Silvercorp Metals Inc. – Profit From the Short Squeeze

by JDH on September 30, 2011

I don’t normally prepare detailed comments on a specific company (my last such report was in July when I discussed Franco-Nevada Corp – Time to Buy?). Today, my thoughts on SVM.TO – Silvercorp Metals Inc..

According to the Silvercorp website:

Silvercorp Metals Inc

Silvercorp Metals Inc. is engaged in the acquisition, exploration, development and mining of high-grade silver-related mineral properties in China and Canada. Silvercorp is the largest primary silver producer in China through the operation of the four silver-lead-zinc mines at the Ying Mining Camp in the Henan Province of China….

Now with US$230.5-million in cash, no long-term debt, strong operations and the lowest production costs among its global industry peers, Silvercorp sees today’s unprecedented market volatility as one ripe with opportunities to grow its business in the long term.

Sounds like a great story, doesn’t it? So why does the chart look like this?

Why did the share price drop from $15.30 on April 8, 2011, to a low of $6.20 on September 13, 2011? Obviously the decline in the silver price played a part, but the bigger reason is allegations of fraud by some determined short sellers.

In early September an anonymous letter was e-mailed around, alleging accounting fraud.

On September 10, 2011 the B.C. Securities Commission announced it was investigating allegations made against Silvercorp Metals Inc. based on an anonymous letter sent to the Vancouver-based company last week. I will reserve comment on the wisdom of a quasi-government agency launching investigations based on anonymous letters.

Then on September 13, 2011 Muddy Waters LLC announced that they were shorting the stock.

In simple terms the allegations are that the amount of silver in the ground, and being mined, is over-stated. Once the short sellers start shorting, down goes the price.

Needles to say, Rui Feng, the CEO, is quite pissed at these allegations, and he’s fighting back. The company has hired KPMG Forensics to do a review, which they assume will prove that no fraud has occurred. They have also invited many analysts on-site to actually see the trucks full of ore, and the milling operations.

So what’s my take?

I believe the short sellers are wrong, and they have handed everyone a great buying opportunity.

So, I’m buying. I started buying this week, and I will continue to buy as the price continues to increase. I assume the 50 day moving average will be breached to the upside shortly, and then the 200 day moving average will be next. I’ll start thinking about selling over $10, but if the price of silver resumes it’s ascent I don’t see why the yearly high over $15 can’t be achieved.

Fasten your seatbelts, and watch the action. A short squeeze is fun to watch, because as the shorts start covering the price can be driven much higher, very quickly.

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