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Silver Standard Resources Inc. (NASDAQ:SSRI)

Q2 2010 Earnings Call

August 6, 2010 11:00 am ET

Executives

Michael Anglin - President and CEO

John Smith –President and CEO

Tom Yip – CFO

George Paspalas - SVP, Operations

Joe Ovsenek - SVP, Corporate Development

Kristen G. Riddell – VP, Corporate Secretary and General Council

Ken McNaughton – SVP, Exploration

Paul Lafontaine - Director of Investor Relations

Analysts

Haytham Hodaly - Salman Partners

Kwan Lunz-Intaglo - Scotia Capital

Heather Taylor - BMO Capital

Chris Lichtenheldt – USB

Operator

Good day, everyone. And welcome to the Second Quarter 2010 Financial Results and Project Update Conference Call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Silver Standards’s Mr. Michael Anglin. Mr. Anglin, please go ahead, sir.

Michael Anglin

Thank you. Good morning, ladies and gentleman. Welcome to Silver Standard’s Second Quarter 2010 Conference Call, reviewing our financial performance and updating our projects.

On the call this morning we have George Paspalas, Chief Operating Officer; Joe Ovsenek, Senior Vice President Corporate Development; Tom Yip, Vice President of Finance and Chief Financial Officer, Kristen G. Riddell, Vice President, Corporate Secretary and General Counsel; Ken McNaughton, Senior Vice President, Exploration; and Paul Lafontaine, Director of Investor Relations.

Also on the call with us this morning is John Smith, the new President and CEO of Silver Standard, effective today. Welcome John. Would you like to say a few words?

John Smith

Thanks, Mike. And hello, everybody. I’d just like to say how pleased I am about the opportunity to join Silver Standard at this time. I’m really looking forward to working with the team here in Vancouver.

I’d also like to thank Mike for acting as Interim President these past several months, he’ll be returning to his role on the Board and we’ll continue to benefit from his service there.

I’ll be meeting with shareholders and other market participants in the coming quarter to discuss activities as we move ahead with our projects. I look forward to hosting the third quarter call in November.

On that note, I’m going to turn things back over to Mike and the management group here to discuss the second quarter and take your questions.

Michael Anglin

Thanks, John. So we’ll give John a chance to get his feet off the desk over the next 90 days, and for this call, I’ll be leading the prepared remarks and moderating the Q&A which follows.

Our financial statements, as well as our management discussion analysis, together with project updates, have been filed on SEDAR and are available on our website.

We have a webcast accompanying our comments today. They can be found at the web location referenced in the news release.

We will be making forward-looking statements on the call today and I advice you to refer to our forward-looking disclosure accompanying our news release and on SEDAR.

I’ll focus on the second quarter, with the optimization of the Pirquitas Mill Complex where we achieved commercial production on December 1, 2009. We have made significant progress to the metallurgy and the transition of sulfide orders resulting in the improvement of both recoveries and production costs. George Paspalas, our Chief Operating Officer, will describe Pirquitas in more detail in his presentation.

Returning to the primary purpose of this call, our second quarter 2010 results, I’d like to turn the call over to Tom Yip, our Vice President of Finance and Chief Financial Officer, who will speak to our second quarter financial results. Tom?

Tom Yip

Thanks Mike. And good morning, everybody. As mentioned, we continue to optimize our Pirquitas Mine and have significantly better production during the second quarter versus the first quarter.

For the second quarter P&L, we reported a net loss of $15.2 million or $0.19 per share versus a loss of 1.4 million or $0.02 a share for the second quarter of 2009. The main components of the $15 million loss, are shown on the slide.

During the quarter, we sold a 1,092,000 ounces of silver, at an average realized price of $18.12 per ounce.

Now with the transportation deductions and refining cost, revenues were $14.1 million. Cost of sales were 10.6 million and depreciation and amortization was 5.1, resulting in a loss from mine operations of $1.6 million. This was a significant improvement over the first quarter where we reported a loss from mine operations of 16.7 million.

G&A cost for the quarter were 4.4 million. The increase over the prior year relates to additional employees as we transitioned to a producer as well to develop and advance our project pipeline.

