Silver Standard management talks success at Marigold

VANCOUVER — Silver Standard Resources (TSX: SSO; NASDAQ: SSRI) is off to a hot start at its Marigold gold mine in Humboldt County, Nev., along the northern reaches of the Battle Mountain–Eureka trend. The company has not only brought its all-in sustaining costs down, but also orchestrated drill success on Marigold’s greater property package that hints at more upside.

Silver Standard picked up the asset back in early 2014 from joint-owners Goldcorp (TSX: G; NYSE: GG) and Barrick Gold (TSX: ABX; NYSE: ABX) for $275 million in cash. At the time Marigold had sustaining costs in excess of US$1,500 per oz. gold, though that number was heavily influenced by capital spending that had gone toward an upgraded mobile mine fleet and other improvements.

This set the stage for material cost savings, with Silver Standard boosting its “mining for margins” program. The company started by reconstituting Marigold’s reserves and resources in a bid to optimize its mine scheduling.

The project now hosts proven and probable reserves of 130 million tonnes grading 0.51 gram gold per tonne for 2.1 million contained oz. Indicated resources total 244 million tonnes of 0.51 gram gold for 4 million contained oz. All calculations assume a 0.065-gram gold cut-off grade.

“When we bought the asset we came into it with a view to change the mine plan and drive the lowest cost per tonne. I think what’s surprised me to the upside has been the prospectivity of the land position that we have there. Marigold has been running for twenty years and it’s always had a nine-year mine life, which is right where we are today,” president and CEO John Smith explained during an interview.

“We went through a full scenario optimization at different levels of production, which really focused on our margins. We ended up in a reduction in reserves compared to the previous owners, but we maintained the resource base. We found that the mining for margins strategy, along with our operational excellence program, really helped us find the sweet spot,” vice-president technical and project development Jonathan Gilligan added.

And the proof is in the operating metrics. The company has dropped its total cash costs for four consecutive quarters, down from US$1,135 per oz. in June 2014 to US$728 per oz. at the end of March. Silver Standard estimates that Marigold’s all-in sustaining costs should be around US$1,090 per oz. this year, and average US$986 per oz. over the mine’s life.

The mine cranked out 56,000 oz. gold during the first quarter, which equated to revenues of US$68 million and income from operations of US$27 million. Marigold is expected to produce between 160,000 and 175,000 oz. gold in 2015 at total cash costs ranging from US$725 to US$800 per oz.

Perhaps more exciting than the operational improvements, however, have been Silver Standard’s recent forays with the drill bit that have yielded new discoveries at Marigold’s brownfield pits. Gilligan said that the company put together a brainstorm program with the experienced geological team at the project and essentially gave them “free rein” to recommend targets. The result was a drill program at the historic 8 South pit area.

“When we spoke with the team on-site there were a lot of ideas and areas they had always wanted to test, but had never really had an opportunity. So when we joined up we sat down and said: ‘Where do you think we’ll make the next discovery, and how would it fit into the production schedule?’ The targets at 8 South really emerged from those discussions,” Gilligan elaborated.

“That area had originally been a high-grade pit, but people sort of forgot about it after the mine transitioned from a concentrator to a heap-leach operation, and previous operators needed larger ore volumes,” he continued.

The 8 South area produced 530,000 oz. at a grade of 1.51 grams gold when it supported a milling operation between 1987 and 1994. The gold distribution in the area is controlled by the Sear Fault, a north-striking, high-angle fault, which extends south of the historic mining zone.

In December Silver Standard released a resource estimate for the 8 South Extension that includes 2.1 million indicated tonnes grading 1.2 grams gold for 82,000 contained oz. Inferred resources total 1.7 million tonnes of 1.41 grams gold for 75,000 contained oz.

The company continued its drilling at the target through the first half of the year, and the investment has paid off.

Silver Standard completed 113 drill holes over 26 km at the new 8 South Extension through the end of June. The intercepts highlight a weighted-average grade of 1.25 grams gold at an average 61 metres thick. Silver Standard also found a new area called 8D — located northwest along trend of 8 South — that grades 1.2 gold over an average 73 metres.

“What we have with the 8D target is the northern extension of a north–south structure running through 8 South that’s slightly displaced to the west. Part of that is likely related to depth, but there’s probably another little structure in there that supports the mineralization. We need a bit more drilling to really grasp what’s going on down there,” Gilligan explained.

“Given the great results we decided to go hard at it for another two or three months before compiling a resource update. We think that’s something that will be very worthwhile for the market,” he added.

Silver Standard announced it would boost its annual property-wide exploration expenditures at Marigold by US$2.4 million to US$4.2 million. Part of that capital will go towards another 13,000 metres of drilling at the 8 South Extension targets.

Silver Standard’s other tent-pole operation is the Pirquitas mine in Argentina, where it could produce 10 million oz. silver this year at cash costs ranging from US$11.50 to US$12.50 per payable oz. sold. With two relatively steady operations, the company can resume its search for new acquisition opportunities.

“Initially when the market found out we were looking for acquisitions the stuff coming across the desk wasn’t of high quality. I think as you’ve seen the majors like Goldcorp and Barrick be rewarded for focusing on ‘core portfolios’ and cash regeneration, it’s validated that strategy, and we’ve seen a willingness to maybe go further down that path and possibly vend more assets,” Smith said.

“We’re seeing more of that come to market, and that’s been beneficial. The second line is that some things have been on the market for a while now, and that’s been wearing down prices.”

BMO Capital Markets analyst Andrew Kaip has an “outperform” rating on Silver Standard, along with a $8-per-share price target. BMO Research wrote on July 6 that the exploration funding allocated to Marigold is “warranted,” and noted that South 8 “delivers positive exploration results that underscore the potential for further discoveries at Marigold.”

Silver Standard has traded within a 52-week window of $4.47 to $11.05, and jumped nearly 31%, or $1.74 since early March, en route to a $7.45-per-share close at press time. The company has 81 million shares outstanding for a $605.4-million press-time market capitalization, and reported $358 million in working capital at the end of March.