Is Diversification Into Gold Paying off for Silver Miners?

In the last one and a half years, several silver companies decided to diversify into gold. In 2013, Hecla Mining (NYSE: HL  ) purchased Aurizon Mines and Silver Wheaton (NYSE: SLW  ) acquired gold streams from Vale's Salobo and Sudbury mines. This year, Silver Standard Resources (NASDAQ: SSRI  ) purchased Marigold mine from Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) . Did those moves bring value to shareholders?

Silver Wheaton became a balanced streaming company with notable gold exposure
Silver Wheaton had to take on significant leverage in order to finance the deal with Vale and now carries $1 billion in debt on its balance sheet. However, the company gained significant exposure to gold for a relatively cheap price. Royalty and streaming companies are a good bet on a silver and gold rebound because their costs are fixed, and Silver Wheaton has exposure to both metals.

The story with Barrick Gold's stalled Pascua-Lama project highlights the timeliness of Silver Wheaton's move and the importance of diversification. Silver Wheaton has a stream deal with Barrick Gold, but Pascua-Lama's construction was delayed due to environmental issues and disputes with locals. Barrick seems to be making progress on this front, but the timetable for a Pascua-Lama restart is not defined.

Gold brings more revenue than silver for Hecla Mining
Hecla's first-quarter revenue grew 64% thanks to gold from the acquired Casa Berardi mine. Meanwhile, the company grew its silver production by 32%. The picture would have been rosy if costs at Casa Berardi were lower. In current conditions, Hecla Mining remains very sensitive to gold price downside, as gold accounts for 41% of its revenue, and there's some work to do on the cost-cutting front at Casa Berardi.

Still, the ongoing Casa Berardi optimization could yield more positive results. If the company manages to curb costs at the gold mine further, it would justify the increase in leverage associated with the purchase of Aurizon Mines.

Silver Standard Resources has yet to convince investors that the Marigold purchase was a good move
Silver Standard Resources shares were on the rise following the news of the company's move into gold. However, the company's first-quarter report revealed cost problems and put pressure on Silver Standard Resources shares.

Barrick Gold and Goldcorp sold Marigold as a part of their effort to get rid of underperforming mines. Unlike Silver Wheaton and Hecla Mining, Silver Standard Resources financed the purchase from cash on the balance sheet. The company had only one producing mine in Argentina and wanted to diversify into a safer jurisdiction.

However, Marigold costs were high under Barrick Gold and Goldcorp ownership and are expected to remain high this year. Silver Standard Resources guided that cash costs at the mine will be between $1,000 and $1,100 per ounce this year -- not exactly the kind of costs that you would like to see in the current price environment. Thus, Silver Standard Resources has yet to prove that it used its money wisely.

Bottom line
Silver Wheaton and Hecla Mining did a solid job when moving into gold. The evaluation of Silver Standard Resources' move is trickier, as it is still unclear what level of costs is reachable at Marigold after 2014. Hopefully, the company will provide more details when it reports its second-quarter results.

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