SVM - The Silvercorp Metals Trade: A Full Position Running Higher

2023-11-28 14:04:04 ET

Summary

• Silvercorp Metals Inc.'s Q2 production and sales show a decline in silver production but an increase in gold production and overall positive performance.
• Production costs have declined, while selling prices for gold, silver, and lead have increased.
• We forecast a large ramp in production, coupled with favorable pricing, indicating continued upside for Silvercorp Metals Inc. stock.

Silvercorp Metals Inc. (SVM) is one of several Canadian mining companies and one that we offered a public trade from the analysts at our Investing Group in August. You can review the details of that trade here . Following the play, it took about 6 weeks to get a full position as the market sold off hard, before turning the corner in late October. Now we are back to the initial buy point and continue to view a $3 target as an appropriate entry.

However, traders should be up about 10% on the trade here about a quarter later since the call. Nothing wrong with taking profit, but the just reported earnings were quite good, and there are other bullish developments that should continue to keep this rally going. In addition, there is general upside we see in silver, which should follow gold's run higher.

If you are new money to Silvercorp Metals Inc. stock, you can likely still get in. This is how we suggest playing the stock if you missed the initial trade.

The play

Target entry 1: $2.55-$2.65 (40% of position)

Target entry 2: $2.40-$2.45 (60% of position)

Stop loss: $2.10

Target exit: $3.00.

Options consideration: Option suggestions are reserved for members of our investing group, however, there are call and put strategies that can be employed here to define entry and/or generate income.

Discussion

We are following up on our trade to discuss the recently reported fiscal Q2 earnings . Silvercorp has long had a history of profitability and growth potential, though costs have crept up and there was a decline in some base metal pricing. However we see Silvercorp Metals stock having upside from current levels, particularly given the fact that Perseus is circling the wagons on OreCorp and Silvercorp's takeover bid. The market did not like the price tag near-term nor the dilution, so this development gave the stock a recent boost. But performance, while mixed, is overall positive and we think you can continue to hold the stock following our trade, but we take no insult if you lock in the double-digit gains while you have them.

Let us discuss the trends in production and costs. This was a good quarter, all things considered.

Silvercorp Metals Q2 production and sales

We always look for rising production and sales when examining precious metals mining companies. Q2 production was strong. In Q2, Silvercorp mined 274,000 tons of ore. We like to look at how this compares to last year, and it was a 6% decline compared to 291,000 tonnes a year ago. Milled ore was 261,000 tonnes, down about 10% compared to 2291,000 tonnes in Q2 Fiscal 2023. Note we rounded all tonnes to the nearest thousand. While production is a key metric, the reason it was down was due to a production delay of five weeks at the GC mine, which is now back. Silvercorp ground out 1.8 million ounces of silver, along with 2,458 ounces of gold. Along with the precious metals, keep in mind that the byproducts also bring in sizable revenue. In Q2, they also pumped out 16.1 million pounds of lead, and 4.6 million pounds of zinc.

Overall, with the production delay, the company saw a 12% drop in silver production, with gold production more than doubling, rising 105% from a year ago. As for the byproducts lead was down 11% and zinc production was down from 23% a year ago. Most of what has produced was sold. Silvercorp sold approximately 2,515 ounces of gold, 1.6 million ounces of silver, 15.2 million pounds of lead, and 4.6 million pounds of zinc, for total revenue of $54.0 million.

Production costs

Costs of production matters as it will impact margins, in tandem with the price of precious metals. Given that production was down, we expected a decline in costs, but were also pleased with costs per tonne mostly declining for operations. Consolidated mining costs were $64.77 per ton, down 8% compared to $70.60 per tonne a year ago. Total milling costs were $13.10 per tonne, up 4% compared to $12.59 per tonne a year ago. Combining mining and milling, production costs per tonne of ore processed were $80.53, down 6% compared to $86.07 last year.

Selling prices

The production numbers were down, though we expect a rebound in fiscal Q3. Production costs were down, but metals prices were up nicely. This is also why the stock is correlated with metals prices to a large degree. There were increases of 38%, 27%, and 2%, respectively, in the realized selling prices for gold, silver, and lead, but zinc prices are still down heavily. Zinc prices saw a decrease of 27%.

Putting the revenue together with production costs we see that operational income was $20.9 million, and this was up 46% compared to $14.3 million a year ago. Total EPS was $0.07 and beat estimates. Cash flow was $28.8 million, up $14.7 million, compared to $14.1 million a year ago. Finally the balance sheet is sound here as Silvercorp Metals ended the quarter with $189.1 million in cash, cash equivalents and short-term investments though this was a dip from the start of the quarter thanks to investments of $23.5 million in NUAG and OreCorp and payment of $15.4 million on capital expenditures.

Looking ahead

The company is still paying a small semi-annual dividend , so that is a small bonus, with a yield of 1.2% So there is, of course, risk with mining operations and jurisdictions in which they operate, but GC mine will be back up and functioning and contributing moving ahead. Production costs are being well-managed. Silver and gold prices are the biggest drivers of the share prices, and those have improved. We see continued upside, particularly for gold.

As we look ahead, the company is forecasting a large ramp in production. We are looking for a company to mine about 1,050,000 to 1,150,000 tonnes of ore. We now see 6,500 to 7,500 ounces of gold to be produced along with 6.3 to 6.9 million ounces of silver. Overall, we see upside in our Silvercorp Metals Inc. trade.

For further details see: