Silvercorp Metals Inc (TSX: SVM) is a mineral mining company which acquires, explores, develops, and mines precious and base metal mineral properties at its producing mines and 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 retains 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 Filing

• Extending capacity: The company has begun the process of building a new 3,000 tonne per day flotation mill and tailings storage facility adjacent to the existing No. 2 mill in the Ying Mining District, Henan Province, China. We believe that this will give the Company more capacity to expand its existing mining operations in the Ying Mining District, particularly in light of recent successful drilling programs that have discovered new resources, process ore from its recent acquisitions, and consolidate other nearby projects.

• Clocking strong cash from operations: On the back of agile management, strong revenues and higher average realization price of metals in the reported period of Q3 2022, the company’s cash flow from operations increased by 20% to USD 28.7 million, compared to USD 23.9 million in pcp. A higher cash flow indicates higher liquidity level and is a key positive.

• Higher production guidance for FY2022: The company's management is bullish 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 Filing

• Lower Cash Conversion period: The company has reported a lower cash conversion period of 32.3 days in Q3FY22, as compared to the industry median of 51.0 days, this indicates that the company is taking lower time to convert its investments to cash flows, which is praiseworthy.

• Minimizing average collection period: The company is having lower average accounts receivable day of 6.7 days, against the industry median of 33.0 days in Q3 2022. Also, the group is minimizing these days on the sequential basis, which is a key positive. A lower average collection period indicates that the organization is collecting its payments at a faster pace. This helps in having enough cash on hand to meet their financial obligations.

• Robust liquidity: As on December 31, 2021, the company reported strong liquidity with USD 211.6 million in cash and cash equivalents and short-term investments, up by USD 12.5 million 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 156.2 million as on December 31, 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.

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 Q3 2022 (Expressed in thousands of U.S. dollars)

Source: Company Filing

• Healthy revenues: The company’s revenue in Q3 2022 stood at USD 59.0 million, up 11% or USD 5.8 million compared to USD 53.3 million in Q3 2021. The increase was mainly due to higher net realized selling metal prices and bigger quantity of silver, lead and gold sold.
• Increased cost of mining operations: In the reported period the company’s cost of mining operations stood at USD 37.6 million against USD 28.4 million in the previous corresponding period.
• Slide in income from mine operations: Higher cost of mining operations resulted in a slide in income from mine operations at USD 21.4 million, in Q3 2022, compared to USD 24.8 million in pcp.
• Marginal hike in income from operations: Income from the operations decreased to USD 19.1 million against USD 18.6 million in the previous corresponding period.
• Drop in net income: Net income in the reported period stood lower at USD 7.9 million compared to USD 12.2 million in pcp. This decline in net income was mainly due to higher finance cost.
  

Top-5 Shareholders

The Company’s top 5 shareholders have been highlighted in the pie chart below, which forms around 21.27% of the total shareholding. Van Eck Associates Corporation and Feng (Rui) hold the company's maximum interests at 10.56% and 3.31%, respectively. The company's institutional ownership stood at 35.70%, and ownership of the strategic entities stood at 4.28%. Higher institutional holding boosts the confidence in the mind of retail investors.

Valuation Methodology (Illustrative): EV to Sales Based

*1USD= 1.27 CAD

Analysis by Kalkine Group 

Stock recommendation

In Q3 2022, the company mined 292,072 tonnes of ore, up 5% or 12,627 tonnes over the previous equivalent period, which enabled the company increase its sales by 11% to USD 59.0 million. However, its operational expenditures increased along with its borrowing costs throughout the reporting period, reducing its net income. Today, the company's balance sheet is almost debt-free, and it has a strong cash position; these factors indicate to the company's solid roots, which will allow it to achieve higher growth in the future. Furthermore, management forecasted positive output for all of its respected commodities in 2022, which would be a noteworthy success.

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. Hence, considering the aforesaid facts, we recommend a “Buy” rating on the stock at the last closing price of CAD 4.01 on April 28, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 28, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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