Setting the Record Straight on Silvercorp Metals

Particularly in this post-Lehman, post-Madoff financial world, where rightfully cautious investors are eager to minimize risk, the shorts have it made.

On rare but high-profile occasions, short-side interests can provide markets with a valuable service by sniffing out red flags and exposing legitimate cases of impropriety. Citron Research scored one such hit with Longtop Financial Technologies, warning investors of problems weeks before Deloitte Touche resigned as the company's auditor, and months before the stock's de-listing from the NYSE.

But more often, I believe, short-side interests exhibit a penchant for carelessly constructed allegations backed by scant or even absent documentary evidence. Motley Fool Global Gains analyst Tim Hanson took exception to the "flimsy evidence" used by one blogger to disparage small-cap Chinese fertilizer producer Yongye International (Nasdaq: YONG  ) last February. The stock languished alongside most companies with operations in China this summer, before a $50 million investment in Yongye by Morgan Stanley's (NYSE: MS  ) Asian private-equity arm emerged to restore confidence and credibility.

More recently, that same blogger took aim at one of my own core equity holdings -- Great Panther Silver (AMEX: GPL  ) -- and missed the mark entirely! Fortunately, the damage was short-lived, as it was clear to anyone who knew the company well that the allegations were entirely without merit. The blog post has since been retracted, but I believe it's vital for investors to note just how easy it is for anyone with a virtual soapbox to trigger panic among some investors with poorly constructed allegations and insinuations.

The latest casualty of the rumor mill
I consider it a sad sign of the times that a company is forced to take seriously even those allegations brought forth by an anonymous party. But particularly where companies with operations in China are concerned, that is certainly the current reality. Successful silver miner Silvercorp Metals (NYSE: SVM  ) found itself in just such a predicament last week, and I applaud the company for moving swiftly to rebut the contents of the allegations Friday with a press release backed by 268 pages of supporting documentation. Reacting to a major surge in short interest to reach 13% of shares outstanding, the company responded to an anonymous letter alleging accounting fraud and other alleged irregularities.

While I will leave the final verdict to the forensic accountants and translators whom I suspect will continue to pore over those myriad documents and filings, I did manage over the course of my own review of the company's comprehensive rebuttal to emerge from the process with my long-standing confidence in the stock well intact. I will be maintaining my own personal holding of Silvercorp shares, and I encourage my readers to seek their own comfort level in the documentary evidence provided.

The anonymous letter alleged that the company posted a loss for 2010 in filings to China's SAIC, in purported contrast to the $66 million profit reported to the SEC. According to the documents posted to the company's website last week, however, it seems clear that Silvercorp's four Chinese subsidiaries in fact recorded a combined profit of $73 million. After dismissing the allegations of a reported loss in its Chinese filings as "clearly false," the miner proceeded to offer a full reconciliation of the two profit figures. Now that Silvercorp has produced comprehensive documentation including income tax filings and value-added tax payment receipts offering strong corroboration of profitable operation, the burden of proof returns squarely to the shoulder of the party behind these allegations.

Silvercorp also countered quite convincingly the letter's secondary allegation that the company's cash balances have been misrepresented. The company posted 67 pages of bank balance statements and documents detailing total cash and short-term investments of $221.3 million (or nearly 16% of the current market capitalization!). Considering the timely and transparent nature of the company's response, I see no reasonable cause to question that tally or the legitimacy of the relevant supporting documentation. Silvercorp referenced two additional allegations in its rebuttal, but there, too, I believe the company has offered an effective rebuttal that directly challenges the veracity of the underlying allegations.

Since 2004, Silvercorp has paid $40 million in dividends to shareholders and utilized another $31 million to repurchase shares. The company has no long-term debt. This low-cost silver miner has earned the trust and respect of precious-metals investors over the course of the past several years, and I submit it would require some extraordinarily convincing evidence of wrongdoing to derail investor interest in this gripping growth story. Of course, the very fact that short-sellers have targeted the stock presents a risk for near-term volatility, and investors will wish to shape their own exposure according to their own degree of confidence that these allegations will ultimately prove unfounded. I for one am satisfied with the company's initial response to the anonymous letter.

