Taxes and Water Scarcity Force a New Deal
Silver Standard Resources' Pitarilla project in Mexico, was long viewed as a source of future growth for the company. However, the recent announcement of the purchase of Marigold mine from Goldcorp and Barrick Gold has changed the near term outlook for Pitarilla.
Money is spent on Marigold
Silver Standard Resources will pay $275 million of cash for Marigold, which is operated by Goldcorp before the closure of transaction. Prior to the announcement of the deal, Silver Standard Resources sold Challacollo project in Chile and San Augustin project in Mexico, further strengthening its liquidity position.
The company finished 2013 with $416 million of cash on its balance sheet, so it has sufficient funds at hand to finance the transaction. The use of its own cash frees Silver Standard Resources from the necessity to borrow money on the debt market or issuing equity. However, the money spent on Marigold could have been money spent elsewhere, for example, at Pitarilla.
No open pit at Pitarilla in the near term
The crucial moment for Pitarilla's near future happened when Mexican government imposed additional taxes on miners. Together with deteriorating gold prices, this tax has hurt the economical foundation of the project.
In its recent earnings call, Silver Standard Resources estimated total necessary capital spending at Pitarilla at $750 million. Last year, the company spent only $9.5 million on the project as it was cautious to spend money in light of falling gold prices.
The hurdles don't stop with gold prices and taxes for Pitarilla, either. Just like with Barrick Gold's Pascua-Lama, it has a water problem. However, there are several important differences with Barrick Gold's case. First, Silver Standard Resources did not put much as much money into the project as Barrick did. Second, Barrick is facing environmental regulations to build a water management system, while Silver Standard Resources cannot access the necessary water at all.
As a result, Silver Standard Resources decided not to proceed with the open pit mining at Pitarilla in the near term. Instead, the company is evaluating the possibilities of underground mining, which needs less water and is less capital intensive. It looks like the only option to extract some value from the project, as significant funds were drawn for the purchase of Marigold mine.
Argentinian economic situation adds uncertainty
Until Marigold joins Silver Standard Resources, the company has only one producing mine, Pirquitas, which is situated in Argentina. The mine produced 8.2 million ounces of silver in 2013 and is expected to produce 8.2 million - 8.6 million ounces of silver this year.
Lately, the Argentinian peso has losing its value fast against the dollar. This is positive for peso-denominated costs at Pirquitas. However, the devaluation could boost an already high inflation, which will lead to higher costs.
What's more, Argentina poses obstacles to remove cash from the country. Silver Standard Resources had $20 million of cash in U.S. dollar equivalent in Argentina at the end of the year. This amount is small relative to the whole cash position, and this is good news for Silver Standard's shareholders.
Bottom line
While Silver Standard Resources adds another producing mine, this move likely delays the Pitarilla project even further. However, problems with getting access to water and the new mining tax significantly affected the economics of Pitarilla well before this deal. In this light, the decision to turn the cash on the balance sheet into real production and cash flow looks sound.
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The article Taxes and Water Scarcity Force a New Deal originally appeared on Fool.com.
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.
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