2012E 11.0x 0.7x US$39.79 US$39.79 5.6 5.6 US$(6.58) US$(6.15) US$0.91 US$0.90 7.0x US$163 US$161 5.4x
2013E 10.8x 0.0x US$37.63 US$37.63 6.4 6.4 US$(5.57) US$(5.57) US$0.88 US$0.88 7.2x US$173 US$173 5.1x
Action
We reiterate our Outperform rating and 12-month target price of $16. The continued allegations, of course, add to the uncertainty already surrounding companies, such as Silvercorp, with Chinese assets. These reports appear, to us, to be opportunistic and in the short-term are driving the share price weakness. Given what we know at this time, we suspect SVM will weather this storm and suggest that the company continue to move forward with its operations and development projects, focusing on its strong margins and cash flow, which will ultimately lead to an outperformance. We will continue to watch any new developments closely.
Analysis
We continue to view these allegations as unfortunate and opportunistic. We also maintain our view that the SGX mine is a high quality asset that has been and should continue to generate positive returns at current and much lower metal prices for many years to come. We also believe when you cut through all of the noise it really comes down to the fact that since 2004 the company has raised just over $200 mln, paid some $40 mln in dividends, ~$30 mln in share buybacks, spent more than $175 mln acquiring, developing, expanding and exploring (both in China and Canada) and still have roughly $220 mln in the bank. This, along with our site visits and the VAT receipts give us the comfort we need to maintain our view.
Valuation
We apply a 1.8x multiple to our $9.22 NAVPS estimate, largely based on the high grade, low cost Ying mine. SVM is currently trading at a P/NAV of 0.7x vs. the peer group at 1.1x.
EPS 1Q 2Q Mar Jun 2011A US$0.09 US$0.07 2012E 0.16A 0.15 2012E 0.16A 0.14 2013E 0.15 0.15 2013E 0.15 0.15 3Q Sep US$0.13 0.17 0.16 0.15 0.15 4Q Dec US$0.08 0.12 0.12 0.14 0.14 Full Year US$0.37 0.59 0.59 0.58 0.58 Revenue (mln) US$176 279 276 293 293 NAV
Company Description Silvercorp is a producer, developer and explorer focused on silver assets in China (albeit with significant by-products). The company's key producing asset is the high-grade SGX Silver project.
9.22 9.22 NA NA
Source: Raymond James Ltd., Thomson One. Fiscal Year End March 31st . Fiscal years ending before May are treated as previous year.
Please read domestic and foreign disclosure/risk information beginning on page 8 and Analyst Certification on page 9.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Fresh Accusations
As we stated in our previous Company Comment published on September 6 entitled Under Attack, outsiders can never state with absolute certainty that something is not a fraud, this is why such allegations are particularly challenging to refute. This still holds true. It is unfortunate that in todays current market environment companies appear to be guilty before proven innocent. Before we dive into the fresh slate of allegations against Silvercorp we wanted to review our thoughts again, and break down what it is that continues to, at the end of the day, give us comfort to maintain our Outperform rating and $16.00 12-month target price. First, as with every company we cover, we perform a certain amount of due diligence; it varies slightly from company to company - reviewing the assets, disclosures, management meetings, third party studies, etc. Often we visit the assets several times, we focus on permitting and various other asset or region specific issues or risks. Once all of this is complete, we decide whether or not to officially cover the companys shares. In the case of Silvercorp, we went through our typical procedure, gaining comfort that yes, the assets exist, have good potential and that we trust management. In mining there are a number of aspects where we need to rely on, our experience, third party reports and management, which is why trusting management is truly a key feature in our analysis. We need to trust not only that they are truthful but also that they can actually accomplish successfully, what we believe is the potential of the various assets to be. What are the key issues when reviewing a mining company (after establishing a level of good faith with management to be truthful and are competent)? 1. Quality of an asset, i.e. grades, widths, size, mine life, etc. 2. Economics of an asset, i.e., can the asset generate positive cash flow sustainably?
Quality of the Asset Once we have established this trust, we then focus, in more detail, on the specifics of the asset, whether in the exploration, development or production phase and then decide whether it is under, over or fairly valued in the market. When we first started to review Silvercorp it was in the exploration/development stage, quickly moving to the production stage. Once in production, and through the typical ramp up issues that all mining companies grind through, we are better able to re-assess whether or not the asset is actually economic and have a much better idea if our original assessment, as to the ultimate potential of the asset, still holds. We focused on SGX, as it was and still is Silvercorps key asset. The issue for us with the SGX mine was not whether it was high grade or if it was likely going to be in operation for several decades - we have been to the mine several times and believe both to be true - our concern was whether or not, given its narrow widths, it could be mined economically. Now of course our original work was done in a much lower metal price environment and given todays prices we would likely have focused a little less on this, however given these recent events, we are glad we did. Initially Silvercorp did have some challenges with the mining methods, and dilution rates were quite high. After a lot of test work and training the company was able to develop a method that maximized the grade mined by minimizing the dilution. We visited the mine both before this was put in place and afterward. So given we believe the asset to be high grade and believe it has a long future ahead of it, albeit will always be a relatively small mine, we were now able to gain comfort that it could in fact be mined economically.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Silvercorp Metals Inc. We are not necessarily overly concerned about the allegations regarding the currently reported size of the asset or its grades (we will touch on this later); as we know, consultants and geologists can take the same information and depending on cutoffs, mining widths (dilution) and several other inputs can come up with a variety of results. In fact, the reported grade in the NI 43-101 report is often not the grade actually mined. When a company lays out its mining blocks it takes into account current metal prices and costs and adjusts its plans accordingly. If the prices are high, it can mine lower grade zones, if the prices are low it can focus on higher grade areas. It can even focus on specific metals that might be trading at higher levels, if for example lead prices are elevated a company may choose to mine a zone that has a high lead grade but a lower silver grade. On the size of an asset, investors in companies with high grade narrow vein style deposits need to be comfortable with the fact that it is far too expensive and in some cases difficult to prove up an entire deposit. History is full of examples of mines that have been in operation for multiple decades with no more than 5 years of proven reserves at any one point in time. Economics Some would assume the quality of an asset goes hand in hand with its economics. Sometimes this is true, but not always. A high grade asset can be uneconomic for any number of reasons. So this is always a key determinant when reviewing a companys assets. There are a number of ways to look at it, the old back of the envelope method where you take the current metal prices, the reported grades and calculate what a tonne of rock is worth and compare that to what you believe the cost per tonne will be. Or you can build full DCF valuations (as we do). Or, and likely the most accurate way, is to analyze whether or not the company is generating positive cash flow. Yes, so here again we are required to review our view of management. And again, we believe the company provided bank statements and financials to be accurate. Silvercorp did make this analysis slightly easier by providing a lot of back up documentation, which for us, the VAT receipts from concentrate sales and its current bank statements were the key. Accountants can argue the validity of different accounting treatments all day long, but as long as sales of concentrate are being made and cash balances are growing, assets are generating cash. We review in more detail cash inflows and outflows in Appendix A. Our Take in Short We continue to view these allegations as unfortunate and opportunistic. We also maintain our view that the Ying property and more specifically the SGX mine is a high quality asset that should generate positive returns at current and much lower metal prices for many years to come. We also believe when you cut through all of the noise, related to the quality of the asset or whether it is economic, it really comes down to the fact that since 2004 the company has raised just over $200 mln, paid some $40 mln in dividends, ~$30 mln in share buybacks, spent more than $175 mln acquiring, developing, expanding and exploring (both in China and Canada) and still have roughly $220 mln in the bank (according to current bank statements note if you dont believe the Chinese bank statements they hold roughly $90 mln outside of China). This, along with our site visits and the VAT receipts give us the comfort we need to maintain our view.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
New Allegations
