Is Silver Standard Resources Undervalued?

| About: Silver Standard (SSRI)

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.