New Smelter Terms Will Hurt Silvercorp's Net Asset Value

Silvercorp Metals Corp. (SVMFF.PK) should remain flush with cash despite the suspension of operations at its TLP and HPG mines in China, says Raymond James analyst Brad Humphrey.

But, the analyst added, the company's new smelter terms will have a negative impact on Silvercorp.'s net asset value.

On Wednesday, Silvercorp said that it was suspending development and exploration at the TLP mine due to dismal current market conditions and the lower grade nature of the project. It will also halt mine and mill operations – but keep exploration going – at HPG as cash flow from the operation is expected to be negative at current metal prices.

Meanwhile, mining, development and exploration at the Ying mine are proceeding as planned with production levels reaching 700 to 750 tonnes per day. Mining capacity at the company's LM mine has been scaled down from approximately 150 t/d to 100 t/d while exploration there has been put on hold.

Mr. Humphrey said in a note to clients:

Silvercorp should continue to generate positive operating cash flow in the current pricing environment thanks to its high‐grade Ying mine and has the flexibility to scale up its other operations quickly if the pricing environment improves.

The suspension of operations at TLP and HPG do not come as a huge surprise given the mines are at breakeven cash flow in the current metal price environment. As a result, these shutdowns have minimal impact on our NAV.

That said, Mr. Humphrey warned his clients that Silvercorp.'s new smelter terms, which have deteriorated due to smelter shutdowns and reduced capacities, would negatively impact the company's net asset value by approximately 15%.

He reduced his target price on the stock by approximately 10% from C$7.20 to C$6.50 and maintained his "outperform" rating.