Tomorrow's production has got to come from somewhere; so what is a reasonable price for silver that's still in the ground? My goal is not to provide the answer, but simply to highlight a metric that can be used to help sift through the rubble. Price-per-ounce can can be used to value and compare mining stocks quickly. Simply divide market capitalization by the number of proven and probable reserves and you've got your answer.
With a current market value of $435 million, Silver Standard Resources (NASDAQ: SSRI ) has 566 million ounces of proven and probable reserves . With a little quick math we get $0.77 on a price per-ounce basis. In other words, buying Silver Standard is the equity equivalent of paying 77 cents for an ounce of silver. Why so cheap? Maybe very few people are interested in buying hypothetical silver, and I can respect that.
Another valid reason is the market knows (or is predicting) the Pitarrilla mine won't be built anytime soon. Until silver prices offer a high-enough return on investment, 84% of Silver Standard's 566 million reserve ounces will be staying right where they are...in the ground.
Before we get in too deep
You should know that a "proven and probable mineral reserve" (P+P) is the economically mineable part of an indicated and, in some circumstances, a measured mineral resource demonstrated by at least a preliminary feasibility study.
It's also important you know that reserve numbers fluctuate up and down, just like a stock. For example, if P+P was calculated using $25 silver and the current price is lower, a percentage of the reserves may no longer be profitable to mine (decreasing the numbers). Likewise, if the price of silver was higher than $25 the reserve numbers could increase.
Bear Creek Mining (NASDAQOTH: BCEKF ) has a current market value of $215 million with 330 million P+P ounces ; costing roughly $0.65 on a per-ounce basis. Why so cheap? One reason is the Peruvian government stripped them of title to mineral concessions covering the Santa Ana project (63 million P+P) in June 2011. Lately, Peru has not been the most popular mining jurisdiction. But geologically speaking Peru is well endowed, proof being its production: They are the second largest silver producing country after Mexico. Should sentiment toward Peruvian mining improve in the future, Bear Creek ought to be ready to go.
Companies of all shapes and sizes can fail (unless they're just too big to fail)— the mining stocks mentioned are no different.
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