In today's report, I dig beneath the headlines to point out the recent reversal of fortune of Silvercorp Metals' (SVM) key SGX mine that accounted for 74% of SVM's total production the last three years. SVM has done its best to mask the abrupt decline in the SGX mine from investors. Nevertheless, it is now clear that the SGX mine has much lower silver resource estimates than SVM previously disclosed and much lower grades of ore recently produced.
1. AMC Mining Consultants 2012 Ying District Technical Report Discloses Much Lower Silver Resources for the SGX Mine
Last year, I suggested SVM should upgrade its independent Qualified Persons (doing business as "BK Exploration Associates") on the SGX mine to a major multinational geological consulting firm with offices and staff in China. On 12/29/11, SVM responded by engaging AMC Mining Consultants ("AMC") of 200 Granville Street, Suite 1330, in Vancouver, Canada, to prepare updated technical reports on SVM's Ying District (including SGX) and BYP mines (press release here). Like "BK Exploration Associates," AMC disclosed that it heavily relied upon translations of key Chinese documents prepared by SVM. AMC's principal geologist, Brian O'Connor, actually visited the Ying district mines in February and April 2012.
On 6/5/12, SVM announced (here) highlights of the much-anticipated AMC technical report with the promotional headline:
"Silvercorp Reports Significant Gain in Measured and Indicated Mineral Resources and Proven and Probable Mineral Reserves at the Ying Silver-Lead-Zinc Mining District, Henan Province, China"
The "significant gain" touted in the headline referred to the 28% (21 million ounce) increase in the combined Measured and Indicated mineral resources of the SGX, HZG, HPG, and TLP/LM mines in the Ying district. As I show below, SVM's press release in my opinion is highly misleading because it masks a dramatic 79% (60 million ounce) decline in the Inferred silver resource, 46% (55 million ounce) decline in total silver resource, and 59% decline in the silver grade of the Inferred resource at the SGX mine.
The following tables compare the SGX silver equivalent resource estimates and metal price assumptions as of 12/31/11 in AMC's technical report dated 6/13/12 (page iii) to the SGX silver equivalent resource estimated as of 12/31/10 in BK's technical report dated 5/20/11 (page 7):
(click to enlarge)
The large declines in silver resources shown in the tables above occurred despite changes in the 2012 measurement criteria, last year's massive exploration program, and significant higher metals price assumptions. These three factors should have significantly boosted estimates, as follows:
- SVM now uses a minimum silver cut off grade of 150g/t instead of 300 g/t, allowing it to count far more resources in its calculations.
- SVM used significantly higher metal price assumptions for silver equivalent calculations allowing for more marginal resources to be counted
- SVM completed its largest underground drilling exploration program on the SGX mine to date, adding 61,066 meters to the 174,836 meters previously drilled as well as 11,186 meters of new tunnels
Ceteris paribus, these three positive factors should have resulted in a much higher silver resource estimate. Why did the exact opposite actually happen? Why did SVM not publicize this huge 60 million ounce decline in Inferred SGX silver resources?
Buried in its 6/5/12 press release, SVM attributes the decline in Inferred resources to:
"…conversion of Inferred Resources to Measured and Indicated categories by extensive tunneling and drilling in 2011, and to a change in the grade interpolation approach in 2012."
SVM's explanation is misleading. Measured and Indicated silver resources increased by a combined 4.9 million ounces, plus SVM purportedly produced around another 4 million ounces, but these amounts do not come close to explaining the 60 million ounce decline in the Inferred silver resource.
Therefore, the vast majority of the decline must be attributable to AMC taking a more conservative approach than BK resulting in a much lower Inferred silver resource estimate for the SGX mine. Looking back at my warnings last year that the SGX resource estimates were likely too good to be true, the following table clearly shows that I was right:
(click to enlarge)
- Rui Feng quoted in The Globe and Mail, "Silvercorp's Rui Feng Fires Back", 9/23/11
Are AMC's findings surprising? Not to anyone who seriously looked at SGX resource data available from the local Chinese Land & Resources Bureau.
The biggest "red flag" that the SGX mine appears to have less resources than SVM previously claimed was published on the Luoning County Land & Resource Bureau ("LRB") website on 11/30/09 listing the resources of the TLP, HPG and SGX mines in the Ying district (a translated copy of the LRB web page can be found here).
