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Silvercorp's 'New Method' Leads To Improved Head Grades As Improper Mining Practices Uncovered

|Includes: LeapFrog Enterprises Inc. (LF)

Silvercorp Metals Inc. (TSE:SVM) (NYSE:SVM) has identified and moved to address fraudulent contractor practices that resulted in diminished head grades, and the new approach employed has already led to improved head grades, the Vancouver-based miner revealed in a production update for the Ying mining district released late Thursday.

The China-focused, low-cost silver producer, in its efforts to adapt to the new price environment, has made a point of reviewing its operations in a quest to identify any potential cost saving measures and in so doing, discovered a practice among mining contractors in the Ying mining district of China that has resulted in a misleading dilution of grade.

A key finding of the silver producer's review was that contractors at the site were engaged in dilutive practices, which have contributed to head grade decline as reported in the miner's two most recent quarterly financial reports.

The review revealed that some mining contractors at the Ying mining camps, heretofore paid based on tonnes of ore mined, were blending waste rock from development tunnels with the ore before the ore-trucks were scale weighed at the gates of each tunnel to determine the amount of ore mined, as a way to obtain higher mining fees. This resulted in the adulteration of ores and reduction of head grades, as well as an increase in operating costs as waste tonnage was shipped and milled.

Silvercorp has taken immediate action to address the situation, modifying the method of calculating the actual amount of ore mined by contractors. This new method, in place since last month, uses assayed grade to determine ore/waste contact and measured length, width, and height of ore bodies in each mining stope mined during the month plus allowed mining dilution (from 10 per cent to 30 per cent) to calculate the amount of ore to be extracted by the contractors. The ore will continue to be scale weighed at the gates of the tunnels, but only as a reference.

In the short period in which the new method has been in place, Silvercorp said silver and lead head grades at the SGX mine in the Ying mining district improved by almost 35 per cent and 21 per cent, respectively, with an approximate 45 per cent reduction in ore production (a 25 per cent reduction in overall silver metal production) compared to July of this year.

In a statement released with the announcement, the company said: "The new method has eliminated significant waste rock resulting in less ore being produced. Additionally, some drillers and miners left the mine sites as they feel that under the new method their pay would be uncertain, which also caused reduced ore production."

Silvercorp forecasts that during this time of transition, ore production with improved head grades may remain at a reduced level for one to two more quarters. Nonetheless, the silver miner expects the new method to lead to long term cost savings and improved head grades.

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