Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Silvercorp Metals was forced on Friday to react to an anonymous letter also sent to the Ontario Securities Commission, presumably from a shorter of the company’s stock that alleges a “potential $1.3 billion accounting fraud” at the company.
The firm with projects in China and Canada closed down just shy of 10% after five times the usual number of shares changed hands. It had lost as much as 14% of its value earlier in the day after the company also said someone had built up a short position of some 23 million shares over the last two months. The Vancouver company has 175 million shares outstanding and is worth $1.3 billion. Silvercorp is the latest in a string of Canadian companies with Chinese backing and operations being accused of fraud.
CBCNews reports earlier this year, TSX-listed forestry firm Sino-Forest was accused by short seller Carson Block of overstating revenues and effectively being a massive Ponzi scheme. The company is fighting the allegations, but in the meantime, Sino-Forest shares have ceased trading on the TSX and CEO Allen Chan has resigned.
MINING.com reported at the end of July how Chinese miners were being punished as investors worry about the soundness of Chinese companies that came to US markets through so-called reverse listings. The value of the 98 companies has declined sharply in preceding weeks as creative accounting and other irregularities were uncovered at firms engaging in operations as diverse as software and timber.
Silvercorp Metals’ press release issued this morning before the market opened:
Silvercorp Metals Inc. (“Silvercorp” or the “Company”) (TSX:SVM)(NYSE:SVM) announces that there has been a dramatic increase in the short position of its shares over the past two months which is now approximately 23 million shares (Source: (http://www.dataexplorers.com/products/data), or 13% of the total outstanding shares.
Late yesterday afternoon, the Company was forwarded a copy of an anonymous letter dated August 29, 2011 addressed to the Ontario Securities Commission, the Company’s Auditors, and various media outlets maliciously alleging a “Potential $1.3 Billion Accounting Fraud at Silvercorp“. The anonymous author also stated that his firm held a short position in the Company’s shares and intended to make his concerns known through internet postings. The Company has not confirmed whether the letter has been disseminated to all the addressees or if any postings have been made.
Recognizing that the anonymous letter may be disseminated the company wishes to proactively respond to the most serious allegations and has posted supporting information on its website to provide investors with comfort regarding the following allegations made in the anonymous letter:
1. The central allegation is that while Silvercorp reported net profit of US$66 million to the SEC in calendar 2010, financials purportedly available from the Chinese State Administration of Industry and Commerce (SAIC) shows “SVM” reporting a loss of US$0.5 million for calendar 2010. This allegation is false.
The SAIC website (http://wznj.saic.gov.cn, Attachment A) discloses the following for Silvercorp’s four Chinese operating subsidiaries: (i) Henan Found filed net after income tax profit for Calendar year 2010 of RMB514,786,392; (ii) Henan Huawei filed a net loss of RMB6,091,388; (iii) Guangdong Found filed a net loss of RMB4,758,879; and (iv) Anhui Yangtze filed a net loss of RMB1,214,663. On a consolidated basis, the net profit of these four Companies is RMB502,721,462 (US$ 73 million). In addition on the cover of each filed SAIC document there is an anti-fraud code displayed which readers can use to independently verify those reports on the Chinese Certified Professional Accountant website (www.henicpa.org.cn). Further information to reconcile this China GAAP consolidated total net profit with the US$66 million figure will be posted on the Company’s website. The anonymous author’s numbers are clearly false.
As further evidence of Silvercorp’s net profit, copies of the 2010 Annual Income Tax Filing Forms for Henan Found and Henan Huawei, which include a receipt chop issued by the State Tax Bureau of the Luoning County of Henan Province, is also attached (2010 Income Tax Filing Form,Attachment B). In the 2010 Annual Income Tax Filing Form, Henan Found reported net revenue of RMB964,812,316 (US$140.1 million), and a pre-income tax net profit of RMB590,727,919 and paid income tax payable of RMB74,441,229.
In China, on each sale of goods the seller must charge Value Added Tax, and the receipt issued for the paid value added tax must be approved and is stamped by the government. The Company is posting details on its website showing a reconciliation of the Value Added Tax paid by Henan Found on its revenues along with copies of the government receipts. (Attachment C)
2. The letter further alleges that the Company’s cash position is grossly overstated. In fact:
(a) Silvercorp, as at June 30, 2011, had a cash position of $230.5 million – more than all the cash ever raised in the Company’s history. Copies of Silvercorp’s current bank statements (July 31, 2011) are available on the Company’s website. (Attachment D);
(b) Since 2004 Silvercorp has raised in total $202.5 million through equity financings. Over the same period of time it has paid out $40 million in dividends, and has spent $31 million repurchasing its own shares, including $16.5 million in the currently ongoing Normal Course Issuer Bid announced June 17, 2011; and,
(c) The Company has $544.6 million in total assets and no long term debt as at June 30, 2011.
