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Allegations of misconduct at Silvercorp's (SVM) China operations form the basis of a...

Allegations of misconduct at Silvercorp's (SVM) China operations form the basis of a class-action lawsuit against the mining company and three of its senior executives, including CEO Rui Feng. They are accused of overstating financial results from SVM’s flagship Ying mine, causing investors to buy the stock at “artificially inflated and distorted" prices. SVM -0.9% premarket.
Comments (4)
  • Judy12
    , contributor
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    Casey Research's posted a comment yesterday: Bottom Line: SVM holders should RELAX! They give no credence to these latest lawsuits. One has to wonder exactly WHY short sellers (if that's what they are) are pushing these suits that have, for the most part, already been discredited. Nevertheless, fear is a powerful motivator, and you may be able to buy at ridiculously low prices if this negative hype catches fire. For my money, tho', the prices are good enough to make substantial buys right now.

     

    Anyway, here's what Casey's Research's team had to say about it:

     

    "The lawsuit is largely based on past allegations from the short sellers, and names Silvercorp and three senior executives, including CEO Rui Feng. It claims the company overstated their financial results from the Ying mine, causing investors to buy the stock at “artificially inflated and distorted” prices.

     

    A few points. We’ve commented extensively on these allegations before, including Jeff Clark’s site visit to Ying within a month of them surfacing in 2011, and found they had no merit. We’ll note that all analysts that were on site came to the same conclusion, and an independent audit from KPMG, a highly respected auditing firm, found no discrepancies. The only additional charge in the lawsuit is that the company reportedly influenced Chinese authorities to arrest and harass researchers working for the short-sellers, including funding a police investigation, and then tried to cover it up. There appears to be nothing that hasn’t already been made public and subsequently rejected by most reputable analysts.

     

    Keep in mind that management did lower the grade and the Resource at Ying last year. Part of this was the result of a new mining plan; with some of the veins trending deeper, an adjustment was necessary. But the lower grade – which is still high relative to other silver mines and very profitable – is permanent, and in the eyes of some could justify the short sellers' accusations. Many of these allegations, however, show either a misunderstanding of mining issues or came from short sellers themselves. Bottom line, we give no credence to the lawsuit itself.

     

    The primary negative is that this could be a drag on the stock. Some investors could get scared off and sell, and we'll point out that SVM has fallen 10.7% in the three days since the lawsuit was announced. We don’t know how low the stock could fall, but it could be significant if this gets a lot of press and begins feeding on itself. Further, we don’t know how long this process could drag out; obviously the longer it goes, the longer our shares could be impacted.

     

    CHANGE IN RECOMMENDATION: HOLD. Since it’s unknown how much and for how long this could affect the stock, the prudent thing to do is to place it on hold. It’s possible this could end up being a great buying opportunity – or the beginning of another long and torturous process. Given the uncertainty, we recommend no more buying until this gets sorted out and the winds for the company shift.

     

    Those who recently bought at $5 should not panic and sell. The company continues operating at full capacity, paying dividends (one of the highest among primary silver producers), and will begin seeing cash flow from the big new GC mine by Q2."
    Sentiment: Buy
    16 Jan 2013, 11:12 PM Reply Like
  • Judy12
    , contributor
    Comments (20) | Send Message
     
    metal argumentor: Silvercorp Shorts Schooled on Accounting and Sampling: 2011 about ore grades
    by ryugo82 . Jan 4, 2013 12:07 PM . Permalink
    The Silvercorp shorts are literally the blind leading the blind when it comes to anything like analytical skills, industry knowledge, basic accounting aptitude, sampling technique or … the list goes on and on. In the past day, the head blind mouse, “Alfred Little“, has stained the group’s so-called credentials even further by publishing two short, ill-informed, comical, recurring “analyses” that we will rip apart today.

     

    Earnings Overstated by 5x?

     

    The first recurring claim is that SilverCorp Management Fails To Refute Evidence Its Earnings Are Off 5X. We’ve already addressed this ridiculous allegation in the comments section to the Seeking Alpha article but let’s formalize it a bit here as well.

     

    Basically Silvercorp’s cooperative joint venture partner in the Ying Project, Henan Found, is owned 22.5% by an entity named Henan Non-Ferrous Geological Mineral Resources Co., Ltd. (“HNGMR”). Based on financial statements obtained by the shorts, it is alleged that HNGMR only reported 22 million RMB as investment income from Henan Found in 2010 vs. a “share” of income that should have been closer to 116 million RMB. This is an alleged overstatement by a factor of 5 but to arrive at that number requires some stupendously bad assumptions.

     

    The first bad assumption is that HNGMR would care nothing about the financial statements of its most-profitable equity investment, Henan Found, being “off” by 5 times. After all, “HNGMR is a Chinese state-owned enterprise (“SOE”) with no incentive to hide earnings or evade tax.” Yet HNGMR would apparently say nothing about its flagship investment inflating earnings and overpaying taxes!

     

    The second bad assumption is that HNGMR is accounting for the investment in Henan Found under the equity method of accounting whereby a pro-rata share of profits is included in investment income. In fact, it is apparent that HNGMR accounts for Henan Found under the cost method of accounting in which only profit distributions (dividends) are included in investment income (as Silvercorp indicated in its rebuttal to the initial allegation). Importantly, the cost method means that the books and accounting of Henan Found and HNGMR are indeed in agreement after considering the profit allocation described below.

     

    Anybody who has closely followed the Silvercorp and Ying story from the beginning (as we have) should remember that the project was originally held by members from the Henan Geological Brigades who were responsible for cataloging and exploring China’s mineral wealth under the old collective system. Although it is none of our business — or Silvercorp’s for that matter — the brigades as a collective made an allocation in the beginning to give 70% of their profit interest in the Ying project to the specific brigades (1st Brigades or “1st Bridge”) that was responsible for working in the area of the Ying project. This decision was helped along by the fact that the 1st Brigades members held the key exploration licenses for the project area.

     

    So to summarize, the Henan Geological Brigades were the original vendors of the Ying project to Henan Found and in exchange they received 22.5% of the project with 6.75% of the profits belonging to the brigades as a collective (HNGMR) while the other 15.75% belongs to the specific 1st Brigades members in whose names the actual exploration licenses for Ying were held. This has nothing to do with Silvercorp and neither the company nor some nosy “investigator” has the right to question or get into the business of the geological brigades, much less demand to be informed how and why they decided to allocate the brigades’ profit share a certain way.

     

    Moreover, the above understanding of the project history should bring into better focus the “auction” for the 5% of Henan Found that was in fact a transfer of an equity interest to an “affiliated” entity. Simply put, this was a move by the brigades to re-allocate the ownership among themselves.

     

    As a result of the above, HNGMR as a collective for the brigades does not actually hold a controlling stake in, or exert a significant influence over, Henan Found and therefore under Chinese accounting rules the cost method is being used as already mentioned above. With this knowledge, the shorts should now hopefully be able to successfully reconcile the financial statements of Henan Found to HNGMR by using 6.75% of the profit distributions (dividends). Importantly, the shorts should not be using the net income of Henan Found as they have attempted so far because net income and dividend income are entirely different things!

     

    Simple accounting lesson: income minus paid dividends equals retained earnings. The paid part is what the calculation should be based on when using the cost method for equity investments, not the retained.

     

    Finally, a point about the tax on dividend income. This in fact is being collected on profit distributions to HNGMR because the Henan Found cooperative joint venture involves a foreign enterprise (Silvercorp’s offshore holding company, Victor Mining) and therefore the earnings of the cooperative are not exempt from taxes assessed on foreign companies.

     

    Once again, we offer consulting at reasonable rates to those who need further explanation of any point discussed above.

