At the beginning of this year, shares of Silver Standard Resources (NYSE: SSRI) enjoyed significant upside following the purchase of Marigold mine from Goldcorp (NYSE: GG) and Barrick Gold (NYSE: ABX). However, when the company published its first quarter results, it was clear that it would take time for Marigold to deliver positive results. Shares of Silver Standard Resources started to decline and this downside continued until November, when gold and silver prices hit their recent lows. Meanwhile, the company released its life of mine plan for Marigold, which was encouraging, but the market's reaction was muted due to the continuing downside in gold and silver prices.
However, Marigold is of utmost importance and remains the biggest driver for Silver Standard Resources valuation. The company's silver producing mine, Pirquitas, is a stable producer that delivers little surprises. This year, Pirquitas is expected to produce between 8.2 million and 8.6 million ounces of silver and 25 million - 30 million pounds of zinc. Last year, Pirquitas produced 8.2 million ounces of silver and 27 million pounds of zinc at cash costs of $12.87 per ounce of silver. In comparison, cash costs at Pirquitas were $12.22 per ounce of silver in the third quarter of 2014. Currently, Pirquitas enjoys improvement in production levels and cash costs which is offset by lower silver prices.
Marigold is a different story as there is still uncertainty about the mine's performance. Marigold was able to beat production expectations in both the second and the third quarters of this year. As a result, Silver Standard Resources increased Marigold's production guidance to 110,000 - 120,000 ounces of gold this year. The mine's life of mine plan states that the mine is able to produce an average of 186,700 ounces of gold per year over the nine years of active mining to 2023 at all-in sustaining costs of $986 per ounce and cash costs of $762 per ounce. In the third quarter, Marigold produced 40,442 ounces of gold at cash costs of $997 per ounce. Silver Standard Resources' ability to ramp up production at Marigold and push costs further down will be a key to upside in its shares in the current pricing environment.
Silver Standard Resources also has a giant Pitarrilla project in Mexico. The project holds 479 million ounces of silver of probable mineral reserves and could produce 15 million ounces of silver annually during the first 18 years of a 32-year production life. However, low silver prices and a change in the tax regime in Mexico mean that this giant will be sleeping for a while. Silver Standard Resources estimates that total construction costs will be $741 million. This estimate means that Pitarrilla project could be on hold for years. Silver Standard Resources finished the third quarter with $135 million of cash and $195 million of long-term debt on the balance sheet, so it cannot afford to spend that much money on the project. Clearly, the company needs a much better outlook for silver prices in order to be able to finance Pitarrilla. Thus, I don't think that this project will have a significant influence on Silver Standard Resources' valuation in the near to mid term.
This leaves us with one major factor to consider except precious metals prices - Marigold's performance. So far, the mine was able to outperform expectations, and the mine's life of mine plan is encouraging. The cash cost trend at both Marigold and Pirquitas looks good, and I think that Silver Standard Resources should be able to outperform gold and silver in the coming year.
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