Silvercorp Metals Inc. (SVM) Earnings Call Transcript & Summary

Hey, everyone. This is John Feneck and appreciate everyone getting on time. Into the room here today, and I will keep it brief because I want to open it up for questions sooner than later because I think it's important with Silver rallying for you guys to be able to ask some questions that are on your mind about Silver, the sector in general and hopefully about our special guests today, Silvercorp. I've got with me today, Lon Shaver, who's VP at Silvercorp. We've known each other for about 2.5 years, and Lon joined the company in 2018. How is it going, Lon?

Good. Thanks, John. Good to join you today.

Good. So I just want to start off broadly, I guess, about Silver and then get more with a rifle approach into certain equities, yours being one. I should start by saying that I started my portfolio in January of '16, it's pretty timely, but Silvercorp was one of my original top 10 holdings. And I know when I worked at Sprott in '16 and '17, Rick Rule was a huge fan of your stock. Don [indiscernible], who is a friend of mine. He's written 14 books on silver and gold, has it in its top 5 picks in 2022. So it's not just me. There's a lot of smart people out there that are saying this really isn't the same old silver corp that they saw maybe a year or 2 ago. So we'll start with that and then the dive into it. So Silver has been acting very, very positively, obviously, over the last number of weeks, we saw things kind of bottomed out in your sector, everyone probably around the last week of September. And Silver has led this rally, which you could argue late September, but really November 4, in my view, started to break out. And when you see Silver starting to lead anything in the metals complex, whether it's precious metals or industrial metals because obviously, it has both qualities, that's a very bullish sign to be buying our sector, whether it's silver directly or silver equities. Obviously, Silver equities have a lot more leverage to the price of silver, which is what I like and Silvercorp is just one of those names that has that leverage. So when we look at the macro picture, Silver is our third largest holding overall. It's been that way since spring of 2000. So I put a position on in March, April of 2000 excuse me. And then I haven't added to the position just yet because I added so much at the time. So when people look at my top 20 holdings, sometimes they get head takes that I'm buying Silver hand over fist, and that's why it's my sort largest position. But really, I bought a lot from 2016 to rally into the 2020 correction. So I've really spent more time doing research on silver equities like Silvercorp because I know I'm going to get more money out of my investment capital by buying companies that have leverage to the price of whatever metal on trying to buy as well. So with that, I'd say the macro picture looks pretty good because we crossed $22, last 3 business days on a close, right? So when you do that, you see a close above major resistance being $22 an ounce. You're welcoming in the next resistance level, which, in my view, is around $25. And then for those of you who know my style, I don't talk $50 silver, $80 silver because it's just not really helpful to the average investor at this point, right? We have to look at each resistance level and take those out. So $25 is the next big hurdle. $28 is sort of like the next big hurdle and then $30 has been, call it, quadruple resistance over the last couple of years, and it's a major hurdle. But once we get through $30, it's going to be amazing in stocks like Silvercorp., and I'm sure Lon can echo that. But even over $25 over, you're going to see a lot of silver juniors and mid-tiers start to take off because they have tremendous leverage at that price point, where on the $18 to $20 an ounce range, they're not as efficient and profitable, right? So that's kind of the macro. We think that we're going to have a good year next year. And so we're leading the way right now, which is very bullish. If you look at previous runs, in the 2008 period into June of '09, with GDXJ was up around 180% during those 6.5 months or so, silver lead. When you look at January 2016, beginning of that rally, into August 3, roughly of 2016, silver led that rally along with silver equities. Silvercorp was one of our top 10 overall holdings that was one of our top 3 silver holdings at the time. So right now, Silver Corp is actually our #2 silver holding behind Golden Minerals, which is AUMN. And our third largest is aftermath silver, which is a Chilean and Peruvian developer, and that ticker is AA GFF. Happy to answer any questions about anything as we move forward. But Lon, why don't we just get started? And talk a little bit about Silver Corp and the opportunities you see for the company over the next 3 to 12 months.