3. The letter also states that the grade of the Company’s deposits is simply “too good to be true” compared to comparable companies. The Company acknowledges that its SGX Mine within its Ying mining district does have some of the highest grades in the industry. As disclosed in its most recent NI 43-101 report measured grades at the SGX Ying mine are 845g/t for silver. The mineral resource estimate for SGX was prepared by Mel Klohn L.P. Geol. of Spokane Valley, Washington, who is a Qualified Person with the firm of B.K Exploration Associates. Details of QA/QC procedures and assay lab information are described in the Technical Report filed on SEDAR under the Company’s profile and available on the Company’s website.
The Company has long established plans for an investor tour to the Ying mine site in the third week of September. All interested investors, analysts and media wishing to visit our mine site and view the ore and operations with their own eyes are asked to contact the Company to join the tour.
4. The anonymous author also alleges that Henan Found’s 22.5% JV partner, the Henan Non- Ferrous Geological and Mineral Resources Co. Ltd., which is a state owned enterprise, sold a 5% interest in Henan Found for US$7 million, implying the Henan Found assets are worth only US$140 million. The anonymous author fails to mention that the transfer was to an affiliate. Based on the joint venture contract and articles of association of Henan Found, the 22.5% joint venture partner can assign its interest to an affiliate.
In accordance with good governance practices, the Company has established a task force of independent directors consisting of Dr. Robert Gayton, Paul Simpson, LL.B. and Earl Drake, Canada’s former ambassador to China, to work with regulatory authorities to immediately investigate and discover the identity of the party behind these allegations. Silvercorp will pursue all legal options, whether in Canada, the United States, or China, to recover damages incurred by the Company as a result of these allegations.
Dr. Rui Feng, the Company’s Chief Executive Officer, noted “this type of manipulative scheme is baseless and which depresses our share price and harms our shareholders. While we are fighting these manipulation schemes, we will continue with our ongoing share buyback program, increase our investor relations efforts, and continue to focus on growth through exploration, acquisitions, and mine development. We are pleased with our current operations and look forward to reporting another profitable quarter.”
About Silvercorp Metals Inc.
Silvercorp Metals Inc. is engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada. Silvercorp is the largest primary silver producer in China through the operation of the four silver-lead-zinc mines at the Ying Mining Camp in the Henan Province of China. The Company is developing its GC silver- lead-zinc mine in the Guangdong Province and recently acquired the BYP gold-lead-zinc mine in Hunan province. In Canada, Silvercorp is preparing to apply for a Small Mine Permit for the Silvertip high grade silver-lead-zinc mine project in northern British Columbia to provide a further platform for growth and geographic diversification. The Company’s shares are traded on the New York Stock Exchange and Toronto Stock Exchange and are included as a component of the S&P/TSX Composite and the S&P/TSX Global Mining Indexes.
Attachments mentioned in this press release can also be obtained by visiting the Company’s website, www.silvercorp.ca and clicking on the electronic version of this press release, or alternatively by calling the Company.
4 Comments
Yukoner
Found this article intersting. Silvercorp’s affiliate partner New Pacific Metals also has a similar problem with the technical report that was submitted to the B.C. securities comission. The security comission had some serious concerns regarding the disclosure of mineral resopurces at the Tagish Gold mine in the Yukon Territory. If anyone is interesting in reading more you can read about it on New Pacific’s website.
dcurban
1 comment from someone with no links or backup and the letter stated they would disseminate misinformation throughout the Internet………..
Seriously, I spoke with some fund managers and while you may be associated with the fund manager this is a grade school level troll attempt.
Neil
An anonymous letter? It should be easy to identify who has taken the large short position in the stock. Approach them and ask if they are man (or woman) enough to identify themselves
and show proof of their allegations. If the allegations prove to be contrived they should be jailed for 10 years at least (or shot.)
Neil
I forgot to menton, if Silvercorp is found to be guilty of the allegations, all of the principals of the company should definitely be taken out and shot.