When a miner's future is dependent on the sole mine, this mine should deliver stable results if the company wants to succeed. This is the case of Silver Standard Resources (NASDAQ: SSRI), which currently has only one producing mine, Pirquitas. This Argentinean mine is the sole source of revenue for Silver Standard, until its big Pitarilla project starts producing silver.
On track to achieve guidance
Silver Standard is expecting to produce 8.2 million – 8.5 million ounces of silver this year. So far, it has produced 5.9 million ounces of silver. Given the stable production that the mine shows, you could expect the company to hit the low end of production target.
I do not think that one should overemphasize the necessity of producing more silver in current price environment. The point here is whether Silver Standard achieves positive earnings results. Analysts are skeptical, predicting a third-quarter loss of $0.11 per share.
Meanwhile, First Majestic Silver (AG 1.04%) has announced that it produced a quarterly record of 3.37 million ounces of silver equivalent. The company now expects to meet or exceed its 2013 guidance of producing 12.3 million to 13 million silver equivalent ounces. Rising production is good for this miner, as its costs have allowed it to stay profitable during this low-price period.
On the contrary, Coeur d'Alene Mines (CDE 0.89%) has recently announced a 10% decrease in silver production. However, this decrease is temporary. The company has been making expansion-related work, and expects that it would lead to significantly higher production levels in the fourth quarter and the next year.
Pitarilla project
Pitarilla is the key to Silver Standard's valuation. This is a mine with a 32-year expected mine life, which would produce an average of 15 million ounces of silver per year during the first 18 years of production. It would take time, and, more importantly, money, to get this project going.
Silver Standard estimates total construction costs at $741 million. At the end of the second quarter, the company had $436 million of cash and $182 million of debt on its balance sheet. It means that Silver Standard would have to take on more debt to finish the project.
Debt is not cheap for silver miners nowadays. Coeur d'Alene issued $300 million of 7.878% senior notes due 2021 in January. Hecla Mining was more successful. The company has managed to issue $500 million of senior notes due 2021 at a 6.875% rate. Silver Standard would probably receive similar terms when it goes to the debt market.
This is why stable production at Pirquitas is that important. Currently, Silver Standard has a clean balance sheet with a significant amount of free cash. If the company manages to curb costs, it will easily find financing for its crucial project.
Bottom line
Just like Coeur d'Alene, Silver Standard is trading at half its book value. This price reflects the fears that the company will get stuck with its huge project because of low silver prices. Silver Standard has evaluated this project with a $27.50 per ounce base case silver price. Sure, silver trades below $22 right now. However, if you believe that silver prices will fall, you should not buy any silver miner. But if you believe that silver prices will rise to at least $28 in the longer term, then Silver Standard is a steal.