Yes. I think it's important to kind of come back to one of things you just touched on, which is views on silver. Like you -- John, we're not betting on higher silver prices to make or justify an investment in Silvercorp. I mean I think our focus here is '22 is better than '20,which is better than '18 with 54% of our net revenues coming from silver. Obviously, seeing that price move up as a positive, seeing it move further as positive. But our focus really is to make sure that the company makes money year in and year out, good cycles and bad. And I think that evidence is our financial track record. So obviously, we'll participate and we'll benefit from those higher silver prices. But it's not as though like many of our other peer companies that were needing those prices to justify an investment decision. I think that's kind of the first point coming to that silver market side of things. I think also just from an investment standpoint, you mentioned the market is maybe not as familiar with. And I think when people think back and kind of associate Silver Corp with what was done in terms of that growth in production through those early years, mainly through the Ying Mining District. Where we've gotten to now is we really have 3 assets in the company. And the silver mines, which are kind of carrying the full freight of the economic results, the revenues, cash flow, earnings and cash flow and a lot of the valuation. That's just one of our assets. The other 2 assets we have are $200 million in cash, which we're looking to deploy prudently and on the same ideas is what we built at Ying. And then we also have an investment portfolio with companies that we have, some of them smaller, but some of the bigger investments and the largest one is a 28% stake in New Pacific, which has been a great silver growth story in Bolivia, and now in projects 2 and 3 are adding both silver but coal to the portfolio. So again, when you look at our $500 million market cap, $20 million in cash, $100 million in these other assets leaves really an implied value of $200 million for the mines that are delivering 6 million, growing to 7 million ounces of silver plus lead and zinc byproducts, plus a growth plan plus new discoveries in those mines. So I think we've got a lot of things going for us. And the story is not what a lot of people are familiar with from sort of having lost touch with Silvercorp over the years.

Yes, good point. Can you talk a little bit about what we saw in the news here about your gold production jumping pretty much like 100% or so year-over-year? And what that means to the bottom line?

Yes. Well, that's just -- it's an element of diversification and obviously, growth in production to add that gold element to the production profile. And we've had a modest gold credit and from time to time and depending from which the mines, not all the mines have had that gold credit. But really, it's on the back of the discovery made by senior management in 2020 in the minds to determine that not only do we have these very rich silver lead zinc veins in the footprint of the mining area which obviously been mining successfully for 17 years. There's another structure that was detected in the mines, which is either a gold or a gold copper zone. And so it's from drilling that started in 2020 to delineate these zones, include them in the resource table, that we published as part of our 43-101 in September. We've got a mine plan wrapped around these zones, and we're ramping up to deliver more tonnes from just these gold and gold copper zones. So that's kind of a new opportunity. And I think if you look at the evolution of the mine over time, the early days were pretty modest boot traffic gets to cash flow, that cash flow really built out the minds to what they are right now, which is 7 mines, Ying feeding into 2 million facilities. But the next chapter looks like it's going to be adding gold, adding maybe some satellite targets, and we're in the midst of building another mill to be able to expand our production capacity.

Okay. Great. And then 7 mines with 2 mills currently with a third being built. When is the construction expected on the third mill?

Yes, it was originally targeted to be done in the mill at the end of calendar 2023. So that's in the middle of our fiscal 2024 because we have a March year-end. Might be push back a little bit just because of some of the delays in moving people around to sort of go spend face time with the regulators and push things through. But everything has gone pretty smoothly with respect to those key items. It's more just procedural more than anything. And then as part of this expansion, we're also building another tailings facility, and that will be done in 2 stages with the first stage expected to be done by the end of calendar 2024. So with that, we should exit and have a combined capacity of 5,000 tonnes per day, which is roughly a double of where we've been running at. And that gives us some room to grow in both our existing mining permits by either adding new mines or up in the production rates, but also I mentioned there is some satellite opportunities that we think could be sources of mill feed for that expanded facility. .

