Top five fraud allegations against Silvercorp (SVM) debunked

A number of credible geologists, analysts and Silvercorp itself have come forth to debunk accusations against the company. Here are the top five fraud allegations and their refutations.

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.

The takeaway

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.

Related

Time to buy Silvercorp Metals (SVM)?

Despite anonymous allegations of wrongdoing, I’m more bullish than ever on Silvercorp Metals (NYSE:SVM). Here are three reasons why.

NOTE: Information released today (Sept. 13, 2011) at AlfredLittle.com negates much of the information here. It sounds like it might be time to dump SVM.

Sometimes allegations of fraud are a good thing, and that might be the case for Silvercorp Metals, Inc. (NYSE:SVM). Shares are starting to look like a bargain. The Vancouver-based silver mining company, which does most of it’s mining in China, got slammed on Friday falling more than 10 percent on four times the stock’s average trading volume.

Why did Silvercorp plunge?

On Friday, Silvercorp announced a dramatic increase in short positions in the company’s stock. Over the past two months, 23 million shares (fully 13 percent of the outstanding shares!) were sold short. On top of that, the company got its hand on an anonymous letter that was addressed to numerous governmental agencies and media sources. The letter was purportedly written by an investment firm that was shorting the stock, and the same firm said it planned to publicize wrongdoings at the company – namely a $1.3 billion accounting fraud.

Three reasons to invest in Silvercorp despite the allegations

You’ve got to make your own call on whether now’s the time to buy into Silvercorp, but I like what the company’s done. It’s fighting back aggressively against short-sellers and the anonymous firm that’s accused the company of wrongdoing. Here are three reasons why I’m still a bull:

1) They’re facing the allegations head on. First, Silvercorp proactively sent out a press release acknowledging the short sales and anonymous letter. In it, Silvercorp provides links to documents that refute the allegations against the company.

2) They’re going after the bad guys. Silvercorp’s set up an independent task force to find out who authored the anonymous letter. The task force has some heavyweights on board, too, including Canada’s former ambassador to China, Earl Drake. If they can uncover the source of the letter, Silvercorp has vowed to pursue “all legal options” in multiple jurisdictions to recover damages caused by the allegations.

3) They’re still buying back their stock. Silvercorp apparently thought the company’s shares were a bargain at roughly $8 a share when they first announced their stock buyback plans in June. On the heels of the anonymous allegations that surfaced on Friday, the stock dipped as low as $7.08 a share, and Silvercorp’s looking at the price move as another great opportunity to buy more shares.

“While we are fighting these manipulation schemes, we will continue with our ongoing share buyback program, increase our investor relations efforts, and continue to focus on growth through exploration, acquisitions, and mine development,” CEO Dr. Rui Feng said in the press release. “We are pleased with our current operations and look forward to reporting another profitable quarter.”

Of course, there’s still a lot of uncertainty surrounding accounting practices in China (just take a look at my recent story on Puda Coal), but this one has the feel of a rogue smear campaign. Once the market regains its senses, Silvercorp could soar to catch back up with the jump in silver prices we’ve seen of late. That’s good news for investors with the fortitude to stay long.

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Top 10 best silver mining stocks over the past six months

Because silver producers have relatively stable fixed costs, a $1 per ounce rise in the price of silver means a multi-million dollar spike in profits. Here’s a look at the top 10 best-performing silver mining stocks over the past six months.

One of the quirks of the recent surge in silver prices is the relative underperformance of silver mining stocks. Shares in Silver Wheaton Corp. (NYSE:SLW) – the world’s largest silver streaming company – have fallen 2.5 percent over the past month while the price of silver has rocketed up 24 percent in the same span of time.

That makes little sense. Because silver producers have relatively stable fixed costs (outside of rising energy prices), a $1 per ounce rise in the price of silver means a multi-million dollar spike in profits. Silver Wheaton Corp. (NYSE:SLW), for instance, forecasts attributable production of 27 to 28 million ounces of silver this year. With silver up $10 over the past month alone, Silver Wheaton’s bottom line could balloon by $280 million this year; assuming, of course, silver prices don’t fall off precipitously by the end of the year.

If silver prices remain high, expect silver mining shares to follow them up. Here’s a look at the top 10 best-performing silver mining stocks over the past six months:

Great Panther Silver Limited (TSE:GPR)
+240 percent over the past six months: Great Panther owns and operates the Topia Mine and Guanajuato Mine, both of which are in Mexico. Production at the mines rose 15 percent year-over-year to 607,225 ounces during Q1. The company sells bullion direct to consumers via its online store.

First Majestic Silver Corp. (TSE:FR)
+228 percent over the past six months: First Majestic has increased its output nearly as fast as Great Panther. The company dug up 1,825,366 equivalent ounces of silver during Q1, a 13 percent increase over 2010. All told, First Majestic expects to produce 7.5 million ounces of silver this year. The company also sells silver bullion direct to consumers online.