Stock based compensation was 2 million which is similar to the first quarter cost as we continue to amortize the Black-Scholes value of previously granted options.

Interest expense of 3.4 million relates to the convertible debenture, which was previously capitalized to the Pirquitas construction and it is now charged to the P&L.

We recorded a foreign exchange loss of 2.3 million, primarily related to the effects of the weakening of the paso on our net monetary assets in Argentina. Lastly, we incurred a million dollars for export taxes related to our Pirquitas Mine.

In terms of cash flow, we began the quarter with 103 million, after completing our equity financing in February. And during the quarter, we had a net decrease of 45 million. We used 9.6 million for operating activities, which is primarily mine operations of 5 million and G&A cost of 4.4.

Investing activities include exploration and project spending of 10.2 million at our various properties.

At Pirquitas, we spent $21 million of which 19 million was used to pay construction liabilities recorded in 2009. The remainder 2 million was of course, sustaining capital.

In addition, we spent 4.4 million or refundable value added tax. We end the quarter with 58 million in cash.

Now if we continue optimizing our Pirquitas mine, we expect the mine to be cash positive in the fourth quarter, and we are well positioned to advance for other key projects.

Back to you Mike.

Michael Anglin

Thank you, Tom. George Paspalas our Chief Operating Officer will walk you through the operational progress of Pirquitas and also describe the work under way at our development projects San Luis and Pitarrilla. George?

George Paspalas

Thanks Mike. And good morning, everyone. Operations are progressing well at Pirquitas. The open pit continues to perform strongly at the design right and is beating our unit cost expectation.

A photo of the pit, taken last week, is shown here on Slide 6. Here we can see the north wall of the pit on the right hand side of the photo, coming down and into the valley floor. We will be mining through the valley floor over the next six weeks. Once through the floor, we will then be into the same [inaudible] system totally and have achieved access to the sulfide and the orbit.

In the background, is the [inaudible] which has been taking the majority of the [inaudible] mine this year. Once through the valley floor, and the sublevel oxidation zone, mining will be predominately sulfide ore for the rest of the mine life

So the pit is operating well at design rates and delivering sub-U.S. $2 per ton, mining cash operating cost. These costs are all in mining cost and include the 7 kilometer [inaudible] to the process facility.

We have made good progress in the process facility as well over the quarter. As we see in the graph on Slide 8, silver production is significantly up from Q1. At just over 1.7 million ounces, Q2 silver production is significantly higher than Q1.

This is driven primarily from improvements in the metallurgical responses to the transition ore, and increase new tonnage once the screen beam failure from Q1 was fixed. This is a one-time failure and we don’t expect to be repeated.

Significant metallurgical test work was conducted on the transition of material during Q1, resulting in the selection of specific flotation reagents that have now permitted good silver concentrate grades and recovery.

The application of these three reagents within the process certainly were optimized during Q2, and flotation recovery in the mid-to-high 60 percentiles are now achievable on the transitional material and recoveries over 70% are being obtained when predominately sulfide ore has been [inaudible] through the facility. This bodes very well for the future for us.

As the silver recovery comparison shows on Slide 8, in percentage terms, Q2 recovery was almost 20% better than Q1. Having achieved a consistently improved metallurgical performance from a transitional, head-grade material was then feed to the plan, which again, contributed to the increase quarterly production. Q2 silver head grade, shown here on Slide 8 was 86% higher than Q1.

We are still expecting full-year silver production at 7 million ounces. As we head into the second half of 2010, the sulfide ore contribution in the field increases and a major increase in silver recovery is expected. Some high-grade ore becomes available in the second half of the year, and this will be fed into the plan to achieve the guidance production.

There is still some silver-zinc separation issues in the silver flotation circuits. And our metallurgical test work is now focused on achieving a cleaner separation. However, we do have a concentrate sales contract that realizes full payment terms to the silver content or recognizing payment for most of the zinc as well.

The zinc flotation circuits has proven it runs well, and produces a sizeable zinc concentrate at design recoveries. We have issued guidance that we expect to make 3 million pounds of zinc in 2010.

Tin grades continue to be low as we open up to the top of sulfide. We’ve been operating the tin gravity circuit and have seen some good upgrading. However, tin production now is expected to be 600,000 pounds for 2010.