I have always preferred a "basket" approach for my precious-metals exposure, spreading my allocation across multiple high-quality names to reduce headline risk from unfortunate developments like this one. While I consider Silvercorp Metals a compelling option at these reduced prices, this experience underscores the attractiveness of a strategy that achieves silver investment exposure through a basket of stocks that might also include Silver Wheaton (NYSE: SLW  ) , Alexco Resource (AMEX: AXU  ) , and Central Fund of Canada (AMEX: CEF  ) (for a bullion component that includes exposure to gold).

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Alexco Resource, Central Fund of Canada, Great Panther Silver, Silvercorp Metals, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 07, 2011, at 10:17 AM, mihrtrn wrote:

    Another brilliant piece !!!! Thank you again, Chris !!!!!!!!!!. I see the obvious pattern of Goldminingxperts unfounded bashing and shorting. I would like to see Goldminingxpert's comments regarding SVM's over 90 page rebuttal to the false accusations. I'm most interested in the FALSE ACCUSATION by the spineless anonymous letter regarding cash being grossly overstated by SVM. Everything goes through cash and SVM posted their bank statements for the whole world to see. This absolutely destroyed that FALSE ACCUSATION and as far as I'm concerned that letter and the other false accusations have ABSOLUTELY NO CREDIBILITY. Can we get a comment from the expert on the false accusation of overstated cash and how it diminishes the credibility of the other ANONYMOUS / spineless allegations ( without even considering SVM's other great responses ), on this page ???????? I'm looking forward to seeing a perp walk by the person/s who sent the anonymous fraudulent letter !!!!!

  • Report this Comment On September 07, 2011, at 10:49 AM, jesusfreakinco wrote:

    Chris,

    Great article. Having been one that didn't have a position in SVM, I view GMX's and Anonymous' slandering of SVM a gift. We'll see this back above $9 soon and with silver's launch above $50, we'll see new highs within a few months.

    Keep up the good work. Your efforts on CAPS are well appreciated by your humble followers :-)

    JFC

  • Report this Comment On September 07, 2011, at 10:52 AM, jesusfreakinco wrote:

    Chris,

    Great article. Having been one that didn't have a position in SVM, I view GMX's and Anonymous' slandering of SVM a gift. We'll see this back above $9 soon and with silver's launch above $50, we'll see new highs within a few months.

    Keep up the good work. Your efforts on CAPS are well appreciated by your humble followers :-)

    JFC

  • Report this Comment On September 07, 2011, at 10:53 AM, jesusfreakinco wrote:

    Oopps.. sorry for the double post...

    Today's raid in gold and silver is an equally generous gift for those looking to add to or initiate a position in gold or silver or add to their physical exposure.

  • Report this Comment On September 07, 2011, at 11:35 AM, racerdv1 wrote:

    I know that silvercorp mining and the ontario securities are working to investigate the culprit who put out the fraudulent report about silvercorps accounting as well as who has shorted their stock to the tune of over 23million shares . It doesnt take a rocket scientist to come to the realization that who ever made the false allegations against svm is probably also responsible for most of the large short position in the stock .! The next question becomes , how did this individual get such a large short position in silvercorp metals in the first place ? To that i would answer he likely is NAKED SHORT many millions of shares of svm which if proven to be correct makes the individual (s) responsible no less than criminal (s) who are gaming the stock via one of the oldest and dirtiest scams in the criminal play book. To concoct a frivilous story about a stock , illegally short massive amounts of shares of that stock and then post your false allegations thruout the investment community to incite panic selling and drive the price of the stock down so the crminals can make massive profits off of their false information and criminal wrong doing!!!!

    I dont know who the culprit/criminal is who is responsible for this criminal act but i do know there is a pending investigation ongoing to find and proscecute the individual(s) responsible and bring them to justice!! If the above mentioned goldminingxperts is in any way a part of the criminal wrong doing , it is my hope that you will be behind bars within a year for your part in what is obviously a blatant criminal act!.

    Anyone that follows silvercorp metals even passively knows that there is no misinformation in their balance sheet and that all the reports contain factual information and what makes this even more maddening from where iam is that silvercorps corporate documents and activities are an open book for all to see . This is one of the most accessible companies i deal with!! How one could come up with the allegations that the naked short seller (s) have concocted is beyond me unless they really had sinister intentions in mind because the data from the company is pretty thurough and couldnt lead anyone to legitimately draw such a totally wacked out conclusion as they have!!!

