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. 

The Motley Fool's Top Stock for 2014
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

  

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers