Silver Standard Resources (SSRI), a silver mining company, announced its updated feasibility study for the company's 100% owned Pitarrilla Project in Mexico. The estimates put the total at 479 million ounces of Probable Mineral Reserves, 5.2 times larger than previously reported. The mine is seen as having a 32-year life with annual production of 15 million ounces during the first 18 years. The company presented an after-tax net present value of between $737 million to $1.7 billion depending on whether the lower base case metal prices or used or the higher spot prices.
Obviously, there are also some large costs in getting the mine constructed and running, projected to be $741 million. The company believes it will be ready for a construction decision in 2013, while it engages in securing financing for the project.
To put things in perspective: Before this announcement, total proven and probable silver reserves for all mines was 189 million ounces. The company is on track to produce about 8 million silver ounces this year. So this development with 479 m ounces yielding 15 m ounces/year clearly ups the ante of potential for SSRI. A slight mitigating factor is that the grade of the silver at 83 g/t at the Pitarrilla mine is much lower than the +200 g/t of the Pirquitas mine, its one active producing mine in Argentina.
Silver can be volatile, even more so than gold. After the huge run-up in 2010 and the first half of 2011 from about $20 to $50, silver has not done much in 2012 trading in a range of $27-35. Like any commodity company, the share price is somewhat linked to the price of the underlying commodity. Silver Standard has generally followed silver prices and its earnings have reflected that.
However there is one notable exception of late: that since Nov. when silver began an upswing in price, SSRI trended down. This divergence most probably has something to do with the company's specific fortunes or misfortunes. Analyst sentiment has soured with a couple of downward revisions in the last 60 days for both this year and next years earnings estimates. This may have to do with last quarter's release where the company noted that cash costs per ounce were higher than in the previous quarter and the year/year quarter. This apparent reason may have helped pushed the shares below the $12.64 book value a couple of weeks ago before a modest recovery to yesterday's close of $13.31.
Today's development should do a good bit towards re-aligning Silver Standard's share price with the recent upturn in silver prices. And if investors are willing to look beyond the long and costly road until financing and production is reached, to embrace this large upward production revision, then shares may diverge again from the price of silver - but in the other direction.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SSRI over the next 72 hours.