Hidden Asset: Silver Miner Provides Free Option on Gold

Two companies, one guy: Dr. Robert A. Quartermain, geologic mastermind, business builder, and current head honcho at Pretium Resources (NYSE: PVG  ) .

Between 1985 and 2010, Dr. Quartermain was President and CEO of a little company called Silver Standard Resources (NASDAQ: SSRI  ) . As some Fools may recall, Silver Standard was a 40-bagger between 2000 and 2007! From the tippy-top at $43, buy-and-holders have experienced a rather painful journey on the climb down. Lately, the stock has been available for less than $6 (86% from the peak).

So easy to say yet so hard to do, let us not forget that "selling high" is an important component of the "buy low and sell high" strategy.

To build or not to build
Pitarrilla is a large silver-lead-zinc project in Durango, Mexico. With an estimated 32-year mine life, Pitarrilla is a core asset (84% of reserves) for Silver Standard, but it's not its hidden asset.

Expected to be released before year's end, the market is anxiously waiting for the go or no go construction decision. I'm thinking the market would prefer to see Silver Standard delay construction at Pitarrilla for now; capital costs are expected to be at least $741 million, enough to take a large chunk out of Silver Standard's rock-solid balance sheet.

Why take the risk now, with metal prices in limbo? Besides, if approved by the Senate, Mexico's proposed 7.5% mining tax could be implemented by early 2014. Tough to make cents by front-running that...

Hidden asset?
Valley of the Kings, as it's humbly known in mining circles, is located in northwestern British Columbia. Originally owned by Silver Standard, Dr. Quartermain and shareholders decided to spin off the assets in 2007.

The new entity, Pretium Resources became the 100% owner. Qualified persons / professional geologists have concluded that Valley of the Kings is in the top quartile of all gold resources in the world.

Source: Pretium Investor Presentation

Looking at the chart, it's in a prestigious position all by itself. In terms of grade and size, Valley of the Kings could ultimately be superior to even Goldcorp's (NYSE: GG  ) Red Lake Mine.

Exciting huh? The beauty of it all is that Silver Standard still controls more than 15% of Pretium Resources (18,986,000 shares). At today's valuation, Silver Standard's stake is worth $132 million! Even though it's hiding in plain sight, the market may be missing this hidden equity asset that's worth about $1.63 per Silver Standard share.

Grade is king-maker of the mining business
On Goldcorp's website, they refer to Red Lake as the world's richest gold mine. It's also their cornerstone asset in Canada (and they've got some nice assets). Last year, miners helped pull 507,700 ounces of gold from Red Lake at an average grade of 19.5 grams per ton (g/t).

Twenty or more years ago a select few mines were producing gold at more than an 1 ounce per ton, but nowadays anything above a half-ounce per ton is about as good as it gets. If Valley of the Kings continues to grow in size at grades above 14 g/t speculators may have a pay day... someday.

In my mind, shares of Silver Standard are a great value proposition, as they provide investors with a free option on Pretium, for silver-like pricing. In addition, Silver Standard offers a geographically diverse pipeline of projects at all stages, everything from exploration to production.

Here's what to expect going forward...
As of October 3, Pretium's 10,000 ton bulk sample is under way. The ore is being shipped to a custom mill in Montana; they will process about 220 tons per day over ten weeks. Numbers from the bulk sample are expected to be released in Q4— assuming that Pretium is mining from a favorable location, I'm predicting the results will be golden.

On top of that, assay results from 5,000 meters of surface drilling will be released soon.

In 2014 an updated mineral resource will be calculated from this year's drilling. It's important to know that resource calculations are estimates at best. Until you start mining (it's kind of like a box of chocolates) you never know what you're gonna get.

Lastly, with the risks surrounding Mexico, maybe Silver Standard will pleasantly surprise by deciding to delay Pitarrilla. Deciding instead to move forward on its high-grade San Luis project, building that mine would cost just $100 million or so, and it could be completed in two years or less.

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