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Silvercorp's star is on the rise

Mining anywhere in the world can be difficult and that is evidenced by statistics, with failures outnumbering success stories pretty much everywhere. Enduring successes with a strong track record of prioritising shareholder returns tend to be even rarer, and it’s fair to say Silvercorp Metals (TSX/NYSE American: SVM), China’s leading primary silver producer, is an even scarcer commodity in that regard.

Silvercorp's star is on the rise Silvercorp's star is on the rise Silvercorp's star is on the rise Silvercorp's star is on the rise Silvercorp's star is on the rise

Higher base metal prices are magnifying Silvercorp's YMD and GC silver mine (above) profits

The Canadian-based company's consistent, low-cost production of more than five million ounces of silver a year, with base metal credits, has kept profits flowing through the usual volatility in silver markets and prices, over the decade or so Silvercorp's flagship Ying mine has been in operation.

"We've been one of the safer precious metals companies you can invest in," says senior vice-president, Lorne Waldman.

"Silver's high volatility is nothing new to seasoned precious metals investors.

"Managing cost is crucial if a company wants to survive a downtown. Silver producers who are most likely to survive fluctuations are those with high-quality, high-margin assets with an ability to maintain a profitable operating mine even in a low-price environment. Our low all in sustaining cost (AISC) and high revenue growth not only well positioned us, generating sustainable profits and superior returns on investment, but provide a hedge against silver market volatility."

Elevated production from the Ying Mining District (YMD) operations in China's Henan Province in FY17 saw US$43 million of net profit generated on $80 million operating cash flow from 6.5Moz of silver output and lead/zinc production of about 89 million pounds. Head grades at the underground mine have been rising since mid-2014 and the operation currently has at least 15 years projected reserve life.

That's after producing 53.6Moz of silver, 773Mlbs of lead and zinc, and net profits totalling $360 million between April 2006 and the first quarter of this year.

It's a record that would be the envy of silver producers around the world, and one Silvercorp expects to maintain.

YMD yielded 1.3Moz of silver and 14.5 million pounds of lead and zinc at a standout cash cost of negative-US$2.97/oz silver, and sector-leading $3.66/oz AISC in the first quarter of fiscal 2018 (ended June 30, 2017). Strong operational cash flows helped Silvercorp build a healthy treasury surplus of US$102.1 million at the end of June.

Silvercorp is one of the few listed silver companies paying dividends (US2c/share) and it continues to leverage its strong cash position by making judicious growth investments, such as the recent $20 million purchase of additional equity in New Pacific Metals Corp (TSXV: NUAG) and its suite of projects in Bolivia, Canada and China. Silvercorp now owns 31.8% of New Pacific and the latter's aggressive exploration plan for the promising Silver Sand property - not far from the renowned Cerro Rico silver and base metal mineral system near Potosi - is fully funded.

Silvercorp is also investing in expansion of production at the new and profitable GC silver-zinc mine in Guangdong, and continues to assess other opportunities in China, where it heads the list of foreign-backed companies with long-standing operating experience and knowledge of local mining rules and conditions.

"Projects will come to our desk before they come to others," Waldman says.

"Our focus is on silver and gold but we're an opportunistic company. If it looks like it could become a high-margin mining project and we can bring it into production relatively quickly, we would probably jump on it. But we're very discerning in terms of how and when we look for new projects.

"We're not looking to grow the top line, we're looking to grow the bottom line. It's all about how fast you're going to be able to get something generating cash flows and providing a return to the shareholders.

"And it's hard to find good projects.

"We are a company that recognises the importance of benefiting all stakeholders, including local communities, and local government, and certainly rewarding our shareholders. We have a long history of paying dividends, have conducted numerous share repurchase programs, and in fact we are the only company [in the silver-sector peer group] whose number of shares outstanding have gone down over the last four years."

 ead grades at the underground mine have been rising since mid2014SilvercorpYingUG Head grades at the underground mine have been rising since mid-2014


By most standard sector metrics Silvercorp is undervalued relative to its North American peers, despite the predictability of its earnings, returns and increasing value of its asset base - in China and elsewhere. In the past five quarters Silvercorp has outperformed its peers. The company has averaged 50% gross profit margins per quarter . Yet it still trades  at a significant price-to-earnings discount to its peers.

Waldman says simply that value investors would be wise to review these metrics.

He says it's too early to discuss the prospects for resource development and value-build in Bolivia, but "we think it has great potential". There was no NI 43-101 resource defined as yet. "But when you look at the drilling and sampling [that's been done historically] you can start to envision a zone that runs about 1.5km long, that's at least 100m wide and perhaps 300m deep … with [sample grades running] around 200g/t [Ag]. So if the drilling bears that out they [New Pacific] might be looking at a substantial resource. We will have to wait and see the results of the drill program. New Pacific is completely funded to be able to carry out that drill program and so the expectation is within a year there'll be a good resource."

