Silver Standard: Priced At Liquidation Value

| About: Silver Standard (SSRI)

By Ivan Y.

After reaching an intra-day high of $10 on August 27, Silver Standard (NASDAQ:SSRI) has plunged nearly 50% since and closed on Thursday at $5.38. What caused the collapse in SSRI's stock price? There have been three contributing negative factors:

  • Since August 27, the price of silver has dropped 10% from $24.50 to around $22 as I write this.
  • An analyst from Deutsche Bank downgraded the stock to a sell rating citing concerns about the funding of the Pitarrilla development.
  • The plunge in Pretium's (NYSE:PVG) stock price on Wednesday after the sudden resignation of independent geologic auditor Strathcona also negatively impacted SSRI.

Do these three negatives justify a nearly 50% drop in SSRI's share price? I think not, but shareholders and potential investors can be the judge of that themselves.

Liquidation Value

As it stands right now, SSRI is being priced by the market at liquidation value or very close to it. How do I arrive at that conclusion? Let's take a closer look at the assets of the company (as of 2013 Q2):

  • Cash: $435.8 million
  • Receivables: $136.4 million - About 55% of this amount is Value Added Tax receivables from the Argentine government. The company has experienced some delays in collecting the full amount from the government, so it is not a 100% certainty that SSRI will reclaim everything, but management has stated that they expect to get it all back and has so far made no provisions otherwise.
  • Pretium Shares: $93.8 million - This is based on PVG's closing share price of $4.91 on Thursday. The company owns approximately 18.6% of PVG's outstanding shares.
  • Inventory (Finished goods only): $30.1 million - The inventory on the books is actually $65 million, but I will be conservative and only count the inventory that is listed as finished goods. Finished goods, I assume, are doré bars. In case you don't know, doré bars are semi-pure bars of gold or silver that need to be sent to a refinery to make it .999 pure.
  • Mining Assets (Property, Plant, Equipment): $395.8 - Last quarter, the company already took an impairment charge of over $200 million, so the $395.8 million number should be safe for now.

After adding these assets up, the total is $1.09 billion. However, since we are talking about liquidation value here, let's be very conservative and give their mining assets a value of $0. That reduces their assets to $696.1 million.

The total liabilities of the company is $316.2 million. That leaves a liquidation value of $380 million (or $4.71 per share), which is only a little lower from the current market price.

What To Expect From Earnings

SSRI released an operational update on Wednesday that said that they produced about 2 million ounces of silver last quarter and sold an equivalent amount. This update was not a surprise because SSRI produces about 2 million ounces of silver every quarter:

  • 2.02 million oz. (2012 Q2)
  • 2.16 million oz. (2012 Q3)
  • 2.27 million oz. (2012 Q4)
  • 2.02 million oz. (2013 Q1)
  • 1.89 million oz. (2013 Q2)
  • 2.03 million oz. (2013 Q3)

Earnings will be released on November 5th. Shareholders should expect the company to book a loss for Q3. The headline EPS won't be as bad as Q2 because this quarter won't have another massive write-down, but operational cash flow in Q3 should be worse than Q2 for two reasons. First, in Q2, the company's average realized sales price was $22.47 per ounce. However, in Q3, the average spot price for silver was lower at around $21.40. Second, cash cost is expected to be higher in Q3. In Q1 and Q2, cash costs were $13.58 and $13.03, respectively. However, management stated in the last earnings reports that they expect cash cost in 2013 to average between $14 and $15. So do the math. In order to have an average of $14-15, cash costs in Q3 and Q4 would have to average around $14.70 to $16.70. In summary, the headline EPS will be much better but operational cash flow will be worse than Q2.

Final Thoughts

SSRI is one of the cheapest, if not the cheapest, primary silver miner in the market today. There will be cash burn this quarter, but the company has enough cash to survive at least a two or three year downturn in silver, even if silver goes below $20. Further, it is trading near its liquidation value which should make it a safe buy.

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.