Silvercorp turning on China’s silver tap (September 08, 2008)

Record production brought in higher revenues for Silvercorp Metals (SVM-T, SVMFF-O) in the latest quarter, and the company maintained its status as one of the industry’s lowest-cost silver producers.

For the quarter ending June 30, Silvercorp reported revenues of US$30.9 million, an increase of 39% over the same period a year earlier. The higher number came with a 27% increase in silver production to 1.1 million oz.

Production was higher thanks to the new TLP and LM mines, which went into limited production in the quarter, just three months after their acquisition.

And while the company had suffered production slowdowns due to power rationing in the region, it says a new hydro project has helped smooth out some of those concerns.

Local authorities have assured Silvercorp that rationing will be minimized going forward and the company is doing its part to ensure that will be the case by putting US$1 million into a new power line to the Ying mine. The line was expected to be finished by the end of August.

As a measure of insurance, the company is also expanding its diesel power-generating capacity in case it sees more rationing.

More concerning for investors than the power issues, however, could be the fact that higher production and revenues failed to translate into stronger net income.

Coming in at US$11.6 million or 8 per share, net income was 2 less than the 10 per share figure for the same period last year.

Silvercorp explains that last year’s higher numbers were due to an income tax benefit of US$1.5 million, and a mineral property option income that generated US$1.9 million.

Once those two factors are taken out of last year’s numbers, net income for this past quarter is actually 4% higher than the comparable period of 2007.

But even taking those issues into account, net earnings still failed to track the large gains made in revenues. The reasons for this, the company says, are manifold.

It lists lower grades at the Ying mine, higher depreciation, and depletion costs, and increases in general exploration expenses and administrative fees.

This year, Silvercorp also started to pay income tax in China — which came in at US$2.1 million.

But the start of production at its TLP and LM mines are the bigger part of Silvercorp’s story for the quarter.

Production there pushed the company to new heights in silver output as it hit a record 1.1 million oz. for the quarter.

That production was sold at an average price of US$13.93 per oz. for total proceeds of US$15.4 million. The company also sold 525 oz. gold for US$300,000, 14.4 million lbs. lead for US$12.8 million and 4.1 million lbs. zinc for US$2.3 million.

Unfortunately for Silvercorp, coinciding with the increase in production was an increase in costs.

The total mining cost per tonne of ore mined was up 60% to US$73.45 per tonne. That uptick came courtesy of higher amortization costs, along with increases in raw materials and exploration costs.

Milling costs were also up — 22% to US$13.39 per tonne — thanks to higher administration and transportation costs, increased wages and higher taxes.

But production costs still remain among the lowest in the industry, thanks to byproduct credits that came in at negative US$5.37 per oz. silver.

At presstime in Toronto, the Vancouver-based company’s shares were trading at $3.67.

Its shares have moved between $3.07 and $10.65 over the last 52 weeks and it has roughly 152 million shares outstanding.

SILVERCORP METALS

A custom-built 300T loading barge waits to ship ore to the new mill at Silvercorp Metal’s Ying silver-lead-zinc mine. The project is in the Luoning area of western Henan province, in central China and consists of five exploration permits totalling about 53 sq. km.