Silvercorp Metals Inc.

Silvercorp Metals Inc. (TSX: SVM) is a mineral mining company that acquires, explores, develops, and mines precious and base metal mineral properties across various exploration and development projects in China.

Key Updates:

• Reported Highest Quarterly Performance: Over the years, the group showcased solid operational performance, which has resulted in significant growth in adjusted net income and free cash flows. Notably, in Q2FY22, the company reported an adjusted net income and free cash flow of USD 15.8 million and USD 25.0 million, respectively, its highest since 2014.

                Source: Company Report

• Robust Profitability Margins: The company commands higher margins than the industry median, indicating improved efficiencies and a key positive. Notably, its EBITDA and operating margins stood higher at 52.7% and 44.0%, respectively, in Q2FY22, higher than the industry median of 39.9% and 27.0%. In addition, its Q2FY22 net margin was 34.7%, significantly higher than the industry median of 12.9%.

• Zero-Debt Balance Sheet with Healthy Working Capital Management: Being a capital-intensive business, SVM maintains a zero-debt balance sheet, which is worth mentioning, as its cash flows are funding its capital investments. Moreover, the company has prudent working capital management and reported a quick ratio and a current ratio of 4.69x and 4.85x in Q2FY22, higher than the industry median of 1.51x and 2.57x, respectively. Notably, the group reported a lower cash conversion time of 26.6 days than the industry median of 56 days.

• Positive Results from Recent Drilling Activities: Recently, the company conducted a drilling activity across its LMW mine in the Ying Mining region in China's Henan Province and discovered thick and high-grade intercepts of silver-lead-zinc veins, which are ready to be mined. Moreover, SVM also found low angle gold veins and copper-gold-silver veins from the region, which require further studies.
  

• Growing Reserves to Support Future Operations: Over the years, the company has consistently increased its mining reserves and resources, supported by the regular addition of new prospective mines under its operations. An elevated mineral reserve is likely to support the future production of the company.

Snapshot of Silver Resources & Reserves (Source: Company Reports)       

Snapshot of Lead & Zinc Resources & Reserves (Source: Company Reports)

• Construction of Additional Storage Facility: The group plans to construct a new 3,000 tonne per day flotation mill and tailings storage facility (TSF) besides its existing No. 2 mill located in the Ying Mining District. The above capacity expansion would complement SVM's growing mining operations and the recent successful drilling programs, leading to the addition of new resources.

• Bullish Guidance: For FY22, the company expects its silver production to range between 6,300-6,600 koz, compared to a production of 6,330 koz in FY21. The corporation expects its Lead production in between 65,700-68,900 Klbs in FY22, while total zinc production is expected to be 26,900-28,500 Klbs, which are in line with the previous year production.

Source: Company Report

• Technical Showing a Potential Upside: The SVM stock has closed near the lower range of its 20-day Bollinger Band on the daily price chart, which indicates a potential up move from the current level. Moreover, the stock's 14-days relative strength index (RSI) is at 46.55, which is near the oversold zone.

Technical Price Chart (as on November 25, 2021). Source: REFINITIV, Analysis by Kalkine Group

Q2FY22 Financial Highlights:

• Improved Topline: SVM announced its quarterly result, wherein the company posted revenue of USD 58.435 million, up from USD 56.372 million in pcp. The improvement was aided by improved income from the Lead and Zinc segments.

• Higher Input Costs: Income from mine operations stood at USD 23.612 million, a slide from USD 26.672 million in pcp. The quarter witnessed higher production costs, increased mineral resource taxes and higher general & administrative expenses.
  

• Decrease in Income from Operations: The company reported an income from USD 16.855 million, lower than USD 24.777 million in pcp. The decline was primarily due to higher corporate general and administrative expenses, coupled with a loss on investments, partially offset by a foreign exchange gain compared to a foreign exchange loss in pcp.

• Sluggish Bottom Line: Its Q2FY22 net income amounted to USD 12.758 million, compared to USD 19.557 million in pcp. The above was primarily due to a lower income from operations, partially offset by higher finance income and lower income tax expenses.

Q2FY22 Income Statement Highlights (Source: Company Report)

Risks Associated with Investment

A decline in the precious metal prices would result in a lower realisation price and hence a slide in the overall performance of SVM. In addition, the company is witnessing a surge in its input costs, which could lead to an increase in cash costs and higher All-In Sustainable Costs (AISC). Continuation of the above trend might dampen the company's margins and profitability.

Top-10 Shareholders

The top ten shareholders of the company together hold approximately 28.03% stake. Van Eck Associates Corporation and Feng (Rui) are the major shareholders in the company with an outstanding position of 10.73% and 3.30%, respectively.

Source: Refinitiv

Valuation Methodology (illustrative): Price to Earnings based

Stock Recommendation:

For H1FY22, the company reported a revenue of USD 66.799 million from sales of silver (up 13% y-o-y), while income from zinc was 62% higher at USD 15.189 million, supported by improved metal prices. Moreover, the company reported its net cash from operations of USD 67.306 million in H1FY22, more heightened than USD 59.743 million in pcp. We expect the above momentum to continue, supported by an improved production outlook coupled with elevated commodity prices. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Altius Minerals Corp, First Majestic Silver Corp, etc. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock of SVM at the last traded price of CAD 5.35 on November 25, 2021.

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

One-Year Technical Price Chart (as on November 25, 2021) Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on November 26, 2021 price as well.

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