Silvercorp rallies on audit findings

Silvercorp Metals (SVM-T, SVMN) 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, after the company’s share price had dipped to as low as $5.81 since the first accusations of cooked books.

Following release of the audit, Silvercorp’s chairman Rui Feng stated that it “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.”

Allegations in the September letter claimed that while Silvercorp reported net profit of US$66 million to the U.S. Securities and Exchange Commission in 2010, the company reported a US$500,000 loss to the Chinese State Administration for Industry and Commerce. A second anonymous letter in mid-September accused the company of improperly reporting concentrate grades, 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 letters were allegedly posted spreading false, defamatory and fraudulent information. Both Canadian and American authorities also launched investigations into the allegations and the people behind them.

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

Feng states that efforts to refute the accusations have directly cost the company $2 million, and that “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.”

In his statement Feng added 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 such “short and distort” manipulation schemes can be prevented in the future.