Silvercorp Metals Inc. has developed a knack for replicating a profitable mining strategy globally
By Peter Kenter
Every precious metal mining company is looking for the next great gold or silver property. Silvercorp Metals Inc. (TSX:SVM/NYSEAM: SVM) is no exception — but it’s doing so from a position of unusual strength, having demonstrated a long history of profitability, and possessing a war chest of US$215 million to make its next carefully curated acquisition.
“Our thesis is straightforward,” says Lon Shaver, vice president at Silvercorp Metals. “We search out, develop and operate precious metal properties containing significant long-term deposits with the potential for high margins, and generate free cash flow from the mines to make further acquisitions.”
Silvercorp was founded in 2003 by chair and chief executive officer Rui Feng, who acquired early-stage properties in China and successfully developed them into long-term cash-producing mines. Since production began in 2006, these mines have produced 81 million ounces of silver and 1.1 billion pounds of lead & zinc. Fiscal 2022 saw the production of 6.1 million ounces of silver, with forecasts indicating production of between 7.0 and 7.3 million ounces in Fiscal 2023.
The company’s flagship Ying District operations consist of seven underground mines and two processing plants, with ready customers for its high-quality silver-lead and zinc concentrates within the area.
Leveraging profits from properties such as these, Silvercorp continues to add to its portfolio of profitable mining ventures, including positions in promising deposits through investment in New Pacific Metals Corp. [TSX:NUAG], advancing three high-quality precious metals projects in Bolivia, and through Whitehorse Gold Corp. [TSXV: WHG] in the Skukum Gold Project in Yukon and recently announced new tin projects in Bolivia.
“Any new acquisition or investment by Silvercorp begins with sound geology and a good ore body that can deliver high margins,” Shaver says. “Next, we ask whether we can permit the property and work with the community in a transparent fashion through due process to achieve sign-off. That approach also tends to reduce the amount of time and money you would invest before you turn a profit.”
In addition, Silvercorp considers its shareholders by investing only in properties likely to generate meaningful returns over the long term. “We won’t go through this process to produce ounces, but only generate nominal profits per year, or to produce intermittent profits,” Shaver says. “Each property must make meaningful cash contributions to the corporate office year after year so that we can acquire and develop additional projects or deliver dividends to shareholders.”
While some investors debate the value of holding physical gold and silver in their portfolios versus mining equities, there’s plenty of evidence that both strategies can exist comfortably side by side.
“Silver and gold have important roles to play in a diversified portfolio, but owning a company that makes more silver and gold is more attractive, as the share price may perform better than the metals’ price over time,” says Jeffrey M. Christian, managing partner at CPM Group, an independent commodities research firm. “And the company may also pay dividends.”
It’s wisdom that’s stood the test of time. In his 1776 book, The Wealth of Nations, Adam Smith wrote that owning a company that makes profits — that generates new wealth — is a better measure of one’s wealth than the amount of gold and silver one owns. That’s not a slight against owning metals. Instead, CPM emphasizes the wisdom of owning both mining shares and metals.
Quantitative studies by CPM Group and other financial research companies have demonstrated that adding even a little gold and silver to a diversified portfolio of stocks and bonds improves long-term performance. Risk, defined as the volatility and exposure to reductions in value of a total portfolio, tends to decline when investors add even a little gold or silver to their investments, while long-term returns tend to rise. Since the 1960s, investing around 25 per cent of a portfolio in gold or silver has been shown to increase the overall appreciation of a portfolio more than it increases overall volatility.
Electrification and the drive to renewable energy are expected to continue to drive demand for silver, in particular, but Silvercorp’s profitability does not depend on it.
“Given our cost structure, we have sub-$10 all-in sustaining costs for silver, using lead and zinc as a by-product,” Shaver says. “When silver is trading at around $20 per ounce, you’ve got at least a 50 per cent cash margin.”
While Silvercorp continues to search for expansion opportunities, it isn’t pursuing growth for growth’s sake.
“We don’t know what our next project will be, but we know what it will look like,” says Shaver. “For Silvercorp, that next project must deliver a meaningful financial impact for shareholders and deliver free cash flow to finance future acquisitions.”
For more information on Silvercorp Metals Inc., visit silvercorpmetals.com.
Prepared by Peter Kenter, Postmedia Content Works, on behalf of Silvercorp Metals Inc., a Stockhouse Publishing client.