     

    Roadside “Ore” Assay Results

     

    The second recurring claim involves the assay results from “ore” that the shorts have picked up from the road between the SGX mine and mill. This is quite interesting because the rocks, although apparently tested as a batch, still came back with an overall grade that is actually quite representative of the run-of-mine grades one would expect from SGX. Here is what they came up with:

     

    ■Silver 275 g/t
    ■Lead 1.93%
    ■Zinc 0.409%
    That is amazing considering (1) some of the rocks are clearly not even ore and (2) each sample should have been tested individually and not as a mixed-together batch. It is very likely that the rocks actually consisting of vein material from this pile (by our guess about 25% of the material) might be representative of the average high grade ore at SGX. This material would not be quite as good as the direct ship ore (such rocks would look quite metallic and that is why they can be hand sorted on a conveyor line) but it would be consistent with the grades reported in Silvercorp’s NI43-101 technical report [page 8]:

     

    Proven & Probable Reserves (SGX High Grade):

     

    ■Silver 410 g/t
    ■Lead 7.28%
    ■Zinc 2.91%
    Actually the silver grade is much higher for the “falling off the truck samples” at 275 g/t than we would have expected — probably by a factor of at least 2 — considering that many of the rocks are clearly not vein material. The high sampling bias (which of course means that the shorts’ “investigation” actually points to the exact opposite of what they want to show: namely that Silvercorp could actually be understating its ore grade) could be the result of several pieces of bona fide ore material containing silver sulfosalts or silver sulfides. Sulfosalts sometimes present as subtle, plain-looking, sooty gray rocks that in fact carry bonanza grades upwards of 50 or even 100 ounces per tonne silver. Or some of the rocks could contain silver sulfides or their oxidation products that again sometimes appear as unremarkable gray rocks. As we look over this pile again, there are a few candidates that catch our eye:

     

    In any case, the shorts made a huge mistake having these rocks assayed in a batch and should have instead submitted each one as an individual “grab sample”. Once again this shows how uninformed they are … but of course that hardly matters given that they don’t even realize the batch assay results point to the opposite of what they are claiming!

     

    Any mine would love to have ore of such rich grade that random rocks picked up from the haulage road grade almost 10 ounces per tonne of silver!!!

     

    Let us now bring things to a close with a bang by pointing the shorts and those who believe them to the report prepared in 2007 for Silvercorp by the renowned international geological firm SRK Consulting. Yeah, we know the shorts never mentioned it while pillorying the company about never having had any real independent experts look at the Ying Mine other than “two old guys out of Canada” who don’t even speak Chinese. After all the falsehoods, did you really believe them?

     

    In fact, Silvercorp planned to list on the Hong Kong Stock Exchange (HKSE) in 2007 before deciding to go to the NYSE instead, and as part of the HKSE application the company commissioned an independent review of the Ying Mine including the work of the two old Canadian guys (who are really just kids in an industry where you can tell the youngsters by their gray as opposed to bald heads). The conclusion of SRK Consulting in 2007 (just shortly after mine startup) was:

     

    The mines and concentrators owned and operated by Silvercorp through its joint venture companies in Luoning County, Henan Province, China have been operating and producing at their designed capacities. The Ying mine contains resources which have been reported in compliance with National Instrument 43-101 (“NI43-101”) of the Ontario Securities Commission. Measured and Indicated resources may provide mill feed at the current processing rate for eleven to twelve years. The HPG mine has resources compliant with Chinese regulations which can be mined and fed to current concentrators. Both mines have exploration permits surrounding current mining licenses, with potential to define and discover new mineralised bodies and new deposits. The NZ project also has some remaining gold resources compliant with Chinese standard, and exploration potential to discover precious and base metal deposits at depth.

