Operating in an environment of low silver prices requires companies to exercise cost discipline and lowering costs which will allow the company to improve margins and free cash flow in periods of higher metal prices. Silvercorp Metals Inc. (TSX: SVM) (NYSE MKT: SVM) released on early Friday morning its fiscal 2017 annual results and the company is reaping the benefits of a disciplined approach and setting itself to gain from any increases in metal prices. The company has focused on returning value to shareholders by increasing sales and production, reducing costs, improving grades at its Ying Mining District operations and increasing its semi-annual dividend.
The company reported net income attributable to shareholders of $43.7 million (US), or $0.26 per share, up 589% compared to $6.3 million, or $0.04 per share in fiscal 2016. The company surpassed 2017 production guidance by 25%, totaling 6.5 million ounces silver. All in sustaining costs (AISC) per ounce of silver were $3.82 compared to $10.20 in 2016. Sales were $163.5 million, up 51% compared to $107.9 million in 2016. The company reported a 12-per-cent, 16-per-cent, and 15-per-cent increase in the head grades of silver, lead, and zinc over the prior year. Cash flow from operations was $80.4 million, an increase of $48.5 million compared to $31.9 million. The bulk of the improvements that drove the improved balance sheet came from the company’s flagship operations in the Ying Mining District, Henan Province, China.
The improvements in fiscal 2017 came from increased sales, improved head grades and increased ore milled and mined at the Ying Mining District mines. Recovery rates showed little improvement with a decrease in the recovery for zinc. Silver, gold, lead, and zinc metals sold in 2017 was up by 35%, 43%, 46% and 13%, respectively, to approximately 5.9 million ounces silver, 3,300 ounces gold, 63.4 million pounds lead, and 5.8 million pounds zinc from 4.4 million ounces silver, 2,300 ounces gold, 43.5 million pounds lead, and 5.2 million pounds of zinc. Silver, lead and zinc head grades improved by 13%, 20% and 19%, respectively, to 303 grams per tonne for silver, 4.7% for lead and 1% for zinc from 268 gram per tonne for silver, 3.9% for lead and 0.8% for zinc in 2016. Recovery rates were 95.5% silver, 96.5% lead and 46% zinc in 2017 compared to 95% silver, 96.5% lead and 54.1% zinc in 2016. In 2017, total ore mined was 636,760 tonnes, an 8-per-cent increase compared to 589,766 tonnes mined in 2016. Ore milled increased by 9% to 638,211 tonnes from 587,450 tonnes in 2016. This performance is not consistent with all the companies operations.
The company has applied a disciplined approach to its Ying Mining District Mines however the GC project is not showing the same amount of improvement with decreased sales, decreased recovery rates and little improvement in head grades. In 2017, the company reported sales from the GC Mine of 564 thousand ounces of silver, 7.1 million pounds of lead, 12.4 million pounds of zinc compared to 637 thousand ounces of silver, 9.0 million pounds of lead, and 12.3 million pounds of zinc sold in 2016. Recovery rates were 72.8% silver, 82.4% lead and 74.8% zinc in 2017 compared to 75.4% silver, 85.8% lead and 86.5% zinc in 2016. Head grades were 94 g/t for silver, 1.4% for lead, and 2.8% for zinc compared to 94 g/t for silver, 1.8% for lead, and 2.5% for zinc in the prior year. There were in improvements in mining and milling costs. Total and cash mining costs per tonne at the GC Mine in 2017 were $40.03 and $32.1 per tonne, compared to $46.49 and $38.23 per tonne in 2016. The decrease in cash mining costs was mainly because 35% of ore was from exploration tunnelling or extracted from previously mined stopes for which direct mining costs were paid in prior years and the only cost involved was to ship the ore to the mill. Total and cash milling costs per tonne at the GC Mine in 2017 were $17.78 and $14.73, compared to $18.30 and $15.79, respectively, in 2016. The decrease in milling costs was mainly due to the use of previously mined ore.. GC Mine is a smaller operation totalling 260,746 tonnes mined in 2017 compared to the 636,760 tonnes mined in the company’s Ying Mining District and did not dampen the stock market’s response to the results on Friday.
Silvercorp Metals Inc. (TSX: SVM) (NYSE: SVM)
The stock jumped high right after the earnings on Friday, trading at $4.09 per share on the TSX and up 20 cents to $3.08 on the NYSE after news of the 2017 fiscal results sent the stock up 7.3% (TSX) and 6.9% (NYSE) in trading on Friday. This time last year the stock was trading around $2.20 (TSX) and reached a year high of $5.90 in February. The company announced an increase to its semi-annual dividend on May 26 by nearly 35%, from once cent (CAD) to one cent (USD), which it restarted in late 2016.
As of May 19, 2017, the consensus forecast according to Reuters amongst two polled investment analysts covering Silvercorp is that the company will outperform the market. This has been the consensus forecast since the analyst’s sentiment improved on Apr 05, 2017. The previous consensus forecast recommended that investors to hold their position in Silvercorp Metals Inc.
Silvercorp Metals has demonstrated that it can reduce costs in a low metals price environment which is clearly returning value to shareholders in the form of equity appreciation, a dividend, improving free cash flow and a positive balance sheet. If this company is any indicator of silver producers, other peer companies should be reporting a similar balance sheet with a focus on reduced costs through higher production, increased sales, improved grade, and recovery rates. This strategy will position silver producers, especially SilverCorp to reap the benefits of silver, lead and zinc price increases. On these positive developments I have started to accumulate Silvercorp Metals as a solid long-term investment and concur with their analysts that the silver producer will be a silver sector and silver miner outperformer.
- Peter Spina, President of SilverSeek.com
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