Unless you follow Silver Standard (NASDAQ:SSRI) closely, you are probably not aware that a significant portion of SSRI's assets on the balance sheet comes from uncollected VAT (value added tax) receivables from the Argentine government. That number stood at $75.1 million as of September 30, 2013, and will be updated in three weeks when the company announces earnings on February 20. The company had paid VAT to the Argentine government in relation to its Pirquitas silver mine in Jujuy, Argentina. According to the company, this VAT should've been recoverable once the mine began producing, which it did at the end of 2009. Now, more than four years later, the bulk (or all) of that amount has still not been returned by the government. A closer look at the VAT receivable balance for the last ten reported quarters shows a disturbing trend.
You will notice that the balance changes by a few or several million every quarter, but you should keep in mind that the VAT receivable balance is reported in US dollars. However, if and when the Argentine government returns it to the company, it will do so with Argentine pesos. Thus, changes in the dollar-peso exchange rate affect the balance. However, it is not clear how much of these changes in the balance every quarter are due to currency rate changes, and how much are due to payments by the government to SSRI. When the peso depreciates against the dollar, the VAT balance should go down. When the peso appreciates against the dollar, the VAT balance should go up. Unfortunately for SSRI, the peso has been rapidly depreciating against the dollar since the beginning of the year. The more the peso depreciates against the dollar, the more worthless this VAT receivable becomes. That's assuming it will someday be collected in the first place.
Also, you will notice for the last four quarters beginning in 2012 Q4 that the VAT receivable balance has been growing. During that time, the peso had steadily depreciated against the dollar, so the balance reflected in dollars should've gone down. However, it has gone up by about $5 million. Logically, it would indicate that during that time SSRI has still been paying VAT to the government. My assumption originally was that the VAT was paid during the construction of Pirquitas, but it seems that VAT is still being paid by the company post-construction for ongoing maintenance and improvements.
A Potential Write-off
The company continues to believe that it will fully collect the $75 million from the government and has not yet marked down the VAT receivable asset on its balance sheet. However, given the trend in the receivable balance and the sorry economic state that the Argentine government has put itself in (currency crisis, high inflation, potential default, looting), investors should not be optimistic that the company will collect anything in 2013 Q4 from this government, and should consider the possibility that the company will have to eventually make a substantial write-off sometime in the future. SSRI's market cap is $632 million, so a partial or full write-off of $75 million would be a huge hit. Keep in mind that the Argentine government has no incentive to return this money as long as its currency is going down. If Argentina becomes another Zimbabwe, it could pay back SSRI with a bunch of worthless Argentine pesos.
At this point, SSRI has trapped itself inside Argentina both financially and operationally. I am still long this stock, but I sold covered calls at the $9 strike to reduce cost. The stock was cheap at $6, but I do not believe this stock fundamentally deserves to trade at double-digits given the depressed price of silver and the Argentine government.
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.