As mentioned, there were new allegations provided in a report from Alfredlittle.com which we summarized below along with our thoughts. Admittedly we are still working through some of details but here is what we have at this time. Henan Provincial Land & Resource Bureau mining reports contradict the production, quality and resource estimates of SVMs key SGX (Ying) mine as shown in its 40-F and independent NI 43-101 reports that rely heavily upon data provided by management. No independent geologists have visited SVMs SGX mine since 2008. There are several allegations made within this statement; we focus on a few below. The author quotes the Henan Provincial Land & Resource Bureau (L&R) throughout the report. We have not yet been able to confirm or deny the accuracy of this data and more importantly what the methodology is behind the data. But going under the assumption that the L&R statements could be correct, there could be any number of reasons for the differences between the tonnes reported in Silvercorps NI43-101 and the L&Rs statements. We do not know if the L&R statements include material from the same area or a subset of it and we do not know what the different standards or requirements are, (and we will continue to look into it), but at this time on its face value, this is not something that we are concerned about. On the different grade calculations; again we do not have the official statements, however we do know that in China there tends to be a standard cutoff that is applied to various metals and deposit types. Although we are still attempting to confirm this, it is our understanding (through various conversations) that the SGX deposit type and style is required to use roughly a 50g/t cutoff in the L&R filings, versus Silvercorps current NI43-101 which is based on a 300+g/t cutoff. This in itself could potentially account for the difference in grade calculations. But there are a number of other determinants and required standards that could also lead to differences in grade. Regardless of what grade is reported in the statements, the grade that counts is the one that is in the mine plan and ultimately mined. We know each quarter what grade was actually mined to generate revenue and Silvercorp further supported this by providing 2010s VAT receipts and by showing their increasing cash balances. The author also claimed to have counted trucks for two weeks and by their calculation Silvercorp should have had 63 trucks per day. However by their count there were only 44 trucks per day. First, in our view, this is not an accurate way to figure out tonnage and throughput. Yes, they are 30tonne trucks, but we would suggest it is highly likely that the trucks are regularly overloaded and note that 30 tonnes of lead ore likely would not fill a typical 30 tonne truck box. The trucks pictured in the report are full, suggesting that there was something more than 30 tonnes in each truck. Regardless, over a two week period it is not possible to prorate to a full quarter or full year, there are any number of reasons why one day tonnage would be higher or lower than the next, and these loads do not count the material that is direct shipped to the refiners or that is potentially stockpiled at the mill. As for the independent consultant that authored the NI43-101, we believe none of the issues stated are really that uncommon for a typical producing asset. If the company reported a wild increase in ounces year over year we may flag it, but we are not concerned at this point. We are curious however, who the independent consultants quoted in the report are, and would like to have been able to discuss some of these issues with them but their identity is also unknown at this time.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Silvercorp Metals Inc. The author also states The SGX mine has calculated reserves that are only 68M Oz of equivalent silver. This is worrisome for a 100M market cap company let alone a $1,000M market cap company. They should have more resources. SGX does have more resources. Possibly just an oversight, but the author neglected to mention that SGX also has an additional 182Moz (silver equivalent) in global resources as per their May 2011 NI 43-101 technical report. The last point in of this allegation that we are going to discuss at this time relates to their inference that narrow vein mines tend to require a higher amount of sustaining capital. This can be correct, especially for underground operations versus open pit. That said, the author went on and listed what it believes the sustaining capital figures of a number of Silvercorps peers are and stated that Silvercorps sustaining capital is the highest at US$436 mln. We are unable to recreate any of the numbers in the authors chart and although the author claims the number for Silvercorp is from its NI43-101, we were not able to calculate anything close to it. From our review we get roughly $44 mln in sustaining capital estimated over the LOM for SGX. Outside Tests of Ore Obtained from the SGX Mine Reveal Low Silver Content. We will not dwell on this point much, but in our view gathering ore that has fallen off the back of a haul truck and having it assayed cannot be used to infer anything other than what the assays are of the rocks collected off the road. The author states that their own independent testing from a local laboratory determined the silver content to be only 30 g/t (from 2 samples we assume 2 rocks?). The author does not know where the material is from, and the high grade material is hand cobbed onsite and shipped directly to the smelter (by-passing the mill altogether). 