Endeavour Silver Corp. (TSE:EDR)
+144 percent over the past six months: Of the top three silver stocks of the past six months, Endeavour has grown its production the fastest. EDR mined 900,133 ounces of silver during Q1, up 17 percent over 2010’s numbers. Gold production was also up 33 percent, pushing revenues up 95 percent in Q1.

Alexco Resource Corp. (AMEX:AXU)
+86.6 percent over the past six months: Alexco entered production on its first mine in January, and the company hopes to yield “a minimum 2.8 million ounces of silver production in 2011” (per AlexcoResource.com). The company’s also expanding its exploration efforts at its Keno Hill property in the Yukon.

Mag Silver Corp (AMEX:MVG)
+69.4 percent over the past six months: An exploration-stage company with rights to 100 square miles of prospective ground in Mexico, MVG got promising results from a prefeasibility study at its Juanicipio Mine, which could hold as much 46.5 ounces of silver per ton of ore (per SmallCapInvestor.com).

Five more silver mining stocks to watch

Metalline Mining Company (AMEX:MMG)
+62.8 percent over the past six months

Silvercorp Metals Inc. (NYSE:SVM)
+62.8 percent over the past six months

Coeur d’Alene Mines Corporation (NYSE:CDE)
+62.7 percent over the past six months

Silver Wheaton Corp. (NYSE:SLW)
+61.5 percent over the past six months

Hecla Mining Company (NYSE:HL)
+41.2 percent over the past six months

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Shares in Silvercorp Metals Inc. (SVM) get hammered

One of my favorite silver mining stocks, Silvercorp Metals, Inc. (NYSE: SVM), got hammered yesterday on a double-whammy of bad news. The China-based silver miner was downgraded from ‘outperform’ to ‘market perform’ by BMO Capital Markets and they announced a sale of $100 million in stock.

One of my favorite silver mining stocks, Silvercorp Metals, Inc. (NYSE: SVM), got hammered yesterday on a double-whammy of bad news. The China-based silver miner was downgraded from “outperform” to “market perform” by BMO Capital Markets, according to AmericanBankingNews.

Silvercorp also announced it was selling 8 million common shares at $12.70 per share in a bought deal worth $101 million. The dilution will have to be absorbed by the market, as evidenced by yesterday’s stock decline. Silvercorp’s 3.3 percent tumble came even as silver rallied over $30 per ounce in late-night trading yesterday.

Trading volume was abnormally high in SVM yesterday with more than 7.4 million shares changing hands. On a typical day, the stock trades just under 3 million shares a day. Even with the stock’s fall factored in, Silvercorp’s trading at a price-to-earnings ratio of 44.68. That’s slightly higher than Pan American Silver Company’s P/E (NASDAQ:PAAS) of 44.02, but I’d still be willing to bet on SVM. They’re half the size of PAAS, and they produce silver for cheaper. I don’t see Silvercorp falling for long.

Related

Silvercorp Metals Inc. (NYSE:SVM): The Most Under-Bought Silver Stock on the Market?

If inflation does hit, expect to see Silvercorp Metals Inc. (NYSE:SVM) around its May peak of just under $9 per share.

All signs appear to be pointing to a bull market in metals as gold finished off a remarkable August, where it surged from $1,180 to $1,245 per ounce. Silver’s ride was less consistent. The metal rose from $18 to just under $19 per ounce, but it did most of it’s moving in the last week of the month.

With inflation fears held at bay by fear of a double-dip recession, you would think that investors would have give up on precious metals all together, but that’s not the case. Gold’s chart (see below) looks like it’s in the heart of a trend that will likely steepen once inflation becomes a reality.

30-Day Gold Chart

That brings us to one of my favorite stocks: Silvercorp Metals Inc. (NYSE:SVM). Trading at a P/E ratio of 26.85, Silvercorp would be appropriately valued if the threat of inflation didn’t appear to be around the corner. Throw that in the mix, and the Chinese metal producer could look like it’s trading at bargain prices a year from now. Indeed, the stock was recently upgraded by BMO Capital Markets, and it looks and heads and shoulders better than its competitors Silver Wheaton Corp. (NYSE:SLW), which is trading at a P/E of 42 and Pan American Silver Corp. (NASDAQ:PAAS), which is trading at a P/E of 28.

Even better than the upgrade? Silvercorp’s gross profit surged to $26.5 million in the quarter ending June 30. That’s better than the company has done in the past four quarters, and the stock maintained its dividend of $0.02 per share. That’s good for a 1 percent yield on top of any appreciation the stock might see. If inflation does hit, expect to see this stock around its May peak of just under $9 per share.