Anyone who had been betting against Silvercorp Metals Inc. on the basis that the company's Chinese mining operations looked a little suspicious was hit with the ugly truth on Monday: A review by KPMG concluded that everything is fine. The share price surged 17.4 per cent and short sellers were left scrambling.
John Hempton at Bronte Capital was one of them. He's willing to concede that the stock market and KPMG may be right about the company. Still, he wonders why the company's capital expenditures are so low at its Ying mine relative to the number of metres of tunnelling and diamond drilling – which is partly why he shorted the stock in the first place.
Through official filings, he found that the company spent just $11.3-million in exploration and development in 2010, yet completed 38,870 metres of tunnels, 38,254 metres of diamond drilling and 935 metres of shaft.
"These seem cheap to me," he said on his blog. "So cheap I thought it implausible."
He now acknowledges that Chinese labour might be cheaper – and building standards lower – than he had thought.
"It looks for the moment that my interpretation was wrong," he said. "Meanwhile it looks like my out-of-the-money puts are likely to expire worthless."