Silver Standard: The Good, Bad, And Ugly

Aug. 9.13 | About: Silver Standard (SSRI)

By Ivan Y.

Silver Standard's (NASDAQ:SSRI) earnings report provided both positive and negative news for investors. The company had already released operational results a few weeks earlier, so there were no surprises concerning production at the Pirquitas mine in Argentina.

The Good

  • It's good to see that the company has reacted quickly to a significantly lower price of silver. About 25% of their office employees have been let go, as well as 7% of their employees in Argentina. The company has also cut back on exploration expenses for the rest of the year and will focus exploration spending only on Mexico for the rest of the year.
  • Cash cost to produce silver at Pirquitas was lower than expected this quarter. More importantly, the cash cost for the rest of the year was lowered significantly from between $17 and $18.50 to between $14 and $15. This was a pleasant surprise and something I had not expected.
  • After an analyst brought up the subject, management acknowledged the possibility that capex for developing Pitarrilla could be reduced. Currently, the company is expecting to spend $741 million for development.

The Bad & Ugly

  • The company recorded negative operating income for the first time in a year. This was due mainly to a large impairment charge at Pirquitas. Even without the charge, operating income would've been negative this quarter due to lower silver prices. Their last operating loss was in the same quarter in 2012.
  • SSRI's impeccable balance sheet took a huge hit in Q2. First, cash on the balance sheet declined by $26 million from $461.8 to $435.8 million. The company's cash had increased in the previous four quarters. Second, there was an asset write-down of $202 million for the Pirquitas mine due to lowered expectations for the price of silver. An additional $20 million was written down for other assets. This resulted in the value of their Property, Plant, & Equipment to decline by roughly one-third. It now stands at $395.8 million. The write-down was a likely scenario given the dramatic decline in the price of silver in Q2, but I have to say it was a lot larger than I expected. The company's book value now stands at $860 million, down from $1.12 billion in Q1.

Unanswered Questions

  • What are they going to do with their 18.6% stake in Pretium (NYSE:PVG)? That stake is currently worth about $150 million. Is the plan to hold on to this as an investment? Or sell it for cash when they need additional cash to develop the Pitarrilla mine?
  • How will Pitarrilla be financed? They have indicated that they will seek a financial partner, but who will it be? A joint venture with another operating company is a strong possibility given that management has stated that to be their preference, but is a royalty agreement with a streaming company like Silver Wheaton (NYSE:SLW) also being considered? More information should emerge in the next several months.
  • When will they make the final decision on whether to move Pitarrilla into development? On the conference call, the CEO said they will "make sure" the project moves into the construction phase. But when will the official decision be made? It was supposed to be sometime this year, but with a depressed silver price, I wouldn't be surprised if they pushed the decision out to 2014. If that happens, the beginning of production would also get pushed out. SSRI expects development to take three years.

Final Thoughts

Despite the hit to the cash level and the huge hit to the book value, SSRI still represents a great value for those inclined to invest in silver mining companies. As I said before in a previous article, I am not a fan of mining companies in general, but SSRI is cash-rich and has the Pitarrilla property, which should be a substantial cash flow machine for the company starting in possibly 2016.

Disclosure: I am long SSRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.