Okay. Can you talk a little bit about the jurisdiction that you're in. Obviously, China has been in the news a lot lately, and I'm sure some of the people here want to know your thoughts on how things are going with Silver Corp. I mean in that jurisdiction and if there's any challenges that you see moving forward?

Yes. I think maybe I'll bring that back a bit, just speak to the fact in 2020, before everybody else in the Western world and all those other mines had issues, of course, we had a prolonged shutdown in 2020. As a result of those measures in the early days of COVID. But since we've been back up and running, we haven't had any impact at the mine site with respect to production. So that's been fortunate, with some of these other sort of restrictions and lockdowns, the challenges we've had have been more moving people around within the country. If you've got people in the head office in Beijing, to leave Beijing and to go to the sites or go do other things, it can be a challenge to get back to Beijing. So people have been more static. But we really haven't had any issues with respect to the supply chains, getting the things that we need or conversely getting our product out and our smelter clients have been there and have taken all our production, and we haven't had any real challenges there. I think what we're seeing now in the media going back a few weeks, my sense from speaking to people, and this is really quite unrelated to the operation and speaking to people who were getting invitations for people like yourself, John, to come to China and present at conferences, but are thinking, well, if these guys are getting invited. I think something is happening, something want to be changing through the course of 2023. So I think that's been our belief. And obviously, with what we're reading now in the media, some of those changes are happening quicker. I wouldn't say it's fully opened yet, but I think things are changing. And I wouldn't be surprised if we're not hosting another analyst site visit in the fall of 2023, for example, which will be nice because the last time we were able to bring people over the fall of 2019, as that was a positive trip. And now actually, there's been more progress, new things built, more things to show people. So I look forward to hopefully getting a chance to bring people later in the year.

That's great. So one last question before I open it up to everyone else would be you mentioned 28% in New Pacific. For those of you that don't follow the stock, we have been tracking that stock for over a year now, and we just started a position around 208. The ticker is NEWP. And I heard the CEO present in Zurich last month. I was very impressed with the story. With a 28% position there Lon, isn't what are your thoughts there about the company? I know you're pretty close with what's going on at day-to-day level. And because they're a Bolivian play, doesn't that automatically diversify the company pretty significantly.

Yes, it does. As I mentioned, right now, that's an element of our value stack, which is that indirect exposure through owning another public company. But going forward, Silver sand, which has been the flagship asset, which is which generated most of market attention is progressing, and we see a number of key milestones coming up. One is very key for us and everybody in the market is the publishing of the first PEA. And so there's been a resource that was put out in 2020, but it's taken longer for a variety of reasons to get a PEA done. But it's being done, it's going to get done here by the end of this month, early in January. And this is going to be the first sort of snapshot on the economics of what a mine at Silver Sand could look like. And just to be very blunt for other companies who might have to go to investment committees or boards to get justification to undertake a transaction. It's pretty hard at the kind of market cap that new Pacific is at, to go and undertake that. When you can't point to something and say, well, this is the kind of project it could be. This is what it could add to our production profile and our earnings and cash flow. So the PEA is the first view of that. And obviously, we've been awaiting that like everybody else. I look forward to seeing the information. And just like investors, assessing the value of the project on the back of PEA as results, and we'll be doing the same thing. And who knows 2023 could be an interesting year based on those results, our desires, other people's desires with respect to the company and the project. I think what's also important to note, though, is that Silver Sand has been the focus for the company. But these other 2 projects that were added after Silver Sand was acquired and which started to get exploration activity in 2021. And then more now in 2022, have really leaped ahead in terms of progress and are quickly catching up to Silver Sand. And so we see a lot of value creation in these projects as well. And I'd say most of the market is unaware of what's been discovered, what's been done and what the game plan is for the other 2 projects.

Thanks for that I would encourage everyone listening to you or Silver ball and most of you are. Check out New Pacific their website because they -- the CEO is stressing just what Lon said, that we're looking back 2 years ago when the stock peaked out, it was Silver Sand all day long. And now it's 2 other projects, and the price has dropped by 2/3 roughly, so you're getting 3 times, 3 different projects for 1/3 of the price that you could have 2 years ago. So it's a really undervalued story as value managers, that's what we look for good value. If you look at a 3-year chart, I'm just guessing line, I'm not looking at a chart, but I think it's around $1.68 with low in 2020. So just above $2 here, it's a very attractive to be priced over stock. .

