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Silver Standard Resources Inc. (NYSE:USA) (NASDAQ:SSRI)

Q1 2014 Earnings Conference Call

May 09, 2014 11:00 AM ET

Executives

John Smith - President and CEO

Andrew Sharp - VP, Technical Services

Alan Pangbourne - SVP, Projects

Carl Edmunds - Chief Geologist

Greg Martin - SVP and CFO

Analysts

Brian Yu - Citi

Operator

Good morning everyone and welcome to Silver Standard’s First Quarter 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 John Smith, President and CEO.

John Smith

Thank you, Nicole. Good morning, ladies and gentlemen. Welcome to Silver Standard's first quarter 2014 conference call, during which we'll provide a review of our financial performance and give an update on our business.

Joining me on the call this morning are Greg Martin, our CFO; Alan Pangbourne, Senior Vice President, Projects; Andrew Sharp, Vice President of Technical Services and Carl Edmunds, our Chief Geologist. Also present is Kelly Stark-Anderson, Vice President of Legal and Corporate Secretary.

Our financial statements and management's discussion and analysis have been filed on SEDAR and EDGAR and are also available on our website. To accompany our call, there is also an online webcast, and you'll find the information to access the webcast in our news release relating to this call. We will be making forward-looking statements today. So please read our disclosures and the relevant documents.

The first quarter of this year has seen a significant change in Silver Standard. The purchase of Marigold Mine from Goldcorp and Barrick, it was a new year for our company in terms of size, cash flow, portfolio and capacity. With large producing mines we are now more strongly positioned and have an enabled platform of future growth. Pirquitas in Argentina has seen significant improvement over the past year in this cost structure and therefore relative positioning in the industry. This was achieved by work force engagement and operational excellence. We now have a continuous improvement program embedded at the mine which keeps focus on cost and productivity.

Our silver production in the first quarter is seasonally consistent at 1.9 million ounces and currently as expected we’re seeing weather conditions abate. Sales for the reported quarter were 1.6 ounces of silver and the annual shipment schedule is managed so that cumulative sales will be similar to production by the end of the year. Cash cost for the quarter of $12.36 per payable ounce of silver sold are slightly below our 2014 guidance range. March and April are months normally for annual wage negotiations at Pirquitas. We have had industrial action during the negotiating process resulting in approximately three days lost production in April. We have not concluded negotiations as of yet but work continues safely at the time and we are focused on what is right for the business, our employees and communities.

Now moving to our Marigold Mine in Nevada, integration is well underway and we have commenced work on long term mine planning and equipment optimization. The entire management team has transferred across the Silver Standard, which has assisted significantly with transitioning and understanding of the business. We acquired Marigold as it improves our operating and political risk profile, it adds to cash flow and reserves and it is operated at world class standards. We also significantly benefit from the recent investments by the previous owners.

Alan Pangbourne, the Executive In-charge of Marigold will later cover our 2014 cost and production guidance for the asset. We commenced work for 2014 recognizing that information relating to life of mine resource and reserve will necessarily be completed later in the year. With a mine plan that works through the price cycle and has optimized mining operations delivering material of best margin, Marigold and Silver Standard are set for o a strong future.

Pitarrilla is an important development asset in our portfolio with significant mineral resources and reserves. However, with the recent acquisition of the Marigold mine, our resources need to be deployed appropriately. Additionally, with extraneous factors such as the New Mexican tax and royalty regime, prevailing metal prices and the national moratorium on aquifer water drilling, we have decided at this time to postpone major project activity on Pitarrilla. We will consider advancing the project based on priorities and when conditions are more supportive. In Peru we are mostly through the permitting process for drilling of the Bonita Zone, up in our San Luis project area and our drill team is commencing proprietary access work.

Now let me hand you over to my colleagues to provide more detail on our performance. Andrew.

