Silvercorp rallies on audit findings

Vancouver – Silvercorp Metals (SVM-T, SVM-N) looks to have been vindicated of fraud allegations in a forensic audit, leading to a sharp recovery in its share price.

The KPMG Forensic audit found that Silvercorp was generally accurate in its reported cash and short-term investment balances and revenues, refuting claims made by anonymous short-sellers in September.

On news of the audit’s conclusions Silvercorp’s share price climbed $1.42 or 17% to $9.60, while since the accusations of cooked books were first made the company’s share price dipped to as low as $5.81.

Following the release of the audit, Silvercorp’s chairman Rui Feng stated that the audit “provides thorough, independent confirmation that the substance of the anonymous allegations addressed in the KPMG report has no merit” and that “These ill-founded claims, made by admitted short-sellers, were intended to manipulate Silvercorp’s share price and harm the company and its shareholders.”

The main allegations in an early September letter claimed that while Silvercorp reported net profit of US$66-million to the US Securities and Exchange Commission in 2010, the company supposedly reported a loss of US$500,000 to the Chinese State Administration of Industry and Commerce, while a second anonymous letter in mid-September accused the company of improperly reporting concentrate grades and sales and several other improper disclosures.

Silvercorp has fought an aggressive publicity campaign since the allegations came to light.  The company also filed a lawsuit in New York against several individuals as well as the Chinastockwatch.com and AlfredLittle.com websites where the letters were posted for spreading false, defamatory and fraudulent information. Both Canadian and American authorities also launched investigations into the allegations and the people behind them.

The company also continued a share buyback program it initiated in June while the audit proceeded, buying as of September 23 some $35-million worth of shares. Outside the buyback program, Feng personally bought some 235,000 shares at between $6.54 and $7.87 in September.

Feng states that efforts to refute the accusations have directly cost the company some $2-million, while the issue has also significantly distracted the company.

“In addition to monetary costs, my focus and that of my entire management team has been almost completely distracted from our normal business operations over the last two months,” stated Feng.

In his statement Feng said that while the main questions overhanging the company have been answered, other questions remain such as who was behind the allegations and short selling? Who will compensate the company and shareholders, and, more generally, how can such “short and distort” manipulation schemes be prevented in the future?