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Sunday
Oct022011

Silvercorp Goes on the Offensive

By Jeff Clark, Casey Research

 

I’m writing from China, where I’m attending Silvercorp Metals’ (SVM) mine tour with other analysts and reporters. We met with company principals the first morning, including CEO and Explorer’s League honoree Rui Feng at their downtown Beijing offices, where the bulk of the discussion centered around a point-by-point rebuttal of the charges made by the now-infamous short sellers. With a reporter’s camera snapping, it became apparent to me that Rui and company have shifted from playing defense to going on the offensive.

“We have eight attorneys now,” Rui explained. “We’re going after these guys.” He admitted that fighting the allegations is getting 100% of his focus right now, something that might be concerning under normal circumstances, but he’s bound and determined to assure shareholders that their investment is sound.

In addition to the lawsuit against some of the short sellers announced last Friday, SVM has hired well-known forensics accounting firm KPMG to audit the company’s books. They’ll be reviewing every scrap of paper, from bank statements to tax receipts, to make their own determination on the soundness of SVM’s finances. A report is expected in about two weeks, and other than seeing ore with our own two eyes, this will arguably be one of the most important steps in fighting the allegations.

Securities regulators are also on the offensive. Not only are they conducting their own investigation into the source of the accusations, other Chinese companies previously targeted by the short sellers are pooling their resources with regulators and SVM. While we don’t know that they’re all innocent, a number have taken aggressive countermeasures; some have been so successful that their stocks have rebounded dramatically.

The tour has been more thorough and transparent than even I expected. We’ve been privy to internal company documents, one of which is a daily tonnage report – something Rui sees every morning. It’s abundantly clear that if operations were exaggerated, it would have to be quite an elaborate hoax. We met with officials from two smelters the company uses, easily seeing that the grades they report match what SVM has documented. We met with the company’s principal accountant in China; a random review of one day’s tax receipts and the SVM’s internal spreadsheet show the numbers match. We also met with four officials from the National Tax Bureau, who informed us in no uncertain terms that SVM’s subsidiaries have generated substantial revenue to the local county. “We welcome any scrutiny,” they added.

I also asked many parties what they thought of the allegations. “They don’t know what we know,” said the deputy general manager at the Ying mine. “They can sell the shares if they want, but we will buy them.” The county tax officials informed us they were never contacted by any party regarding revenue or tax receipts. “The allegations are simply not true,” we heard through an interpreter. I asked an official at one of the smelters we visited what he thought of the allegations; he laughed. We had dinner with four local government officials, with the interpreter telling us the mayor was “pissed off” at the short sellers. And what about the workers themselves? “Many are angry,” Rui told us. “And some just laugh at the accusations.”

But perhaps the most important aspect of the trip and of determining if there is any truth to the accusations is the ore. We saw the parade of trucks drive by us, watched the weighing process, randomly leafed through stacks of records documenting the ore that’s passed through the gates, witnessed the ore being transported by boat and rail cart, looked on in amazement at the new 2,000-tonne-per-day mill in full operation, and observed piles of finished product waiting to be shipped to the refineries. And yes, we toured the Ying mine itself and saw with our own eyes those sparkling veins full of high-grade silver. I’ve got pictures of all this, and I didn’t hide behind any trees to get them.

We have a lot more on the agenda; by the time you read this I’ll be on my way to meet with another tax office and tour the GC and BYP mines. I’ll be filing a full report, complete with pictures and recommendations, for International Speculator and BIG GOLD readers sometime next week. If you have a vested interest in this stock, this is one report you won’t want to miss. I can tell you right now it will contain not only a complete analysis of every aspect of the company, but a very specific recommendation of when to buy.

In the meantime, based on my extensive discussions with management; review of reams of both internal and public documents; conversations with government, tax, and refinery officials; interviews with workers and supervisors; observations of plant operations; and putting my hands on high-grade veins running throughout the Ying mine, I have a message for the short sellers.

You’d better think about covering.

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