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Silvercorp Metals churning out metal from Chinese mines and set to bolster portfolio with Guyana deal

Snapshot

The group's flagship asset is the Ying project, which was acquired in March 2004

Silvercorp Metals Inc -

Quick facts: Silvercorp Metals Inc

Price: 6.06 CAD

TSX:SVM
Market: TSX
Market Cap: $1.05 billion
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  • China's premier silver producer
  • Deal with Guyana Goldfields set to widen asset base and geographical exposure
  • Underground mine specialist

What Silvercorp Metals does:

Silvercorp Metals Inc (NSYEAMERICAN:SVM) (TSX:SVM) has been an underground mine operator in China since 2006 and has a track record of growing organically through its own cashflow. 

The Vancouver-headquartered company has also built up substantial reserves. A profitable company, it is focused on mining silver, lead and zinc.

The group's flagship asset is the Ying project, which was acquired in March 2004 and which started commercial production on April 1, 2006. It lies 240 kilometers (km) southwest of Zhengzhou, the capital city of Henan Province in central China and consists of six separate mines which feed two mills with 3,200 tonnes per day (tpd). Six smelters lie within 200 km. The mine life runs until 2036.

Elsewhere, the company has the GC mine in Guangdong province. Output started in 2014 and the projected mine life of 12 years, through to 2031, is based on proven and probable reserves, at an average annual production rate of about 300,000 tonnes.

An updated report last year for GC showed a resource of 9.1 million tonnes in the measured and indicated categories, an increase of 42%, which contained around 24.5 million ounces of silver, 233 million pounds of lead and 564 million pounds of zinc.

Significantly, in April this year, the firm revealed a deal to buy the mid-tier gold producer Guyana Goldfields Inc (TSE:GUY), which runs the Aurora gold mine in the South American country. In May, the deal was upgraded, upping the consideration and valuing Guyana at around C$227 million. The amended deal has been unanimously agreed by both companies' boards.

Between April 2006 and December 2019, Silvercorp produced a consolidated 69.7 million ounces of silver and 999.2 million pounds of lead and zinc. In terms of resources, its consolidated measured and indicated resources of contained metal is around 151 million ounces of silver, 736,000 tonnes of lead and 470,000 tonnes of zinc.

Silvercorp also owns around 29% of New Pacific Metals Corp (CVE:NUAG), which has a market cap of around C$591 million, and hopes to grow this investment.

New Pacific Metals is advancing the Silver Sand project in Bolivia, which boasts encouraging near-surface silver mineralization.  A maiden mineral estimate reported in April outlined a 35.4-million-ton resource grading at 137 grams per ton silver for a total of 155.9 million ounces in the measured and indicated category. Silvercorp's chairman and CEO Dr Rui Feng is the CEO at New Pacific.

Silvercorp also wants to bring its BYP gold mine in Hunan province, suspended since 2014, back into production, targeting 30,000 ounces of the yellow metal a year. Last year, an NI 43-101 resource for BYP showed 421,000 ounces in the measured and indicated (M&I) and 110,000 in inferred.

How is it doing:

At the time the Guyana Goldfields deal was announced in May, Rui Feng, Silvercorp's CEO said it would create a new globally diversified precious metals producer. The new entity will have two profitable underground mines in China and a gold operation in Guyana, along with a strong balance sheet to fund growth.

"We believe this is a rare opportunity to leverage our underground mining expertise and strong balance sheet to unlock value for all shareholders through the development of the Aurora underground project as well as aggressive exploration programs in a proven gold district," Feng said.

Earlier in May, the firm revealed that it beat its full-year output guidance, despite an extended shutdown in its fourth quarter to end-March, 2020. Operations in China were suspended for around six weeks due to the coronavirus pandemic.

Once operations reopened in March, however, production was ramped up to full capacity with no employee infections.

However, the amount of ore mined overall in fiscal 2020 (to March 31) was down 2% to 885,830 tonnes compared to the previous year.

Revenue for the year fell by 7% to US$158.8 million, down from US$170.5 million in fiscal 2019, as Silvercorp sold 6.3 million ounces of silver, 3,300 ounces of gold, 65.3 million pounds of lead, and 25.4 million pounds of zinc.

But net income for the year still came in at US$34.3 million, or US$0.20 per share, versus US$39.7 million or US$0.23 per share for the year to end-March, 2019.

In addition, the group's cash flow from operations for the year was US$77.2 million, up from US$70.4 million for the previous year, while the metals producer paid out US$4.3 million in dividends to shareholders, versus US$4.2 million in the prior year.

Silvercorp reiterated its fiscal 2021 production guidance of 930,000-970,000 tons of ore, yielding 6.2 million to 6.5 million ounces of silver, 66.1 million to 68.5 million pounds of lead, and 24.5 million to 26.7 million pounds of zinc.

The firm had US$142.5 million in cash and cash equivalents at end-March, 2020, up 24% on the US$115.3 million seen at the end of fiscal 2019.

In March, Silvercorp announced a share buyback program to run from March 19, 2020, to March 18, 2021, as the company believes that market conditions have resulted in its stock being undervalued.

Inflection points:

  • Closing of Guyana Goldfields transaction
  • Operational improvements
  • Metals price moves

What the broker says:

Following the fiscal 2019/2020 results, on May 26, broker Roth Capital repeated a 'Buy' rating on SilverCorp Metals with a US$5.75 price target for the stock

Roth analyst Joe Regor said he thought the miner had enjoyed another "strong year" but added that the results were 'uneventful', hence the unchanged rating. However, the analyst did also say he believed Sillvercorp should benefit from current rising metals prices.

"With the lack of material impacts from financial results and our decision to exclude the Guyana acquisition until it closes, we saw no meaningful change in our DCF valuation of SVM,"  the analyst concluded.

What the boss says:

Silvercorp's vice-president Lon Shaver spoke to Proactive in May along with Alan Pangbourne, the CEO Guyana Goldfields. Shaver highlighted some of the reasons behind the Guyana deal.

"It's an operating mine so a lot of the elements have been checked and are working, but what really excites us about this is that this is a mine that's transitioning from more of an open pit mine to an underground operation and that really is Silvercorp's specialty so we are excited about being able to bring our expertise and our capital to help this mine."

Pangbourne added: "The pro-forma company gives us exposure to multiple metals. It diversifies the holdings of the pro-forma company. You get rid of the single asset risk issue that you always have as a single operating entity." He also noted the firm 's understanding and access to the Chinese supply chain.

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