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Silver Standard, a different company By : Sean Rakhimov Editor,
www.SilverStrategies.com/ |
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Introduction Silver Standard (NASDAQ:
SSRI, TSX: SSO) is a company that needs no introduction to silver bugs.
Or does it? It has long been regarded as a premier silver play and its
President, Bob Quartermain virtually single-handedly popularized the
"land bank" aka "ounces in the ground" concept of valuing
a company based on the defined undeveloped resources it has. And it has
been wildly successful. So successful in fact, that today we lament
that (in our opinion) it has largely removed the analytical work from the
daily chores of many mining analysts at investment houses and diminished it
to plugging in numbers into a resource-centric model of valuation of
exploration companies and small producers. This, of course, is not the
fault of Silver Standard, but rather a testament to their marketing prowess. To that end, SSRI
has amassed some 2.5 Billion ounces of silver
equivalent (with gold and
base metal, more on that later) and grew to gain its place among the best of
the best of exploration companies. That, you know. More importantly,
over half of those resources – spread over a host of projects from
Canada to Chile and Australia – are concentrated in the company's four
development stage projects: Pirquitas, Pitarrilla, Snowfield, Diablillos with
the high grade San Luis project being the fifth to sweeten the mix. Production You probably also
know that most recently the company has put its first silver mine into
production at the Pirquitas
project in Argentina. That is a transition few companies have navigated
without hiccups, at least in the beginning and it would be naive to expect it
in this case. The plan is to produce silver at the rate of: 1. 1 Million oz in
2009 2. 9 Million oz in
2010 3.
10 Million oz annual
average for the life of mine of 15 years 4.
$2/oz cash cost
average for the life of mine At current metal
prices that should generate some hefty cash flow to the tune of $150 - 200 MM
annually. These numbers are made possible because of expected significant
credits from production of tin and zinc. In our opinion, there is a
good chance that cash cost net of credits could turn negative at some point
in the future due to rise in base metal prices. Like for most
industrial metals, the tin price has moved to higher levels in recent years
and there is no reason that we know why it would not continue to participate
in the general commodities bull market which should last at least another
decade. Incidentally, the case for future zinc prices could be even more
compelling. You can find the long term charts for zinc and tin at Infomine.com. The first
shipment of concentrate from the Pirquitas mine took place at the end of July
of 2009, and there were a few more since then, with ramp up towards
commercial silver production scheduled toward the end of this year. The
tin circuit construction is under way and plans for subsequent commissioning
of the zinc circuit are in place.
If Silver
Standard to cashflow $150+ MM or more free and clear starting 2010, that
could mean we may have seen the last equity offering by the company earlier
this year. This is a rather important point, emphasized by Frank Holmes
in this interview. Shareholder dilution has been the Achilles
heel of the industry and SSRI stresses per share value in its development
strategy. That is not to suggest the company should not take advantage
of growth opportunities in the future which may involve share issuance so
long as per share value remains a priority. At $17 silver, a
10 Million ounce/year producer, depending on different variables, can be
valued anywhere between $500 MM to $1 B in market cap. For our
calculations, we'll use a number in the middle of that range, say $650
Million. In the
development pipeline for production are two more projects: San Luis in Peru
and Pitarrilla
in Mexico. San Luis is a joint-venture with Esperanza Silver (TSX.V:
EPZ, a
company we have long favored and discussed in the past) where SSRI has 55%
interest, which can be taken to 70% by delivering a feasibility study
(currently underway, expected to be completed in Q1, 2010), and to 80% by
funding it through production. While the current resource at this project may
appear small (350,000 oz Au), particularly with respect to ballpark mine
construction cost of $100 MM, this high grade gold mine would produce some
80,000 oz of gold annually at $300/oz (our guesstimate) cash cost. At
$1000 gold price, SSRI's 80% interest would add in round numbers another $45-50
Million annually to the bottom line for 4 years (projected mine life).
Since production at San Luis is not likely to start until 2011-2012, one
could theorize that the actual upside could be much greater given recent
action in the gold market. (Personally, we believe most of these
numbers, especially ones 5-6 years from now, let alone 10-15 years, will be
blown out of the water based on our expectations for metal prices, but we
have to use some numbers, and think current prices will resonate with most
readers.) Although
Pitarrilla is in development stage and is slated for production within 4-5
years, we can't resist the temptation to use a recent market transaction to
arrive at a hypothetical price tag for this project. Digging for more
value To simplify the
math and valuation on the Pitarrilla, which is somewhat of a monster project,
we will use the recent acquisition of Aquiline for $626
MM as a basis. That
transaction included the Navidad project in Argentina with 750 Million oz of silver and 3.5
Billion lbs of lead (in all categories) along with about 1.5 M oz of gold at
two other projects. A portion
of that silver was sold to Silverstone (now Silver Wheaton). Pitarrilla sports 726 Million oz of silver
(in all categories) with minor base metal resources. To make an "apples to apples"
comparison and be conservative at that, we'll round down the theoretical
market value of Pitarrilla to $550 MM. One could argue that number up
or down, but in the current context with admittedly liberal assumptions, it
is close enough for us. That is what the market paid for a comparable
asset just last month. A similar
calculation can be made for the Snowfield project in British Columbia,
Canada. This project essentially occupies a part of the same ridge and
is an extension of the KSM project of Seabridge Gold (TSX: SEA). On its web site Seabridge reports the following: "The KSM project is one of the five
largest undeveloped gold projects in the world. Measured and indicated resources
now total 34.5 million ounces of gold and 8.5 billion pounds of copper."
