Add This Core Position – Deep Value In Silver Mining
September 01, 2011
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Silvercorp – Silvercorp has and continued to remain one of my core holdings to hold throughout the cycle and it is currently priced to perfection. It has been a serial outperformer, making it hard to recommend despite my conviction in this company, patience has finally paid off, at least for those who have yet to gain exposure to Silvercorp (if it fits ones investment profile). While Silvercorp continues to fire on all cyclinder it has suffered from “the baby being thrown out with the bathwater”, falling prey to a weak equity market augmented by the Sino-Forest Debacle (which caused some investors to avoid Chinese stocks), knocking the price down below $8 just days ago. Silvercorp has been able to take advantage of this via repurchasing 10m shares in the open market at what views as bargain basement prices. As of the second week of July, Silvercorp has completed just over 20% of this buyback with more likely to have already taken place in the $8’s. This will allow Silvercorp to re-issue these shares when they start to trade closer to fair value, a strong sign in the mining industry (rare to see this unlike mainstream US stocks who do it for the press release).
Silvercorp has been one of the best stories among primary silver producers, mainly due to the strong management team who have a very keen eye for high quality properties with plenty of exploration upside which they have illustrated over the years. I consider Silvercorp one of the best explorers among current producers with expectations that the 2 recently acquired companies, including the XBG project, will add material long term growth to what is already an excellent production growth profile.
Management is and always will be the most important attribute in any great company but doesn’t always equate to a good investment. In this case you have both given the unwarranted slide from $16/share to approximately $8.50 as this is written. While those who criticize Silvercorp for the “just 70%” of revenue derived from silver, one needs to also take into account its negative cash costs which are estimated to be approximately -$6.20 for the FY 2012 (which began a few months ago). Silvercorp also happens to be one of the best ways to play China as its flagship operations include the the Ying mining district in Henan province, which is comprised of four mines and set to produce 5.6m oz silver in 2012 and 4k oz gold. Other growth assets include the GC project and BYP, the latter which has substantial exploration upside. Complementing its China operations include the advanced stage silvertip project in B.C
The XBG project is located on the same regional mineralization belt as the Ying mining camp, which also happens to be one of the most lucrative in China. To date, exploration has identified 12 primary silver veins (with gold, lead and zinc bi-product) and 3 gold veins. With several of these veins having similar mineralization relative to Ying, the prospects of XBG being a medium-large growth driver in the future look bright. With one of the strongest balance sheets among primary silver producers relative to capitalization, Silvercorp has the means to make further land or company acquisitions. Following the end of the share buyback program and the approximate 10.4m spent on acquisitions, Silvercorp should still in excess of 160m in cash and no debt.
I will add a DCF which yields $18+ using a 10% discount rate & $40 silver
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