Silvercorp Metals Inc., a TSX-listed silver miner that operates solely in China, has been accused of fraud by a short-seller, sending its stock plummeting 16 per cent.
Researchers from Alfred Little, an independent research firm that looks into companies doing business in China, allege that Silvercorp has overstated its production, inflated the grade of silver it mines and failed to disclose that its largest customer is a related party.
The report was released much in the same way that Muddy Waters released its initial findings from its investigation into Sino-Forest's business dealings in China. The head of Muddy Waters, Carson Block, was also short Sino-Forest's stock when he released his report.
Alfred Little started looking in Silvercorp earlier this summer, but did not disclose its findings until Tuesday. During the course of its investigation, the company's stock has fallen from a peak of $11.34 in July, down to $6.50 on Tuesday, a 42-per-cent drop. Part of that fall can be attributed to an anonymous letter writer who sent Canadian regulators and the company a note that alleged Silvercorp was engaged in a "Potential $1.3 Billion Accounting Fraud."
Before its stock started to plummet, Silvercorp had a market capitalization of just over $2-billion.
To conduct its investigation, a team from Alfred Little made multiple visits to Silvercorp's largest mine, named Ying, in Henan province. During the trip, Alfred Little said that it found the grade of Silvercorp's ore was much lower than it had reported in U.S. filings. To assess the grade, the investigators examined the mined material that fell off trucks on their way to mills. Alfred Little said it knows this is a small sample size, so it is submitting more samples for examination.
The researchers also claim that the production Silvercorp reports in U.S. filings is much lower than what it reports to the Ministry of Land and Resources in China. To look into the matter, the company watched the trucks leaving Silvercorp's biggest mine for two weeks and found that based on the number of 30 tonne capacity trucks coming and going each day, Silvercorp's production could about half of what is expected.
Alfred Little has also talked to an international geological consulting firm that puts together 43-101s reserve reports. This firm said Silvercorp's latest 43-101s were likely based on earlier reports, rather than new information because Silvercorp's own external geologists have not visited the company's main SGX mine since 2008. That means Silvercorp's employees are likely creating their own resource estimates, Alfred Little wrote.
Moreover, the report alleges that Silvercorp has failed to disclose that its largest customer is a related party. (It is partly owned by a Silvercorp subsidiary.) Moreover, the company's acquisition of Yangtze Gold in 2008 gave a relative of Silvercorp's chairman and chief executive officer a 1500 per cent gain on capital that was invested for only six months.
This isn't the first blow to Silvercorp. On Sept. 1, the company was forwarded a copy of a letter alleging a "Potential $1.3 Billion Accounting Fraud at Silvercorp." The author did not provide his or her name, but acknowledged holding a short position on the stock. The letter was sent to the Ontario Securities Commission, the company's auditors and some media outlets.
Some of the claims made in the anonymous letter are similar to those made by Alfred Little, particularly the discrepancies between the Chinese resource filings and U.S. filings. Silvercorp addressed this issue (and some others) earlier in September and claimed it has done nothing wrong.
Alfred Little's researchers say they do not know the identity of the anonymous author and have not collaborated with him or her.
Tim Kiladze