Silvercorp is China's premier silver producer, with a production of 6.3 million ounces of silver, 67.1 million pounds of lead, 27.9 million pounds of zinc and 4,700 ounces of gold during the fiscal year ended March 31, 2021. In addition to its operational success, Silvercorp is considered a preferred mining company in the Henan province, having built a solid reputation for upholding high safety and environmental standards and for supporting local community initiatives. Facilitated by China's 1997 Mineral Resource Law, Silvercorp first entered China in 2003 to capitalize on the country's vastly underexplored geological potential.

Investment Rationale

• Silver Well Positioned for Long Term Growth: There are multiple reasons to remain bullish on silver in the long run, ranging from increasing industrial demand as silver is used in solar panels and EV batteries. However, inflation banging on the door, and silver seems unable to break out of the mid-twenties in price as silver dipped below USD25 for the first time since March and hovering near USD 24.24/oz. But there are a few important things to consider. Notably, silver spent seven years floating between USD14 and USD18/oz. Its value surged nearly 50% in 2020. The fact that it is remaining relatively steady is proof the market is digesting its recent surge, especially in the backdrop of all of the uncertainty brought about by the Federal Open Committee Meeting, which sent almost every other precious metal tumbling for a few days. It is also important to remember that the fundamentals for silver in the long term remain strong as they were back in February when the metal nearly hit USD30/oz. Silver is still looking down the barrel of a global shortage, with demand likely to rise thanks to its industrial uses in clean technology. Further, as 5G towers become more prevalent, silver is going to be in demand there as well. The company is well poised to take advantage of the rising silver demand.

• Reported Solid Margin Expansion on QoQ Basis: SVM reported solid margin expansion in Q1FY22 on the back of an increase in commodity sales on a comparable quarter basis and relatively higher commodity realization prices. Gross margin expanded by 330bps to 48.8%, EBITDA margin expanded by 1150bps to 47.8%, operating margin expanded to 33.6% from 14.7% a quarter before. Amid times when inflationary pressures are increasing, margin expansion reflects strength in the business model to sustain on the profitability front. However, the Net Profit margin was slightly lower on a quarter-on-quarter basis.

• Debt Free Balance Sheet: The company has a debt-free balance sheet, with consolidated gearing stood at 0x from 0.01x reported a year before. The solid rally in the underlying commodities prices since 2020 has enabled the company to generate a lot of free cash flow, which help them to pay off the outstanding debt. A debt-free balance sheet would further give a strong competitive advantage to the company against the competition.

• Robust Liquidity Position: SVM enjoys solid financial flexibility, with a strong liquidity profile within the silver universe. The company's current ratio at the end of the Q1FY22 stood at 5.26x, significantly higher than the industry median of 2.82x. The ratio also improved from 5.95x reported at the end of fiscal 2021. The solid liquidity position reflects the strong operating cash flow generation capabilities of the group.

• Solid Q1FY22 Performance: During the first quarter of fiscal 2021, the company revenue surged by 26% mainly due to a ) an increase in the net realized selling metal prices; b) an increase in the quantities of metals sold. Cash flow provided by operating activities in Q1 Fiscal 2022 was USD 36.5 million, up 21% and exited the quarter with a strong balance sheet with USD214.4 million in cash and cash equivalents and short-term investments, up USD15.3 million or 8%.

• Consistently Rewarded Shareholders: The company has a consistent track record of dividend payment and dividend growth over the past 5-years. In the last five years, the company has increased dividend payment by~38%, which reflects that the company is rewarding its shareholders regardless of the economic cycle. During the quarter just gone by, the company paid USD2.2 million of dividends to the company's shareholders.

Dividend History. Analysis by Kalkine Group

• Bagged three Exploration Permits: In April 2021, the company was granted three exploration permits of 48.8 square kilometres in area, covering depth extensions of three mining permits, SGX, HPG, and TLP-LME-LMW, at the Ying Mining District. Previously, the exploration activities underneath the mining permits were covered by a joint venture agreement between the company and the Department of Natural Resources of Henan Province.

