Silvercorp Metals Inc (TSX: SVM) is a mineral mining company which acquires, explores, develops, and mines precious and base metal mineral properties. The company is mainly into mining, exploration and development projects in China. 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 Rationales

• Robust silver production: The company has a track record of success and has demonstrated its ability to continue output. Despite the recent turmoil, the company's consolidated silver output has remained stable, which is commendable.

           Source: Company

• Realizing higher metal prices: As a result of higher realized metal prices, the company's financials are improving. The average realized price of Silver climbed by 48% to USD 20.70 throughout the time period, compared to USD 13.99 in the prior equivalent period. The same pattern was seen in other commodities as well. Despite some volatility, we expect higher average realised prices for several commodities, which would represent a significant advantage to the company.

Source: Company

• Higher production guidance for FY2022: The company's management is optimistic about its operations, predicting that silver output would be in the range of 6,300 to 6,600 Koz in FY 2022, with lead and zinc production also expected to improve, which is a crucial positive.

Source: Company

• Clocked highest free cash flow: The business generated robust cash flow from operating activities of USD 36.5 million, up 21% or USD 6.4 million from USD 30.1 million in the prior year quarter, thanks to good operational performance. Furthermore, compared from 2014 to till date, the firm produced its highest free cash flows of USD 25 million, which is a big advantage.

Source: Company

• Industry beating margins: Despite the turmoiled period due to Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q1 2022, which exhibits the competitive advantage of the company within the industry.

• Robust liquidity: With USD 214.4 million in cash and cash equivalents and short-term investments, the company had a healthy balance sheet, up USD 15.3 million or 8% from USD 199.1 million on March 31, 2021. This does not include associate interests or equity stakes in other firms, which had a total market value of USD 243.2 million on June 30, 2021. We believe the Company is in a good position to meet all of its liquidity needs with its current cash level, which is appreciable.

• Elevated commodity prices to support future earnings: Despite recent volatility in commodity prices, the firm is doing well, and we can observe a substantial influence of this movement on the balance sheet of precious and industrial metal mining companies. As prices rise, average realisation prices for miners rise, resulting in a greater margin profile, higher free cash flow generation, and balance sheet deleveraging. We believe the firm is well positioned to profit from rising underlying commodity prices and end FY2021 in good financial shape.
  

• Event update: The company will release its Q2 Fiscal 2022 unaudited financial results on Thursday, November 4, 2021.

• Risks associated with investment: The performance of the company is directly correlated with the metal prices. Thus, volatility in the commodity price would dampen the company’s income and would take a toll on the overall performance.

Financial overview of Q1 2022 (Expressed in thousands of U.S. dollars)

Source: Company

• Healthy revenues: The company’s revenue in Q1 2022 stood at USD 58.8 million, up 26% or USD 12.1 million compared to USD 46.7 million in Q1 2021. The increase was mainly due to higher net realized selling metal prices and bigger quantity of zinc sold.
• Increased cost of mining operations: In the reported period the company’s Cost of mining operations stood at USD 33.3 million against USD 27.4 million in the previous corresponding period.
• Corporate general and admin expenses were on the higher side at it stood at USD 3.8 million compared to USD 2.6 million in pcp.
• Drop in income from operations: Income from the operations decreased to USD 19.7 million against USD 23.0 million in the previous corresponding period.
• Net income in the reported period stood slightly lower at USD 16.2 million compared to USD 18.4 million in pcp.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 29.94% of the total shareholding. Van Eck Associates Corporation and Feng (Rui) hold the company's maximum interests at 10.95% and 3.27%, respectively. The company's institutional ownership stood at 37.35%, and ownership of the strategic entities stood at 4.21%. We believe this strong institutional ownership boosts the confidence of the retail investors.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales

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 had a good result in Q1 2022, with practically no debt and a solid cash position. All of these elements point to the company's strong foundations, which will enable it to achieve higher growth in the future. Furthermore, management provided positive production forecast for 2022 for all of its respected commodities, which would be a significant achievement.

We believe that average realized prices per ounce will continue to rise, resulting in increased margins. In addition, the firm is clocking free cash flows and even it holds the strong institutional ownership, which boosts the confidence of the retail investors.

Furthermore, the company leaped the industry median margins on many fronts in Q1 2022, which exhibits its competitive advantage, even the technical indicators are reflecting strength for the potential pull back. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 5.38 as on October 28, 2021. We have considered First Majestic Silver Corp, Endeavour Silver Corp, SSR Mining Inc., etc. as the peer group for the comparison.

*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:

One-Year Price Chart (as on October 28, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on October 29, 2021, price as well.

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Disclaimer

 

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