98% of Henan Founds Sales Growth in 2010 came from Two Questionable Customers. Management Failed to Disclose SVMs Largest Customer is a Related Party. We are not entirely clear about what the issue is here, Silvercorp does own a 15% non-controlling interest in the Luoyang Yongning Smelter, this ownership was previously disclosed and when Silvercorp first announced its participation in this smelter project it stated as a reason for its participation was to try and improve the prices it was getting for its concentrate (as a side note we visited this smelter in 2009). This is by no means uncommon, particularly in base metals; in fact a recent trend in the zinc sector is for smelters to acquire mines and mining companies. In the end, all that concerns us is that Silvercorps assets produce a product and then sell that product generating positive cash flow. This is shown by the VAT receipts and its expanding cash balance. Recent Auction Sale of 5% of Henan Found Values it at a 90% Discount to SVMs Market Value. We refuted this claim in detail in our previous Company Comment. We would only add that it is incorrect to say that if it was worth more than the roughly $7 mln it was transferred at (5% of book value) someone else would have bid for it, because Silvercorp holds a right of first refusal on any sale other than to an affiliate and would have, we suspect, jumped at the chance to acquire the additional interest if it was truly for sale. SVM Acquired Yangtze Gold from Chairman Rui Fengs Relative Giving Him a 1500% Gain in Six Months. In April 2008, Silvercorp did complete a transaction to acquire Yangtze Gold Ltd., a private company for cash (40%) and equity (60%) totaling $61.95 mln. The equity
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Canada Research | Page 6 of 13 portion of the transaction was issued at a closing price of $8.20 per share for a total of 4.5 mln shares. Prior to the transaction, an independent NI 43-101 technical report completed by SRK Consulting China Ltd. dated January 2008, reported a measured and indicated resource for the GC Permit (owned by Yangtze Gold Ltd.), of 1,829,700 tonnes grading 129g/t silver, 1.45% lead, 2.79% zinc and 0.14% zinc and inferred resources of 7,381,300 tonnes grading 125g/t silver, 1.38% lead, 3.00% zinc and 0.13% tin. While the transaction was indeed with a relative of Mr. Fengs (his father), this was disclosed and the transaction was approved by the independent directors of Silvercorp in accordance with applicable regulations. A fairness opinion was also given at the time as being in line with previous transaction of that type and nature. Our analysis of the value of the transaction also suggests that the value was reasonable for that period. Since this time, the silver price has increased some 100% and Silvercorp has proven up an additional ~20Moz of measured and indicated resources. This asset will soon be Silvercorps next leg up in production and it cost just $62 mln to acquire and is expected to cost around $30-40mln in initial capital to construct. We do not believe that Silvercorp shareholders should feel this was a poor acquisition (we have also visited the GC project).
Valuation
We continue to suspect that this will be a short-term event and are maintaining our current Outperform rating and 12-month target price of $16. We will continue to watch any new developments closely. We apply a 1.8x multiple to our $9.22 NAVPS estimate, largely based on the high grade, low cost Ying mine. Silvercorp is currently trading at a P/NAV of 0.7x vs. the primary silver producer group at 1.1x. Exhibit 2: Silvercorp NAV Estimate Summary
Mining Assets SGX Mine Other Assets Investments Total Mining Assets Other Assets Total NAV 753.1 699.2 36.4 1488.7 150.6 1639.4 4.23 3.93 0.20 8.37 0.85 9.22
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Appendix A
Silvercorp's Historical Cash Flow Statement from 2006 to 2011 (in US$mln)
Cash Flow Statement CASH FLOWS FROM OPERATING ACTIVITIES: Net Gain (loss) Add (deduct) noncash items: Accretion of asset retirement obligations Equity income (loss) Future income tax Gain on disposal of subsidiary Non-cash other income Loss on disposal of mineral properties Stock-based compensation Non-controlling interest Depreciation Other CF - before WC changes CASH USED IN OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES: In 2008, spent $12mln to Mineral rights and properties expand mill capacity to Acquisition and capital expenditures 1,500tpd at the Ying mine. Proceeds on disposal Plant and equipment In 2006, spent $6mln on Acquisition initial 1,000tpd mill to Proceeds on disposal process ore from the Ying Equity Investments mine. Marketable securities Luoyang Yongning Gold and Lead Smelting Co. Ltd Sale of (purchase of) investments Prepayments to acquire plant and equipment Reclamation deposit paid Cash transferred in on acquisition of Ying Project Payment to Joint Venture partner for acquisition of Henan Found Other CASH USED IN INVESTING ACTIVITIES
In F2008, purchased CASH FLOWS FROM FINANCING ACTIVITIES: the LM & TLP Advance to related parties, net of repayments received properties for Bank loan and notes payable US$25.5mln. Proceeds Repayments In F2008, paid $0.05 per Non-controlling interest share dividend. Contribution Distribution Cash dividends distributed In F2009, paid $0.08 per Capital stock share dividend. Proceeds from issuance of common share Share cancellation CASH USED IN FINANCING ACTIVITIES
F2006A F2007A F2008A F2009A F2010E (6.3) 0.2 25.1 0.1 0.3 59.9 0.1 0.3 0.1 (4.4) (0.6) 2.5 19.2 3.7 0.0 80.9 79.8 (16.0) 0.1 1.5 (7.9) 0.8 2.1 1.5 7.2 55.4 44.7 47.0 38.5 0.1 0.4 0.8 1.9 13.3 4.8 1.1 61.1 66.0
F2011E 68.8 0.2 (1.9) 1.6 (1.9) 2.3 20.6 7.1 (4.5) 92.4 104.2
-0.0 (0.3) (4.4) 1.7 0.0 2.3 2.2 (0.1) 7.2 0.1 1.5 0.0 (2.5) 32.0 (1.6) 34.2
In 2009, purchased the GC property for US$61.95mln, split 40% cash, 60% equity of SVM shares @ $8.20 per share.
