Will Lower Silver Prices End Silver Standard Resources' Run?

Will Lower Silver Prices End Silver Standard Resources' Run?

Silver Standard Resources shares have been among the best performers in the mining sector, rising more than 50% year to date. The company's shares were boosted by the news of the purchase of Marigold mine from Barrick Gold and Goldcorp . However, the purchase is not yet completed, and Silver Standard Resources remains with the sole producing silver mine, Pirquitas, in Argentina. Pirquitas' performance did improve last year, as total costs declined to $19.68 per ounce of silver from $24.42 per ounce of silver in 2012. Will this be enough to support the company's current valuation?

No cost improvement at Pirquitas scheduled for 2014
Cash costs at Pirquitas totaled $12.87 per ounce of silver last year. The company guided that it expects cash costs between $12.50 and $13.50 per ounce of silver in 2014, meaning that the costs will rise rather than fall. As silver prices are near the $20 mark, they are close to the company's total costs to produce silver.

The fact that Pirquitas is situated in Argentina adds to the uncertainty. The country is experiencing a currency devaluation and high inflation rates. While the devaluation is positively contributing to labor costs, the impact of inflation could offset these improvements.

The purchase of Marigold mine is a diversification into gold production. Both Barrick and Goldcorp stated that the sale of the mine was a part of their strategy to improve their portfolios and focus on core assets. In other words, Barrick and Goldcorp are selling worse performing mines while contributing capital to their top performers. Whether Silver Standard Resources will be able to push the costs at the mine lower quickly is still a question.

Cash cushion protects the company
Silver Standard Resources plans to spend $15 million at Pirquitas this year, as well as $22 million on its other exploration and development projects. The company is yet to reveal how much it plans to spend on the Marigold mine. Silver Standard Resources received less than $20 million of cash from operations last year. As silver prices remain low and costs at Pirquitas are not expected to decline, the company is unlikely to substantially increase this figure in 2014.

Still, Silver Standard Resources possesses lots of cash, even after the Marigold purchase. The mine will cost the company $275 million, while it had $415.7 million of cash on the balance sheet at the end of the fourth quarter. The solid financial position is probably the main reason why investors pulled money into Silver Standard Resources this year. The company can afford many months of negative operational cash flow given the financial resources it has.

Bottom line
Lower silver prices will certainly affect Silver Standard Resources' performance. However, the situation at the freshly purchased gold mine is more important for the valuation of the company. First figures from Marigold mine will be made public when the company reports its second-quarter results. Before this, one could only speculate whether Silver Standard Resources will succeed at cost-cutting at the mine.

Goldcorp's annual report revealed that all-in sustaining costs at Marigold were $1,503 per ounce in 2013, much higher than the current gold price. To achieve positive operational cash flow from this mine, Silver Standard Resources must be able to push costs below $1,300 per ounce. The uncertainty about whether the company could accomplish this task may weigh on its shares.

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The article Will Lower Silver Prices End Silver Standard Resources' Run? 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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