Setting the Record Straight on Silvercorp Metals

Before you go, we thought you'd like these...
Before you go close icon

Particularly in this post-Lehman, post-Madoff financial world, where rightfully cautious investors are eager to minimize risk, the shorts have it made.

On rare but high-profile occasions, short-side interests can provide markets with a valuable service by sniffing out red flags and exposing legitimate cases of impropriety. Citron Research scored one such hit with Longtop Financial Technologies, warning investors of problems weeks before Deloitte Touche resigned as the company's auditor, and months before the stock's de-listing from the NYSE.

But more often, I believe, short-side interests exhibit a penchant for carelessly constructed allegations backed by scant or even absent documentary evidence. Motley Fool Global Gains analyst Tim Hanson took exception to the "flimsy evidence" used by one blogger to disparage small-cap Chinese fertilizer producer Yongye International (NAS: YONG) last February. The stock languished alongside most companies with operations in China this summer, before a $50 million investment in Yongye by Morgan Stanley's (NYS: MS) Asian private-equity arm emerged to restore confidence and credibility.

More recently, that same blogger took aim at one of my own core equity holdings -- Great Panther Silver (ASE: GPL) -- and missed the mark entirely! Fortunately, the damage was short-lived, as it was clear to anyone who knew the company well that the allegations were entirely without merit. The blog post has since been retracted, but I believe it's vital for investors to note just how easy it is for anyone with a virtual soap box to trigger panic among some investors with poorly constructed allegations and insinuations.

The latest casualty of the rumor mill
I consider it a sad sign of the times that a company is forced to take seriously even those allegations brought forth by an anonymous party. But particularly where companies with operations in China are concerned, that is certainly the current reality. Successful silver miner Silvercorp Metals (NYS: SVM) found itself in just such a predicament last week, and I applaud the company for moving swiftly to rebut the contents of the allegations Friday with a press release backed by 268 pages of supporting documentation. Reacting to a major surge in short interest to reach 13% of shares outstanding, the company responded to an anonymous letter alleging accounting fraud and other alleged irregularities.

While I will leave the final verdict to the forensic accountants and translators that I suspect will continue to pore over those myriad documents and filings, I did manage over the course of my own review of the company's comprehensive rebuttal to emerge from the process with my long-standing confidence in the stock well intact. I will be maintaining my own personal holding of Silvercorp shares, and I encourage my readers to seek their own comfort level in the documentary evidence provided.

The anonymous letter alleged that the company posted a loss for 2010 in filings to China's SAIC, in purported contrast to the $66 million profit reported to the SEC. According to the documents posted to the company's website last week, however, it seems clear that Silvercorp's four Chinese subsidiaries in fact recorded a combined profit of $73 million. After dismissing the allegations of a reported loss in its Chinese filings as "clearly false," the miner proceeded to offer a full reconciliation of the two profit figures. Now that Silvercorp has produced comprehensive documentation including income tax filings and value-added tax payment receipts offering strong corroboration of profitable operation, the burden of proof returns squarely to the shoulder of the party behind these allegations.

Silvercorp also countered quite convincingly the letter's secondary allegation that the company's cash balances have been misrepresented. The company posted 67 pages of bank balance statements and documents detailing total cash and short-term investments of $221.3 million (or nearly 16% of the current market capitalization!). Considering the timely and transparent nature of the company's response, I see no reasonable cause to question that tally or the legitimacy of the relevant supporting documentation. Silvercorp referenced two additional allegations in its rebuttal, but there, too, I believe the company has offered an effective rebuttal that directly challenges the veracity of the underlying allegations.

Since 2004, Silvercorp has paid $40 million in dividends to shareholders and utilized another $31 million to repurchase shares. The company has no long-term debt. This low-cost silver miner has earned the trust and respect of precious-metals investors over the course of the past several years, and I submit it would require some extraordinarily convincing evidence of wrongdoing to derail investor interest in this gripping growth story. Of course, the very fact that short-sellers have targeted the stock presents a risk for near-term volatility, and investors will wish to shape their own exposure according to their own degree of confidence that these allegations will ultimately prove unfounded. I for one am satisfied with the company's initial response to the anonymous letter.

I have always preferred a "basket" approach for my precious-metals exposure, spreading my allocation across multiple high-quality names to reduce headline risk from unfortunate developments like this one. While I consider Silvercorp Metals a compelling option at these reduced prices, this experience underscores the attractiveness of a strategy that achieves silver investment exposure through a basket of stocks that might also include Silver Wheaton (NYS: SLW) , Alexco Resource (ASE: AXU) , and Central Fund of Canada (ASE: CEF) (for a bullion component that includes exposure to gold).

At the time this article was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of Alexco Resource, Central Fund of Canada, Great Panther Silver, Silvercorp Metals, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners