Silver Standard Resources (NASDAQ:SSRI) is a precious metals mining company with operating mines in Nevada and Argentina, and development projects in Mexico and Peru. The company became a multi-mine precious metals producer in April of 2014, when it acquired the Marigold mine in Nevada. Silver Standard's flagship asset is the Pirquitas mine in Argentina, which produces more than 8 million silver ounces annually.
With 8+ million ounces of silver and 120,000+ ounces of gold production estimated annually, a balance sheet with working capital well over $400 million, and a couple of exciting development properties, I believe the company provides investors with huge leverage to precious metals price, and shares look like a buy at current prices.
Silver Standard Resources Inc.
Recent Stock Price: $9.40
Shares Outstanding: 80.75 million
Market Cap: $760 million
52-Week Range: $5.18 - $12.21
(Credit: Yahoo Finance)
You'll see in the below chart that Silver Standard has underperformed both the Gold Miners Index (NYSEARCA:GDX) and the Silver Miners Index (NYSEARCA:SIL) over the past 5 years. However, I believe this underperformance is about to change, for a number of reasons.
(Credit: Yahoo Finance)
Pirquitas Mine - Profitable Silver and Zinc Production
Silver Standard's Pirquitas mine is an open-pit silver and zinc mine located in Argentina. The mine achieved commercial production in 2009 and has proven minerals reserves of 48.1 million silver ounces at high grades of 180.8 g/t silver, and 93 million lbs. of zinc. Probable reserves are 25.9 million ounces of silver at 169.1 g/t, and 109 million lbs. of zinc. In total, the mine has reserves of 74 million silver ounces and 200+ million lbs. of zinc.
Pirquitas produced 8.2 million silver ounces and 27 million lbs. of zinc in 2013, which exceeded guidance. In 2014, production of 8.2 to 8.6 million silver ounces is expected, as well as 25 - 30 million lbs. of zinc. At full production, the mine should produce up to 10 million silver ounces and 10-12 million lbs. of zinc annually.
For the second quarter of 2014, the mine reported cash costs of just $12.18 per silver ounce. For the full-year 2014, guidance is for cash costs to fall between $12 - $13 per ounce. This is well below 2011's total cash costs of $19.70 and 2012's total of $16.88 per ounce, as the company continues to improve margins and cost structure at the mine.
Marigold Mine - Focusing on Cost Reductions
Silver Standard acquired the Marigold mine on April 4, 2014, from Goldcorp (NYSE:GG) and Barrick (NYSE:ABX), for a total of $275 million. The mine, with a proven and probable reserves of 4.92 million ounces, produced 162,000 ounces of gold in 2013 and is located in Humboldt County, Nevada.
Marigold is a heap leach operation with several open pits, including waste rock stockpiles, leach pads, a carbon absorption facility, a carbon processing and gold refining facility. $150 million in capital expenditures were incurred in 2012 and 2013 by Goldcorp and Barrick.
The benefits of the deal are numerous. First, the deal allows Silver Standard to diversify its assets, adding another producing mine located in one of the best mining jurisdictions in the world in Nevada. The mine generates immediate operating cash flow for the company and allows Silver Standard to diversify its precious metals production and gain leverage to a rising gold price.
2013 pro-forma production was immediately increased, from 8.2 million silver equivalent ounces to 17.9 million, which is more than a 100% increase. Pro-forma silver equivalent reserves also jumped, from 583 million to 879 million ounces.
Cash costs were quite high at Marigold in Q1 2014, at $1,117 per ounce. However, management believes there is a great opportunity to optimize costs at Marigold, and has given guidance of $800 - $900 cash costs per payable ounce of gold for 2014.
Pitarrilla Project: Long-Term Upside Potential
The company's 100% owned Pitarrilla project in Mexico contains an enormous silver reserve base of 479 million ounces, plus probable reserves of 1 billion lbs. of zinc. The mine should produce 15 million ounces of silver per year during the first 18 years of production, and the project carries a net present value of $737 million (after-tax) at $27.50 silver. The company could announce a joint-venture partner or sell a silver stream on Pitarrilla to help fund the capital costs required to production.
Unfortunately, on February 14, 2014, the Mexican Ministry of Environment and Natural Resources did not approve an environmental impact assessment for the mine, and management has suspended all project activity on the mine indefinitely. It is unclear at this point if or when development on Pitarrilla will recommence. However, at this point, investors should look at the project as a long-term "upside" option for the company and not a main growth driver.
High-Grade Silver at San Luis
The company's 100% owned San Luis project is located in Peru. A feasibility study in 2010 was based on proven and probable silver reserves of more than 7 million ounces, at very high grades of more than 600 g/t silver proven and 426 g/t silver probable. The life of mine is only 3.5 years, however, and capital expenses are estimated at $90.4 million.
The company continues to drill the Bonita Zone at San Luis to find additional ounces. A five-year extension agreement with a local Peru community was signed in 2013, which allows the company to conduct exploration activities on the lands that cover the southwestern sector of the project. All exploration permits for the Bonita zone target were obtained in the second quarter of 2014, and in July 2014, a drill rig was mobilized to the property in anticipation of project start in early August (Source: Q2 Earnings Release).
Q2 2014 Results Show Significant Growth
The second quarter saw Silver Standard's silver equivalent production increase by 81% compared to the first quarter of 2014.
- The company recorded production of 2 million ounces of silver, 22,060 ounces of gold and 9.3 million lbs. of zinc. Revenue was $64.3 million, compared to just $33.4 million in the first quarter.
- Total costs at Marigold came in high as expected, at $1,103 cash costs per ounce. However, the company has only owned and operated the Marigold mine for six months now, so investors should be patient. Cash costs are still expected to be between $800 - $900, with full year production of 105,000 to 115,000 ounces of gold. The fourth quarter is forecasted to be the highest production period of the year, with 33,000 ounces of gold expected to be produced.
- The company reported income from mine operations of $11 million, which is compared to a loss of $19 million year-over-year.
- Net loss was $7.3 million or $.09 a share, however, this is a significant improvement from a year earlier, and cash and equivalents were $102.2 million at the end of the quarter, with working capital of $427.5 million. The company has current assets of $527 million compared to current liabilities of just $99.6 million, so the balance sheet is quite healthy, even after the Marigold acquisition.
- The company also sold 1.44 million of its shares of Pretium (NYSE:PVG) for net cash proceeds of $10 million, subsequent to the period end.
Bottom Line: Silver Standard is a Gold/Silver Producer to Keep an Eye On
With 120,000 ounces of gold production and declining cash costs at Marigold, 8+ million ounces of silver production at Pirquitas at sub-$12 cash costs, 479 million silver reserves at its Pitarrilla project and 7 million ounces of high-grade silver at San Luis, Silver Standard has a number of exciting assets and projects to keep an eye on.
The company also has more than $400 million in working capital to complete further deals, and with a current enterprise value of around $600 million and 879 million silver equivalent ounces in reserves, the market is currently valuing each ounce at less than $1.
I believe Silver Standard should provide investors with big leverage to gold and silver prices, which could lead to a big outperformance of its peers over the next few years.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.