    I will be doing what ever i can to help root out who ever is responsible for what i see as a blatant criminal act and iam hopeful that they will be brought to justice in the months ahead if indeed there is criminal wrong doing as i suspect that there is!!

  • Report this Comment On September 07, 2011, at 11:46 AM, goldminingXpert wrote:

    I have no comments about the letter because I have not seen the letter. I have no involvement in SVM other than trading its stock. I am not sure why, other than perhaps a personal grudge, the author of this article continues in his inaccurate criticisms of me.

  • Report this Comment On September 07, 2011, at 11:47 AM, goldminingXpert wrote:

    should read, no comments about the letter or the rebuttal, because I have not seen the letter (it is hard to tell how good a rebuttal is without seeing the primary argument.)

  • Report this Comment On September 07, 2011, at 12:06 PM, XMFSinchiruna wrote:

    I am simply committed to truth.

    http://caps.fool.com/Blogs/add-this-core-position-deep/63733...

    #16) On September 02, 2011 at 9:27 AM, goldminingXpert (99.68) wrote:

    "I have been waiting for the fraud allegations to go mainstream. Been short for awhile and waiting for the dirty laundry to go public."

  • Report this Comment On September 07, 2011, at 12:31 PM, speedybure wrote:

    goldminingXpert has no idea what hes talking about. Great article Sinchy, glad to see others come to the defense of legitimate companies.

  • Report this Comment On September 07, 2011, at 12:46 PM, mihrtrn wrote:

    Goldminingxpert is staying in the closet on the cash fraud allegations along with "anonymous".

    All you have to say if anonymous accused SVM of overstating cash as part of their many frauds, it looks like anonymous blew the short / hedge fund's case but STILL COMMITTED A CRIME !!! The only fraud here is the letter. PERP WALK BY SHORT / HEDGE FUND COMING !!!!!!!

    What Chris wrote above and I cut and pasted below does INTRIGUE me VERY MUCH !!!!

    http://caps.fool.com/Blogs/add-this-core-position-deep/63733...

    #16) On September 02, 2011 at 9:27 AM, goldminingXpert (99.68) wrote:

    "I have been waiting for the fraud allegations to go mainstream. Been short for awhile and waiting for the dirty laundry to go public."

  • Report this Comment On September 07, 2011, at 3:16 PM, mihrtrn wrote:

    According to a post on Yahoo, the PO-LICE are investigating already ( see below ). GAME OVER for the Shorts / Hedge Fund !!!!!!

    Silvercorp Metals Inc. (SVM), the Chinese miner accused in an anonymous letter of an accounting fraud, said Canadian federal police have contacted the company and offered to help find who made the allegations.

    Two members of the Integrated Market Enforcement Team, an arm of the federal Royal Canadian Mounted Police, met with Silvercorp executives yesterday morning, Chief Executive Officer Rui Feng said in an interview at the company’s Vancouver headquarters.

    “The RCMP are aware of the situation and offered to help” determine the source of the letter, Feng said yesterday. He said the police didn’t elaborate on what assistance they would offer.

    The anonymous letter, circulated by e-mail last week, alleges that Silvercorp reported a profit in calendar 2010 to the U.S. Securities and Exchange Commission while posting a loss to regulators in China, Silvercorp said Sept. 2 in a statement. The letter was addressed to the Ontario Securities Commission, Ernst & Young LLP, Silvercorp’s auditors and various media outlets, Silvercorp said.

    Silvercorp denied the allegations and provided tax and other financial documents related to its Chinese silver mining operations in its Sept. 2 statement to back up its assertion that the anonymous accusations are false.

    A call by Bloomberg to the RCMP’s IMET office in Vancouver wasn’t immediately returned.

    Tip From Shareholder

    Silvercorp had expected allegations of wrongdoing after the company was contacted by a shareholder, Feng said. Ralph P. Aldis, a San Antonio-based money manager at U.S. Global Investors Inc., called the company Aug. 16 to say that a U.S. stock brokerage was spreading information that short seller Carson Block’s Muddy Waters LLC was preparing to publish a report on Silvercorp, Feng said.

