Silver Standard: Wait for Management Clarity

| About: Silver Standard (SSRI)

Silver Standard (NASDAQ:SSRI) released first quarter results on Tuesday with 1.7 million ounces of silver and 3.2 million pounds of zinc produced during the first quarter at a net cash cost of $10.93 per ounce. Revenues tallied $60.1 million for the quarter, up from a year ago but down sequentially as de-bottlenecking procedures were implemented.

SSRI recorded net income of $9.9 million or $0.12 per share for the first quarter of 2011 with operating cash flow of $21.8 million. Cash and cash equivalents totaled $260.7 million at the end of the first quarter. In early April, SSRI realized C$115 million of gross proceeds from the sale of Pretium (PXZRF.PK) shares along with $17 million from the exercise of the overallotment option.

Pirquitas produced 1.697 million ounces of silver at cash operating cost of $23.23 per ounce and a total production cost of $27.52 per ounce. The crushing circuit at Pirquitas has been installed on schedule and on budget. De-bottlenecking procedures continue further down the production line.

SSRI reached an agreement in late February to purchase the remaining stake in the San Luis JV from Esperanza Resources (OTC:ESPZF). Land access negotiations continue with the hope of reaching an agreement that will allow construction of the project to proceed. Construction is expected to be completed in two years.

The Pitarrilla project in Mexico proceeds with the purchase of two near-new ball mill crushers in the first quarter. Project development options are being evaluated by management for Pitarrilla. The deposit is spread out over five separate zones, each capable of hosting an open pit mine. Estimated probable reserves total 91.7 million ounces, with 551.6 million measured and indicated resources and 82.2 million inferred ounces of silver respectively.

Management has guided up cost estimates for the year from $15 per ounce average cash operating cost and total production cost of $19 per ounce to $19 and $23, respectively. SSRI exploration and development programs continue to move forward. Key additions to the team have been made in the past few months bringing valuable experience to the team.

The sale of Pretium shares was odd, in that instead of placing the shares privately through a large investment bank, they were sold as units with warrants backing the units. If Pretium’s share price rises above the strike price of $12.50, then SSRI leaves money on the table.

Management seems to have its hands full. Cost control will be a big focus as the year goes on, as inflation in Argentina continues to put pressure on Pirquitas’ margins.

The clouds overhanging SSRI’s stock price are too great to ignore at this stage of the bull market. There are a number of attractive properties and management is moving forward hoping to unlock the underground value. However, with margins under pressure and some curious decisions, investors should wait until they have greater clarity.

Technically, SSRI appears headed for a test of the 200-day moving average. The oversold condition means there should be a bounce coming, but a head and shoulders pattern is forming which could foreshadow a bigger drop in the company’s stock price over the summer if cost and production issues are not resolved.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.