(7.2) 5.5 (0.8) (4.5) 1.9 (1.8) (0.4) (7.3) (0.24) 10.69 10.4 (0.1)
(13.4) (7.2) 0.0 0.5 (1.3) (21.3) 1.8 47.8 (5.5) 44.1 0.6
(36.6) 0.6 (7.5) 0.2 (5.6) (29.5) (3.4) (81.8) (1.4) (3.4) (6.9) 2.3 (9.4) 5.1
(37.1) 0.8 (12.7) 0.0 (0.3) 13.0 (0.4) 0.0 (36.7) (0.0) 0.7 0.2 (13.2) (5.5) 22.7 (9.5) (4.6) (11.3)
(21.2) (5.0) 0.1 (1.4) 0.0 (14.3) (0.5) (0.1) (42.3) (0.1) 2.9 (2.1) (7.2) (12.0) 1.3 (17.2) 2.7
(25.6) 0.5 (9.5) 0.0 (31.4) (14.3) (23.4) (103.5) 0.2 (1.5) (10.6) (13.1) 115.8 90.8 5.1
In 2010, purchased the Silvertip property in BC for US$7.5mln cash and $7.5mln of SVM shares for total consideration of $15mln.
For F2012, SVM plans to spend $18.5mln at the Ying mine on mine development, which includes shafts, declines, exploration drilling, ramps and tailings facility.
12.6
66.9
82.9
64.1
93.3
204.9
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Analyst Information
Analyst Compensation: Equity research analysts and associates at Raymond James are compensated on a salary and bonus system. Several factors enter into the compensation determination for an analyst, including i) research quality and overall productivity, including success in rating stocks on an absolute basis and relative to the local exchange composite Index and/or a sector index, ii) recognition from institutional investors, iii) support effectiveness to the institutional and retail sales forces and traders, iv) commissions generated in stocks under coverage that are attributable to the analysts efforts, v) net revenues of the overall Equity Capital Markets Group, and vi) compensation levels for analysts at competing investment dealers. Analyst Stock Holdings: Effective September 2002, Raymond James equity research analysts and associates or members of their households are forbidden from investing in securities of companies covered by them. Analysts and associates are permitted to hold long positions in the securities of companies they cover which were in place prior to September 2002 but are only permitted to sell those positions five days after the rating has been lowered to Underperform.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Aggressive Growth (AG) Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, and a substantial risk of principal.
Rating Distributions
Coverage Universe Rating Distribution RJL Strong Buy and Outperform (Buy) Market Perform (Hold) Underperform (Sell) 78% 21% 1% RJA 58% 38% 5% RJ LatAm 35% 56% 9% Investment Banking Distribution RJL 58% 38% 0% RJA 16% 5% 2% RJ LatAm 47% 0% 0%
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Update Date
Closing Price
Target Price 16.00 16.80 16.50 15.65 13.00 R 13.00 10.15 9.75 9.50 6.75 5.00 6.00 6.50 7.20
M 2$ 6 0 O 1 .5 M 2$ .2 M 2$ .5 O 7 0 O 6 0 M 2$ .0 O 6 0 M 2$ .0 O 5 0 $ 60 1. 0 $ 40 1. 0 M 2$ .7 O 6 5 M 2$ .5 O 9 0 M 2$ .7 O 9 5 M 2$ 0 5 M 2$ 3 0 O 1 .1 O 1 .0 R R M 2$ 3 0 O 1 .0 M 2$ 6 0 O 1 .8 M 2$ 6 0 O 1 .0
Sc rt Pi e( S) e ui y rc U $
$ 20 1. 0 $ 00 1. 0 $. 0 80 $. 0 60 $. 0 40 $. 0 20 Sp1 - 8 e - 50 Ag1 - 9 u - 70 Sp1 - 9 e - 40 Ag1 - 0 u - 61 Sp1 - 0 e - 31 Mr 20 a-0 - 9 Mr 00 a-3 - 9 Mr 11 a-0 - 0 Mr 91 a-2 - 0 Mr 71 a-1 - 1 My 50 a-2 - 9 My 41 a-2 - 0 My 21 a-1 - 1 Nv 00 o-1 - 8 Dc 80 e-0 - 8 Nv 90 o-0 - 9 Dc 70 e-0 - 9 Nv 81 o-0 - 0 Dc 41 e-0 - 0 Dc 11 e-3 - 0 Ag2 - 1 u - 31 F b0 - 9 e - 20 F b0 - 0 e - 11 F b1 - 1 e - 71 Ot 30 c-1 - 8 J n 50 a-0 - 9 Ar 70 p-2 - 9 J n 20 u-2 - 9 Ot 20 c-1 - 9 J n 41 a-0 - 0 Ar 61 p-2 - 0 J n 11 u-2 - 0 Ot 11 c-1 - 0 J n 51 a-2 - 1 Ar 41 p-1 - 1 J n 71 u-0 - 1 J l-2 - 9 u 00 J l-1 - 0 u 91 J l-0 - 1 u 21 J l-2 - 1 u 71 $. 0 00
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Aug-03-11 Apr-26-11 Jan-26-11 Jan-04-11 Jan-04-11 Dec-11-10 Nov-11-10 Aug-13-10 May-14-10 Dec-01-09 Oct-28-09 Mar-16-09 Jan-21-09 Jan-02-09 Oct-23-08
10.23 13.89 9.96 12.37 13.04 12.93 12.23 7.14 8.49 8.07 4.90 2.73 2.50 2.60 2.05
Valuation Methodology: Our valuation methodology for the company considers the stock's valuation as it compares to our estimate of Net Asset Value (NAV).
Risk Factors
