Silver Standard Buys Marigold: A Good Deal for Shareholders?


On Monday evening we learned that Silver Standard Resources (NASDAQ:SSRI) plans to purchase the Marigold Mine in Nevada from its joint owners Goldcorp (NYSE:GG) and Barrick Gold (NYSE:ABX). This deal comes after the company raised capital by selling two exploration projects towards the end of last year. While I initially thought that these deals were in preparation for the expensive yet potentially lucrative development of the company’s flagship Pitarrilla silver mine, it seems I was wrong. Let us take a closer look at the deal.

Silver Standard is buying the Marigold Mine in Nevada for $275 million in cash. The company can easily afford this given its estimated $620 million in working capital. The mine has been producing between 140,000 ounces and 160,000 ounces of gold for the past several years, and it is expected to do so for at least another 15 years. For a company with a market capitalization of $630 million, this isn’t a lot — although keep in mind that Silver Standard also has its Pirquitas mine, which produces 8 million ounces of silver annually, as well as its Pitarrilla mine, which will produce over 10 million ounces of silver annually for over 30 years.

Given that the mine is in Nevada, and given that it is a gold mine, Silver Standard is now a more diversified company in terms of both the location of its mines and its commodity exposure. The company emphasizes this point in its just released Marigold Mine presentation.

One thing that should raise some eyebrows is the mine’s relatively high production costs. Cash-costs, that is, the basic costs of running the mine, have been steadily rising from $608/ounce in 2008 to $894/ounce today. “All-in sustaining costs,” which includes exploration expenses, SG&A, and mine upkeep are missing from the aforementioned presentation. But if we look at Goldcorp’s most recent financial statement, we will see that this figure is a whopping $1,476/ounce, which is more than $200 higher than the current gold price. It gets worse — if we look at Barrick’s estimated all-in sustaining cost figure, it’s $1,609/ounce.

Now it is certainly possible that this figure can come down. Silver Standard is preparing an updated geological study to determine the mine’s value and the expected costs to be incurred, and this will be released later this year. Furthermore, some of the costs that are included in all-in sustaining costs might be spread over several of Goldcorp’s operations such as SG&A. This is evident in the difference in costs shown by Barrick and Goldcorp. But ultimately, without a good explanation, there is no reason that we should assume that the cost will be much lower than the $1,476/ounce figure put forth by Goldcorp.

Given this data, it seems that Barrick and Goldcorp used Silver Standard as a dumping ground for a mine that is a liability rather than an asset at the current gold price. While the deal could end up paying off for Silver Standard, I think the company could have done far better things with its shareholders’ hard-earned capital, and I am therefore reevaluating my bullish stance on the company.

Disclosure: I am long Silver Standard shares but may divest my holdings over the coming days.