Yes. And I'd say people who think they know the story when we've been meeting with them to discuss the results over 2022 are really taken it back and what's been delivered from a technical standpoint. So I think it's just the market needs to play some catch up here. And again, with all these other milestones, I think 2023 will be an interesting year for us and for new [indiscernible].

That's great. [Operator Instructions]

Maybe in the meantime, on, we just talk about. Because I know you mentioned it before and highlighted the fact that from a growth standpoint, what is Silvercorp thinking of doing with that cash or chest $200 million. We've talked about New Pacific, and there could be some catalysts there in 2023. But more generally, as a group, we are aggressively looking at projects around the world. Some of them we find ourselves, other ones are brought to us by advisers, private equity groups, investment banks. And we sign, I'd say, typically maybe 30 or so CAs a year. So that means a minimum of 2.5 fairly extensive reviews of projects from a data room a month. So it's a pretty busy flow. I'd say we're a very discerning buyer the lots of things that are being floated out there. I mean the reality is there's lots of companies out there that truly aren't for sale at current prices. They will say they are, but they'd rather just see if they can raise the money to keep their current business plan going. But there's lots that we look at that we just card. I don't know those reviews, there might be 1 or 2 projects that fit the bill. And then the big question is, can we get a deal done on terms if you like it? So that we can move forward and show the market that we've added a new asset in a new jurisdiction.

Yes. I mean you get that question quite a bit. I'm sure about the cash balance and I'll point out again, no debt, that's huge. I mean having no debt in this market is that has killed the companies in the '08, '09 crisis and in late 2015 into '16, you want to be able to survive and obviously, and we've seen that happen this year, right, with some silver and gold companies just not vacant and most of the time, it's because they carry that debt load. We have one question to start off with, and it says, where do you see the price of silver and Silvercorp going next year? I'll take the silver piece and why don't you take the valuation piece line, maybe talk a little bit about the free cash flow and such. The silver price, Ted, I think you joined a little late. I basically said that we broke through 22 major resistance and then 25% is the next kind of round number hurdle. And then $28 would be kind of bigger resistance with $30 being super resistant. So I look at everything methodically like that because I never like to get ahead of myself when it comes to prices of commodities. And I think those are major hurdles that are on everyone's radar. I do think we have a shot at $28 next year. I'm not so sure about $30. It just depends, right? I mean, you've got a lot of geopolitical risk out there with what's happening in Russia, Ukraine. There's a lot happened with interest rates globally, obviously. And today's ISM number is now another notch in the bell for a 50 basis point rate hike December 14, in my view, and the markets reflected that with selloff. So it just depends. The Fed being data dependent, you have to kind of look at every one of these weeks whether it's nonfarm payroll, CPI, GDP, whatever and a SaaS going along, right? So it's a fluid situation. I wish I could give you a better answer, but that's how I see it, and that's where I think our process and our value proposition to clients is that we're updating clients today 6 minutes after the ISM release. And I said, buckle-up is going to be probably a tough day for equities and getting that information helps my clients because if they're thinking about going along something, maybe they'll hold back a little bit and get a better entry point. The other question from Ted was is Silvercorp to acquire any more projects they have so much cash, and I think you kind of just addressed that line with the fact that you're seeing a lot of -- you're investigating a lot of different companies. Can you clarify for Ted for others, what the CAA means in terms of that acronym, please?