     

    The underground mine developments of the Ying and HPG projects include adits and shafts to access underground, exploration drifts along the mineralised veins, and haulage tunnels. Both mines use the shrinkage mining method. Mining is labour intensive, but has yet to produce sufficient ores to satisfy the feed requirements of the ore processing plants which have throughput capacities of 600tpd at Ying and 200tpd at HPG. The geotechnical conditions in the mines are good; only localised support of the tunnels is necessary.

     

    The Ying and HPG concentrators use conventional flowsheets in common use in the industry. Additional hand sorting of high lead and silver (Pb and Ag) grade ores is employed, which produces ores which are sent directly to the smelter, thus reducing the cost of milling. The feasibility study of the Luoning smelter is a high quality document, and the technology has been developed and utilized by other smelters in China.

     

    Both the Ying and HPG operations have only recently started operating and SRK notes the efforts of the company to comply with Chinese regulations on various issues, including environmental and occupational health and safety. There is still potential for improvement on these aspects. Silvercorp utilizes the experience of Chinese technical personnel very well to control operating costs, and enjoys a very good relationship with governments and the local community.

     

    By the way, the curious can find small hints of the work that the “1st Brigades” conducted at these projects before they were vended to Silvercorp along with a few other goodies to be found in this independent report by an international firm with a major presence in China that casts very serious aspersions on the claims of the shorts.

     

    In conclusion, we remain vigilant and ready to take on any other challenges that the shorts throw at the wall in an increasingly desperate effort to see if anything — anything at all — can stick to Silvercorp. So far it’s been like eels on Teflon.

     

    Disclaimer: We own shares and various long put and call option strategies in Silvercorp. We have not been compensated by any party for this commentary. Options and warrants are particularly risky as you can lose your entire “investment”. Therefore, only buy options and warrants with money you can afford to lose and not lose sleep over. This is not investment advice, which you should seek from an investment advisor or licensed broker.
    19 Jan 2013, 11:33 PM Reply Like
  • Judy12
    , contributor
    Comments (20) | Send Message
     
    Submitted by an SD reader & an Individual Shareholder of SVM
    I have written a rebuttal to the recent law firms Gainey & McKenna, Bernstein Liebhard LLP, and Rosen Law Firm’s attempt to manipulate SVM’s stock price lower as it has just hit its 52 week low. I believe these firms were hired by the consortium of hedge funds under the pseudo-name “Alfred Little” which is Jon Carnes of the failed fund, EOS Funds and his partners.

     

