Best Valued Silver Producer

China’s Premier Silver Play

A Taipan Publishing Group Investment Research Report
by Justice Litle, Editor, Safe Haven Investor

As you already know, gold is set to do very well over the next few years. From a big picture perspective, the yellow metal’s fortunes have rarely looked better.

What you may also know is that gold isn’t the only monetary metal. Silver, too, has the potential to shine in inflationary times.

And because the silver market is smaller and more volatile, we can potentially see that much more upward pressure on silver’s price per ounce when fiat currency chaos comes down the pike. Some even argue that, in an environment where gold increases by X percent, silver will have the power to increase many multiples of that in percentage terms.

So in this report, we’re going to pick up some exposure to silver with a bonus “aggressive value” pick. You could say that this company is “China’s premier silver play” — and at current levels it looks like a mouth-watering pick indeed.

The name of the company is Silvercorp Metals Inc. (SVM:TSX). Silvercorp is actually a Canadian company, traded on the Toronto Stock Exchange, with primary operations in China.

As of this writing, the company has a market cap of roughly C$500 million. Better still, Silvercorp is the lowest cost silver producer in China, enabling the company to finance growth via internal cash flow and avoid long-term debt.

The Dangers of Debt

For miners in this tough post-credit-crunch environment, avoiding debt like the plague is key. It’s very hard to get bank financing these days for conservative biz projects, let alone more “speculative” projects like metal mining. This puts heavily leveraged miners in danger.

If an over-leveraged miner suddenly finds that their line of credit is cut off, or a key project suddenly needs emergency funding, it can result in disaster for shareholders in this less forgiving environment. In the past few months, a number of tiny miners with promising portfolios all but disappeared — vanished in a puff of smoke, their assets sold off in fire sales — when the burden of debt got to be too great.

That’s why Silvercorp’s financial position is so darn attractive. The company has no long-term debt, and cash flow from current production means it doesn’t have to go begging to the bankers.

The company is “well financed with $48.6 million in cash and short term investments,” according to the company profile, and benefits from its position as “the largest producer of silver in China and the lowest cost producer among its global peers.”

A Chinese Treasure

Silvercorp’s remarkably low cash costs per ounce are due to the “exceptionally high-grade nature” of its deposits in the Ying Mining District, along with the “incredibly efficient and low-cost jurisdiction in which it operates.”

In addition to properties in the Ying Mining district, Silvercorp has a new development in Guangdong Province (marked GC Project on the map) and a future exploration site in the Na Bao area.

The Ying Mining Camp, which contains multiple mines alongside the flagship Ying Mine, is expected to produce 4 million ounces of silver in fiscal year 2010. The GC project is expected to start producing in 2012.

When you hear the word “silver,” China may not be the first association that comes to mind. But there are a number of advantages to operating in China.

For starters, did you know China is the third-largest silver producer in the world? It’s true… only Peru and Mexico are bigger.

Some of China’s other mining advantages are low capital and operating costs, access to low-cost mining equipment, and plenty of experienced labor.

China also offers the advantage of no-hassle construction. In most Western countries there is a strong NIMBY element — “not in my back yard” — or barring that, a strong indigenous element. That can make it harder to put up the necessary roads, mills and other construction facilities necessary to get a mine humming along.

In China none of that stuff is a problem. The authorities are so hungry for economic growth — and good jobs for the locals — that most construction projects are approved immediately, no muss or fuss, with supplies provided on the spot.

Last but not least, many regions of China remain underexplored. There is quite literally a lot more gold (and silver) in them thar hills.

A Disciplined Producer

Another truly attractive aspect of Silvercorp is the disciplined nature of management. These guys understand that now is a time to tread carefully as far as new leverage and debt goes.

That’s why the company has put a number of its exploration projects on hold, waiting for an upturn in the credit cycle before extending itself too much. This is a sign of shrewdness and regard for shareholder value.

As of the first half of fiscal year 2009 — the months dating from April 1 to Sept. 30, 2008 — Silvercorp saw $16.5 million in net income on $51.0 million in revenue. By the end of the current fiscal year, Silvercorp expects to have doubled its 2006 silver production, to a total of 4.0 million ounces.

The company is net profitable, has solid cash flow, offers a quarterly dividend of C$0.02 per share and has even bought back millions of shares through a repurchase program.

If you want more exposure to silver — and who doesn’t, given what’s ahead? — it looks hard to go wrong here.

Originally published April 9, 2009.

Other Related Topics: Commodities Investment , Gold , Justice Litle , Safe Haven Investor , Silver Investment

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