Black Friday Sale In Silvercorp ($SVM) Shares
Silvercorp (SVM - US$3.42) - SVM announced its FY 2025 Q2 numbers on November 7th. Revenue was $68.0mm, a 26% YoY increase. A decline in gold and lead sold was more than offset by increases in silver and zinc plus higher prices for silver, gold, lead and zinc. The leverage to the price of silver translated into a 51% increase in operating income YoY. The operating margin jumped to 46.5% in FY Q2 vs 37% a year ago. The AISC for silver increased slightly from $11.50/oz a year ago to $11.66/oz for the latest quarter.
I don't want to get too detailed in dissecting the numbers. The 1500 tonnes/day mill expansion is in the commissioning process. The midpoint for the Company's FY 2025 production guidance is 7mm ozs of silver vs 6.2mm in FY 2024, a 13% rate of growth. SVM's margins outperform the industry average. Trailing twelve month EBITDA margin is 46% vs 17% for its peers. SVM had $209.5mm in cash at the end of the quarter and the total market value of its equity investment portfolio (like New Pacific) was $84.4mm.
Separately, SVM announced on November 15th that the Provincial Court of Bolivar (location of the El Domo project) dismissed the appeal filed by plaintiffs who argued that the Ecuador's environmental agency improperly conducted community consolutations with respect to issuing Adventus (now owned by SVM) a license to construct and operate the El Domo mine. In addition, SVM repaid the $13.25 million advanced to Adventus by Wheat Precious Metals under the $175.5mm Precious Metals Purchase Agreement funded by WPM. Under the agreement, SVM would have had to give WPM approximately 92 ozs of gold per month beause of the $13.25mm drawdown by Adventus. The full $175.5mm PMPA will be available to be drawn by SVM during construction of El Domo. SVM targeting first production at El Domo in 2026.
On November 19th, after the market closed, SVM announced a $130mm convertible bond deal. The market for some reason did not like the announcement. The following day the stock closed down 12% and was down as much as 20%. The following day the fell another __%. The convertible was priced at 4.75% with a 5-year maturity. The conversion price into equity is $4.63, which is a 30% premium to the closing price of the stock on November 20th. The proceeds will be used for the construction of copper-gold mining projects outside of China, for exploration of other projects and for working capital.
Contrary to raising capital via a stock deal, this deal will not be dilutive to shareholders until the stock price is above the $4.63 conversion price. Until that occurs and the bonds are converted, the cost of capital to shareholders is 4.75%. In the event that the entire issue is converted, this deal should viewed as "pre-selling" shares at 30% premium. Furthermore, to the extent that the Company can find projects to develop that return big ROR, this deal is anti-dilutive.
I chatted with Peter Lekich, Director of Corporate Development, at SVM (and at NEWP).