Silvercorp struggles with operational issues at Ying

VANCOUVER — It was a tough quarter for China-focused producer Silvercorp Metals (TSX: SVM) as the company grappled with staffing and cost issues at its flagship Ying silver mining district in the central province of Henan. The company operates four mines in the region, where it continues to manage problems with contract miners and strive to improve overall head grades.

Silvercorp produced roughly 1 million oz. of silver during the period, which marks a 28% quarter-on-quarter decline from the 1.4 million oz. the company cranked out during its first fiscal quarter of 2014.

During an operational review Silvercorp identified an issue with the “dilutive practices of its mining contractors”, which had been contributing to a recent drop in average head grade. During the last quarter Ying’s mill was processing grades of 200 grams silver per tonne, 2.7% lead, and 0.8% zinc; which represented 52-week lows for the mine.

As a result the company dismissed one of its contractors, and had a number of miners leave Ying’s site, which contributed to the quarterly production shortfall. Silvercorp did, however, succeed in improving grades at the operation. Ying’s mill was processing an average of 217 grams silver, 2.9% lead, and 1% zinc over the past three months.

Silvercorp intends to bring in its own miners in late November, which it expects will gradually improve production levels over the next two quarters.

The ongoing adjustments also contributed to Silvercorp’s lackluster financial performance. The company reported sales revenue of US$28.5 million, along with an adjusted net loss of US$400,000. That compares to revenues of US$45.2 million and net income of US$9.5 million, or 6¢ per share, during the same period in 2012.

Meanwhile, Silvercorp is nearing a commercial production target at its GC silver-lead-zinc mine in China’s Guangdong province. The company completed around 1,200 metres of development tunnels during the quarter, and continues to prepare for safety and environmental regulatory inspections estimated to take between three and six months. Once up and running GC will process approximately 1,600 tonnes per day. The project hosts proven-and-probable reserves totalling 4.7 million tonnes grading 121 grams silver, 1.31% lead, and 2.95% zinc.

Silvercorp also announced it had sold a pair of assets for a total of roughly US$28 million. The company entered into a share transfer agreement with a private Chinese company to sell its 90% equity interest in the XGB and XHP projects in China’s Henan province for US$12.4 million. Meanwhile, Silvercorp unloaded its Silvertip project — located in British Columbia — to a private Canadian company for US$15.1 million.

Silvercorp finished up the quarter with around US$99 million in cash and short-term investments, and announced a quarterly dividend of 2.5¢ per share. The company has traded within a 52-week window of $2.48 and $5.85, and closed at $2.89 per share at the time of writing. Silvercorp maintains 171 million shares outstanding for a $494 million press-time market capitalization.