Operating cost control has been a feature of the mine performance with total monthly expenditures holding around the $6 million mark. As production increases, unit cost on a per-ounce basis will continue to fall, and hence we maintain our cash operating cost guidance at U.S. dollars 10 per ounce, net of byproduct credit for the year. So a great improvement this quarter at Pirquitas, and further improvement expected for the balance of the year.

Turning now to the San Luis project in Peru. The feasibility study for the project has been completed and we are progressing through a number of approval and agreement processes in order to prepare for development decision. At Pitarrilla in Mexico, we are on schedule to complete the feasibility for the end of 2010 on the Breccia Ridge underground, I look forward to releasing these results once available.

So that’s it for Pirquitas and the advanced-stage projects. Back to you Mike.

Michael Anglin

Thank you George. I would now like to talk about our progress on other product activities, particularly Snowfield and Brucejack exploration projects in Northern British Columbia.

In early June, we announced the completion of a 43-101 compliant preliminary assessment of the Snowfield project, which outlined the scope of 120,000 ton per day open-pit mine producing an annual average of 607,000 ounces of gold, plus cooper, silver, and rhenium.

An updated study is underway which when though the projects rhenium resources as well as the gold and silver resources from our December 1, 2009 resource estimate for neighboring Brucejack project. Results from the updated preliminary assessments are expected later this quarter.

An 18,000 meter diamond drill program at Snowfield is well on the way with the primary focus and upgrading the project’s known gold resource. We have started compiling the assay data and we’ll release the results on completion.

At the adjacent Brucejack project, drilling results to date have been successful at demonstrating consistency of high-grade gold-silver sections first encountered in last year's program in the Galena Hill and West Zones. Results also expand the newly discovered Bridge Stone, which interpretation suggest may have the potential to be a gold-silver potpourri. We will continue to release accurate results from these programs as they are received.

The Berenguela, the 5,000 meter diamond program is underway to test for the sorted depth of the silver-cooper resource at surface.

To conclude, achieving full production of efficiencies at Pirquitas remains our cooperate priority. We have made solid progress during the quarter. Advancement for our two development projects, San Luis and Pitarrilla, are on track. We are maintaining the tempo of exploration activities at our key programs, which are continuing to deliver significant results.

These are the formal remarks that we wish to make this morning. I will now respond to questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

We do have a question from Haytham Hodaly from Salman Partners.

Haytham Hodaly – Salman Partners

Good morning, everybody.

Michael Anglin

Good morning, Haytham.

Haytham Hodaly – Salman Partners

Just a question for George. George, with regards to throughput and grades here in this quarter that you’re seeing so far, what are you getting up to at this point?

George Paspalas

Good morning, Haytham. We’re hitting the design true put, 4,000 tons per day through the plant. Grades are running roughly around 240 grams a ton, and we expect that to ramp up as we go into the second quarter, and ramp up more so in the fourth quarter than in the third quarter.

Haytham Hodaly – Salman Partners

So, sorry George. If you had to give me an average for the throughput for the quarter, do you think it would be, what, 4,000?

George Paspalas

Yep.

Haytham Hodaly – Salman Partners

And then you said average grade would be what?

George Paspalas

Average grade moving forward will be higher than what we’ve seen in the second quarter, probably up about 30% on that.

Haytham Hodaly – Salman Partners

So giving you what time of gram per ton?

George Paspalas

We’re going to come in around the 300-gram-per-ton mark.

Haytham Hodaly – Salman Partners

Three-hundred grams per ton, okay. And for the full year, I saw your forecast for cash production costs, was it $10 per ounce?

George Paspalas

That’s correct.

Haytham Hodaly – Salman Partners

What cost per ton are you assuming in the second half of the year? It’s easier [inaudible] the second half of the year, what type of transition from third to fourth quarter is what I’m trying to determine.

George Paspalas

On the operating cost side, the best way to look at it is we’re consistently putting in $6 million a month for the operating costs. So giving you that throughput guide, I think you can work that out, Haytham.

Haytham Hodaly – Salman Partners

Okay, this 6 million a month, that hasn’t really changed from before?