Andrew Sharp

Thank you, John. Without a doubt, comparing Pirquitas’s Q1 seasonally affected results with the strong performance in Q4 2013 shows a number of quarter-on-quarter reductions. This wet season came early in hand and a little unusually maintained saturated soil conditions for most of the quarter. The saturated conditions precluded some high grade ore mining from river plain resources that are now delayed to later in 2014. As a third consequence, by not being able to source some of our perforated ore in Q1, this was replaced by low grade oxide stockpiles and so reduced head growth and impacted silver recovery.

In Q1, the mining operations team moved 4.2 million tons of material, 2% less than the fourth quarter. This small variation resulted from major load component change outs, but total mine movement is in line with our expectations. In the plant, ore was milled at an average rate of 4,514 tonnes per day during the quarter, 13% above the mill's nominal design, reflecting improved process control and mechanical availability. The continuous improvement program is well established at Pirquitas and we will discuss further benefits as they are delivered throughout 2014.

The new silver head grade was 204 grams per ton in Q1, 11% lower than Q4. Silver recovery was at 72.1% in Q1, compared to 73.9% in Q4, being slightly affected by the use of our oxide stockpile material. With have produced 1.9 million ounces of silver and 8.8 million pounds of zinc in Q1, 16% and 14% lower than Q4 respectively.

The annual ranch negotiations for the Pirquitas mine have traditionally occurred during like Q1 to early Q2. The current year’s negotiations commenced in March and are in progress to this date. During the negotiations the union did chose unfortunately to engage in 2.5 days of work stoppages in April. There has also been an additional half day of production lost meetings for information disposal and time for orderly planned shutdown and startups.

We would like mention that the site is currently operating at full capacity and we continue to work with the union too seek a fair and just outcome for all. In the first quarter we achieved cash costs of $12.36 per payable ounce of silver sold, slightly less than our full year guidance range of $12.50 to $13.50 per ounce. The lower cash costs are a result of the cost discipline we instituted in 2013 and we aim to deliver continued benefits in 2014. Notwithstanding the weather impacts on Q1 results we expect to see stronger performance for the remainder of the year and silver and zinc production to be within our stated guidance for 2014.

Alan will now provide an update on activities at the Marigold Mine and the Pitarrilla project.

Alan Pangbourne

Thank you, Andrew. First I’ll address our new operation, the Marigold Mine in Nevada. As you have seen from our previous press release, we closed the transaction on April 4th and we’re now working on the final purchase price adjustments that Greg will discuss later. This marks the end of the transition of Marigold Mine to the Silver Standard family. All of the employees are now being fully successfully transferred with payroll, IT and other administrative processes having been smoothly integrated. Marigold is now operating as a Silver Standard mine.

Over the second quarter, we’ll continue to see integration of systems and processes as we move through our first reporting period with Marigold. In April we moved into an optimization phase of the Marigold integration. This has seen the start of a comprehensive review of the current geological models and mine plans which will lead us to 43-101 compliant reports being released as planned. We’re also focused on current day to day operational practices and procedures with an aim to optimize the mining operational effectiveness to ensure we put the best ore at the lowest cost on the leach pads.

Today we’re also pleased to release our production guidance for Marigold for the remaining three quarters of 2014. We expect to produce between 105,000 ounces and 115,000 ounces at a cash cost between $1,000 and $1,100 per payable ounce of gold sold. The required capital for the remaining three quarters will be $20 million which includes funding reserve replacement drilling. The second quarter production will be lower than the average of around 20,000 ounces with the associated higher unit cost of production. This is due to the significantly lower than average grade ore that has been placed on the pads over the last six months. The current mine plan shows an increasing heap leach grade with associated high production in the last half of the year.

I’ll now move on to Pitarrilla. Pitarrilla continues to be an important asset in our portfolio with significant mineral resources and mineral reserves. However, as John discussed, with recent developments, we’ve decided to postpone major project activity on Pitarrilla and we’ll consider advancing when external conditions are more supportive.

Moving forward we will continue our presence in Mexico and preserve the value of the project while maintaining good relationship and commitments to the local communities continuing to monitor the water moratorium and advance our land holdings. Additionally we will continue to explore a range of options that could enhance the overall value of the Pitarrilla region to the company.

I will now hand over to Carl who will take you through our exploration activities in the first quarter.

