Last week, I wrote an article questioning whether Silvercorp Metals (SVM) was the target of a bear raid. The silver miner declined considerably in the prior days on no news about the company, and in stark contrast to the price movement of silver itself. In the few days since I wrote the article, Silvercorp has gone on the offensive, including responding to its detractors and the initiation of a share repurchase plan.
First, on January 24, Silvercorp responded to the recent onslaught of lawsuits that were brought against the company, and press releases by law firms that are looking for potential plaintiffs. These claims essentially allege that Silvercorp overstated the level of silver production at its mines, as well as the quality and quantity of its ore reserves. Silvercorp commented that the requested class action lawsuits, first commenced on December 24, 2012, in New York, "are based on the accusations made by the blog site alfredlittle.com, which have already been established as entirely false by the Company." Moreover, Silvercorp noted that:
"To date, from public court documents, only two people representing only 7,000 Company shares initiated the class actions. It is the Company's belief that there is no merit to the allegations set out in the class action lawsuits since they are based on previously made false accusations and as such represent nothing new and are a non-event; the Company will defend itself accordingly."
Last year, Silvercorp engaged in a legal battle with some of its arguably defamatory critics. In September of 2011, Silvercorp sued Anthion Management, Chinastockwatch.com, Alfredlittle.com and other entities, accusing the sites of intentionally publishing false information in order to lower the company's share price and profit on short positions. Anthion counterclaimed, while simultaneously admitting it was the author of the anonymous report on Silvercorp that was sent to securities regulators, auditors and journalists on August 29, 2011, and that Chinastockwatch.com published. Anthion also ran Chinastockwatch.com, but the site was taken down since then.
In July of 2012, Anthion's counterclaim was dismissed, and the same court dismissed Silvercorp's defamation lawsuit a month later on the basis that the defendants raised questions of potential accounting fraud and other possible asset misstatements. According to the August decision by New York Supreme Court Justice Carol Edmead, Silvercorp's claim was dismissed because the statements were constitutionally protected opinions that were stated as possibilities rather than certainty, and that the author probably believed they were true.
The court indicated the allegation of fraud was stated merely as a possibility and not an absolute certainty, and that the anonymous publishing likely reduced the perceived veracity. Nonetheless, Silvercorp has sought to appeal that decision, arguing that the claims "were solely intended to manipulate the market so that profits could be made from short selling." That appeal is still pending.
Silvercorp subsequently noted that the proved and probable reserves in the company's flagship property increased since the alleged short and distort defamation, but its critics have countered that Silvercorp may have funded Chinese officials in order to initiate and expedite investigations against the publishers of those claims against the company. While Silvercorp is a Canadian company, its assets are primarily in China.
The Anti-Corruption Unit of the Royal Canadian Mounted Police is apparently investigating this matter to gauge whether Silvercorp violated the nation's Corruption of Foreign Public Officials Act. While not an expert in Canadian regulations, I am an attorney and reviewed the act. I believe Silvercorp may have some reasonable defenses under the act, though a lack of public facts makes such determinations difficult. In any event, there is an exemption for payments made for the purpose of facilitating or expediting the performance of routine governmental actions, under which this activity may fall. Further, another defense exists where payments are permitted under the laws of the foreign nation, and yet another defense exists where payments involve the development of a business relationship with that foreign government. One or several of these exemptions may be relevant regarding the funding allegations.
This week, Silvercorp did something that is likely to have a stronger effect than almost any other action the company could have initiated. On January 29, Silvercorp announced plans to acquire up to 8.5 million of the company's common shares from February 1, 2013, to January 31, 2014. This represents approximately five percent of the shares currently issued and outstanding. It is also worth noting that the share repurchase plan is of relatively equal size to the current short position in Silvercorp.
Silvercorp noted that it "is taking this action because it believes that prevailing market conditions have resulted in Silvercorp's shares being undervalued relative to the immediate and long term value of Silvercorp's portfolio of producing and development properties in China and Canada." The repurchase plan, being so substantial, should have a more significant effect upon shares than might even a dismissal of the recent shareholder lawsuits that appear to be so minor in size, at least according to Silvercorp's indication that only two people representing only 7,000 shares are thus far named as plaintiffs.
The Market Vectors Junior Gold Miner ETF (GDXJ) has been one of the largest purchasers of SVM shares over the last few years, and Silvercorp is actually one of the larger components within the currently 79-member index ETF, representing about 2.4 percent of its total holdings. The Junior Gold Miner ETF last reported holding 11,780,809 shares, which was a decline of 1,587,120 shares compared to its prior reporting, and represented almost seven percent of the company.
Given that Silvercorp is not a gold miner, this ETF's position is slightly perplexing, and it is entirely possible that GDXJ's management may have opted to eliminate the position. Such a determination may have also caused some of Silvercorp's recent weakness. Of course, at this point, such is merely speculation.
As Silvercorp continues to respond to the allegations against it and acquires roughly five percent of its shares, the company should appreciate. Beyond these actions, Silvercorp will release its unaudited financial and operating results for the prior quarter (its Q3 2013 or calendar Q4 2012) in about two weeks, on Wednesday, February 13, 2013, after the close of the market. Investors will be interested in company's progress at its "GC project" in Guangdong Province. Last quarter, the company noted that it was making "good progress with finalizing construction at GC," and that it "expected that the mill will be operational in third quarter of fiscal 2013."
Disclosure: I am long SVM.