George Paspalas

No, it’s been consistent and it’s been a reflection of the focus and the achievements of the people at [inaudible] controlling those costs.

Haytham Hodaly – Salman Partners

Okay. When do you think you’ll get up to a throughput of around 5,000 tons a day, George?

George Paspalas

Well, the plant was only ever designed for 3,800, Haytham. You know, it’s the crushing circuit that’s at 6,000. And as we get into the sulfur, we’ll start to look at the overall performance of the facility. But we won’t exceed 4,000 tons per day on the milling circuit as that is the capacity of the circuit.

Haytham Hodely – Salman Partners

Okay. Okay, thanks, George.

George Paspalas

All right. Thank you for your questions.

Operator

Our next question comes from Kwan Lunz-Intaglo from Scotia Capital

Kwan Lunz-Intaglo – Scotia Capital

Hi. Good morning, guys.

George Paspalas

Good morning.

Kwan Lunz-Intaglo – Scotia Capital

I just wanted to reconcile the operating costs for the quarter. I see you sold 1.1 million ounces, and I guess at $15 an ounce, that’s 16.5 million. But you have 10.6 million for Pirquitas for the quarter. So what else is in there? Is that export duty and the like?

Michael Anglin

Let me hand over Tom Yip, Chief Financial Officer to answer that. Tom?

Tom Yip

Well, thanks for the question. The operating costs that we have on the P&L reflects the 1.1 million [ph] total ounces that we sold.

Kwan Lunz-Intaglo – Scotia Capital

Yeah. Okay. And then is that at the $10 an ounce cost or $15 an ounce? And what’s the difference between those two.

Tom Yip

Well, what happens is that we have written down our opening inventories at the end of March to a net-realizable value. So we would have recognized certain costs from our opening inventory down to net-realizable, so those would have flown through in the second quarter. That’s why it’s slightly lower than our reported cost per ounce.

Kwan Lunz-Intaglo – Scotia Capital

I see.

Tom Yip

On a production basis.

Kwan Lunz-Intaglo – Scotia Capital

All right. And going forward, it will be as expected?

Tom Yip

Yes.

Kwan Lunz-Intaglo – Scotia Capital

Okay, thanks. Secondly, just could I get a breakdown of the exploration and CapEx schedule for the rest of 2010, and for 2011, just overall?

Tom Yip

I mean, at this point, I’ll work backwards. The 2011 numbers, you know, still haven’t been submitted or reviewed by the Board, so it’s impossible to speculate what they may be.

And then, you know, basically as far as the rest of this year, we’re on track, all the programs are going. You know, yesterday, for instance, you know, we decided to approve additional funding to continue with the Brucejack work. So we’re in pretty good shape, and then we’ll finish off the year as we thought we would.

Kwan Lunz-Intaglo – Scotia Capital

All right. Thanks a lot, guys.

Operator

(Operator Instructions) Our next question comes from Heather Taylor from BMO Capital Markets.

Heather Taylor – BMO Capital Markets

Hi there. Thanks for taking my call. I just noticed that you produced 1.7 million ounces, but you only sold 1.1 million. So I’m wondering if you can address the missing 600,000 ounces.

Tom Yip

Sure. Let me hand that over to George to talk about that.

George Paspalas

Sure, Heather, thank you. Yeah, we did produce 1.7. The differential between the production and the sales is purely a timing issue with the port in Antofagasta. The boat didn’t leave at the end of the month. It left in early July so we couldn’t actually book the revenue until that boat left the port. So it will be coming in July rather than June.

Heather Taylor – BMO Capital Markets

And can we expect the same sort of thing for the next coming quarters?

George Paspalas

No. In fact, we’re changing the recognition of revenue at that port. So we won’t be linked into the departure, the boat from the port.

Heather Taylor – BMO Capital Markets

Okay. Thanks.

George Paspalas

No problem.

Operator

Our next question comes from Chris Lichtenheldt from UBS.

Chris Lichtenheldt - UBS

Good morning, guys. First, the 6 million a month site costs, does that include everything; treatment charges and everything?

George Paspalas

Let me hand that over to Tom, Chris.

Tom Yip

Chris, those are actually our production costs, direct costs at the mine site.

Chris Lichtenheldt - UBS

Okay.