Since KSM is further in development than Snowfield, for valuation we'll use
resources in all categories, which stack up at 46.6 M oz Au and 18.8 M oz Au
for KSM and Snowfield respectively. Silver Standard also reports silver
values, while Seabridge shows significant copper resource. SSRI did
more drilling since then and we should expect better numbers in the next
resource calculation, perhaps before year end. The new resource should
move a chunk of the inferred resources into measured and indicated as well as
increase the total number of ounces. Again for a quick and dirty
calculation erring on the conservative side we'll assume that Snowfield can
be valued at 1/3 of the KSM project valuation. Based on that, at
current prices, the rough guesstimate price tag for the Snowfield project is
about $300 MM. Put all of the above together and we get a classic
situation where a sum of parts is greater than the whole (all numbers in
CA$).
As of day close
of November 13, 2009, the market values the rest of Silver Standard's roughly
1 Billion oz of silver (eq.) ounces at $0.00, with a big Z. That includes
the San Luis project discussed above, the San Agustin which we visited last
year and believe it has the potential to be another monster deposit, the
entire team, another dozen projects scattered through the Americas, and so
on. To be fair, a case like this can probably be made for many other
companies, but that only confirms our point that stocks will play catch-up to metal
prices in the next few years. The Team In the case of Silver
Standard, we think the "management" or "team" factor
should be given specific consideration. You may not know that in the
early days SSRI had acted as an exploration arm for western Canada for Teck
(TSX: TCK). Teck itself started as an exploration company and grew into
– quote from their web site – "Canada's largest diversified mining, mineral
processing and metallurgical company". In addition to
Bob Quartermain (geo), Kenny McNaughton (geo) and Joseph Ovsenek (eng), who
have been building the company forever (something like 50+ years between
them), Silver Standard has beefed up its upper and middle management in the
last three years with people who have done it before on the operations
side. Here are some of the recent additions to the management team.
You can find more
info on some of these gentlemen here or inquire with the company (while you're at it, also check out the Board members). As you can see, there are no lame
ducks there and Silver Standard has been proactive and judicious in
assembling an experienced and accomplished team of professionals to
facilitate the transition to an operating company and has the necessary
expertise to grow as a producer. We also think that some of these hires
are intended to further advance development of projects in the production
pipeline. If there are any staffing gaps still, they certainly have the
resources and ability to attract additional talent. Where to from
here So how is Silver
Standard planning to add shareholder value going forward? – A question
we asked when we met with the company. They outlined three directions: a) Grow
production - as discussed above; b) Continue
exploration, particularly on the gold side (Snowfield) for which the company
does not
yet get due credit; The company has
$138 M in long term convertible (at $42) debt at 4.5% interest and $23 M
still tied up in the ABCP instruments. The former does not worry us as
the actual inflation rate is probably higher and the anticipated cashflow
should be sufficient to cover it or pay it off. We think that chances
of conversion of this debt into equity are better than 50%. As for ABCP
issues, it certainly must have been an unpleasant experience, but what's done
is done and the management is likely to be ultra conservative with their cash
in the future. To that end, we don't recall anyone giving the same
management a pat on the back for their very profitable silver bullion
holdings that were bought at an average cost of $5.85/oz and cashed in above
$20. More importantly,
we expect the management team to continue to make good decisions and steer
the company to new heights. If that does not seem like a valid
argument, consider this: 80% of wealth in most sectors is created by 5% of
the people. People who have been successful in the past have a tendency
to do it again; whereas those who haven't managed to break through are less
likely to do so in the future. This is a very important point,
particularly in the resource sector. The stock may
track the silver price for a few more months, while the production ramp up at
Pirquitas is under way and the new reality of Silver Standard as an operating
company sinks in with the investment public. New investment funds are
entering the precious metals space at a steady pace and this trend should
both broaden and accelerate. We also expect the money flow into this
sector to do the same, as money managers increase their percentage allocation
to metals. Lastly, as a producer, Silver Standard is likely to be added
to various indexes, which in turn will make it more attractive to still new
investors. Sean Rakhimov Editor,
www.silverstrategies.com/ Information contained herein is obtained from sources believed to be
reliable, but its accuracy cannot be guaranteed. It is not intended to
constitute individual investment advice and is not designed to meet your
personal financial situation. The opinions expressed herein are those of the
author and are subject to change without notice. The information herein may
become outdated and there is no obligation to update any such information.
The author, 24hGold, entities in which they have an interest, family and
associates may from time to time have positions in the securities or
commodities discussed. No part of this publication can be reproduced without
the written consent of the author. |
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