It’s been three months since Vancouver’s Silver Standard Resources (TSX:SSO,NASDAQ:SSRI) completed its $275-million purchase of the Marigold gold mine, and another two since the purchase was first announced; however, some market watchers are still not sure buying the mine was a good idea.
Marigold, formerly the property of subsidiaries of Goldcorp (TSX:G,NYSE:GG) and Barrick Gold (TSX:ABX,NYSE:ABX), is located in Nevada, and, as Silver Standard explained when the transaction was first announced, it was drawn to the mine in part because of its ability to provide “immediate positive cash flow from a mine in a prolific gold-silver region.” It identified Marigold’s ability to preserve “shareholder exposure to silver” and add “exposure to gold” as another plus.
Explaining further, John Smith, president and CEO of Silver Standard, said at the time, “[t]he acquisition of Marigold accomplishes our strategic goal of adding an operating mine in a well-established, low-risk mining jurisdiction. We are excited to welcome our new team members as Marigold upgrades our portfolio quality whilst leveraging our open-pit mine expertise and financial capacity.”
That all sounds pretty good, especially given the fact that Pirquitas, Silver Standard’s only other operating mine, is located in Argentina, which is not the most mining-friendly jurisdiction. So what’s the problem?
According to a June article by The Motley Fool’s Vladimir Zernov, it’s that Marigold is “a high-cost mine, and that’s why Goldcorp and Barrick Gold were eager to sell it.” Expanding on that statement in a more recent article, he notes that “Marigold costs were high under Barrick Gold and Goldcorp ownership and are expected to remain high this year. Silver Standard Resources guided that cash costs at the mine will be between $1,000 and $1,100 per ounce this year — not exactly the kind of costs that you would like to see in the current price environment.”
That’s a valid concern. Cost cutting has been rife in the gold and silver sectors this past year; indeed, for many companies it’s been the only way to survive. Fortunately, Silver Standard appears aware that costs at Marigold are a problem. Smith said in the company’s Q2 results release last week that the company’s “focus at Marigold is on developing our life of mine plan and implementing operational changes to move material at the lowest cost.”
Whether the company will be able to successfully follow through on that plan remains to be seen. However, it’s worth noting that for the most part, analysts seem to believe that Silver Standard will succeed in doing so.
For instance, TickerReport.com notes that while analysts at RBC Capital Markets cut their price target on the company from $11 to $10 following the Q2 results release, Deutsche Bank (NYSE:DB) analysts upgraded the company from a “sell” to a “hold” rating. Similarly, the news prompted BMO Capital Markets analysts to bump Silver Standard up from a “market perform” rating to “outperform.”
Whether that optimism continues remains to be seen. Certainly Marigold’s performance and Silver Standard’s efforts to cut costs will be important factors for analysts to keep an eye on moving forward, especially in light of the fact that silver continues to have trouble holding onto the gains it makes.
Silver Standard closed today at $9.50 per share, up significantly from $6.96 at the beginning of June and slightly higher than $9.28 at the start of July. As of July 14, the stock held a consensus rating of “hold” and an average price target of $10.84.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.