US stocks gained on Friday as investors breathed a relative sigh of relief over an inflation report that came in line with expectations. The $Dow Jones(.DJI)$ and the $S&P 500(.SPX)$ rose roughly 0.6%. The tech-heavy $NASDAQ(.IXIC)$ climbed 0.4%.
The best-performing concepts is Precious Metals & Minings. Considering the different perceptions of the stock, this time TigerPicks chose $Silvercorp Metals Inc(SVM)$ to have a fundamental highlight to help users understand it better.
In the past five days, SVM's share price has risen by 16.7%, surging by 2.7% compared with the same period last year.
Silvercorp Metals Inc. is a Canadian mining company producing silver, gold, lead, and zinc. The Company operates several silver-lead-zinc mines at the Ying Mining District in Henan Province, China and the GC silver-lead-zinc mine in Guangdong Province, China. The Company’s producing mines are located in China, and exploration and development projects are located in China and Ecuador.
Whilst gold has been getting most of the headlines, silver has been having a bull market of its own. Silver has ascended from $29/oz in January to over $42/oz, its highest level in over a decade. Silver miners have seen their profit surge, sending their share prices higher this year
Latest Earnings
Silvercorp released their latest earnings at the start of August. Quarterly production came in at 2.0 million ounces of silver equivalent, an increase of 12% from the corresponding quarter a year ago.
The company’s main Ying Mining district in Henan Province, China, was responsible for the production increase; silver equivalent ounces produced rose 14% to 1.85 million ounces. This was driven by higher ore tonnes processed (+28%), which was partly offset by lower silver grades (217g/t vs. 241g/t).
Silvercorp’s other mine, the GC mine, continued to show weak performance. Only 138 thousand ounces of silver were produced (-5% YoY), with a drop in ore processed (-13%) more than offsetting the increased silver grades (69g/t vs. 64g/t).
Whilst silver has experienced a recent rally in price, much of this rally came outside of Silvercorp’s first quarter. This led Silvercorp to report an average realized selling price of $29.54, only a small improvement from the $26.34 in the previous year and a far cry from the current silver price in the 40s. This meant that revenues only rose 12.7% to $81.3 million, roughly the same percentage as the increase in silver equivalent production. This, however, should change with the higher silver price reflected in the next set of results.
Ying District Mine – Silvercorp Website
On the cash flow front, Silvercorp reported cash flow from operations of $48.3 million and free cash flow of $22.5 million. Silvercorp had $377.1 million of cash and cash equivalents on the balance sheet and a total debt of $111.6 million. This net cash position is what I consider to be Silvercorp’s greatest asset, a net cash position that represents almost a quarter of the balance sheet. This means that Silvercorp should be capable of funding capital expenditure and its new mine projects without having to raise costly debt or dilute existing shareholders.
Valuation
Given a miner’s earnings are heavily reliant on the price of the underlying commodity they mine, in a rising commodity market, all miners stand to benefit from higher prices. However, all have different starting valuations and operations, which may impact potential future returns.
As such, the first way I want to evaluate Silvercorp is in comparison to other silver miners such as $First Majestic Silver(AG)$ $Pan American Silver(PAAS)$ $Endeavour Silver(EXK)$ $Hecla Mining(HL)$. Given the large difference in cash and debt levels, a direct comparison of earnings multiples will not suffice, and I instead use a forward enterprise value to EBITDA multiple.
Chart
When compared to peers, we see Silvercorp trades at a significantly lower valuation of only an EV/EBITDA ratio of 5.889. A discount to peers can certainly be expected; all of Silvercorp's operations are in China, a rather mixed jurisdiction for miners. On one hand, China has strong infrastructure, a skilled workforce, and easy access to mining equipment but suffers from opaque permitting and potential changes in royalty regime. If Silvercorp does have a dispute with a local authority, there are no independent courts to turn to. With Silvercorp trading only slightly above its 5-year average of 5.43, I believe this seems a fair multiple, not particularly overvalued or undervalued.
To determine a price value for Silvercorp, I calculate the estimated cash flow and apply a multiple to this. I use the midpoint of 2026 guided production for 8 million ounces of silver equivalent, taking into account the weaker 2nd quarter production management expects due to the fatality at the Ying Mining District. I use an AISC of $14 per ounce, just above the current quarter's value.
Cash Flow From Operations – calculated by the author
Assuming a silver price of $42, the current price of silver, we get a cash flow per share estimate of $0.72. I opt to use a free cash flow multiplier of 7, lower than the wider mining sector. This aims to take into account the jurisdictional risk and the fact that Silvercorp only has two operational mines currently, but also the diversification and production growth that El Domo is set to bring. Applying the 7x multiple gives a target share price of $5.02, slightly below the current share price of $5.28. On this metric, Silvercorp appears fairly valued.
Conclusion
Silvercorp shares have had a strong year so far, following the silver price higher, despite the latest results being on the weaker side.
With the shares trading slightly above my price target for the shares, I believe Silvercorp shares are a hold at this price. Until the El Domo mine is successfully built and begins generating cash flow, I would prefer to stay on the sidelines.
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts.
Based on 6 Wall Street analysts offering 12 month price targets for Silvercorp Metals in the last 3 months. The average price target is $6.46 with a high forecast of $7.89 and a low forecast of $5.38. The average price target represents a 6.25% change from the last price of $6.08.
Resource:
https://seekingalpha.com/article/4822872-silvercorp-metals-looks-fairly-valued-after-recent-rally
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