Silvercorp Metals Inc (TSX: SVM) is China's premier silver producer, with the 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

• Exited Fiscal 2021 on Strong Note: The company reported strong financial performance in the fiscal year just gone by, with revenue for the year was USD 192.1 million. Revenue was up 21% compared to USD 158.8 million in the prior year. Net income to equity shareholders was USD 46.4 million, up 35% compared to the prior year. Cash flow from operations was USD 85.9 million, up 11% compared to USD 77.2 million in the prior year. For the year, the group has announced that they mined 964,925 tonnes of ore, milled 967,581 tonnes. Those numbers were up 9% and 8% respectively.

Source: Company

• 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. However, the yield is quite low at 0.44%, which is lower than the Canada 10-Year Government Bond Yield of 1.4%.

Dividend History

• Industry Leading Margin Profile: The strength of SVM business can be gauged by throwing some light on its margin profile. In fiscal 2021, the company’s gross margin stood at 50% (an outperformance of 460bps against the industry median of 45.4%), EBITDA margin stood at 50.5% (an outperformance of 1350bps), and Net Margin stood at 31.5%, significantly above the industry median of 5.6%. Moreover, the company is generating a significantly higher return for its shareholders, with an ROE of 11.1% in FY21, whereas the industry median stood at 3.6%. This reflects a strong competitive advantage; its shareholders are having against their peers. Also, a higher-margin profile indicates that the company is generating significantly higher free cash flow, which provided a greater margin of safety amid rough seasons.

• Robust Financial Risk Metrics: The company become debt free in fiscal 2021, with consolidated gearing stood at 0x from 0.01x reported a year before. The long-term debt to total capital ratio stood at 0.2% at the end of fiscal 2021, improved from 0.3% at the end of fiscal 2020. Higher profitability and strong free cash flow generation ability help in becoming virtually debt-free in 2021.
  

• Superior Liquidity: SVM enjoys solid financial flexibility, with a strong liquidity profile within the silver universe. The company’s current ratio at the end of the FY21 stood at 5.95x, significantly higher than the industry median of 2.61x, also improved from 5.68x reported at the end of fiscal 2020. The solid liquidity position reflects strong operating cash flows.
  

• Received Three Exploration Permits: In April 2021, the company has been 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.
  

• Potential Million-tonne-per-year type mill at Ying District: The company is thinking about adding potentially another million-tonne-per-year type mill to the Ying District for both Ying proper mines that they have right now, the ones they are looking to develop on the footprint, both with the existing silver, lead, zinc that they were mining and to accommodate potentially some gold zones.
  

• Silver Outlook- Positive: Silver remained around USD 26 an ounce, hovering close to the lowest level since mid-April as investors continue to digest hawkish comments from the Federal Reserve. US policymakers expect higher growth and inflation this year and see two rate hikes by the end of 2023. Still, Federal Reserve Chair Jerome Powell said the central bank would not act pre-emptively to quash inflation and would wait for a recovery in the job market before raising interest rates. However, from electronics to photography, jewellery and coins, silver is integral to numerous everyday products. Its high electrical conductivity and durability give an edge in industrial and technological applications, with almost every computer, mobile phone, automobile and appliance containing silver. Therefore, demand for silver is quite strong, and we believe silver prices to remain elevated in the mid-term to long-term.

• Risk Associated with 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: FY21

Source: Company

• During the year ended March 31, 2021, the group reported that they have mined 964,925 tonnes of ore and milled 967,581 tonnes. Those numbers were up 9% and 8%, respectively.
• In terms of sales, the company sold 6.3 million ounces of silver, 4,700 ounces of gold, 67 million pounds of lead, and just under 28 million pounds of zinc.
• In fiscal 2021, silver production was up 1%, gold production was up 42 %, but that’s a bit of an anomaly because the group had a clear-out of some concentrates at a mine that’s on care and maintenance.
• Lead production was up 3%, and zinc was up 10% compared to the prior year. Silver and lead production met guidance, and zinc production beat guidance.
• Revenue for the year was USD 192.1 million, up 21% compared to USD 158.8 million in the prior year. However, one should note that silver was 58% of total revenues for the year on a net basis compared to 53% in fiscal 2020.
• From the realization price standpoint, the realized price for silver was up 30% for the year but 64% for Q4. Lead was, in fact, down 6% for the year but up 21% in Q4. And zinc was up 26% for the year and up 92% for the fourth quarter of FY21.
• For FY21, net income to equity shareholders was USD 46.4 million, up 35% compared to the prior year.
• Cash flow from operations was USD 85.9 million, up 11% compared to USD 77.2 million in the prior year.
• Further, during the year, SVM also won an online auction to acquire the exploration rights to the Zhonghe Silver Project from the Henan provincial government in China, and with the mineral rights transfer contract pending a national security clearance by the related authorities.

Top-10 Shareholders

The top-10 shareholders together hold a 29.11% stake in the company, with Van Eck Associates Corporation and Feng (Rui) are the top shareholders with an outstanding position of 10.54% and 3.28%, respectively. Moreover, 6 out of the top-10 shareholders have increased their position in the company, with two remains unchanged. Given the top-10 shareholder’s activity, we believe that overall sentiment is still bullish on the stock. Institutional ownership in the company stood at ~35%.

Valuation Methodology (Illustrative): Price to Cash Flow

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 competitive advantage helped the company to report solid financial performance in the year just gone. Going forward, we believe that silver prices and underlying commodities in which the company operates would remain firm, given the strong infrastructure budget announced by the US government.

Also, for FY22, the company expects to produce approximately 960,000 to 1,010,000 tonnes of ore, which is anticipated to yield approximately 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, 7% to 10% in zinc production, and similar levels in lead production compared to the Fiscal 2021 annual guidance.

Higher underlying commodity prices, together with the increased production guidance, would further bolster the group's performance in FY22.

Hence, based on the aforementioned facts and valuation, we recommend a 'Buy' rating on the stock at the closing price of CAD 6.93 on June 24, 2021.   

1-Year Technical Price Chart (as on June 24, 2021), Analysis by Kalkine Group

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

*Recommendation is valid at June 25, 2021 price as well.

Disclaimer

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