Upside for Silver Standard Resources Inc Might Be Limited

If a miner has only one producing mine, this mine must deliver stable performance. This was the case for Silver Standard Resources (NASDAQ: SSRI  ) , which had only one producing mine, Pirquitas in Argentina, in the first quarter. However, the company has completed its acquisition of Marigold mine from Goldcorp (NYSE: GG  ) and Barrick Gold (NYSE: ABX  ) at the beginning of April, so it started the second quarter with two producing mines.

Silver Standard Resource has recently reported its first quarter production results, which showed that production at Pirquitas was 1.9 million ounces of silver, down from 2 million ounces of silver in the first quarter of 2013. Will these numbers be enough to sustain the valuation of a company whose shares are up 49% this year?

Marigold performance will be crucial
Silver Standard Resources stated that first quarter production at Pirquitas is typically affected by the rainy season and that the mine remains on track to produce 8.2 million-8.6 million ounces of silver this year. Pirquitas was a solid performer in 2013, delivering strong production and generating positive cash flows despite low silver prices. Although cost performance at the mine is somewhat uncertain due to big inflation and economic headwinds in Argentina, it looks like Pirquitas will continue to be in good shape in 2014.

However, the main driver of Silver Standard Resources' shares this year was the company's diversification into gold with the acquisition of Marigold mine, as gold outperformed silver in 2013 and continues to outperform in 2014.

According to Goldcorp's annual report, all-in sustaining costs at Marigold were $1,503 per ounce of gold last year. In the fourth quarter, the mine delivered a much better performance with all-in sustaining costs of $1,216 per ounce. Although this level of costs will bring positive cash flows at current gold prices, the costs are still high. Silver Standard Resources will have to push costs at the mine to lower levels in order to justify spending $275 million on the acquisition.

Upside is limited before first Marigold results
Most likely, the market had already priced in the solid performance at Pirquitas. The mine's track record shows that there will possibly be no major surprises on the upside or downside this year. Therefore, Marigold's performance will give more clues for Silver Standard Resources' future valuation.

Until then, the upside for the company's shares might be limited unless silver prices start to rally. This looks unlikely at this point, as silver prices are stuck around the $20 mark and there are no major catalysts to drive prices higher. What's more, Silver Standard Resources' shares are trading at roughly the company's book value. I see little reason for shares to trade at a premium to book value until the market could see the cost and production performance at Marigold in the second quarter.

Bottom line
The Marigold sale benefited both the sellers and the buyer. Goldcorp and Barrick Gold continued to focus on their key assets while selling non-core operations. Silver Standard Resources found a productive use for a significant amount of cash on the balance sheet that generated no revenue. It looks like Silver Standard Resources shareholders will have to be patient and wait for first clues about how things are going at Marigold. Until then, Silver Standard Resources' upside might be limited.

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