Silver Stocks (SIL) Fall, Large-Cap Producers Disappoint

SILVER STOCKS NEWS – Silver stocks retreated Thursday as the Global X Silver Miners ETF (SIL) dropped $0.62, or 2.6%, to $23.53 per share in late morning trading.  Weakness in silver stocks and the SIL was fueled by a sell-off in the price of silver, which fell $0.89, or 2.6%, to $33.18 per ounce.  The entire precious metals space came under considerable pressure, with gold futures down $41.00 at $1,750.60 per ounce.

Notable silver stocks in the news Thursday included Silver Standard Resources (SSRI), which delivered a very disappointing third quarter earnings report.  Although Silver Standard’s headline earnings per share number of $0.27 handily beat the consensus estimate of -$0.09 per share, it included a $0.63 per share gain on the sale of mineral properties.  Furthermore, silver sales were substantially lower than analysts’ estimates, as the sales contract with the company’s only customer was canceled during the quarter.

UBS analyst Chris Lichtenheldt noted in a report to clients that “Within the earnings release, SSRI announced a drilling campaign at Pirquitas has been completed and reserves have been cut 52% from 195.1Mozs to 93.1Mozs.  Overall resources (inclusive of reserves) have been reduced 32% from 221.2Mozs to 150.1Mozs. Reasons for the reduction include: 1) mineralization between high grade veins lessens towards depth; 2) higher costs result in fewer economic ounces; 3) depletion of 18.6Mozs mined to-date; 3) further understanding of the processing; and, 4) the exclusion of tin (formerly counted as silver-equivalent).”

SSRI was the worst performing member of the silver stocks sector on Thursday, as it plunged as much as $4.62, or 24.1%, to $14.52 per share.  Lichtenheldt – who previously had a Buy rating and $27.50 price target on SSRI – noted that his rating and estimates “are being placed under review.”

Silver Standard’s worse than expected quarter followed a disappointing earnings report yesterday from another large-cap silver stock – Pan American Silver (PAAS).  TD Securities analyst Daniel Earle wrote in a note to clients that “Pan American Silver Corp reported a weak quarter, in our view, with operating and financial results below consensus and our expectations…Given these developments and continued struggles at the Peruvian operations the company has lowered its annual production guidance to 22.5mm oz (from 23-24mm).”

Shares of PAAS tumbled $2.89, or 9.6% to $27.22 per share on Wednesday, and fell another 4.2% to $26.09 on Thursday.  PAAS and SSRI have been two of the worst performing silver stocks in 2011, having posted year-to-date declines of 36.7% and 48.5%, respectively.

In contrast to the two aforementioned large-cap silver stocks, one mid-cap silver producer that has bucked this trend is Fortuna Silver Mines (FVI.TSX, NYSE: FSM).  Shares of FVI.TSX have climbed 34.9% in 2011 as the emerging silver Company has made significant progress at its silver mines in Peru and Mexico.  Fortuna has been one of the few silver stocks to provide investors with the silver price leverage exhibited during previous bull markets in precious metals.

This morning Fortuna released its third quarter earnings report – which included record quarterly net income of $10.31 million and a 79.4% increase in quarterly revenue.  Jorge Ganoza, Fortuna’s CEO, commented that “The Company has delivered its best quarter yet in terms of net income, cash flow and metal production. The San Jose mine declared commercial operations in September and had its initial contribution to production and sales figures for the quarter.  We look forward to reporting sustained low cost quarterly silver production growth over the upcoming 18 months as we expand San Jose from 1,000tpd to the design capacity of 1,500tpd.”