Silvercorp Metals Inc (TSX: SVM) is a mineral mining company. It acquires, explores, develops, and mines precious and base metal mineral properties at its producing mines and exploration and development projects in China. Its segments are Mining and Administrative. Its projects include Ying Mine, HPG Mine, TLP Mine, LM Mine in the Ying Mining District and BYP Gold- Lead-Zinc Mine, among others.

Investment Rationale

• Solid FY22 Production Guidance: In Fiscal 2022, the company expects to process approximately 960,000 – 1,010,000 tons 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 at par with the current Fiscal 2021 guidance.

• Silver Demand to Remain Resilient: Demand for silver would be in the limelight led by a wide range of reasons; a) Silver has the highest electrical and thermal conductivity of all metals, making it an important metal in the transition to a low carbon economy; b) ~10% of silver supply used for photovoltaics (construction of solar panels; c) ~30% of silver supply used in electrical applications (shift to a low carbon economy involves an increase in electrical componentry, including electric vehicles); d) Silver is an important component in the buildout of 5G networks (the next major evolution in communication technology); e) Silver has medical and sanitary applications because of its anti-bacterial properties. Further, Silver investment rose in 2020, as investors gravitated to safe-haven investments, and global holdings of silver-backed exchange-traded products (ETP) rose to a record 1.1 billion ounces. Also, the macro environment is supportive of precious metal prices (high levels of negative-yielding debt, significant fiscal/monetary stimulus, and lower real rates globally). The group is likely to be benefited from the rising demand for silver.

• Solid Mining Activities in Q3FY20: 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. This represents an increase of 7% in gold and 8% in zinc production, and a decrease of 6% in silver and 15% in lead production compared to Q3 Fiscal 2020.

• Strong Balance Sheet: The company has a strong balance sheet with USD 204.1 million in cash and cash equivalents and short‐term investments, an increase of USD 4.0 million or 2% compared to USD 200.1 million as of September 30, 2020. Cash and Cash equivalent jumped by 67% on a YoY basis. Further, the company is virtually debt-free with total debt to total equity ratio stood at 0.4%, which implies no balance sheet risk for the company, and growth has been funded through internal proceeds and higher free cash flows.  

Source: Company Filing

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

Revenue Percentage by Metals: Source: Company Presentation

• Profit Soared by 33% in the Third Quarter of 2021: In the third quarter of 2021, Silvercorp reported Net income attributable to equity shareholders of the Company stood at USD 8.4 million, or USD 0.05 per share, up 33% compared to USD 6.3 million, or USD 0.04 per share in Q3 Fiscal 2020. The spectacular performance on bottom line 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; b) an increase of 14% and 7% in the amount of gold and zinc sold, offset by i) a decrease of 4% and 11% in the amount of silver and lead sold; ii) a USD 3.0 million in foreign exchange loss, and iii) a USD 1.4 million finance costs.

Source: Company Filing

• Risk Associated with Investment: The company’s revenues 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, 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 the quarter under review, the consolidated total mining and cash mining costs were USD 78.90 and USD 58.79 per ton, up 0% and 2% compared to USD 78.65 and USD 57.54 per ton, respectively, in Q3 Fiscal 2020. The increase in per ton cash mining cost was mainly due to an increase of USD 0.4 million in labour costs and USD 0.9 million in mining contractor costs.
• The consolidated total milling and cash milling costs in Q3 Fiscal 2021 were USD 13.23 and USD 11.66 per tons, down 3% and 3% compared to USD 13.58 and USD 12.01 per tons, respectively, in Q3 Fiscal 2020. The decrease in per tons cash milling cost was mainly due to a decrease of USD 0.2 million in mill administration costs.
• Correspondingly, the consolidated cash production cost per tons of ore processed in Q3 Fiscal 2021 was USD 73.04, up 1% compared to USD 72.16 in Q3 Fiscal 2020.
• The consolidated all‐in sustaining production cost per tons of ore processed was USD 129.09, up 6% compared to USD 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 USD 1.4 million in mine and corporate general and administrative expenses and a USD 0.3 million increase in sustaining capital expenditures.
• Revenue in Q3 Fiscal 2021 was USD 53.3 million, up 20% or USD 8.8 million compared to USD 44.5 million in Q3 Fiscal 2020.
• Working capital as of December 31, 2020 was USD 168.7 million, an increase of USD 38.4 million or 29%, compared to USD 130.4 million as of March 31, 2020.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 28.98% of the total shareholding. Van Eck Associates Corporation and Feng (Rui) holds the maximum interests in the company at 11.57% and 3.26%, respectively. The institutional ownership in the SVM stood at 34.38%, and ownership of the strategic entities stood at 4.13%, respectively.

 Source: Refinitiv (Thomson Reuters)

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: The company reported robust performance in the third quarter of 2021, led by higher realized prices in the commodities it deals with. Mainly 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% implies adequate free cash flow to meet its obligations and fund future projects as well. We expect the demand for silver to remain elevated in the foreseeable future, which would strengthen the price of silver. Higher silver price would result in improved financial performance for the group.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on SVM at the closing price of CAD 6.14 on March 25, 2021.  

1-Year Price Chart (as on March 25, 2021). Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at March 26, 2021 as well.

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