Carl Edmunds

Thank you, Alan. During the first quarter exploration activities remained focused on advancing key projects in our exploration portfolio, while optimizing the remaining properties by evaluating their probability of success. The exploration portfolio remains a significant source of value as the proceeds from the sales of San Augstin and Challacollo are now realized on our balance sheet.

At our San Luis project in Peru, we are just coming out of the rainy season and are in the final stages of permitting the Bonita Zone drilling program. We remain on target with proprietary exploration activities. The authorization to work from the Ministry of Energy and Mine is expected in late May with drilling beginning in June. The drill program aims to define a resource which could provide an additional development path this project. The Bonita Zone is located entirely on Cochabamba community land covered by exploration and development agreements.

At Pirquitas, we continue to work on replacing reserves and extending the mine life of the operation. In support of this, we remain focused on mapping and sampling directed towards finding new resources on the property. At Marigold, we have just approved the first phase of an exploration program that is targeted towards replacing reserves mined this year and adding resources.

The majority of the 85-hole 15,000 meter program is aimed at adding reserve ounces in the North Mackay [ph] pit while the remainder of the drilling has the potential to cover new shallow resource ounces in other areas. This exploration program began in April this month and we look forward to receiving results over the coming months. Longer term, we are working towards developing and testing near surface open pit target concepts, as well as the higher grade underground resource potential that may lie beneath areas already exploited to-date.

Now, over to Greg, for discussion of Company’s financial results.

Greg Martin

Thanks, Carl. Financial results for the first quarter of the year are in line with expectations and consistent with the seasonally impacted first quarter production. I love our planned silver concentrate deliveries. Revenues for the quarter were $33.7 million, a reduction from $49 million in the comparative first quarter of 2013 due to the combined effects of a 33% drop in silver prices and a 21% reduction in silver ounces sold, which were partially offset by an almost fourfold increase in zinc pound sold. We sold over 10 million pounds of zinc in the quarter. Income from mine operations was $5.9 million representing a 17.6% gross margin. Margins benefited from the lower cost of inventory of silver ounces sold due to the cost reductions accomplished in 2013, somewhat offset by lower silver prices and a greater proportion of lower margin zinc pounds sold.

General and administration expenditures continued to decline to $4.4 million for the quarter. Due to our increased share price, non-cash stock base compensation expense was higher than previous period at $2.5 million making the reported G&A expense of $6.9 increase relative to the comparative quarter despite the underlying cost reductions. As outlined in our fourth quarter call, income tax -- income before taxes were impacted by two significant items, the January devaluation of the Argentine peso by approximately 25% combined with a weakening Canadian dollar resulted in a foreign exchange loss or income statement purposes of 16.8%. The majority of this foreign exchange impact was noncash, related to our VAT receivable balance in Argentina.

Secondly we recognized a $9.2 million pretax or $7.5 million after tax gain on the sale of Challacollo, which closed early in the first quarter. For the period we reported we reported a net loss of $16.9 million or $0.21 per share. Shifting to cost performance, Pirquitas’s reported cash costs were $12.36 per payable ounce sold, 9% below the first quarter of 2013 and marginally below our guidance range. We remain vigilant around managing cost but the interaction between inflation and currency devaluation as introduced further volatility into the forward view on the costs. Overall we still expect these two items to offset through the full year.

We generated $1.2 million in cash from operating activities in the first quarter, a decrease from $8.9 million in the comparative quarter of 2013. We saw strong sales collection during the first quarter resulting from our surge and concentrate sales in the fourth quarter of 2013, which helped offset lower silver prices and sales volumes.

Investments in our business were consistent with guidance as we invested $2 million on PP&E, $3.5 million in our property portfolio and $4.2 million in deferred stripping. All items were down significantly from the comparative period reflecting, the lower capital intensity at Pirquitas this year and our most focused project spending. Investing activities were supported by $3 million in VAT recovery and $7.5 million of cash proceeds from the sale of Challacollo.

