Monday, December 31, 2012

Silvercorp (SVM) Questions Remain

Silvercorp (SVM / SVM.TO) was under a cloud for some time due to questions about its accounting practices.  Those questions should have been settled in late 2011 but I'm still concerned given some recent news. Silvercorp changed their auditors, ostensibly to avoid higher fees.  They are also the target of a class action lawsuit, filed today, for the period in which their financial information was under scrutiny.  These two developments would mean little for most normal companies, but in the context of Silvercorp's past they give me pause.

Silvercorp's fundamentals look impressive.  Their FCF is positive and they are free of long-term debt.  Their EPS growth and ROE are both strong.  They even pay a dividend.  So what's not to like about a mining company run by geologists?  I can't get the accounting questions out of my mind.  I also can't reconcile how they continue to report extremely high grades of silver at several projects.  I swore off China exposure in 2012 and I'm staying away from it in 2013.

Full disclosure:  No position in Silvercorp at this time.