Yes. confidentiality agreement. So there's something you can do in terms of reviews of companies based on public data. But then if there is a real desire to investigate if there is a real opportunity, we need to see data that isn't shared widely with the market and investors. So we'll enter into a confidentiality agreement, which is intended really to protect the disclosure more than anything else, just that we don't take the information and broadcast around the world. And so it's with those agreements that we then get access to more data that we need from a technical standpoint to the targets. What do is I might jump back and just address the second part of that other question. Where do we see things going next year Yes, John, you speak to what our attractive silver prices, none of our planning is dependent on silver hitting $28, Obviously, going to 7 million ounces, we're going to participate in that silver price move. But nothing that we're really doing is dependent on that. If we did see $28 silver, yes, we might go and make some adjustments to the scheduling and where and what we're mining. But again, that's all good news. A nice problem to have, so to speak. So...

Yes. We have another question about the September GDXJ rebalance and how that may have affected Silvercorp and why do we see that volatility line?

Yes. Well, obviously, our stock came under pressure through the summer and going into September. I mean I look at the market cap now at just over USD 500. And I think at one point, in September, it was $3.73 on an intraday [indiscernible]. If you look at what the market was paying for our mines after you take the cash and those other investments out, that was a pretty crazy evaluation. But from a trading standpoint, we dipped below that threshold, which lose $500 [ million ] for inclusion. Correct me if I'm wrong, John, but I think it is...

Maybe $450, I am not sure.

Okay. Yes. Actually maybe is the $450 number. So we're well above that. Unfortunately, the mechanism means you slip below that. And you get dropped out, which causes everybody to rebalance. But now we're at $500. Are we going to be facing the opposite situation now with about $500 or above $450. And get added back in. It's -- I'll leave that to those ETF guys to manage. We just have a company to run based on the things that we can control.

Yes, good answer. And that's important for everyone to note. One of the things I teach everyone is to mark your calendars for that third Friday on quarter end. So September 16 is the day, I believe we're talking about here, December 16 and looking at my calendar is the next time you're going to see that rebalance everyone in GDX and GDXJ. So what [indiscernible] does as the manager of those 2 ETFs? Is they don't buy my opinion, okay, but I think they buy everything on that day, they can't because our sector is very illiquid, right? So if they're going to include something like Silvercorp and GDX, for example, they need to buy going up to it. And that's why you saw a decline leading up to September 16, I think, in Silvercorp is that they were getting out of it slowly and then they got out of a bunch of it on the reval. But that's a buying opportunity. And if you can kind of look at those kind of things more closely, I saw the same thing happened with New Gold a few years ago, NGD, and it was amazing. They were getting right on the cusp, right? They were getting kicked out. Then the next quarter, they were back in and they were kicked out. They were back in. It was unbelievable trading opportunity. In the case of Silvercorp, I mean, I don't trade it. I'm just buying those dips, right? So like at $2.32 a share, we bought another few thousand shares there because I thought like, hey, this is just [indiscernible] balancing that has no material information on stock whatsoever that's affecting the price. It's simply they are getting out because of a metric, right? Those are always good opportunities in my opinion, long term. We have another question. What about exploration and resource development?

Yes. Well, there's a couple of ways of addressing that question. I mean one is with our existing assets. So exploration, yes, it's ongoing and extensive. And Ying alone doesn't mean they're operating at all times, but we've had 80 rigs spread across 7 mines within the inline district. We did in 2020 and 2021, 630,000 meters of drilling, and that's on that back of that discovery that I mentioned earlier in terms of these new gold zones, but that expanded out looking at traditional mineralization. So exploration and resource development is a big thing for us in terms of our existing lines. It always has been. That's why we've always had a long life of mine ahead of us, even being an underground sort of narrow vein precious metals company. We've typically had a longer mine life than many of our peers. It's going to continue that way. And then I would say outside of that greenfields area, the exploration and resource development really is done indirectly through some of these other investments. And again, coming back to New Pacific, that opportunity was seeded when they were presented with what was largely a grassroots silver opportunity in Bolivia. And a grassroots exploration opportunity in another jurisdiction probably isn't a fit for Silvercorp. We'd like to buy something that's got some resources, some things we can sink our teeth into and think about it, how to build a mine and start delivering cash flow. But if there's a promising exploration or development opportunity that we can participate in indirectly like we did with New Pacific. That's not a way of getting exposure and also having some oversight and some input in terms of how to do things well and how to make that discovery and grow our resource.