As discussed on our fourth quarter call, we paid the full Mexican tax amount on the San Agustin sale of approximately $16 million in the first quarter. The deferred cash proceeds of $30 million, 10 million of which was received a few days ago are being collected free of any additional tax. VAT recoveries in Argentina are progressing well as evidenced by the Q1 recoveries and the increased VAT amount reclassified to current receivables during the first quarter.

We closed the quarter with $396 million of cash and a higher working capital position $587 million. So we remained in a strong liquidity position as we closed and funded the Marigold transaction on April 4, 2014. With Marigold closed and integration well advanced, we have begun working through the reporting issues as we prepare report our combined operations in the second quarter. A valuation team is on the ground working through our purchase price fair market value determinations as we set the opening balance sheet for acquisition. As Alan discussed, Marigold second quarter is the lowest production quarter of the year, so we really won’t see the strength of the combined business until late in 2014.

Additionally all of the ounces on the heap leach pads at time of acquisition will be written up to fair value. So these noncash adjustments will impact cost of goods sold and therefore reduced reported earnings as those ounces are produced and sold largely through the second and third quarters of 2014. The strength of our balance sheet enabled us to fund the Marigold transaction and associated costs from cash on hand here early in the second quarter. So post-acquisition, we maintain solid liquidity and retain a strong working capital position duet to our marketable securities portfolio. This provides us with capacity to remain active on our exploration and development properties and continue to consider opportunities while we optimize Marigold to generate increasing free cash flow from both of our operating assets.

I’ll now turn the call back to John.

John Smith

Thanks Greg. Ladies and gentlemen to conclude our goals for 2014 are to fully integrate and optimize Marigold, to maintain the drive on operational excellence at Pirquitas and to determine pathways for San Luis and Pitarrilla projects. We will also maintain strong cost discipline, which is essential at all times in business. At Silver Standard, we strive for excellence in all that we do. Our aim is to deliver value from all parts of our business for shareholders. I believe our track record supports this with the positive changes made at Pirquitas, the property divestments such as San Agustin and Challacollo and a Marigold acquisition.

As management, we’re acutely aware that now we have to deliver at Marigold and maintain the good progress like Pirquitas. The work that we’ve done at Pirquitas is very relevant for reconfiguring Marigold and we will leverage this experience as well as action future growth. With the entire Marigold management team now part of Silver Standard our capacity and capability to asses and uncover other growth opportunities is also significantly enhanced.

So ladies and gentlemen, that concludes this presentation part of the call. And I’d like to turn it back to operator. I will answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen. (Operator Instructions) Our first question comes from the line of Brian Yu of Citi. Your line is now open.

Brian Yu - Citi

So the question is with Marigold and you are guiding for volumes since like cost improvements year progresses. Can you try and give sense of where your exit rate is going to be yearend and might that be a better proxy for where do you expect Marigold to operate at on a go forward basis?

John Smith

This year is a transitioning year for us and through the year is not consistent quarter. But I’ll let Alan to talk about how that proceeds through the year in the future.

Alan Pangbourne

Brian, the gold production at Marigold as I mentioned in the top quarter call is low in the first quarter and then in second quarter. We then expect to see third and fourth quarter increase significantly and get us in the position where going forward the annual earns would be similar to the 150 or 160 sort of range that we’ve seen in the past. That isn’t clear yet. We need to finish the new mine plants for the life of mine plan and make sure that we focus on the better margin materials. But certainly towards the ends of the year, we get back to that sort of run rate.

John Smith

So in summary Brian, I think we worked hard to get the 2014 guidance out because that’s important for market, but Andrew and the team are working with Alan on the mine plan optimization and how we do with equipment and as we go through the year, we’ll update the market on progress.

Operator

Thank you. (Operator Instructions) There are no further questions at this time. I’d like to turn the call back over to Mr. Smith for any closing remarks.

John Smith

Thank you, Nicole. So ladies and gentlemen, I look forward to speaking to you at our AGM. We’ve got at 2 p.m. pacific time today. If you’d like to listen to the presentation, you can find the link on the webcast on our website. But again thank you for participating and have a good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s call. You may all disconnect. Have a great day everyone.

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