Prospects for above-average returns for investors in China's evolving mining landscape, with a keen eye for value, also continue to improve.

Silvercorp director Yikang Liu says China's government leaders reiterated the important role mining will play in the world's biggest economy in the country's new (13th) Five Year Plan.

"China has a population of 1.3 billion, therefore the domestic market is huge. China is also the world's largest manufacturing country," Liu says.

"With the completion of the industrialisation, the consumption growth for mineral products will gradually slow down … but total consumption of minerals will still be very large. So in China's economy, the important status of mining will not change."

Liu says China's policies on foreign investment in the domestic mining sector are complex but evidently fair for those who "study these laws and regulations carefully before making any investments".

He says Prime Minister Li Keqiang's recent statement to foreign investors, that China will continue to send "a strong signal … [and] take further steps to deepen the reform and unswervingly open China wider to the rest of the world" was aimed at mining and other international investment.

"I was the first Chinese to participate in PDAC," Liu says.

"At the 1995 PDAC Conference, I gave a speech on ‘Minerals Resources and Investment Opportunities in China'. At that time Canadian colleagues did not understand China. After the speech, the question raised to me at the most is the political risk of China.

"Over the past 22 years China has now become the second-largest economy in the world. The Chinese peoples living standards and quality have been significantly improved. China's social and political stability have been further strengthened throughout the country [and the country] has undergone enormous changes.

"So I think China's tremendous change speaks for itself.

"For mining companies specifically, as long as a mining company has received high quality mining rights, seriously abides by state laws and regulations, implements strict mine management, uses advanced mining technology, and is committed to a high level of social responsibility to local communities, then this company will have stable production and profitability.

"Silvercorp Metals' 12 years in succession is a convincing example."

The Canadian company's success in harnessing innovation and application in its local management and workforce can be seen in one of its key business performance indicators: the production head grade at YMD.

"Head grade is a testament to the vigilance of management in maximising productivity," Waldman says.

"We are a narrow vein miner with high-grade ore, so dilution control is crucial for managing the grade. If drilling starts to veer away from mineralisation even slightly it translates into a dramatic increase in the quantity of waste rock extracted. The consequence of that is the head grade plunges and the cost rises."

The company introduced what it calls its ‘Enterprise Blog' (EB) platform, a social media based internet application that improved communication and transparency of vital operating and safety data across the expansive workings, to improve dilution and grade control. Each mining stope, development face or piece of equipment is assigned a blog name, and each blog has a checklist table with supporting photos. The system, with its structured data and images on the different blogs, gives management valuable information on each workplace as soon as it is posted, which has produced faster and more accurate decision-making. Unread blogs are recorded and action is taken to ensure all employees actively use the system.

"Silvercorp initiated a 6% employee profit sharing program in 2016," Waldman says.

"Higher grade ore extraction leads to lower costs and higher profits. Our employees see the benefits in their own pay envelopes."

He says while the company's ability to fund its own growth from robust cash flows, and its consistent delivery to forecasts, are strengths that have almost become weaknesses as Silvercorp has, of late, flown under investors' radars, significant value catalysts are lining up in its favour.

Investor appetite for that safe, compelling silver market hedge provided by equities such as Silvercorp is growing, particularly as options in other jurisdictions are proving less reliable, and higher base metal prices are magnifying YMD and GC mine profits.

"We've produced a lot of silver, lead and zinc, but we still have a mine life of 20 years," Waldman says.

"Our strategic advantage also includes six smelters within a 200km radius of our flagship Ying assets. Our ore contains almost no deleterious materials, like arsenic or antimony, so our concentrate is highly sought after by smelters as it can be used to blend with lower grade and less pure concentrates from other mines.

"The scenario creates the competition for concentrates so smelters pay for concentrates in advance thus we have virtually no receivables."



SHARES ON ISSUE: 168.19 million

MARKET CAP (as at 8/11/17): C$544.95 million

DIRECTORS: Rui Feng, Marina Katusa, Yikang Liu, Paul Simpson, David Kong

MAJOR SHAREHOLDERS: Van Eck Associates (6.25%), O'Shaughnessy Asset Management (2.19%), Old Mutual Global Investors (1.75%)



SHARES ON ISSUE: 168.19 million

MARKET CAP (as at 8/11/17): C$544.95 million

DIRECTORS: Rui Feng, Marina Katusa, Yikang Liu, Paul Simpson, David Kong

MAJOR SHAREHOLDERS: Van Eck Associates (6.25%), O'Shaughnessy Asset Management (2.19%), Old Mutual Global Investors (1.75%)