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 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 filing

• Extending capacity: The company recently announced that it 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.

• Industry beating margins: The Company continued 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 Q2 2022, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this. 

Source: REFINITIV, Analysis by Kalkine Group

• 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

Financial overview of Q2 2022 (Expressed in thousands of U.S. dollars)

Source: Company Filing

• The company’s revenue in Q2 2022 stood at USD 58.4 million, up 4% compared to USD 56.4 million in Q2 2021. The increase was mainly due to higher net realized selling price and bigger quantity of zinc sold.
• In the reported period the company’s Cost of mining operations stood at USD 34.8 million against USD 26.6 million in the previous corresponding period.
• Income from the operations decreased to USD 16.8 million against USD 24.7 million in the previous corresponding period. This fell mainly due to higher G&A expenses along loss on investments.
• Net income in the reported period also stood lower at USD 12.7 million compared to USD 19.5 million in pcp.

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. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company's top line grew nicely in the reported period, but the bottom line lagged behind, owing to a loss of USD 4.1 million on investments and an average 8% appreciation of the Chinese yuan against the US dollar, resulting in higher costs presented in US dollars. Additionally, a 14.5% increase in mining contractors' fee rate at the Ying Mining District dragged the company's net income down. In light of recent successful drilling programs, the company recently announced that it will expand its capacity and has begun the process of building a new 3,000 tonne per day flotation mill and tailings storage facility. This will aid in the expansion of the company's existing mining operations in the Ying Mining District. Furthermore, in Q2 2022, the company outperformed the industry median margins on a number of fronts, demonstrating its competitive edge. We also expect that realized average prices per ounce will continue to rise, resulting in higher margins. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 4.82 as on December 8, 2021.

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

Technical Summary Analysis

One-Year Price Chart (as on December 8, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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