The table below summarizes the LRB published silver, lead and gold resources4 of the TLP, HPG and SGX mines and compares them to the total resources disclosed in the January 2010 Mineral Resources Estimates provided on page 10 of the 2/26/10 NI43-101 technical report on the Ying District mines:
For the TLP and HPG mines, the relative variance is reasonably small (in the range of +69% to -42%). For the SGX mine, however, the NI43-101 resource estimate is over 900%, or ten times, higher than the LRB published resource estimate!
Why is the Chinese resource estimate for the SGX mine so much further at variance relative to the other mines? I first pointed this out in my reports last year. SVM has never, to date, offered any explanation for the widely different variances.
Mysteriously, after the publication of my reports last year, the LRB removed this data from its website (invalid old link here), probably at the request of SVM. To date, the LRB has not published a revised version of these resource estimates on its website.
2. SVM Tried to Conceal that is SGX Grades are 32% Lower than Last Year
In its 2013 Q1 earnings press release (link here), SVM tried to avoid disclosing a dramatic decline in the silver head grade of SGX ore by combining the results of the several Ying mines together as a "district." For the entire district, the silver grade declined 16.2% from 271 g/t to 227 g/t.
However, in response to an analyst inquiry on the conference call, SVM Chairman Rui Feng was forced to admit that the SGX silver head grade fell from 444 g/t a year ago to "around 295 or 300" g/t, a decline of over 32% and double the decline of the district.
Feng then said the grade would probably be the same for Q2 2013, thus admitting that there would be two quarters of dramatically lower ore grades from the SGX mine, as shown in the following chart:
- Rui Feng comment to shareholders at SVM's annual meeting in Vancouver on 9/23/11, according to The Globe & Mail
In its press release announcing its Q1 2013 results (link here), SVM provided the following ludicrous excuse which blamed short sellers for the sharply lower production grades:
"The "Short and Distort" attack last fall has caused Managements' time being inadvertently, but necessarily diverted to deal with the crisis, which caused delays implementing certain development plans at the SGX mine, resulting in a gap in the mining schedule of blending ore from different zones with different grades."
The big decline in the SGX silver grade to 295-300g/t in the quarter ended 6/30/12 was a huge surprise to investors who on the 5/18/12 earnings conference call (highlighted transcript here) in which Rui Feng reiterated 2013 guidance (link here) of 460 g/t. Once again, I question SVM's unwillingness to disclose negative material information.
Furthermore, on 8/1/12, the day before SVM reported horrible Q1 2013 results and many weeks after SVM management became aware of the sharp declines in the SGX silver grade and Inferred resource estimate, SVM announced positive drilling exploration results for the SGX mine (link here).
I view the 8/1/12 positive announcement as a highly promotional attempt to support SVM's stock price that was teetering at the $5 level ahead of the terrible Q1 2013 results SVM reported the next day.
In September 2011, I warned that Chinese government mining reports from 2005 to 2010 appeared to show much lower grades and resources for Silvercorp Metals' key SGX mine, compared to SVM's 2004-2011 technical reports. As I have shown in this report, SVM's recent disclosures prove that I was completely justified in my concerns about the SGX mine last year.
I challenge SVM management in the future to:
- Be honest with investors and admit that the SGX mine is no longer as great as previously touted.
- Provide transparency by continuing to break out the SGX mine production and grades as long as it remains SVM's key producing property.
- Strictly follow its own Corporate Disclosure Policy (highlighted here) and stop concealing and delaying disclosure of bad news.
If SVM management refuses to change course, the stock will continue to attract short sellers who will continue to publicly point out SVM's many red flags. SVM, like its fellow litigants Deer Consumer Products (NASDAQ: DEER - Halted) and Sino Clean Energy (NASDAQ: SCEI - Delisting), deserves greater scrutiny.
Over the course of the last year SVM's Chairman Rui Feng has offered plenty of fire and brimstone in the media against his critics, wasted $4 million on a lawsuit that is now dismissed, and conducted an all-out personal war against me in China. Recent SVM disclosures prove Rui Feng's actions are wrong.
Disclosure: I am short SVM.