Silvercorp Metals Inc (TSX: SVM) is a Canadian mining company producing silver, lead and zinc metals in concentrates from mines in China. The Company’s goal is to continuously create healthy returns to shareholders through efficient management, organic growth and the acquisition of profitable projects.

Investment Rationale

• Solid Top-line Performance in Q3FY21: The group reported solid performance in the third quarter of 2021, with revenue soared to US$ 53.3 million, up 20% or US$ 8.8 million compared to US$ 44.5 million in Q3 Fiscal 2020. The increase was mainly due to a) an increase of US$ 10.5 million arising from the increase in the net realized selling prices of silver, gold, lead and zinc; b) an increase of US$ 0.7 million arising from the increase in the amount of gold and zinc sold. This was partially offset by a decrease of US$ 2.6 million arising from the decrease in the amount of silver and lead sold.

Revenue Percentage by Metals, Source: Company Presentation

• Strong Bottom Line Expansion: In the third quarter of 2021, Silvercorp reported Net income attributable to equity shareholders of the Company at US$ 8.4 million, or US$ 0.05 per share, up 33% compared to US$ 6.3 million, or US$ 0.04 per share in Q3 Fiscal 2020. The spectacular performance on bottom line level was primarily driven by a) an increase of 33%, 20%, 1% and 47% in the net realized selling prices for silver, gold, lead and zinc, respectively; b) an increase of 14% and 7% in the amount of gold and zinc sold, respectively. This was partially offset by a decrease of 4% and 11% in the amount of silver and lead sold, respectively and a US$ 3.0 million in foreign exchange loss.

Source: Company Filing

• Robust Mining Activities in Q3FY21: On a consolidated basis, the company mined 279,445 tons of ore, a 6% increase over Q3 Fiscal 2020, and milled 260,648 tons of ore, a decrease of 2% compared to Q3 Fiscal 2020.  Approximately 1.7 million ounces of silver, 900 ounces of gold, 17.1 million pounds of lead, and 8.7 million pounds of zinc were produced, representing increases of 7% in gold and 8% in zinc production, and decreases of 6% in silver and 15% in lead production compared to Q3 Fiscal 2020.

• Strong Balance Sheet: The company has a robust balance sheet with US$ 204.1 million in cash and cash equivalents and short‐term investments, an increase of US$ 4.0 million or 2% compared to US$ 200.1 million as at September 30, 2020. Cash and Cash equivalent jumped by 67% on a YoY basis. Moreover, the company’s total assets at the end of the third quarter of FY21 stood at US$ 834.05 million against the total debt of US$ 202.56 million. Further, the company is virtually debt free with total debt to total equity ratio stood at 0.4%, implies negligible balance sheet risk for the company and growth has been funded through internal proceeds and higher free cash flows.

Source: Company Filing

• Bullish Management Guidance for FY22: In Fiscal 2022, the company expects to process approximately 960,000 – 1,010,000 tonss of ore, yielding 6.4 million to 6.7 million ounces of silver, 65.7 million to 68.9 million pounds of lead, and 26.9 million to 28.5 million pounds of zinc.  Fiscal 2022 production guidance represents an anticipated increase of approximately 3% in silver production, and 7% to 10% in zinc production compared to the current Fiscal 2021 guidance. In Fiscal 2022, lead production is expected to be similar to the current Fiscal 2021 guidance. 

• Expanding Mine Portfolio: On December 17^th, 2020, the Company, through its subsidiary Henan Found, won an online auction to acquire the exploration rights to the Zhonghe Silver Project from the Henan provincial government. The Zhonghe Project covers an area of 4.96 square km, approximately 50 km (75 km by road) northeast of the Company's Ying Mining District, also located in Luoning County. The final winning bid submitted by the Company was approximately US$ 76.0 million (RMB 495.0 million). 

• Risk Associated with the Investment: The Company’s revenue is derived from the mining and sale of silver, lead, zinc, and gold contained in metal concentrates. If silver and other metals prices decline significantly for an extended period of time, it can have a significant ill-impact on the group’s performance, financial health and stock price. Further, the company is also exposed to regulatory risk such as permits and licenses.

Financial Highlights: Q3FY20

Source: Company Filing

• In Q3 Fiscal 2021, the Company sold approximately 1.6 million ounces of silver, 800 ounces of gold, 16.8 million pounds of lead, and 9.0 million pounds of zinc. This reflects an increase of 14% and 7% in gold and zinc sold, and a decrease of 4% and 11% in silver and lead sold, compared to 1.7 million ounces of silver, 700 ounces of gold, 18.8 million pounds of lead, and 8.4 million pounds of zinc in Q3 Fiscal 2020.
• In Q3 Fiscal 2021, the consolidated total mining and cash mining costs were US$ 78.90 and US$ 58.79 per tons, up 0% and 2% compared to US$ 78.65 and US$ 57.54 per tons, respectively, in Q3 Fiscal 2020. The increase in per ton cash mining cost was mainly due to an increase of US$ 0.4 million in labour costs and US$ 0.9 million in mining contractor costs.
• The consolidated total milling and cash milling costs in Q3 Fiscal 2021 were US$ 13.23 and US$ 11.66 per tons, down 3% each compared to US$ 13.58 and US$ 12.01 per tons, respectively, in Q3 Fiscal 2020. The decrease in per tons cash milling cost was mainly due to a decrease of US$ 0.2 million in mill administration costs.
• Correspondingly, the consolidated cash production cost per tons of ore processed in Q3 Fiscal 2021 was US$ 73.04, up 1% compared to US$ 72.16 in Q3 Fiscal 2020.
• The consolidated all‐in sustaining production cost per tons of ore processed was US$ 129.09, up 6% compared to US$ 121.49 in Q3 Fiscal 2020, but within the Company’s annual cost guidance. The increase in all‐ in sustaining production cost per tons was mainly due to an increase of US$ 1.4 million in mine and corporate general and administrative expenses and a US$ 0.3 million increase in sustaining capital expenditures.
• Revenue in Q3 Fiscal 2021 was US$ 53.3 million, up 20% or US$ 8.8 million compared to US$ 44.5 million in Q3 Fiscal 2020.
• Working capital as of December 31, 2020 was US$ 168.7 million, an increase of US$ 38.4 million or 29%, compared to US$130.4 million as at March 31, 2020.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 27.85% of the total shareholding. Van Eck Associates Corporation and Feng (Rui) holds the maximum interests in the company at 11.57% and 3.23%, respectively. The institutional ownership in the group stood at 34.10%, and ownership of the strategic entities stood at 4.05%.

 Source: Refinitiv (Thomson Reuters)

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters) 

Stock Recommendation: The group is built upon strong fundamentals and maintained a robust margin profile over the past several quarters. Moreover, the group has outperformed the industry median on various financial metrics. The company reported robust performance in the third quarter of 2021, led by higher realized prices in the commodities it deals with. Higher silver prices bolstered the company’s financials and strengthened the company’s balance sheet, with cash and cash equivalent nudged up significantly by 67%. The company’s free cash flow has bolstered, and the company is featuring a higher free cash flow yield of 4.4%, which implies adequate free cash flow to meet its obligations and fund future projects.

We believe silver could be the metal with the next big surprise as rapidly rising demand for silver in industrial applications, especially those driving the green transformation such as photovoltaic cells used in solar panel production. Consequently, silver prices are likely to remain elevated in the foreseeable future. Higher silver prices would help the group in delivering a robust performance in the coming quarters.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing Price of CAD 7.73 on February 11, 2021.

1-Year Price Chart (as on February 12, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at February 12, 2021 price as well.

Disclaimer

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