One Small Cap Metals & Mining Stock to Hold- SVM

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:

• Q3FY22 Operational update: During the third quarter of FY22, SVM sold ~1.7 million ounces of silver, 1,100 ounces of gold, and 17.2 million pounds of lead, reflecting a growth of 4%, 38%, and 2% on y-o-y basis in silver, gold and lead sales. On the flip side, zinc sales was down by 15% on y-o-y to 7.6 million pounds.

• Healthy balance sheet and Improved Cash Flows: Being a capital-intensive business, the company has zero debt in its balance sheet, and reported a Debt/Equity ratio of zero in Q3FY22, as compared to the industry median of 0.22x. Additionally, the company reported higher cash from operations of USD 95.9 million in 9MFY22, higher than USD 83.6 million in pcp. A higher cash flow indicates increased liquidity, which is a key positive.

• 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 52.1 days, which indicates that the company is taking lower time to convert its investments to cash flows.

• Update on new facility: Recently, the group disclosed its plan to construct a flotation mill and tailings storage facility, having capacity of ~3,000 tonne per day at the Ying Mining District, Henan Province, China. Notably, the company made progress on agreements to lease 123.46 hectares with the local community.

Risks associated with Investment

The income of the company is related to international commodity prices, and price volatility could fluctuate the operations in terms of the average realized rate which could sway the financials in the near term in any direction. 

Q3FY22 Financial Highlights (Expressed in Thousands of USD)

Income Statement Highlights (Source: Company Report)

• SVM announced its quarterly result, wherein the company posted its revenue of USD 59.0 million, as compared to USD 53.2 million in pcp. The growth was primarily driven by the increase in the net realized Lead and Zinc selling prices.
• The cost of mine operations stood higher at USD 37.6 million, as compared to USD 28.4 million, which resulted in a slide in income from mine operations at USD 21.4 million versus USD 24.8 million in pcp.
• The period witnessed a lower corporate general and administrative costs, while reported a foreign exchange gain v/s foreign exchange loss in pcp. Income from operations improved to USD 19.1 million from USD 18.6 million in pcp.
• Net income was reported at USD 7.9 million, as compared to USD 12.2 million in pcp. The decline was primarily attributable to higher finance costs of USD 9.6 million v/s USD 1.4 million in pcp.
  

Valuation Methodology (Illustrative): Price to CF-based

Analysis By Kaline Group

Stock Recommendation:

In FY23, the group is expecting to mine and process to be around 1,040,000 to 1,140,000 tonnes of ore, yielding 6,300 to 7,900 ounces of gold, 7.0 to 7.3 million ounces of silver, 68.4 to 71.3 million pounds of lead, and 32.0 to 34.5 million pounds of zinc. Hence, the guidance depicts production increase of 9% in ores, 100% in gold, 11% in silver, 3% in lead, and 12% to 21% in zinc compared to the Fiscal 2022 guidance. We have valued the stock using the Price to CF-based relative valuation method and have arrived at a single-digit upside (in percentage terms).  We have considered Pan American Silver Corp, MAG Silver Corp etc for our peer valuation. Considering the aforesaid facts, we recommend a 'Hold' rating on the stock of SVM at the last closing price of CAD 4.94 on March 24, 2022.

One-Year Technical Price Chart (as on March 24, 2022). Analysis by Kalkine Group

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

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