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Silver Standard's value waiting to be unlocked

Ore is piled up for delivery at a mine owned by Silvercorp Metals Inc. in Jiyuan, China, on Sept. 27, 2011. A mining analyst believes Silver Standard Resources could be worth as much as $58.

Keith Bedford/Bloomberg/Keith Bedford/Bloomberg

For bulls on silver, there is a way to play the precious metal that's literally dirt cheap: Buy it while it's still in the ground, at the rock bottom price of only 51 cents an ounce.

That's the price the stock market is assigning to the huge hoard of the metal that Silver Standard Resources says is likely to be found around its mine in Argentina and its other exploration sites.

Metal that is locked in ore in the ground always trades at a substantial discount to the value of pure metal above ground, because mining companies have to shoulder the large costs of extracting the metal. But the Silver Standard discount appears extreme.

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Arch rival Pan American Silver , which has a roughly similar ore resource totalling more than 1 billion ounces of the white metal, has a stock market value that implies its silver in the ground is worth about $2 an ounce, four times as lofty.

An indication of whether Silver Standard is being valued too cheaply by the market could be available as early as Monday when the Vancouver-based company is scheduled to report fourth quarter results. Analysts will be looking at the profitability of its Pirquitas mine in Argentina as a key indicator of the company's near term prospects, and any improvements will be greeted favourably.

Silver Standard shares tanked last year because of continuing start up difficulties at the mine. The stock, currently around $15, is less than half of its 52-week high of $34.17.

One of the bulls on the company is Adam Graf, mining analyst at Dahlman Rose & Co., a New York-based investment bank that focuses on natural resources. He estimates the firm could be worth as much as $58.15 a share if it were to fully develop its mineral properties.

Mr. Graf estimates the company trades at about 28 per cent of its asset value, compared to Pan American, considered the premier, low-risk pure silver play on the Toronto market, at about 70 per cent.

Pan American does have seven operating mines, compared to Silver Standard's one, explaining why investors would assign it a more conservative valuation. Still, the relative valuations suggests Silver Standard has considerable upside if it's able to close the gap with Pan American. "I think there is a tremendous amount of value there to unlock," Mr. Graf says of Silver Standard.

Of the 11 analysts who follow Silver Standard, six rate it a "buy" and five a "hold," according to Bloomberg. Most of the analyst price targets range from $18 to about $24 a share.

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Silver Standard has been highlighting the low price the market assigns to the value of its silver resources at investor presentations. The firm arrived at the figure by calculating the market value of its stock, less the company's cash position and liquid investments, then dividing by the number of ounces of silver in its ore.

"It's clearly undervalued," said John Smith, Silver Standard CEO, in a recent interview, of the company's metal resources. He says the stock doesn't reflect the value of its ore reserves because investors have been disappointed over the start-up difficulties at its Argentine mine. "We have to show the market we can deliver," he says.

Silver Standard has been trying to give its stock some zip. Pretium Resources, in which Silver Standard is the largest shareholder, has been set up to develop its British Columbia gold properties.

Mr. Smith said Silver Standard spent about $20-million exploring the gold properties, but its spin out of Pretium has yielded around $700-million worth of cash and stock in the gold play. Silver Standard plans to use the money to develop more of its silver prospects.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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