Silvercorp Metals Inc. released a lengthy public statement on Wednesday to push back against the allegations levelled by short-seller Alfred Little, giving at least some investors confidence. Since hitting a near-term low of $5.89 early Wednesday morning, the stock has rebounded about 15 per cent.
Yet the company’s defence of itself leaves some questions unanswered.
There's no doubt that Silvercorp chief executive officer Rui Feng understands its first press release can't exonerate his company of all allegations. That's why the independent directors have hired forensic accountants at KPMG to look into Silvercorp’s business dealings. But because that review will take some time, it’s worth noting what big issues remain unclear.
Silvercorp was particularly perturbed by Alfred Little’s accusation that its production has been overstated by at least one-third. To prove this wrong, the company released documents that show it has paid $116.6-million (U.S.) in taxes to the Chinese government and $152-million in dividends to shareholders, which it says is in line with Chinese tax rates, given the amount of silver ore it has reported to have produced.
However, there is no direct link between the company’s production and the taxes and dividends it has paid. The money used for these payments could have been funnelled through subsidiaries or other entities, which is something regulators will have to investigate. A more accurate proof of production would be receipts from Silvercorp's buyers that demonstrate the reported amount of production was shipped and received by external parties, and then paid for and receipted.
Grade of silver
Silvercorp also took issue with Alfred Little’s suggestion that the grade of silver it mines is much lower than the company reports. Alfred Little based this accusation on the grades reported in documents filed with the Henan Land and Registry Bureau in China, against what is filed in the U.S. and Canada. Silvercorp fought back against this argument by noting that the figures in the Land and Registry reports are from 2005, even though these documents were published in 2009 and 2010. (Chinese regulations do not require the company’s exploration results to be updated annually, the company said, so the figures in its 2009 and 2010 reports are from limited exploration results in May, 2005.)
Still, there are questions. Alfred Little compared the Land and Registry report to the company’s 43-101, which is a report filed publicly on SEDAR that is supposed to independently measure its silver reserves. Silvercorp’s argument assumes that the figures in 43-101 are correct, but Alfred Little said that an independent geologist has not visited the company’s main SGX mine since 2008. That allegation is true. According to documents on SEDAR, BK Exploration, which produced the 43-101 for the big mine, has relied on data offered up by the firm for the last three years. Legally speaking, that’s just fine. But someone independent will have to verify new samples to clear the company of the allegations.
While these questions continue to exist, Silvercorp was able to prove that its 15 per cent stake in Luoyang Yongning Smelting Co. Ltd. was disclosed after Alfred Little said it hadn’t been. The company’s financial statements for the quarter ended June 30, 2011, available on SEDAR, clearly state that Silvercorp holds an equity investment in the smelting company, and has marked the stake as “available-for-sale.”