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation. Risks - Precious Metals Acquisition Risks Mining is very competitive when it comes to acquiring additional properties or projects. This could negatively impact companies that overpay for assets or purchase assets that fail to meet expectations. Asset Ownership The validity of most mining and exploration titles can be contested, resulting in disruptions, increased expenses, and potentially the loss of the asset. Commodity Prices All mining companies are impacted to varying degrees by changes in commodity prices. Rising or falling commodity prices have a direct impact on earnings, cash flow, and NAV estimates. Commodity prices also impact operating, capital spending, and exploration decisions, which may have longer term effects. Currency Risk Any mines or projects operating in countries that are not US dollar denominated will have some exposure to currency risk. Any dramatic strengthening or weakening will impact capital and operating costs at these mines and/or projects. Development Risk During the development phase, certain events can lead to unforeseen delays or costs overruns, which could dramatically change the economics of a project. Energy Prices Energy typically accounts for a material amount of the cost involved in producing precious metals. Some processes are more energy-intensive than others, but a trend in rising energy prices would have a negative impact on margins, all else being equal. Environmental Risks Environmental regulation is continuously becoming stricter and requiring greater capital expenditures or guarantees. Companies could be negatively impacted if regulations in the areas in which they are active become more stringent or expensive. Infrastructure Risk Although improving, there is a lack of qualified professionals and a shortage of services in the mining industry as a whole. In todays robust environment, securing services such as drill rigs, consultants and assaying facilities can prove difficult, leading to delays and an increase in capital requirements. Operational Risk Operating issues are inherent with all mining activities. Changes in ground conditions, as an example, can lead to production shortfalls, cost increases, and/or resource reductions (temporary or permanent). The impact on our estimates would depend on the nature, as well as the severity, of the operating issue.
Raymond James Ltd. | 2200 925 West Georgia Street | Vancouver BC Canada V6C 3L2
Rating 2 2 2 2 2 R 2 2 2 2 2 2 2 2 2
Permitting Risk Permits are essential to all development projects and mining operations; delays in obtaining or refusal of critical permits can significantly impact the valuation of a project. Political/Country Risk Each country poses unique risks. Governments can change mining and/or environmental laws and can implement tax or royalty changes, which could potentially have a negative impact on company earnings, cash flow, and NAV estimates. There is also the risk of asset expropriation or nationalization without compensation and political regimes can change, along with the attitude towards mining activities. Risks - Silvercorp Metal Mining is an inherently risky business. Key industry wide risks include the political environment, operating issues and metal prices. More company-specific risks relating to Silvercorp include: 1) Silvercorp derives 100% of its asset value from properties in China - higher political risk. 2) We make a number of assumptions relating to two of Silvercorps assets, which adds to our valuation risk. 3) Silvercorp also derives a significant amount of its revenue from by-product lead and zinc production. If lead or zinc prices were to drop significantly below our price assumptions our estimates would be negatively impacted. Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available for Raymond James at rjcapitalmarkets.com/SearchForDisclosures_main.asp and for Raymond James Limited at www.raymondjames.ca/researchdisclosures.
International Disclosures
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