Silvercorp Metals: Substantial Upside With Silver (NYSE:SVM)

Silvercorp Metals (NYSE:SVM) is one of several Canadian mining companies. The minder of course by name prioritizes producing silver but also has a substantial production record of gold, as well as base metal byproducts like lead, and zinc. The company has long had a history of profitability and growth potential. But like all silver mining stocks, and gold mining stocks for that matter, the number on driver of share movement is the price of the precious metals. Sure, production is part of the equation, as is all-in sustaining production costs, but for the most part, these stocks are levered plays on the price of the underlying assets. Gold had a strong rally in 2022, while silver has kind of lagged. But with the gold to silver ratio widening further in recent years, and with silver projected to be in a shortage this year, and for years after, we think Silvercorp Metals has substantial upside from current levels. The company just reported earnings and we want to discuss the trends in production and costs, and why we see this as a good bet if you believe in a silver rally.

Production and sales

We look for rising production and sales when evaluating a precious metals miners. But specifically, we look to see how miners act depending on where pricing is. In Q3, pricing for gold was rather strong, while silver was decent. Production was also strong.

In Q3 Silvercorp processed 296,050 tons of ore. We like to look at how this compares to last year and it was not much of an increase, rising about 1% compared to 292,072 tonnes a year ago. Milled ore was 303,442 tons, about flat from a year ago. Now production is a key metric, and it rose marginally overall. Silvercorp pumped out 1.9 million ounces of silver, along with 1,100 ounces of gold. Along with the precious metals keep in mind that the byproducts also bring in sizable revenue. In Q3 they also churned out 20.1 million pounds of lead, and 7.0 million pounds of zinc.

All in all, the company saw a 1% rise in silver production, with flat gold production from a year ago. As for the byproducts lead was up 6% but zinc production was down from 13% a year ago. The company sold almost all of what it produced, selling 1.9 million ounces of silver, the 1,100 ounces of gold, 19.3 million pounds of lead, and 7.1 million pounds of zinc. But what about the costs to produce these sales?

Production costs

Having a sense of production gives us an idea of the trend of mine operations. But the cost of production matters as it will impact margins. We were pleased to see that total production costs were $77.73 per ton, dropping 9% compared to $85.73 per ton last year. The all-in sustaining costs were $136.90 per ton of ore, down minimally compared to $137.04 a year ago. The total all-in sustaining costs per ounce of silver (net of byproduct credits) were $9.28 compared to $8.82. This was a bit of a disappointment but the increase was a result of higher capex spending.

Financials

So we saw the sales number and costs. The average selling price of silver was actually down 7% from a year ago to $17.16 per ounce down from $18.44 a year ago. But gold was sold at a higher price of $1,541 per ounce, rising 13% from a year ago. Lead and zinc prices were down 8% and 13%, respectively. Putting together the sales volume and pricing we see that revenue was $58.7 million, down 1% compared to $59.1 million a year ago. While revenue was down, this was a beat against consensus estimates.

Putting the revenue together with production costs we see that operational income was $21.7 million, and this was up 1% compared to $21.5 million a year ago. That is strong. Total EPS was $0.07 and beat by $0.04.

While we had a strong earnings figure, cash flow provided was $25.7 million, down $3.0 million compared to $28.7 million a year ago. The company remains in very great shape cash wise with $210.3 million up 5% or $9.3 million compared to $201.0 million to start the quarter.

Looking ahead

So the numbers were pretty strong, particularly with the production costs being well-managed. Production numbers were about flat to up while pricing of sales is at the mercy of the market. We do believe silver prices have upside and think gold should hover around where they are now. Byproduct prices came down with inflation being addressed but will fluctuate. Shares of SVM should rally if we see silver prices rally. Silver and gold are the biggest drivers.

The company also issued early 2024 guidance which we view as bullish. The company is forecasting a large ramp in production. They should mine about 1,100,000 to 1,170,000 tonnes ore. Management projects 4,400 to 5,500 ounces of gold to be produced along with 6.8 to 7.2 million ounces of silver. s for byproducts we can look for 70.5 to 73.8 million pounds of lead, and 27.7 to 29.7 million pounds of zinc. Depending on where things land this will be a 1% to 26% increase in gold production, and a 3% to 8% increase in silver prices. Further this translates to a 3% to 8% in lead, and 14% to 23% in zinc versus what is expected for 2023.

Operationally the company is strong. The company is also investing heavily in a number of its mines. Details of those investments can be read in the release. Ultimately we think the silver prices are going to see an increase from a deficit of production, as well as ongoing demand. We see shares as a buy, with reasonable value, even at current prices. But we largely expect shares to appreciate from $3.00 given the investments into mining operations and the leverage with metal prices. We rate shares a buy.