also, the silver that goes into making products does not get recycled because it just doesn’t pay to pull the silver components out of a cell phone, for instance. Quite the opposite is true for gold. Almost all gold that has been mined historically still sits on the surface today in various forms. So I think the supply-demand dynamic for silver is very good, and because of that I think we’ll see silver prices doing well.
The thing about silver prices dropping is that it’s a curse and a blessing. The blessing comes in a funny way in that the all-in cost of sustaining mine production is higher than today’s silver price when you look at averages in this industry. Therefore, the supply-demand curve will start to be impacted over a period of time because marginal mines and mines that are not making money will have to close if the silver price stays where it is today or goes lower. So there’s a natural buffering capacity in the industry that will happen.
The reason I would speculate that silver prices will go up is for currency reasons. Gold and silver are competitors in the currency business, and compared to western currencies, gold and silver should hold up quite well and do very well considering that western currencies are being printed at a runaway pace. I don’t necessarily look at silver prices going up. The way I look at the world is that the paper money that is going to be used to purchase this silver and gold is going to be falling dramatically in value; therefore, you have to use more dollars to buy an ounce of silver, so the silver price goes up on a relative basis . If you follow that to its logical conclusion, you can see a much higher silver price in the future.
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Ball mill.
SIN: Is there anything else you’d like to add?
KM: We have just recently started a big initiative in the company, and it relates to getting our final permit in April of this year. The initiative is on CSR. Not only do we want to become the new leader in the silver space, but we want to operate responsibly with that balance that I spoke about between all. stakeholders We’ve started a new division in the company so we have equal weight between operations, finance, exploration and now CSR. We’ve hired BSR to help guide our plans both corporately and in country. We just recently put out a press release that describes some of the things that we’re doing in our CSR programs. I want to highlight that as something we strongly believe in. We will have more news on the initiative going forward.
SIN: Thank you very much for speaking with me today.
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