Right. Okay. And also, I mean, piggybacking on that, couldn't you do some type of joint venture with the junior that already has gone down that road a little bit.

Yes.

Yes. So it's not all about what you have. You're seeing a lot of people come to you with opportunities and some of these opportunities are pretty meaningful.

Yes. I'd say we're in the stage of the market with the volatility we've had. But reasonably, it's still been a fairly robust market up until now. The volatility hurt share prices, but a lot of the companies have had enough cash to continue. We've had a point here where I'd say people are approaching us to see if we're interested in the strategic investment through their stock. We haven't seen that level of, call it, desperation or capitulation yet, where people are prepared to let us get in at the asset level, which is than once you're in, you're in or to actually sell the project or the company as a whole at these levels. So we'll see what happens here. The market turns around and get strong again, and the market for raising money is there for these companies, in which case continue on to raise money and try to move their assets ahead and derisk them. But if it stays tough for them to raise money, then we might see more people willing to let go of the asset in a bigger transaction.

Yes. Absolutely. And do you think that we've kind of turned the corner a little bit here with regards to the sentiment? I mean, at least, we're not seeing the capital markets lock up obviously, but it has been a pretty challenging period of time, say, from July until October for juniors to raise money.

Yes, it has been. And I'd say the downward movement in everybody's share price just augmented a typical -- the typical tax loss selling season that we've seen in the markets, which I think carried into November, I think for the most part, people are prepared to sit on the sidelines and not make any decisions that there I think will be foolish here between now and year-end. And hopefully, yes, we've gotten some of that bad news behind us. And then as you point out with a bit of an uptick in the silver price and maybe some more commodity market enthusiasm in January, we'll see the markets turn a bit robust. Typically, again, it always shows more on the liquid larger cap seniors. And then the longer that momentum and enthusiasm stays, you see the appetite trickle down to the smaller caps, where the share prices move. And then potentially, if there's more money behind that, you see the financing is getting done again. We are seeing -- there are some financings that have been done. You mentioned after [indiscernible], just a financing, which was, I think, upsized 2 or 3x. [ Avere ] silver did a financing. I think it was obviously Visla did one a couple of weeks ago. So for select names, and these are dominantly silver names. For select names, there is some capital being raised for this.

Yes, absolutely. I mean, the October 3 saw Silver up 9% one day, right? So like anyone who was financing through that or just after that, got a little more loved and say, from July, August and September, right? So it woken people up pretty quickly. In fact, there was a piece on [ Kikot ] sent to all my clients that TD Securities was really short silver up until Friday, it's amazing how some of these larger institutions at these prices are shorting silver, shorting gold. It's like -- to me, it's absolutely ridiculous. I think there's so many opportunities to short out there. We're 13% short right now, but we are short things like travel and leisure, technology, retail, things that I think have a lot more hair on in our sector at these price points. So with that, let me just mention, we have a website called feneckconsulting.com. If you're interested, there's some information there about what we do. We have -- here's my personal e-mail address. You guys haven't had a chance to answer earlier questions. It's [email protected], that will go right to me, and I'll try to respond within 24 to 48 hours. And I think when we look at how much pain we probably all felt on this webinar from August of 2020 to today, it's been 27 months, right? I mean this is a really long downturn because if you look back to the 2001 kind of recession, there's only been there's never been a time that's gone over really like 12 months of any significance. Usually, corrections are 8 months in length, and this one is a triple. So that doesn't mean you get triple upside. That simply means that this one is pretty spring loaded. And if you look at how GDX and GDXJ just as proxies for our sector have performed, you're starting to see some real action in the silver and gold equity space, which is very encouraging. So if any of you guys have any questions that go beyond this, happy to try to do what I can to answer them and get any questions to Lon and his team. And Lon, really appreciate having you on today.

Thanks, John. Appreciate it. Always a pleasure and look forward to the next one.

Thank you. Thanks, everyone.

Bye-bye.