Will This Miner's New Purchase Pay Off?

Silver Standard's move to buy a gold mine from Barrick and Goldcorp raises several questions.

Feb 5, 2014 at 8:47AM

Following in the footsteps of Hecla Mining (NYSE:HL), another silver producer, Silver Standard Resources (NASDAQ:SSRI), recently decided to move into gold. Silver Standard will purchase Marigold mine in Nevada from Goldcorp (NYSE:GG) and Barrick Gold (NYSE:ABX).

Hecla purchased Aurizon Mines almost a year ago. The acquisition turned Hecla into a diversified miner, as gold brought in 35% of its revenue in the third quarter. Hecla's decision was successful, as the company managed to bring the costs at the acquired Casa Berardi mine down while increasing production. Will Silver Standard's purchase be a success too?

Why Silver Standard is doing this
Before the announcement of the Marigold purchase, Silver Standard had only one operating mine, Pirquitas. This mine produced 8.2 million ounces of silver in 2013, including 2.3 million ounces in the fourth quarter.

The sole problem with Pirquitas is the fact that it is situated in Argentina, which is going through a difficult period with inflation nearing 30%. What's more, the Argentinean peso is dropping fast against the U.S. dollar. The country is trying to help its currency with different measures, including restrictions on the purchase of foreign currency.

When Silver Standard Resources was presenting at Scotiabank Annual Mining Conference back in December, the company stated that it was difficult to get the money out of the country. This is perhaps the main reason why Silver Standard doesn't pay a dividend.

At the same time, the company finished the third quarter with as much as $544 million of liquidity on hand. This money had to be put to work rather than just sit on the balance sheet.

The company could have turned its eyes on internal projects like Pitarilla in Mexico, which holds probable reserves of 479 million ounces of silver. Total construction costs for the project are estimated at $747 million. However, the Mexican government has recently decided to impose an additional tax on miners. It's clear that Silver Standard decided to take its time and reassess the project's economics based on the new reality.

Is Marigold worth the money?
With the purchase of Marigold, Silver Standard gets an asset in a safe jurisdiction. However, there is one important thing to consider. Goldcorp's third-quarter report revealed that all-in sustaining costs at Marigold were $1,476 per ounce. In its statement on the sale of Marigold, Barrick stated that its share of Marigold's production in 2013 came at all-in sustaining costs of about $1,545 per ounce.

For both Barrick and Goldcorp the sale of this mine looks rational, as both miners try to optimize their portfolios and get rid of high-cost production. Given the fact that gold stubbornly trades below $1,300 per ounce, the mine is losing money.

Silver Standard will acquire 4.92 million ounces of proven and probable reserves at Marigold for $275 million, which looks like a reasonable price to me. The key question is whether Silver Standard will be able to optimize production and cut costs in the way that Hecla was able to accomplish. Silver Standard states that in 2012 and 2013 significant investments were made to purchase new mining equipment, which was expected to improve the efficiency of mining operations.

At the end, everything will depend on whether Silver Standard will be able to push costs at Marigold significantly lower. In the purchase press release, the company states that Marigold will provide immediate positive cash flow. However, given the cost data from both Goldcorp and Barrick, I would like to see some proof on that before drawing any conclusions. 

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