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[Picassa]

"Buy SVM prior to the release of the KPMG report"


I spent an entire workweek with Silvercorp management, touring all their major operations in China. We asked questions at every turn and always received straightforward answers. We reviewed reams of both internal and public documents. We had conversations with government, tax, and smelter officials. I spoke candidly with various employees and toured all major plant operations. I put my hands on high-grade veins running throughout the Ying mine.

Based on all this, it is my opinion that there is no fraud on the part of Silvercorp Metals. The level of cooperation required among all the various entities would have to be so widespread and well coordinated that it’s almost ludicrous to consider. I’m confident that anyone who saw what I did would reach the same conclusion.

It’s time to put the allegations of the anonymous groups behind us. The KPMG report should be the final nail in the coffin of the short sellers’ claims. On the other hand, if they do find serious discrepancies, Silvercorp would be toast. Since I don’t expect this, nor do I anticipate any of the other analysts to reach a different conclusion, I think the stock is a Strong Buy.

Buy SVM prior to the release of the KPMG report. We don’t know exactly when the report will be released, but it could be as early as one week (from October 7). If the report concludes what we think it will, the company will be exonerated in the eyes of many investors. I am not saying the stock will pop dramatically (though it certainly could), but this will pretty much be the end of the road for the accusations made by the anonymous groups.

My only hesitation with going all in over the next week is if we were to get another 2008-style selloff in all markets. The stock would suffer along with others in that scenario, and I’d like to have one last tranche available if that came to pass. If you don’t own the stock, I might buy more than one tranche now, though, because current prices are very attractive, especially if you can get it at or below US$8. If the stock were to rebound like some of the other Chinese companies that were vindicated, the rise could be dramatic, but a falling silver price could dampen the enthusiasm.

Also note that the stock has already recovered 33% since its September 13 low (as of October 6). Most of this occurred while the silver price was falling, so it appears some of the short sellers have been covering. However, short interest remains high, around 25 million shares. This is probably due to the US Department of Justice investigating alleged accounting irregularities of certain Chinese companies operating in the US; SVM is a Canadian company and thus wouldn’t be part of any US investigation, but short sellers are probably lumping it in with other Chinese firms. At some point, though, all these shorts will have to cover.

Bottom line: the stock is a Strong Buy. A year from now this will all be old news, and the opportunity to buy at current levels won’t be available.


Jeff Clark, Senior Editor