Buy, Sell, or Hold: Silvercorp Metals
Feb 10th 2012 10:32AM
Updated Feb 10th 2012 10:34AM
When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Silvercorp Metals (NYS: SVM) today, and see why you might want to buy, sell, or hold it.
It's not surprising that the company's own website will offer reasons to be intrigued by it. Here, for example, are a few things it wants you to know:
- Silvercorp Metals is involved in buying, exploring for, developing, and mining silver and silver-related properties in China and Canada.
- It's the largest primary silver producer in China.
- Its projects also involve gold, lead, and zinc.
- Over five years, it has been the lowest-cost silver producer among its peers.
- It even pays a dividend -- recently yielding 1.2%.
- It sports more than $160 million in cash and no long-term debt.
If that's not enough, consider this: The company is not just a low-cost producer of silver -- its production cost was recently negative, meaning that Silvercorp actually makes a profit on each bit of silver it produces. This is possible because its Ying mine features silver, lead, and zinc, and during the process of mining silver, lead and zinc byproducts are also produced, which are sold. These sales actually generate close to half of the company's revenue.
The dividend is another big positive -- not just for the modest income it generates for its shareholders, but also for the confidence in the company's prospects that it conveys. Companies never want to have to reduce or eliminate their dividend, so they typically set dividends at sustainable levels. They often forgo them completely until they're comfortable that their earnings are relatively steady and reliable.
Silvercorp has also bought back many of its shares over the year, spending more than $30 million on such efforts since 2004. A reduced share count boosts the value of existing shares for shareholders and is typically a good thing -- unless the share price is overvalued at the time of purchase.
Even if you're not thinking of selling Silvercorp, lots of short-sellers already have. Short-selling helped drive down the stock's price last year, by a lot. Short-sellers often have reasonable grounds for disparaging a stock, but in the case of Silvercorp, it looks like much of the negativity may be scurrilous.
The company has taken pains to address and counter claims that it sees as misrepresentations and falsehoods. It has spent some $1.5 million on an internal investigation and has also hired outside consultants to verify its condition via a mining-industry NI 43-101 report. These reports have boosted confidence in companies such as Rubicon Minerals (NYS: RBY) and Rare Element Resources (ASE: REE) .
Silvercorp is also going after its critics, via a lawsuit accusing them of a "short and distort" scheme whereby they spread "false, defamatory and fraudulent" information in order to drive down the price of the shares they had shorted.
The company may well emerge victorious at the end of this episode, but the situation still counts as a reason to at least consider selling. After all, when a company has to defend itself so vigorously, it can cost a lot of money and can distract management to some degree, as well. It can also juice the volatility of the stock.
As my colleague Rich Duprey has suggested, it might be best for the company to just prove its naysayers wrong via a strong performance, rather than spending so much energy defending itself.
There are other red flags, or cautions, about Silvercorp, too. For one thing, remember that much of its business is in China. That's a big green flag, due to the country's size and growth rate, but the Chinese government and Chinese regulations can cause trouble for companies there on short notice. Plenty of investors have chosen to simply steer clear of the nation.
If you find yourself torn regarding Silvercorp, you should hold off on taking any action. Perhaps wait for more dust to settle regarding the short-selling crisis and ensuing lawsuits. Perhaps wait for more strong results from mining activities. Perhaps wait for continued dividend growth.
There's enough uncertainty in this situation to make me hold off. There are, after all, plenty of other exciting stocks to consider.
If you'd really like to invest in a strong silver stock, though, and are skittish about Silvercorp, perhaps look at Silver Wheaton (NYS: SLW) . It also enjoys very low production costs, a dividend that was tripled in 2011, and rosy prospects for 2012.
At the time this article was published Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter @SelenaMaranjian, holds no position in any company mentioned. Click here to see her holdings and a short bio. Try any of our Foolish newsletter services free for 30 days. 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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