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

• Bullish industry scenario: Majority of the company’s revenue comes from silver, and the demand for the above metal is likely to remain elevated in the coming days supported by its abundant usage across several industries like electric vehicles, manufacturing of Solar Panels in renewable energy etc. Additionally, as per the US Department of Energy’s National Renewable Energy Laboratory, the country would require 8,000 solar carport stations to provide a minimum level of urban and rural coverage nationwide. 

• Extending capacity: The Company has set aside USD 29.8 million to build a new 3,000 tonne per day floatation mill and USD 38.0 million to build a tailings storage facility in the Ying Mining District. The New Mill will include a Knelson gold gravity separation circuit and will be capable of producing silver-lead, zinc, copper, and gold concentrates. We believe that this will increase the Company's capability and may offer up new opportunities for larger cash flows.

• 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 FY 2022, the company’s cash flow from operations increased by 25% to USD 107.4 million, compared to USD 85.9 million in pcp. A higher cash flow indicates higher liquidity level and is a key positive.

• Higher production guidance for FY 2023: The company's management expects to mine and process roughly 1,040,000 - 1,140,000 tonnes of ores, generating 6,300 to 7,900 ounces of gold, 7.0 million to 7.3 million ounces of silver, 68.4 million to 71.3 million pounds of lead, and 32.0 million to 34.5 million pounds of zinc. This guidance represents a production increase of approximately 4% to 14% in ore, 14% to 19% in silver, 85% to 132% in gold, 6% to 11% in lead, and 19% to 29% in zinc productions compared to Fiscal 2022 production results.

• 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 FY2023 in good financial shape.

• Improving cash cycle days: The cash cycle (days) of the company is improving sequentially, which is a huge positive, as it takes less days to convert inventory to cash. In fiscal year 2022, the firm recorded 39.3 days of Cash Cycle, the lowest in the prior four years and lower than the industry median of 64.0 days, which is commendable.

• Robust liquidity: The company reported strong liquidity as of March 31, 2022, with USD 212.9 million in cash and cash equivalents and short-term investments, up by USD 13.8 million or 7% compared to USD 199.1 million in pcp. This excludes affiliate interests and equity stakes in other companies, which had a total market value of USD 164.3 million as of March 31, 2022. We believe the Company is well-positioned to satisfy all its liquidity requirements given its present cash level, which is substantial. Furthermore, the organisation does not have any debt, which is a significant plus.
  

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

Source: Company Filing

• Healthy revenues: The company’s revenue in FY 2022 stood at USD 217.9 million, up 13% or USD 25.8 million compared to USD 192.1 million in FY 2021. The increase was mainly due to higher net realized selling metal prices.
• Increased cost of mining operations: In the reported period the company’s cost of mining operations stood at USD 133.6 million against USD 107.9 million in the previous corresponding period. The company witnessed an uptick in every line item under the cost of mining operations varying between 11% to 27%
• Steady income from mine operations: Higher cost of mining operations nullified the higher revenues clocked the company in FY 2022, which resulted in a steady income from mine operations at USD 84.3 million, compared to USD 84.1 million in pcp.
• Fall in income from operations: Income from the operations decreased to USD 62.5 million against USD 71.7 million in the previous corresponding period. The decline in income from operations was primarily due to higher loss from associates and higher loss on equity investments.
• Drop in net income: Net income in the reported period stood lower at USD 43.2 million compared to USD 60.5 million in pcp. This decline in net income was mainly due to higher impairment charges, placed under finance cost.

Top-5 Shareholders

The Company’s top 5 shareholders have been highlighted in the pie chart below, which forms around 21.99% of the total shareholding. Van Eck Associates Corporation and Feng (Rui) hold the company's maximum interests at 10.58% and 3.31%, respectively. The company's institutional ownership stood at 35.40%, and ownership of the strategic entities stood at 4.29%. Higher institutional holding boosts the confidence in the mind of retail investors.  

 Valuation Methodology (Illustrative): EV to Sales Based

Stock Recommendation

In FY 2022, the company mined 996,280 tonnes of ore, up by 3% or 31,355 tonnes over the previous equivalent period, which enabled the company increase its sales by 13% to USD 217.9 million. However, its operational expenditures increased along with impairment charges, 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 2023, 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 healthy 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 3.61 on May 26, 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 May 26, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 27, 2022, price as well. 

 Technical Analysis Summary

Disclaimer

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