Tom Yip

And beyond that, we have the PCRCs outside the mine. If we look at our definition, when we say cash production costs, that’s mine costs less any byproduct credits, then we add the PCRCs and the royalties and export taxes to get to our cash operating cost, which we report this quarter as 14.98 which is similar to the guidance of $14 per ounce for the year.

Chris Lichtenheldt - UBS

Right. Okay, yeah. The second question, can you just walk us through the CapEx from the quarter? I’m still a little bit confused exactly what the 21 ½ million was for.

Tom Yip

Chris, the 21 ½ million, the real spending for additional capital is around $2 million. And that’s for minor sustaining capital. The remainder, which is 19 million is primarily the pay down of construction liabilities that related to the construction, which were basically complete at the end of last year, but because of time lags and getting the bills from the various contractors, we settled during the quarter. So it’s related to past liabilities.

Chris Lichtenheldt - UBS

So it’s really a payment for payables?

Tom Yip

It’s a timing difference.

Chris Lichtenheldt - UBS

Okay. So will there be any more of that? Like I would have thought maybe that would be an operating item, like a working-capital sort of thing, rather than CapEx.

Tom Yip

It’s just the way the definition of where we put investing versus offering activity. We started the process as investing by accounting definition if nothing else.

Chris Lichtenheldt - UBS

Okay.

Tom Yip

There’s just a little bit left to settle on that account, and that’s just primarily the last settlements.

Chris Lichtenheldt - UBS

How much is left?

Tom Yip

Approximately 5 or 6 million.

Chris Lichtenheldt - UBS

Five or 6 million. And that’s probably next quarter?

Tom Yip

Yes.

Chris Lichtenheldt - UBS

Okay.

Tom Yip

Third quarter.

Chris Lichtenheldt - UBS

Third quarter, right. Okay, thanks. And then probably just a question for George. On the availability of sulfide, I know it seems that that’s now a mid-Q4 event, and I think in the past quarter it was sort of an end-of-Q2 event. Can you describe what’s happened that that’s been delayed a bit?

George Paspalas

Yeah, Chris. Because of the vain nature of the deposit, it’s very difficult to predict the actual extent of the weathered profile from the surface. And as we mine down the sides of the valley and get into the valley floor, that oxidation zone is a little deeper in some areas than we thought. So there’s just a little bit more of that than anticipated. But transition being a mixture of oxidized material and sulfide, the deeper you get even within that oxidized horizon, the more sulfitic it gets.

So mid-Q4 right for like sulfide only ore.

Chris Lichtenheldt - UBS

Okay. So having to that Q3, the transition will be more sulfitic than Q2? Can you expect -- do you have some gauge yet of what you think recoveries might look like then in the third quarter?

George Paspalas

You know, when we see sulfide ore in the plant, and we’ve done that in the second quarter. We’ve had complete days of sulfide, we see pretty good response. We’ve seen feasibility study recoveries. We’re hoping to trend that way as that percentage of sulfide increases in the feed Q3 and then into Q4.

Chris Lichtenheldt - UBS

Okay. And then like you said, it’s difficult to gauge exactly when it will happen, so is your comfort on mid-Q4 now better than your comfort was last quarter as you’re deeper now? Do you get a pretty good sense that that will be the case?

George Paspalas

It’s more finite from an area point of view. There’s just some interpretation on the how deep it goes, and we’re being conservative on this. We’re hoping it will be earlier than what we’re saying. But you know, if it’s not, it’s not exactly the end of the world because we’re starting to get pretty good numbers even on the transition material.

Chris Lichtenheldt - UBS

Okay. And do you think the pure sulfide will help with the zinc separation? Do you expect that to occur?

George Paspalas

We’re hoping that. Actually, the test run in the lab is indicating that. So hopefully that’s been reflected in the plant.

Chris Lichtenheldt - UBS

Okay. Okay, that’s it for me. Thanks a lot.

George Paspalas

Thanks, Chris.

Operator

(Operator Instructions) I am not showing any questions at this time.

Michael Anglin

Okay. Well, thanks very much. This concludes the call then.

Operator

Ladies and Gentlemen, this does conclude today’s program. You may now disconnect, and have a wonderful day.

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