Is Silver Standard Resources Undervalued?

I attended the corporate presentation by Silver Standard Resources (SSRI) at Penn Club, New York City on May 7th. The presentation was given by Bob Quartermain, CEO of SSRI.

Silver Standard Resources, headquartered in Vancouver, Canada, engages in the acquisition, exploration, and development of mineral resource properties, primarily silver, plus by-products and   gold, tin, zinc, lead and copper. It has 17 ongoing projects in Argentina, Australia, Canada, Chile, Mexico, Peru, and the United States, and is diversified politically and geographically.

In general, I am impressed by Bob's business acumen in this sector and his style of openness and straight talk. Like almost all other junior miners, SSRI stock price has been under pressure lately, but their business seems to proceed well as planned. A few highlights from Bob's presentation:

1) SSRI, as one of the largest silver miners, has the largest resource base in this sector. If we ignored inferred resources conservatively, only counting P&P (proven & probable) and M&I (measured & Indicated), they have about 900 million ounces of silver, or 15 ounces per share, greater than several other large silver miners. Same thing if you look at their market cap vs. silver reserves, achieving the lowest market cap per silver ounce.

2) The major project investors are focusing now is Pirquitas at Argentina, which has commissioning scheduled for Q4 of this year. This mine is expected to have annual production of 11 million ounces of silver, 2,500 tonnes of tin and 6,500 tonnes of zinc. Bob indicated because tin's price doubled or tripled since last year, the cashflow from tin production itself would be enough to pay for the costs of the whole mine if tin stays at current price level. In other words, basically they are getting silver and zinc for free. With silver reserves P&P at 136 million ounces, it has a mine life of about 10 years. If I use average $15 for silver next year, silver production at Pirquitas alone will generate a free cash of about $160 million to self fund other projects.

3) Just name a few other interesting projects. The Pitarrilla, Mexico mine (including Breccia Ridge zone) has M&I reserves of over 500 mil ounces of silver combined. The Snowfield, BC of Canada mine has M&I reserves of 3 mil ounces of gold. Since gold is not part of SSRI's core business strategy, this project will probably draw buying interest from gold mining companies.

4) SSRI has also seemed to conduct some smart financing and investing deals. For example, by putting excessive cash in use, they purchased some silver back in 2004 and sold recently at around $20 per ounce, and made a decent $20-30 mil profit. Another example, in order to avoid hedging which is usually required by banks providing debt financing, SSRI has issued a convertible bond of $138 mil with 4.5% interest. SSRI reserves the right to purchase the bond back and even if it is fully converted 5 years from issuance, it will only add about 5% dilution to the current shareholders, which may or may not happen. It has a strong cash balance of $230 mil, and with the upcoming production of Pirquitas, it is likely SSRI will not need to tap into capital market for financing anytime soon.

Even though there is always a high level of risk involved with mid-cap and junior miners, in general, for SSRI, there are enough cushions and comforts from their large silver reserves, near production of their major project, potential self-funding on future projects, a diversified portfolio geographically and politically, strong cash position, strategic levers that they can pull in their portfolio (such as selling existing mine interest, profit sharing and joint venture with other miners).

Last but not least, it is their operating leverage to the silver price, which closely correlates with and can potentially outperform gold in next several years.

Disclosure: I have owned SSRI shares since Oct 2005 in my portfolio and have not sold any of them up to date.

Comments

[Jimmie]

Given Mr Tan's most favourable analysis of Silver Standard and his long-term shareholding, I regret that he did not comment on the very depressed price of its shares. I notice many PM juniors with a much less inspiring story to tell that have out-performed SSRI. Can anyone tell me why? Sometimes, the market she is strange!

[GMiki]

Most of the juniors simply haven't flourished--yet. SSRI WAS doing very well as a popular stock, but then it fell back. (I have very few shares.) Mr. Quartermain seems to have a very good reputation in the industry.

A lot of investors seem be shorting the juniors. I so look forward to a short covering rally. They've decimated the share prices of many wonderful companies with established resources and good financing--even some producing companies. Accumulate.

[Jason T]

This was a very good article, thank you for sharing your opinion of the CEO. SSRI is a key holding for myself and my clients. I've had to deal with ups and downs in the past. But this years rise in silver price that did not seem to do justice for SSRI was frustrating to say the least. Writing covered calls has certainly helped cushin the fall. But as the share price has fallen, I got greedy instead of fearful and added where I could.

Just today, I did some research on SLV, the silver ETF that has silver bullion backing it's share value. When it started out in 2006, it had 20 million ounces of silver. At the end of 2007, it has 150 million ounces of silver. Now it has 190 million ounces of silver. This is only $3.2 billion worth. GLD, the gold ETF has a market cap of $18 billion or so. The world inventory of silver that is above ground and available for investment I believe is less than 1 billion. It could be as low as 600 million. At which case, SLV would have to become a closed end fund as they would not be able to acquire silver to add to it's shares.

Companies like SSRI I believe stand to benefit tremendously when the coming silver shortage takes hold in my opinion.

[BxCapricorn]

I am surprised that there is no mention of the bad investments that SSRI has made. A little research would reveal why this otherwise fine company is currently selling at a discount.

[BxCapricorn]

Good comment about there being less than one billion ounces of investment grade silver, and the SLV ETF holding over 200M ounces last I looked. The LSE listed ETF - PHAG, holds 10M ounces, and there is currently 400M ounces sold short, according to the Commitment of Traders report, available here...
www.cftc.gov/marketrep...

We get a few more ETF's started based on physical possession of an industrially-used and consumed metal like silver, whose current mining cannot keep up with current demand, slide 39 of the May 2008 presentation...
silverwheaton.com/main...
and we've got an interesting situation.

[vse]

Dear BxCapricorn -
I had been reading and thoroughly enjoying your blog for some time, and was shocked when one day it seemed to vanish. Can I respectfully ask why, and/or if you have a link to a new blog destination?

Best Regards,
B. Kaiser

On May 22 09:01 AM BxCapricorn wrote:

> Good comment about there being less than one billion ounces of investment
> grade silver, and the SLV ETF holding over 200M ounces last I looked.
> The LSE listed ETF - PHAG, holds 10M ounces, and there is currently
> 400M ounces sold short, according to the Commitment of Traders report,
> available here...
> www.cftc.gov/marketrep...
>
>
> We get a few more ETF's started based on physical possession of an
> industrially-used and consumed metal like silver, whose current mining
> cannot keep up with current demand, slide 39 of the May 2008 presentation...
>
> silverwheaton.com/main...
> and we've got an interesting situation.

[BxCap]

I now have a private blog, by invitation only, to avoid the constant spamming. My new blog is even more focused on Financial Analysis, and you can request admission by writing to "fineartofresurfa...


On May 27 10:21 PM vse wrote:

> Dear BxCapricorn -
> I had been reading and thoroughly enjoying your blog for some time,
> and was shocked when one day it seemed to vanish. Can I respectfully
> ask why, and/or if you have a link to a new blog destination? <br/>
>
> Best Regards,
> B. Kaiser
>
> On May 22 09:01 AM BxCapricorn wrote:

[BxCapricorn]

B. Kaiser, that's "fineartofresurfa...