It’s been a wild two weeks for Silvercorp Metals Inc. (NYSE:SVM). On Sept. 2, the company announced it had acquired an anonymous letter accusing Silvercorp of fraud. The stock has since lost nearly 20 percent of its value as investors try to figure out what the hell’s going on.
I’ve even wavered back and forth. First, I wrote a post titled Time to buy Silvercorp Metals (SVM)? on Sept. 6. A week later, I updated the post with a note that it could be time to sell Silvercorp on the heels of more allegations against the company (this time from well-known, as-yet-unidentified finger-pointer AlfredLittle.com).
Since then, though, a number of credible geologists, analysts and Silvercorp itself have come forth to debunk accusations against the company, and I’ve decided Silvercorp has fallen prey to a “Short and Shock” campaign (the opposite of a “Pump and Dump” scheme). Here are the top five fraud allegations against Silvercorp debunked (you can read more from Silvercorp’s Chairman here):
Fraud allegation No. 1:
Ore that fell off Silvercorp’s truck didn’t have much silver in them.
There’s something comical about this claim, but here it is: AlfredLittle says their “investigator” collected ore that fell off Silvercorp trucks while traveling to and from the ferry dock and mills near the mine last month. They then sent the ore to a local lab for testing and found a mere 30 grams of silver per ton of ore.
Firstly, mining companies are notorious about protecting their goods. Many make outside visitors strip off their clothes and wear company-approved overalls while visiting mines. The notion that a mining company would let chunks of ore topple off their trucks every time they hit a pothole just doesn’t seem that likely (although Silvercorp does admit it contracts out the hauling of its ore – weighing shipments when they leave their mine and arrive at the mill). So, let’s just say that there’s ore laying on the side of the road near Silvercorp’s mine, and AlfredLittle happened to get their hands on some.
AlfredLittle admits a fallacy in their own allegation: “We acknowledge our sample size was small and unscientific. To correct this we are submitting numerous additional samples for testing and plan to publish our findings in a later report.”
Even if they get more samples tested, there won’t be much that’s scientific about their sample – particularly if it’s ore Silvercorp cares so little about that they let it fall off trucks like rotten cabbage.
“Who are you?” Silvercorp writes in response to the allegation. “Are you a geologist, a mining engineer or a QP? You are not qualified to take a sample, not to say you took a sample from rocks falling off our trucks.”
Fraud allegation No. 2:
The production, quality and resource estimates of SVM’s Ying mine are inaccurate.
AlfredLittle bases their production allegations on outdated materials, including a L&R Report that was done shortly after Silvercorp purchased the Ying mine. L&R Reports aren’t required to be regularly updated and they adhere to far less stringent standards than Canada’s 43-101 reports that much be verified by a “Qualified Person” (as recognized by the Canadian Securities Administrators).
AlfredLittle repeatedly asserts that the company has “refused” to let outsiders test the Ying Mine since 2008, but such tests aren’t required unless Silvercorp were to file to renew their mining permit, announce a change in their estimated resources or disclose a new discovery that hadn’t been previously made public.
To prove Silvercorp’s got the silver the company claims it does, they’ve went as far as releasing 12MB of bank statements from the Bank of Montreal. It doesn’t seem like the move a fraudulent company would make (especially since the statements show a closing balance of CAD$7 million).
Fraud allegation No. 3:
An SVM subsidiary’s largest customer is an undisclosed “related party.”
A “related party” relationship occurs when one company has the ability to control another company’s financial or operational decisions. It is true that a Silvercorp subsidiary (Henan Found Mining Co. Ltd.) has a 15 percent stake in a Silvercorp smelter, Luoyang Yongning Smelting Co. Ltd. But that fact was reported by Silvercorp in the company’s June 30 quarterly filing with the Canadian Securities Administrators, and it certainly doesn’t qualify as a “related party.”
“In fact, sales to the smelter, in keeping with the profitable concept of vertical integration, are
preferred as the Company obtains an interest in the smelting profit as well,” Silvercorp writes.
Fraud allegation No. 4:
SVM Acquired Yangtze Gold (the Gaocheng Project) from Chairman Rui Feng’s relative, and in the process yielded that relative a 1,500 percent gain in six months.
Silvercorp did indeed purchase rights to the Gaocheng (GC) project in 2008. However, that move was approved by the company’s board and duly reported to the TSX. It wasn’t, Silvercorp maintains, a six-month, 1,500-percent gain, though. In fact, Rui Feng’s relative spent six years exploring the site before it was acquired by Silvercorp in 2008.
Now, Silvercorp looks at the GC projcet as one of the company’s prime assets: “The GC project is currently expected to be the biggest driver for the Company’s silver production growth over the next 3 years,” Silvercorp writes. “Since acquiring the project the Company has succeeded in increasing the resource, obtaining an environmental permit, a mining permit and is now moving the project into the construction phase.”
Fraud allegation No. 5:
The truckloads of ore arriving at Silvercorp’s mills don’t add up to the amount of silver the company claims to produce.
AlfredLittle claims its investigators counted trucks arriving at Silvercorp’s mills to get an idea of just how much ore the company is processing. “Our investigators spent two weeks this summer counting the number of 30 tonne capacity trucks delivering ore to SVM’s two mills,” the AlfredLittle report states.
“We appreciate you worked hard to count 2 weeks of our truck shipments in the hot Henan
summer,” Silvercorp retorts. “We think that your count (of the number of trucks) is reasonably close except that you do not know exactly how many tonnes each truck carries.”
According to Silvercorp, those 30-tonne trucks actually carry closer to 45 tonnes of ore on each trip.
Both the anonymous letter and AlfredLittle’s “report” look like a smear campaign designed to make a whole lot of money for the unidentified investors who have taken up huge short positions in the company. I say, wait for the dust to clear, then go long SVM. Consider it a discount on a great mining company.
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