Summary
Silvercorp Metals recently reported its Q2 Fiscal 2016 financial results.
Despite plummeting metals prices, Silvercorp was able to turn a decent profit in the quarter, and repurchased 1.63 million shares of its stock.
I'd like to see Silvercorp repurchase more shares of its stock, but I think shares look like a good long-term buy here.
(...)
Recent Stock Price: $.60
Shares Outstanding: 169.24 million
Market Cap: $100.70 million
52-Week Range: $.59 - $.62
Silvercorp Metals is a low-cost silver producer that owns multiple mines in China. This includes the GC project, which commenced production last year, and the Ying Mining District, which produced 3.9 million ounces of silver in 2014. The company's resource base includes 101 million ounces of proven and probable silver reserves, plus 442.5 million tonnes of lead and 267.5 million tonnes of zinc.
Make no mistake about it: the drop in metals prices - in particular, silver prices - is hurting all silver miners, including Silvercorp. Still, Silvercorp continues to post respectable financial results despite these dire market conditions, and has maintained one of the best balance sheets in the industry.
The Results
The company recently posted its Q2 Fiscal 2016 financial results, and I thought it was a pretty decent quarter for Silvercorp despite a 26% yearly drop in average realized silver prices.
The company says it produced silver sales of 1.3 million ounces, lead sales of 13.2 million pounds, and zinc sales of 4.6 million pounds; Silvercorp produced $4.6 million in operating cash flow, or $.03 per share, and positive net income of $2.2 million, or $.01 per share. Gross margins fell from 49% last year to 32% this quarter, mainly due to lower zinc and lead prices, as these by-product metals contribute to the company's cash costs (higher prices means lower cash costs, and vice versa).
Inventory Build Up
Now here comes the interesting part of the earnings report: Silvercorp says it intentionally held on some of the produced metals, in reaction to lower metals prices.
That's why the company's silver-lead inventory rose from 430 tonnes to 2,228 tonnes (containing 200,000 silver ounces and 2 million pounds of lead, worth around $5 million at current prices). This seems like a wise strategy as the company could sell this inventory in the future, when metals prices are higher.
Balance Sheet Strength
In addition, Silvercorp has maintained its solid cash balance. The company says it ended the quarter with $70 million in cash, cash equivalents and short-term investments, and that's up slightly from last year.
This quarter, the company's cash and cash equivalents increased by $1.78 million, as the $4.6 million in operating cash flow produced was enough to offset the $2 million spent in investing activities (capital expenditures) and the $1.9 million spent on dividends and share repurchases (the dividend has since been discontinued). The company still has no long-term debt.
Share Buyback
Finally, Silvercorp says it bought back 1.63 million common shares of the company's stock in the quarter at a price of $.77 per share.
However, as mentioned in a previous article, Silvercorp's buyback lets it repurchase up to 16.5 million shares of its stock.
Therefore, 14.87 million shares of stock can still be repurchased by the company. The company definitely has enough money to complete this buyback: with a current share price of $.80 (on the TSX), it would cost the company just $11.89 million to complete the buyback.
As a result of the buyback, Silvercorp's share count fell to 169.17 million as of writing. With a full buyback, the share count would drop to 154.3 million shares outstanding, and Silvercorp would be left with a cash and cash equivalents balance of $58.11 million (and no debt).
The Bottom Line
The rapid decline in silver, zinc and lead prices is certainly hurting Silvercorp's earnings, but still, the company remains profitable and has a cash hoard of $70 million, with no debt.
On the TSX listing, the company's enterprise value is $71.55 million, and with current annual EBITDA of approximately $16 million at current metals prices, shares trade at an EV/EBITDA of just 4.47. With $.04 per share in annual EPS, shares trade at a forward P/E of 20.
Silvercorp should continue to buy back its own shares while they remain depressed, and I like the company's strategy of holding back some of its metals instead of selling them at current rock-bottom prices. I think shares look like an attractive long-term buy here for silver bulls.