    Aldis didn’t immediately respond to a telephone call and an e-mail requesting comment.

    Silvercorp executives said they received no response when they tried to contact Muddy Waters last month. Still they don’t believe Muddy Waters is involved. Block also denied a connection to the anonymous letter.

    “We had no knowledge of, or involvement in, the letter sent to Silvercorp,” Block said today in an e-mail request for comment from Bloomberg. “Regarding the possibility of upcoming reports, it is our policy not to comment on market rumors.”

    Muddy Waters’ allegations of fraud against Sino-Forest Corp. (TRE), a Hong Kong- and Mississauga, Ontario-based tree-farm operator in China, have heightened investors’ concern about other North America-based companies with operations in China

  • Report this Comment On September 07, 2011, at 3:32 PM, BillyTG wrote:

    Wow, so goldminingAhole might be a hedge fund shill?

    Well, since we now have this guy on record saying these things, maybe TMF can push his name and IP address to those Canadian police...

    GMX, serious questions, because I find this stuff fascinating:

    1. How much do you get paid to spout this nonsense on TMF?

    2. How did you get recruited or find this kind of work?

    3. Are you the fulltime TMF representative for hedgefund PM positions?

    4. How does the hierarchy work? Like, does some anonymous person working on behalf of several hedgefunds contact you with tasks, or are you called directly from hedgefund managers? I'm just wondering to what extent they go to protect their illegal actions...are we talking CIA-level cover companies and layers of crooks in between the decision makers and the low level wonks like yourself?

    5. You are a piece of SH!T. Whoops, I guess that's not a question.

  • Report this Comment On September 07, 2011, at 3:57 PM, XMFSinchiruna wrote:
  • Report this Comment On September 07, 2011, at 5:04 PM, XMFSinchiruna wrote:
  • Report this Comment On September 07, 2011, at 6:04 PM, xetn wrote:

    I voted with my $$$ and loaded up below $8.00.

  • Report this Comment On September 07, 2011, at 6:20 PM, BillyTG wrote:

    From the bloomberg article:

    "Silvercorp cited Sept. 2 a 'dramatic' increase in the short position of its shares. Silvercorp said yesterday it has contacted the Ontario Securities Commission and the U.S. Securities and Exchange Commission."

    Funny, but isn't that the same day that goldminingIdiot commenced his full-on attack of SVM here at TMF? Yet, he actually red-thumbed SVM on CAPS on August 31, BEFORE Silvercorp noted the dramatic Sep 2 short increase. Hmmm. So is it possible he was one of the originators of the letter, before it hit the larger hedgefund community and public on Sep 2?

    Surely, just a coincidence, as GMX has shown himself to be an upstanding man of integrity.

    Here he is admitting knowledge of something just a couple days before the big shorts roll in:

    #16) On September 02, 2011 at 9:27 AM, goldminingXpert (99.59) wrote:

    I have been waiting for the fraud allegations to go mainstream. Been short for awhile and waiting for the dirty laundry to go public.

    At least he makes an attempt at denial prior to any accusations being thrown his way:

    #35) On September 02, 2011 at 1:56 PM, goldminingXpert (99.59) wrote:

    No interest in writing about SVM. I do not in any way want to be associated with the shorters here until I see their evidence ... sending that letter could get he/them in quite a bit of trouble if it is inaccurate. All I know is that there was chatter that their SAIC filings did not match, which in and of itself is sufficient cause to get short, since this has been a flawless predictor of accounting irregularities ever since John Bird exposed the CSKI shenanigans.

    If you buy SVM here, your odds are about as good as if you bought CCME, RINO, SinoForest, or other mismatching SAIC Chinese filers.

  • Report this Comment On September 08, 2011, at 6:51 AM, mihrtrn wrote:

    Interesting, GMX is staying in the closet on this one. No comments on SVM's great over 90 page rebuttal

    SMACKING DOWN the false accusations. The one I'm most interested in is the silly/rookie/SWISS CHEESE accusation of cash being overstated.

    All you have to do is use the word IF in place of not seeing anonymous' letter. (ie IF what SVM who showed the letter to the police, OSC and E&Y reported that anonymous alleges cash being overstated is true ANONYMOUS was incompetent in their attempt to perpetrate a fraud on SVM and it's investors while STILL committing FRAUD,) We're waiting, Ian. MAN UP !!!!!!!!!!!

  • Report this Comment On September 08, 2011, at 6:28 PM, skypilot2005 wrote:

    Sinch,

    Thanks for your efforts regarding SVM.

    I set a target before taking off this AM and hit it. I am up over 3% in less than 24 hours.

    Your Web Link Assistant

    Sky Pilot

  • Report this Comment On September 09, 2011, at 3:40 PM, XMFSinchiruna wrote:
  • Report this Comment On September 11, 2011, at 7:56 AM, skypilot2005 wrote:

    Brigus FYI:

    9/7/11

    http://www.snl.com/Cache/1500035742.PDF?D=&O=PDF&IID...

    Brigus Reports High-Grade Gold Assays at the Contact Zone of the Black Fox Comple

    Sky Pilot

  • Report this Comment On September 12, 2011, at 7:32 PM, speedybure wrote:
  • Report this Comment On September 13, 2011, at 11:53 AM, XMFSinchiruna wrote:
  • Report this Comment On September 13, 2011, at 12:04 PM, XMFSinchiruna wrote:
  • Report this Comment On September 13, 2011, at 12:22 PM, lnamaz wrote:

    It seems that Alfred Little is responsible for the bad reports. You can read about "him" here:

    http://www.businessweek.com/news/2011-06-07/suing-alfred-lit...

    Extract: Alfred Little “may be a pseudonym” for a group of short sellers “engaged in market manipulation.

  • Report this Comment On September 13, 2011, at 9:42 PM, jwhitwell wrote:

    On September 02, 2011 at 9:27 AM, goldminingXpert (99.59) wrote:

    I have been waiting for the fraud allegations to go mainstream. Been short for awhile and waiting for the dirty laundry to go public.

    Hmm, so goldminingXpert seems likely to have been at the heart of the slander/fraud in question, *and* trading on insider information.

    Interesting.

  • Report this Comment On September 14, 2011, at 3:30 PM, INVESTWISE2010 wrote:

    Could someone comment on the implications of the announcement made by some legal firms claiming to investigate potential securities fraud claims against Silvercorp Metals, Inc. (NYSE:SVM - News) (“Silvercorp” or the “Company”) resulting from allegations that the Company may have issued materially inaccurate financial statements and inviting investors to lodge complaints.

  • Report this Comment On September 15, 2011, at 3:37 AM, INVESTWISE2010 wrote:

    I may add, is this a case of these firms "fishing in troubled waters" for private gain and would it not ultimate undermine the interests of existing investors putting the share prices of Silvercorp under further downward pressure.

  • Report this Comment On September 16, 2011, at 6:53 AM, INVESTWISE2010 wrote:

    Here are what some analysts representing investment banking firms have to say.

    1, BMO analyst Andrew Kaip commended the company's rebuttal of the allegations and reiterated BMO's "outperform" rating on Silvercorp shares, but noted that the share price is likely to remain volatile for now.

    "BMO Research views the company's proactive approach toward disclosure to repudiate the short-seller's allegations as a positive step," Kaip said in a note to clients.

    Kaip's comments also reflect the sentiments of analysts at UBS and Raymond James, who have questioned the veracity of the short-seller allegations.

    2. Raymond James’ Analyst, Brad Humphrey argues recent allegations of fraud provide an "unfortunate and opportunistic" chance to get into the stock.

    The analyst insists Silvercorp's SGX mine in the Ying property "is a high quality asset that should generate positive returns at current and much lower metal prices for many years to come." Amid the fraud claims, Humphrey believes the discussion boils down "to the fact that since 2004 the company has raised just over $200 mln, paid some $40 mln in dividends, ~$30 mln in share buybacks, spent more than $175 mln acquiring, developing, expanding and exploring (both in China and Canada) and still have roughly $220 mln in the bank."

    Humphrey said he expects Silvercorp to "weather this storm."

    Raymond James reiterates an Outperform rating and $16 price ta

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