    Comments to Rosen Law Firm, Bernstein Liebhard LLP, Gainey & McKenna Concerning the Recent Manipulation to SilverCorp’s Shareprice
    By: An Individual Shareholder of SVM
    1/5/2013
    The allegations and lawsuits by the aforementioned lawfirms are highly negligent at best and manipulative at worst. If one does a search about the “Alfred Little” whose real name is Jon Carnes, you will find that his fund, EOS funds failed miserably (do a google searh of “EOS Funds”).
    If you click on the “News” tab at the top of their site, they provide a timeline of investments going back to 2007. The stated objective of the EOS Fund is:
    “Eos focuses on finding early stage companies with superior management performance, capable of achieving substantial market share and high return on invested capital. These three elements make up what Warren Buffet calls a “franchise” or business that is protected from competition due to barriers to new entrants. A franchise is therefore said to have durable competitive advantages.”
    According to a list of EOS Funds investments, none of the companies it had a vested interest in were franchises. That is the first sign that Jon Carnes and his EOS Funds primary focus is not to tell the truth as they have gone against their own stated mission and objective.
    So let’s take a look at their record, and figure out why Jon Carnes, aka “Alfred Little” radically changed its posterity into “short and distort” strategies. Their first major investment was a preferred stock investment’ in China Education Alliance (CEAI) in May 2007 of $3.4 Million. The stock was not listed on a western exchange at the time, but it was listed on the (OTN Exchange) as recently as 2009 under ticker symbol (CEAI). Now, if the timeline on the EOS Funds website (whose President was Jon Carnes, aka Alfred Little) is truthful then it appears they lost almost their entire equity stake as (CEAI’s) most recent stock price is $0.52 a share. (CEAI) was hovering near $20 a share in 2009. (CEAI’s 52 week low is $0.41)
    There are numerous statements on the timeline that show the EOS Fund (if they are reporting truthful data) focused on numerous Chinese Infrastructure, Pharmaceutical, and Technology companies. So the case I just described above is 1 instance of an investment going foul. Their next investment was a $10 Million preferred stock purchase of Tianyin Pharmaceuticals (TPI) during January 2008. (TPI) was not listed on the American Stock Exchange (ASE) in Jan of 2008 but its earliest recorded price was in the $3 range in November 2008. (TPI’s) stock price as of this writing is $0.64, an extreme devaluation from the likely amount it was at in January 2008. (TPI’s 52 week low is $0.61)
    The list goes on and on of all the EOS Fund’s investments in Chinese companies that went sour. The EOS fund also did one other highly risky investment strategy which likely destroyed its total capital and cash resources; they gave bridge loans to companies that could not pay off the interest on their loans. A bridge loan is a highly risky situation when a company is insolvent and can not pay off their creditors because they have no cash flow.
    There are 2 instances of bridge loans occurring, according to the news timeline on EOS’s website:
    12/24/2009,
    “Eos arranged and funded a $1,000,000 bridge loan to MDRNA Inc., (NASDAQ: MRNA) secured by the intellectual property and equipment of the company. MDRNA is a biotechnology company focused on developing therapeutics based on RNA interference (RNAi) techonology.”
    At the time of this ‘bridge loan’ (MRNA) was trading around $34 a share. (MRNA) now trades at $0.43 and a 52 week low of $0.20 a share.
    20 Jan 2013, 12:41 PM Reply Like
  • Judy12
    , contributor
    Comments (20) | Send Message
     
    The other bridge loan that EOS Funds provided was to Southwest China Cement. Southwest China Cement doesn’t even exist anymore and it appears the company went bankrupt sometime in December 2010, 10 months after EOS gave a $2 Million Bridge loan to them:
    2/12/2010,

     

    “Eos arranged and funded a $2,000,000 bridge loan to Sichuan based Southwest China Cement, to repay existing debt in advance of a $20 million high-yield debt plus warrants financing to fund the completion of its Ziping cement plant expansion at the heart of the 2008 earthquake devastated region.”

     

    A search on Google of ‘Southwest China Cement’ will lead you to the linkedIn profile of the former CFO, Johnson Yang. It appears he left when the company when it went bankrupt in December 2010, according to his LinkedIn profile. He is now working for a subsidiary of Chart Industries, in Sichuan Province.
    The reason I took you through this timeline is because every investment EOS made, ended up sour and losing almost all of its value. This gave them motivation to change tactics to more desperate and unlawful manipulative measures of shorting..
    Not that shorting is unlawful, but the tactic of shorting and/or buying put options and then claiming on their own affiliated website that the companies are involved in accounting scandals in order to manipulate the price to their own advantage is not only unlawful but morally wrong. Yes, I believe in freedom of speech just as much as the District Supreme Court of New York, but I do not believe one has the freedom to speak false accusations that are designed to manipulate the price of the stock in ones’ own favor.
    After the failed bridge loan in Southwest China Cement, EOS updated its ‘News’ section of its website a whole 11 months after that investment went sour and released this statement:

     

    1/01/2011, “Eos refocused its resources on identifying and investing in U.S. and Canadian biotechnology and natural resource companies.” Not only does it appear that at that time in Jan
    of 2011, did EOS have a terrible investment history in every firm and loan they made equity and debt offerings to, but now they totally changed their investment course and focus. Here are EOS Fund’s last 2 remaining updates on its timeline, in chronological order: 4/15/2011 “Eos re-opened its Vancouver, British Columbia office.”
    20 Jan 2013, 12:43 PM Reply Like
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