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Silvercorp Metals Implements New Mining Strategy At Ying District To Lower Total Mining Costs

Like many of its peers, Silvercorp Metals (TSE:SVM)(NYSE:SVM) has posted fourth quarter results that reflect the current challenges facing the mining industry, but the China-focused silver producer says that it is implementing a new mining strategy at its core operations that will lead to lower total mining costs, with the company also forecasting higher ore production for its next fiscal year.

For the three months that ended March 31, the miner reported net income attributable to equity holders of $6.4 million, or 4 cents per share, compared to a profit of $9.7 million, or 6 cents per share, a year earlier.

The company said in a statement late Wednesday the decline was mainly due to lower base metal production, specifically lead and zinc, as well as a decrease in realized prices for silver and lead of 7 and 8 per cent, respectively, and an increase in production costs.

Realized sales for the quarter were $33.1 million, down from $44.3 million in the fourth quarter of 2012.

Cost of sales rose to $16.1 million from $14.3 million on an 11 per cent increase in ore production, with these latest figures including cash costs of $13.8 million.

The company also said Wednesday that it re-negotiated contracts with eight mining contractors at its operations in China's Ying Mining District, with updated fees to reflect the change in mining strategy, which increases the use of "the lower cost shrinkage method" to 75 per cnet and reduces the use of the higher cost re-suing method to 25 per cent for expected ore production of 900,000 tonnes in fiscal 2014.

The new contracts, which took longer than expected to negotiate and therefore impacted ore production, are expected to reduce total mining costs and increase mine life in the long term in the effort to combat increased labour costs in China, it added. The new strategy is also expected to take the company to up to a mining rate of 3,200 tonnes per day.

Given the recent rout in precious metal prices, Silvercorp said it is currently reviewing its capex costs for fiscal 2014, as it looks for ways to reduce expenses and optimize the allocation of capital, including examining strategic options for non-core assets.

In the fourth quarter, in the Ying Mining District in China, the company mined 153,323 tonnes of ore, compared to 135,748 tonnes in the fourth quarter of fiscal 2012.

Total production, however, which includes gold output from the BYP Mine in Hunan Province China, was 0.94 million ounces of silver, 2,333 ounces of gold, 9.8 million pounds of lead, and 1.9 million pounds of zinc. This compares to 1.1 million ounces of silver, 1,987 ounces of gold, 14.7 million pounds of lead and 2.9 million pounds of zinc a year ago.

Silvercorp said that head grades at the Ying Mining District were lower for silver, lead and zinc as a result of the increased use of the shrinkage mining method, while cash mining costs were higher at $61.67 per tonne, compared to $57.62 a tonne in the fourth quarter of 2012. Cash costs per ounce of silver were $3.65 per ounce, versus negative $4.22 an ounce a year earlier.

Gross profit margin fell to 52 per cent from 68 per cent in the year-ago period.

Cash flow from operations, however - a key metric in the industry - rose to $14.8 million, or 9 cents per share, from $12.6 million, or 7 cents per share, in the equivalent quarter of 2012.

The company, which began trial mining and processing of its GC mine in China in the past year, also declared a quarterly dividend to shareholders of $4.3 million, or 2.5 Canadian cents per share, to be paid on or before July 19.

As of April this year, all contracts for mining at the Ying District had been renewed, and production has returned to levels required to reach its 2014 output forecast, Silvercorp said. Assuming all regulatory permits are in hand by the expected timeline of July, the GC mine is anticipated start proper production in the second half of this year, adding 740,000 ounces of silver output in fiscal 2014, which ends in March of next year.

For the full year 2013, the company posted an adjusted profit of $36.9 million, or 22 cents per share, on sales of $181.6 million, and returned $17.1 million to shareholders in quarterly dividends.

Shares of Silvercorp rose almost 3 per cent in Thursday morning trade, to $2.88, paring year-to-date losses.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.