No Fast Results From Marigold for Silver Standard Resources Inc

Marigold mine could be a drag on Silver Standard Resources results this year as costs at the mine remain high.

May 17, 2014 at 11:52AM

Silver Standard Resources' (NASDAQ:SSRI) first quarter report was eagerly anticipated by investors after the company completed its purchase of the Marigold mine from Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG). Prior to this purchase, Silver Standard Resources had a significant amount of cash on the balance sheet, which it had to put to work. However, Marigold was a high-cost mine under Goldcorp and Barrick Gold ownership. Its purchase evoked doubts about whether Silver Standard Resources would be able to deliver immediate positive results from the mine. The company's first quarter report brought an answer to this question, and the answer was no.

Expect high costs at Marigold in the second quarter
Silver Standard Resources expects that production and sales from Marigold will reach 105,000-115,000 ounces of gold in 2014. Cash costs are estimated at $1,000-$1,100 per ounce. In comparison, Goldcorp's total cash costs excluding Marigold were $658 per ounce in the first quarter.

What's more, Silver Standard Resources expects that the second and third quarter will be marked by low production at Marigold. The company expects that the mine will produce just 20,000 ounces of gold in the second quarter. This will inevitably lead to higher costs and will pressure Silver Standard Resources' bottom line in the second quarter.

Going forward, Silver Standard Resources expects Marigold to produce 150,000–160,000 ounces of gold annually. However, future production numbers are not as important as future costs. Having cash costs above $1,000 per ounce is not good in the current gold price environment. The company will have to lower this number in order to justify the purchase of the mine.

Lower sales pressured first quarter results
In the first quarter, Silver Standard Resources had one producing mine, Pirquitas in Argentina. Its performance was hurt by lower silver grades of 204 g/t compared to 228 g/t in the fourth quarter of 2013. As a result, the company produced 1.9 million ounces of silver, down from 2 million ounces of silver in the first quarter of 2013.

Importantly, Silver Standard Resources sold 1.6 million ounces. Lower sales did hurt the bottom line, and the company's operational cash flow was just $1.2 million. The company had three days of production outage at Pirquitas during the quarter, which highlighted the difficult situation in Argentina. The country suffers from high inflation, which Silver Standard Resources estimates at 2.5%-3% per month. This fact increases cost uncertainty, as labor wants to negotiate higher wages in order to protect itself from future inflation.

Yet, Silver Standard Resources managed to push total costs from $17.75 per ounce in the fourth quarter of 2013 to $17.42 per ounce in the first quarter of 2014 despite lower production rates, which is a positive achievement. The company reaffirmed its yearly production guidance of 8.2 million–8.6 million ounce of silver, so one can expect higher production rates at Pirquitas in the coming quarters.

Bottom line
Silver Standard Resources' first quarter results were hurt by lower silver sales, but this is likely a one-time event. However, the company's freshly purchased Marigold mine could be a drag on its results this year. Silver Standard Resources has to push the costs at the mine lower if it wants to benefit from the purchase.

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