When investors shop for top investment prospects, they typically look at two types of companies: those that are undervalued (i.e discounted) or those with “dynamic growth profiles”.
The problem? Companies that are seen as undervalued may not offer a value proposition and are often priced that way because the market doesn’t see good future growth prospects.
Conversely, companies that demonstrate impressive growth profiles generally have premium valuations, because the market is already pricing-in that growth potential.
Then we have Silvercorp Metals Inc. (TSX:SVM / NYSE-A:SVM).
Silvercorp offers investors an amazing value proposition.
Silvercorp offers investors a dynamic growth profile.
The best of both worlds. Just laying out the value proposition here is a full story in itself.
An established silver producer is grossly undervalued
As its name implies, Silvercorp made its name in the mining industry as a primary silver producer. However, in both its operations and strategic investments, Silvercorp has increased its “gold” footprint in recent years to complement its silver production.
It is easy to illustrate how grossly mispriced this silver/gold company is in today’s markets.
As of March 24th (when SVM’s market cap was USD$625 million), more than half of the Company’s market cap was attributable to just its cash and strategic investment in New Pacific Metals (USD$332 million out of $625 million).
For a mining company with highly profitable silver mines producing at strong margins, that’s hard to believe. The March 24th market cap figure (above) implied a valuation of only USD$293 million for these operating mines (and additional development projects).
What should be the valuation of those assets? Silvercorp Metals is widely covered by mining analysts, and their average NAV for these mining assets is roughly USD$575 million.
If Silvercorp’s market cap increased so that the implied market cap for its mining assets merely matched that NAV, SVM’s share price would have to rise by 45% (nearly USD$300million) – to USD$907 million.
Has this revaluation already begun? Since bottoming on March 10th at USD$2.93, SVM has been pushing higher, up more than 30% since that time.
Silvercorp is extremely undervalued versus mining peers
Even at the current share price, Silvercorp is still greatly undervalued in absolute terms. But the Company looks perhaps more-undervalued when stacked up against its peers.
Whether we compare Silvercorp to its peers in terms of silver reserves, EBITDA, or cash flow, the Company’s market cap (and share price) practically shouts “undervalued”.
As already noted, SVM’s recent move higher has eliminated a small portion of this value disconnect versus peers. However, the share price would have to rise substantially higher for Silvercorp to achieve merely an average valuation – using any of these metrics.
A well-run and well-managed mining company
In today’s markets, a lot of public companies are billed as “great value propositions”. But when investors do their due diligence and kick the tires, suddenly the value proposition looks not so great.
With Silvercorp, the closer that investors look, the stronger the appeal.
Despite relatively weak silver prices (and extreme price volatility), Silvercorp has managed to remain strongly profitable, almost without interruption.
The Company’s Ying Mine Complex, which accounts for the vast majority of Silvercorp’s total silver production, is generally high-grade/narrow vein mineralization (silver with robust lead and zinc credits).
Experienced mining investors understand what that means: precision mining.
Ore from these high-grade veins must be carefully and expertly extracted. Otherwise, too much waste ore is mixed in with the metals. Operating margins (and profits) drop substantially.
For most high-grade/narrow vein mining operations, this generally means a trade-off. Either sacrifice total production to achieve strong margins, or accept weak operating margins in order to boost production.
Silvercorp manages to consistently maintain a high output at the Ying Complex, over 29 million ounces of silver produced over the past 5 years, while also preserving strong margins on this production.
- Cash costs per ounce of silver (net byproduct credits): negative $1.15
- All-in sustaining costs (AISC) per ounce of silver (net of byproduct credits): $9.28
The Company has announced an expansion program to increase Ying’s milling capacity to 5,000 tpds, via construction of a third mill. Silvercorp is just waiting on the environmental approval for the new facility.
These cost-effective mining operations yielded USD$11. 9 million in net income, in just Silvercorp’s most-recent quarter.
At Silvercorp, “mine optimization” is a 24/7 imperative. It involves everything from using the latest mining technology to implementing the most-progressive mine management systems. If investors were to sum-up Silvercorp’s mining operations with one word, that word would be “disciplined”.
Management adopts that same disciplined attitude when it comes to managing the Company’s coffers.
With its current cash position of USD$210 million, Silvercorp is well-positioned to bolster its assets with a significant acquisition. However, unlike many larger mining companies, Silvercorp refuses to overpay to add either another producing asset or exploration project, being very disciplined in its approach.
Management thought that they had made an even more-significant acquisition in April 2020, when the Company entered into a definitive agreement to acquire Guyana Goldfields, in a transaction valued at CAD$105 million.
