“The company really grew out of an emphasis on the wise deployment of capital in terms of generating financial returns,” says Lon Shaver, the company’s Vice President.
“The idea was not to be a huge consumer of capital, and not to get fixated about talking about being a world class asset.”
In short, Silvercorp was set up to generate financial returns for its shareholders, and to build value. All else was secondary.
And how successful was the company in meeting these aspirations?
It’s now the largest Western-listed producer of silver in China, capitalised at well over C$1bn, and still on a path to growth.
The key assets are the Ying mines in Henan province originally put into the company by founder and chief executive Dr Rui Feng, a Saskatchewan-educated PhD geologist responsible for the discovery of the prolific CSH mine in Inner Mongolia formerly owned by Jinshan Gold, now China Gold International Resources Corp. (TSE:CGG).
After that success Dr Feng began to look around for another opportunity that could generate enough cash flow to support an ongoing effort to explore for and discover a world class asset. At that point, in 2004. he found Ying.
At the time, Ying was a narrow vein style of deposit not viewed favourably by the market. And yet, within a year, under the tutelage of Silvercorp and its joint venture partners at the local geological bureau, Ying was generating sufficient cash to support all the exploration and development activities the company undertook. Silvercorp's capital investment in the project was only US$5mln, making it a true entrepreneurial success, and the rest as they say is history.
Driven by the high grades at Ying, the mines have since that time been able to distribute profits of US$468mln, and to keep driving production and profits higher.
How has he done this?
Two factors stand out above all others: the quality of the assets, and the ability of Dr Feng to make things work in China.
“These assets were driven off the high grade and their close proximity to surface,” explains Shaver.
“The rock was of such high grade it could go directly to the smelter – you could ship this rock and the smelters were happy to take it.”
That gave the company an early avenue to cash flow, and allowed the company the ability to deliver organic growth.
All that was back in the early 2000s, but it’s a further indication of the quality of the assets that in spite of all the mining that’s taken place between now and then, the Ying mines still have a 15 year life ahead of them. And there may well be more, if exploration can be brought to bear effectively in the future.
But for the time being it’s not the size of any future resource that’s Silvercorp’s focus. On the contrary, because it’s all about maximising returns, grade is the key.
“The question is can we find more higher grade material to defer mining into the lower grade,” says Shaver.
“If we can, it will improve the NPV and the economics. If we can find more material that’s shallow, that’ll be great for us. It’s our big push. You can do that in this kind of a mine as an ongoing project, as opposed to taking your foot off the gas pedal.”
In the Silvercorp universe, constant reinvestment leads to incremental improvement and steady growth. That’s evident at a financial level in the company’s outperformance of Coeur, Hecla, First Majestic, and Pan American over the past five years in free cashflow growth, in EBITDA margin, return on equity and all-in sustaining costs.
In part this is achieved through a focus on internal management efficiency and key performance indicators that is rarely matched by other mining companies. Incentive for the workforce comes in the shape of a generous profit-sharing plan, which keeps everyone’s eyes on the same goals. This kind of forward thinking is also evident at an operational level in the implementation of what’s known as the “Enterprise Blog”, an on-mine social media system that allows for the co-ordination of activities across a wide range of areas.
“The Enterprise Blog is our forward-looking information technology,” says Shaver.
“There’s a lot of activity and a lot of people in the mine, and this helps us keep track of all these complex tasks in each area of operations.”
It all adds up to significant and rising production.
In 2019, the company produced 5.8mln ounces of silver from Ying and 600,000 ounces from the operation at GC. In 2020, the guidance is for 6mln ounces of silver from Ying and steady production from GC at 600,000 ounces.
But increased production is not the only likely avenue for growth. Silvercorp is also on the look out for acquisitions around the world, in particular, says Shaver, “where the current owner isn’t equipped to move the project forward either technically or financially.”
The trend to diversification is there to be seen already. There’s the GC mine for a start, located far to the south in Guangdong province. Then there’s also the BYP project in Hunan, an earlier stage former lead-zinc mine that also shows significant promise for gold.
And there’s also the 29% stake in New Pacific Metals, a company conceived and created by the Silvercorp team and which is now worth more than C$1bln.
All told, Silvercorp has more than US$135mln in cash and short-term investments that it could deploy in the event that the right deal came along. There’s also the possibility of using the company’s paper for an acquisition, but don’t bet on that happening. The company is famously reluctant when it comes to dilution – the number of shares on issue has only fluctuated by around one percent over the past five years.
Whatever happens, the company has shown time and again it can be innovative and creative when it comes to growth, but most importantly of all, it’s demonstrated a clear ability to generate cash and to return it to shareholders when it comes in.a