Although some of our readers and clients have grown concerned about yesterday’s considerable drop in the value of Silvercorp Metals’ (SVM) common shares, we maintain our view that the company is a legitimate and efficient silver mining operation in full compliance with the regulations of the countries in which it is publicly listed.
The major decline was partially due to: (1) abnormally high short postions (over 20 million shares); (2) unusual options activity (400% above average yesterday); and (3) overall diminishing investor confidence in the company following the release of an anonymous letter distributed two weeks ago. We believe the allegations in said letter to be purely bogus and unfounded as no clear evidence was presented to support such claims. Silvercorp’s management has also refuted charges that it was inconsistent in its regularly audited financial filings with China’s State Administration of Industry and Commerce (“SAIC”) and the Securities and Exchange Commission (SEC), and has provided proof of its cash holdings and silver resource estimates by a qualified third-party expert. Moreover, the company has been fully cooperative with recently initiated investigations by the Ontario Securities Commission (“OSC”) and the British Columbia Securities Commission (“BSCS”).
Yesterday morning, however, the company was hit with fresh allegations of fraud by a “little” blogger who is facing defamation lawsuits by two U.S.-listed Chinese manufacturers that he also falsely accused of fraud earlier this year. The blogger claims he counted (for a very short period of time) Silvercorp’s daily truck deliveries to mills and somehow came to the conclusion that production activity was about a third less than purported, amongst other unreasonable allegations.
It is not surprising that these false reports have come after Silvercorp reported record silver production at higher profit margins than ever. To some, this seems just too good to be true. Nonetheless, there is simply no evidence to support any of the bloggers’ allegations.
Therefore, not only do we continue to hold our core position in SVM, we took the opportunity today to significantly add to it. At such low prices, we are of the opinion that Silvercorp has quickly become the most undervalued major mining company in the world and is now more attractive than ever–especially considering the company’s share buy-back program. Once OSC and BCSC have wrapped up their investigations, we expect the price of shares to begin to move in the direction of our $15 price target.
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