However, when a third party stepped in with a much higher offer for that company, management refused to get into a bidding war. Instead, Silvercorp pocketed USD$20 million in gains from a toehold position and the “termination fee” for Guyana’s breaking of the original agreement.
Closer to home, the Company acquired its Kuanping Silver Project in October 2021, via an online government auction process, for USD$13.5 million.
Kuanping is located close enough to the Ying Mine Complex to share its milling facilities, making the acquisition highly accretive. Silvercorp is currently developing its mine plan/cost estimates as it looks to move Kuanping to production.
Then there is Silvercorp’s strategic investment in New Pacific Metals (TSX:NUAG / NYSE-A:NEWP).
In 2017, Silvercorp’s Chairman and CEO Rui Feng chose to make a CAD$39 million strategic investment in New Pacific Metals, based in Bolivia. With a 28.2% stake, Silvercorp is the single largest investor in NUAG.
Today, New Pacific Metals is a CAD$500+ million mining exploration company, with three gold and/or silver projects with “monster” potential.
Today, Silvercorp’s CAD$39 million investment is worth ~USD$125 million, down from its previous all-time high. A fat profit on Silvercorp’s balance sheet. But (very likely) also a substantially undervalued asset at the current price.
Silvercorp’s long-term success in building the Company is largely a function of its rigorous commitment to discipline.
Disciplined and efficient in its mining operations. Disciplined and astute in its financial management.
An undervalued company producing an undervalued commodity
We’ve seen how Silvercorp is undervalued in absolute terms. We’ve seen how the Company is even more undervalued versus its silver-producing peers.
With Silvercorp’s fiscal 2024 guidance projecting ~7 million ounces of silver production, consider how undervalued is silver itself.
This is best illustrated by looking at gold.
For over 4,000 years, the gold/silver price ratio gravitated closely to a level of 15:1. Not surprising, reflecting the average supply of each metal. In the Earth’s crust, the ratio of silver to gold is ~17:1.
Historically, humanity has had a slight preference for silver over gold.
Also not surprising.
Silver actually has a greater brilliance quotient than gold (it’s shinier). And being more abundant than gold, silver has been far more useful as money throughout our history.
Today, the gold/silver price ratio is >80:1.
What’s changed? Silver is more valuable than ever. Yet apart from recent history, it has never been more undervalued versus gold. The metal remains “precious” with massive demand globally in jewelry and as an investment. However, silver is also the world’s most-versatile metal, with numerous potent chemical and metallurgical properties.
This creates enormous industrial demand for silver in addition to its jewelry/investment demand. Applications include: electronics, solar panels, anti-microbial products, and catalysts. According to The Silver Institute, “almost every computer, mobile phone, automobile and appliance contains silver.”
If silver corrected to its historical 15:1 ratio, then even if the price of gold stayed the same that would put silver at ~USD$130 per ounce.
Think that Silvercorp is undervalued today? Now project the share price if (when?) the price of silver soars by >5X.
Fantastic valuation for rock-solid silver producer
At its current price, from every angle Silvercorp Metals radiates value.
Value in its grossly undervalued mining assets. Value in the massive upside potential of its large strategic investment in New Pacific Metals. Value in its potential to grow the Company further with its robust cash position.
However, as already noted, Silvercorp also offers surprisingly strong growth catalysts – for an established mid-tier mining company.
It would eat up too much additional time for readers to expand on these growth drivers in this article. However, an upcoming full-length feature will connect the dots on how Silvercorp’s growth prospects compliment the fantastic value proposition.
In current market conditions, many investors are willing to sacrifice growth potential in order to hold more stable investments (and sleep better at night). With Silvercorp, investors get that stability (including a USD$0.25 dividend) without sacrificing on growth.
Silvercorp Corporate Presentation (April 2023)
Disclaimer:
The Information contained here is a paid advertisement and is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Prior to making any investment decision, it is recommended that readers consult directly with the public company and seek advice from a qualified investment advisor. The corporate information included in this was provided by Silvercorp Metals in order to help investors learn more about their company. The information provided is purely and solely the responsibility of Silvercorp Metals who has reviewed and approved all material for accuracy. Stockhouse does not provide investment advice and the information on this profile should not be considered a recommendation to buy or sell any security. Investing in securities is speculative and carries risk. Persons who wish to buy or sell securities should only do so at their own risk and in consultation with their registered securities advisers. Stockhouse does not own stock in Silvercorp Metals. The writer holds shares in Silvercorp Metals.
