By Ivan Y.
A couple years ago, I took advantage of a free portfolio evaluation offered by an asset management company specializing in resource stocks. One of the stocks I asked them to evaluate was Silver Standard (NASDAQ:SSRI). Basically, what they told me was that they were neutral about the stock and they added that they were not impressed by the company's management. Since that time, I have looked warily at my investment in SSRI. Recently, the company announced that they were able to sell one of their projects for $75 million in cash and equity. SSRI will be receiving $15 million in cash, $30 million in deferred cash, and $30 million in shares from Argonaut Gold (OTCPK:ARNGF) in exchange for the San Agustin property located in Mexico. Argonaut had a market cap of about $800 million when the deal was announced, so SSRI will end up owning roughly 3.75% of the outstanding shares of Argonaut when the deal closes in early 2014. So along with it's 18.6% stake in Pretium (NYSE:PVG), SSRI will also have approximately a 4% stake in ARNGF (presumably, they will be receiving shares of AR on the Toronto Stock Exchange, not the OTC shares).
Who is Argonaut Gold?
SSRI shareholders should already be familiar with Pretium, but what are they getting with Argonaut? Well, this gold producer has four main projects: two in production, one scheduled to begin production in 2014/2015, and one that is planned to produce later in the decade. The two operating mines (La Colorada and El Castillo) are low-grade (less than 1 g/t) open-pit gold mines located in Mexico. Both are in the process of being expanded. As you might be aware, Mexico recently instituted an 8% royalty tax that will begin in 2014. ARNGF's ultimate goal is to produce 500k ounces of gold annually, but that won't happen until all four projects are online.
Looking at the balance sheet, there is about $125 million in cash with little debt. The total debt is only about $16 million. Almost all of that is for finance lease obligations for mining equipment. Looking at the most recent earnings, Argonaut recorded a net income of $6.6 million. If annualized, that would give the stock a P/E of 30. Operating cash flow was $16.3 million and cash cost came in at $680 per ounce. In my view, ARNGF looks like a stable gold stock, but not necessarily a cheap one.
Investors should already be familiar with Silver Standard's portfolio which is highlighted by Pirquitas, its operating mine in Argentina, and Pitarrilla, an undeveloped but large silver mine in Mexico. However, few were probably aware that San Agustin even existed. Management did a great job of liquidating this asset for $75 million. Keep in mind that SSRI's market cap is only about $500 million, so a $75 million addition is quite significant. Besides San Agustin, SSRI also has several other projects in the exploration stage: Maverick Springs and Candelaria in Nevada, Berenguela in Peru, Challacollo in Chile. Since these are non-core projects that are years away from producing anything, I would like to see management continue to liquidate these assets. Whatever cash or considerations they can get for these projects would fortify their balance sheet and allow the company to continue to weather today's low silver prices. Selling these assets would also slightly lower their operating and exploration expenses since they would no longer need to spend money maintaining these sites. Cash is king during these rough times in the silver market, and fortunately for Silver Standard investors, the company has a lot of it. Ultimately though, higher silver prices are a must for this company and others in the industry, but SSRI's balance sheet strength gives the company time to wait for higher prices.