• Increased Reserves and Resources at the GC Mine: From the start of operations at the GC Mine in 2014 through to December 31, 2020, 1,853,662 tonnes have been mined at average head grades of 94 grams per tonne silver, 1.6% lead, and 2.9% zinc. Based on only Proven and Probable Reserves, the GC Mine has a projected life of 13 years through 2034, at an average annual production rate of approximately 310,000 tonnes, and with average silver equivalent grades of approximately 309 g/t. The GC Mine has the potential to extend the LOM beyond 2034 via the conversion of existing Mineral Resources to Mineral Reserves and further exploration and development.

• Risk Associated to Investment: The company is exposed to volatility in the underlying commodity prices, which can have a significant impact on the group’s financials. Further, the company is exposed to forex risk and interest rate risk as well.

Financial Highlights: Q1FY22

Source: Company

• During the quarter under consideration, the company’s revenue stood at USD58.8 million, up 26% or USD12.1 million compared to USD46.7 million in Q1 Fiscal 2021. The increase was mainly due to a) an increase of USD19.3 million arising from the increase in the net realized selling metal prices; b) an increase of USD1.3 million arising from the increase in the quantities of zinc sold; offset by c) a decrease of USD8.5 million arising from the decrease in the quantities of silver, gold, and lead sold.
• Revenues from silver, gold, and base metal were USD34.0 million, USD1.5million, and USD23.3 million, respectively, up 30%, 2%, and 22%, respectively, compared to USD26.2 million, USD1.5 million, and USD19.0 million in Q1 Fiscal 2021. 
• Revenue from the Ying Mining District was USD47.4 million, up 19%, compared to USD39.7 million in Q1 Fiscal 2021. Revenue from the GC Mine was USD11.4 million, up 62%, compared to USD7.0 million in Q1 Fiscal 2021.
• During the quarter under review, the company sold approximately 1.6 million ounces of silver, 1,000 ounces of gold, 16.8 million pounds of lead, and 7.3 million pounds of zinc, representing decreases of 12%, 9%, and 20% in silver, gold and lead sold, and an increase of 4% in zinc sold, compared to the prior year quarter.
• Cash flow from operations of USD36.5million, up 21% or USD6.4 million compared to USD30.1 million in the prior year quarter.
• All-in sustaining cost per ounce of silver, net of by-product credits, of USD7.46, compared to USD5.61 in the prior year quarter.
• Strong balance sheet with USD214.4 million in cash and cash equivalents and short-term investments, up USD15.3 million or 8% compared to USD199.1 million as at March 31, 2021.
• Income from mine operations in Q1 Fiscal 2022 was USD25.5 million, up 32% compared to USD19.3 million in prior year quarter.

Top-10 Shareholders

The top-10 shareholders together hold 29.81% stake in the company with Van Eck Associates Corporation and Feng (Rui) are the top shareholders with an outstanding position of 10.95% and 3.27%, respectively.

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: Strength in underlying commodity prices together with strong completive advantage, helped the company to report solid financial performance in the quarter just gone. The company recorded revenue growth of 26%, mine operation earnings growth of 32% and Net Cash generated from operating activities nudged by 21%.  Further, the solid reported performance was mainly on account of a 48% surge in the average silver selling price on a YoY basis, a 12% jump in the gold average selling price and a 70% jump in the zinc average selling price on a YoY basis. We believe that higher underlying commodity prices, together with the increased production guidance, would further bolster the group's performance in FY22 as well.

Also, the company has a robust balance sheet, with zero debt and a strong liquidity position, which places SVM well against its peers to capitalize on its strong competitive advantage. Further, we remain bullish on silver in the long run, on the back of increasing industrial demand as silver is used in solar panels and EV batteries.

Hence, based on the rationale discussed above and valuation, we recommend a 'Buy' rating on the stock at the closing price of CAD 5.33 on September 09, 2021.   

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

1-Year Price Chart (as on September 09, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at September 10, 2021 price as well.

Disclaimer

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