Major Player in Booming Chinese Silver Industry

Today’s look is at a stock that I actually haven’t seen teased very heavily, and I haven’t received the ads directly yet, but I have gotten dozens of questions from readers about it … so here goes.

It looks like the teaser must have been in the S&A Digest, which is the “free” weekly report for folks who subscribe to any of the paid Stansberry letters — and it’s all about the latest pick by Matt Badiali for the S&A Oil Report.

Here’s the blurb that folks sent to me:

“Matt’s most recent Oil Report recommendation is a major player in the booming Chinese silver industry. This company has doubled its silver production in the past two years (an amazing feat), and it has nearly quintupled its resource base to 198 million ounces in just four years – but it’s just getting started. The company is building a new mine that could add 40% to 50% to its production in the next two years.

“Plus, it is one of the lowest-cost silver producers in the world. It actually earns $2 per ounce of silver it mines – before it even sells the metal.

“Despite its enormous growth potential, the market is pricing this company at a ridiculously low multiple. Its competitors trade in the neighborhood of 25 times earnings. Currently, Matt’s recommendation trades for 10 times earnings. If it simply trades in line with competitors – not accounting for any future growth – subscribers will more than double our money.”

So … not a huge number of clues, but I think I can answer this one quickly for you … this should be …

Silvercorp Metals (SVM, trades in both Toronto and NY)

And while Badiali probably picked this stock sometime early last week (or before, not sure when his letter comes out), a lot has actually happened since then, too, so there’s plenty of action in Silvercorp.

So … who are they? This is a miner that has been recently focused on Chinese silver assets — and Porter was right, they actually do get paid to take silver out of the ground. That’s due to the “byproducts” that also come out of these same mines, zinc, lead, and a wee bit of gold … and, of course, to the absurdly low operating costs of the mines (thanks, primarily, to cheap labor and an agreeable government). And they are profitable, and they do pay a noticeable dividend of about 2%.

Here’s what Silvercorp says about themselves (they’re not shy):

“Silvercorp today is China’s largest primary silver producer and has achieved an enviable three-year track record of being the lowest cost producer of silver among its industry peers. In FY2009 (ended March 31, 2009), the company produced a record of 4.2 million ounces of silver at a cash cost of negative $2.77 per ounce. At the same time, the company is growing its resource base through continuous exploration of existing projects as well as acquiring new development projects in multiple jurisdictions. It is also one of only a handful of metals producers to pay shareholders a dividend.

“With US$65.4-million in cash, no debt, strong operations and the lowest production costs among its global industry peers, Silvercorp sees today’s unprecedented market volatility as one ripe with opportunities to grow its business in the long term.”

So … what’s the catch? Well, aside from the fact that Matt apparently has a good number of subscribers, and other newsletters have also probably been climbing on this too due to the rising silver price in recent months, there’s some corporate news.

First, I’ll just hazard a guess that the S&A Oil Report recommendation might have come out on June 2 — that is, unless a higher circulation letter came out on that day. That’s because on June 3, last Wednesday, the volume spiked dramatically in SVM trading to over four million shares … more than 10X the average daily volume. And interestingly enough, that was also a day when the bullion price of silver fell by several percent, as did most other silver miners, but SVM went up. Not dramatically, I suppose, but still up nicely on a day when almost all silver stocks were down. It was dramatic enough that SVM had to respond publicly and say that they didn’t know why the stock was trading this way.

But beyond the attention from newsletters, there was also more to come from SVM — and though there were probably rumors about it floating around (I didn’t hear them, I’m just guessing), this probably wasn’t part of Badiali’s analysis and forecast for the shares: Silvercorp just offered to buy out a Nevada gold company.

If you love Silvercorp, this might actually be a nice thing in the short term — it helped to slow down the advance in the shares, since acquirers almost always see their shares suffer, and the stock is now right about where it was on June 2, before (I’m guessing on this) the S&A Oil Report picked the stock … though it is still up about 20% from where it was two weeks ago.

Silvercorp’s big corporate news is that they’ve announced an offer to buy Klondex Gold (KDX in Toronto, KLNDF on the pink sheets) in what would be an all-stock deal. The offer was for half a SVM share for each Klondex share, a big premium to the Klondex share price at the time, and you can read about it (and hear the conference call from Monday morning) on Silvercorp’s special website that they put together for this offer. I know very little about Klondex or about the offer, but from the wording it sounds like it’s a deal they’ve been trying to make with management, but now they’re going direct to shareholders now in what might be a hostile offer, depending on how the management responds. The initial response was tepid, to say the least, and Klondex does have a 43-101 resource estimate that looks very promising, so they may have some leverage for a better offer or a different bidder to come in — they’re definitely in the early stages and they need funding to do any mining, but they are sitting on a nice chunk of gold.

From the pricing of Klondex, it seems like investors in that little gold explorer believe the deal will go through, or that a better offer will be forthcoming — the shares are currently trading almost exactly in line with the deal terms, at about half the price of Silvercorp shares.

So … another interesting pick in the silver arena, a low-cost producer with good assets in China who might also become a Nevada gold miner. And the shares have gotten a lot of attention lately — will the price drop as the attention wears thinner, or will this acquisition be a “goldmine” for them and drive the prices higher? Or does it just depend on the price of silver? Let us know with a comment below.

And, if you happen to have ever subscribed to Matt Badiali’s S&A Oil Report, let us know what you thought with a review here (or just check out the reviews other folks have written, this is, so far, the second-ranked commodity-focused newsletter on the reviews site).

The author will always disclose any direct long or short equity, debt or option position in any stocks written about as of the day of publication, and will not trade in any stocks mentioned for three days (72 hours) after publication. Full disclaimer is at the bottom of the page.

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1. Thanks for including now Canadian tickers with US-stocks, where available, Travis. Helps staying on track. )

   [Reply]

   Posted by Mahkel | June 10, 2009, 11:33 am

2. From a charting perspective SVM looks very interesting. The chart compares closely to that of Hecla Mining (HL). Both stocks are in a downtrend and both are overbought. However, HL’s weekly momentum has just turned negative and so has its strength relative to the broad market. In other words, SVM is the relatively stronger chart and it should outperform HL as its technical picture is stronger. Plus…….SVM has a 2% yield.

   I’d like it to pull back some and I’d buy SVM at 2.75 – 3.25 looking for it to go to 6.00 – 7.25. Fundamentally, HL has a lot of silver and significantly less political risk than SVM. I’d especially be interested in other comments regarding fundamental comparisons as I don’t do balance sheets……..GO Wings!

   [Reply]

   Posted by spreadtrader | June 11, 2009, 6:14 am

3. Looks like this same stock is probably being teased more aggressively now, from a quick glance at the new teaser about the lifting of the MLR-07 silver ban beginning “China’s Silver Boom,” it appears they’re talking about this firm again, telling us the shares will double from here.

   [Reply]

   Posted by StockGumshoe | June 24, 2009, 11:55 am