Prior to the purchase of Marigold mine for $275 million from Goldcorp (NYSE: GG) and Barrick Gold (NYSE: ABX), Silver Standard Resources (NYSE: SSRI) had only one producing mine, Pirquitas in Argentina. With more than $400 million of cash on the balance sheet at the end of 2013, Silver Standard Resources had the necessary funds to diversify, and it decided to move into gold in a safe jurisdiction. The Marigold purchase was the main driver of Silver Standard Resources' share movement this year. First, after the purchase was announced in early February, the company's stock got a big boost. Investors welcomed the fact that the company had finally put its cash to work. What's more, gold has been outperforming silver for quite a while, so diversification into gold was also a positive factor.
However, after the company reported its first quarter earnings, the sentiment changed. Silver Standard Resources warned investors that the second and third quarters of 2014 were expected to be low gold production quarters and guided second quarter production at just 20,000 ounces of gold. What's more, the cash cost guidance of between $1000 and $1100 per ounce of gold was a disappointment as well. Upside in gold and silver prices in June helped Silver Standard Resources' shares recover some ground. Now that the company reported its second quarter earnings, we could look at how Marigold performed during the first full quarter under Silver Standard Resources' management.
Lower cost guidance is a good sign
Marigold's production came ahead of guidance, and the mine produced 22,060 ounces of gold. Despite the increase in production, cash costs were $1103 per ounce of gold, at the high end of the previous guidance. However, Marigold's guidance for the full April through December period became more optimistic. Silver Standard Resources expects that Marigold's cash costs will average between $800 and $900 per ounce.
Despite the fact that actual production exceeded guidance at Marigold in the first quarter, Silver Standard Resources left its full-year production guidance intact at 105,000 - 115,000 ounces of gold. The company lowered its sustaining capital estimates from $20 million to $15 million - $20 million. By adding sustaining capital expenses to cash costs estimates, we get costs of $930 per ounce in the best case scenario (highest production with lowest sustaining costs) and $1090 per ounce in the worst case scenario (lowest production with highest sustaining costs). Please note that these numbers do not include related administrative expenses, finance costs, exploration costs and depreciation, depletion and amortization. They are a quick glance of the amount of cash Silver Standard Resources will spend to deliver production from Marigold.
Silver Standard Resources also restated its production guidance for silver and zinc, which was 8.2 million - 8.6 million ounces of silver and 25 million - 30 million pounds of zinc. Using conservative price estimates of $20 per ounce of silver, $1300 per ounce of gold and $1.00 per pound of zinc, we could see that Marigold's share in this year's total revenue will be over 40%. This share will grow in 2015, as the mine will be operating a full year under Silver Standard Resources' management.
So, was Marigold worth purchasing? Yes. Given current company's production and cost estimates, the mine is going to deliver not only growing revenue, but positive cash flow as well. The initial cost estimates that were revealed in the first quarter report were scary, but now it looks like Silver Standard Resources is ready to extract value from its purchase. This is a better scenario compared to the scenario when the company continued to sit on a pile of cash. What's more, Silver Standard Resources' liquidity position remains solid. The company finished the second quarter with $102 million of cash, $180.4 million of marketable securities and $192 million of debt. Thus, despite the purchase of Marigold, the company's net debt remains at zero. All in all, the Marigold purchase looks good from a long-term of view and will contribute to upside in Silver Standard Resources shares.
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