Short sellers have levelled new allegations of impropriety against Silvercorp Metals Inc. , causing the miner's stock to plummet amid rising anxiety around certain companies doing business in China.
An independent research firm that focuses on public companies operating in China alleges Vancouver-based Silvercorp overstated its production, inflated the grade of silver it mines and failed to disclose that its largest customer is a related party.
The report released Tuesday by the firm, which goes by the name Alfred Little, said provincial mining reports contradict Silvercorp's resource and production estimates at its Ying mine, and notes independent geologists haven't visited Silvercorp's flagship Ying mine in Henan province in three years, calling into question the accuracy of its data.
Silvercorp is the second Toronto-listed company in recent months with operations in China to be hit by allegations of fraud following a report this summer from short-seller Carson Block of Muddy Waters, which accused Chinese forestry firm Sino-Forest Corp. of accounting fraud.
The Alfred Little report is strikingly similar in tone and in some of its allegations to the Muddy Waters report, which has led to a halt in trading of Sino-Forest shares as regulators cite evidence of fraud. The Ontario Securities Commission is looking into allegations that Sino-Forest may have misrepresented some of its revenue and exaggerated some of its timber holdings.
The company's corporate secretary, Lorne Waldman, condemned the report before investors at the Rodman & Renshaw conference in New York on Tuesday.
"Ours is about as clean and as simple of a business, as you can get," Mr. Waldman said. "I really encourage everybody, find out the truth for themselves. This is an exceptional Canadian junior exploration success story - a company that was one of those lottery ticket companies that you see out there, but made real, and now somebody is trying to spread lies about it. Don't believe them, find out for yourself and act accordingly."
The company has denied allegations of a $1.3-billion accounting fraud sent in an anonymous letter dated Aug. 29, some of which are similar to those in the second report, including the discrepancies between the Chinese resource filings and U.S. filings.
Allegations against Chinese firms targeted by short sellers have wiped billions from the market value of the companies. Silvercorp's market capitalization has dropped to $1-billion from about $2.7-billion at its peak. Shares of Silvercorp, already depressed by the first set of fraud allegations released earlier this month, plunged 20 per cent to $6.20 on the Toronto Stock Exchange on Tuesday. The shares have fallen 60 per cent from its record high of $15.58 in April when silver was at a record.
Silvercorp has a number of big-name investors, including such Canadian funds as the Canada Pension Plan, the Public Sector Pension Plan, and the Alberta Investment Management Corp, according to Bloomberg. Alfred Little acknowledged the report's contributors have shorted Silvercorp stock before the report was posted on its website and circulated to subscribers on Tuesday.
Silvercorp went public with the anonymous letter on Sept. 2 and addressed the financial discrepancies by posting links on it website to a variety of financial reports and statements, including filings with Chinese authorities.
Chief executive officer Rui Feng stated then that the allegations in the letter amounted to a "manipulative scheme" that is "baseless and which depresses our share price and harms our shareholders."
The company is co-operating with police and regulators now investigation the letter. The British Columbia Securities Commission made the rare move of confirming its investigation last week of both the letter and the allegations in it.
On Tuesday, a BCSC official said it will include the new Alfred Little report in its investigation, and that it could take months to complete its work given the geographic distance of where Silvercorp's operations are and the language barrier.
The Alfred Little report says contributors started looking into Silvercorp earlier this summer, including hiring researchers to monitor the volume of trucks delivering ore to Silvercorp's mills and the testing of mined material that fell off trucks along the route from the ferry dock.
To conduct its investigation, Alfred Little hired various consultants, some of which also worked on reports it has done on other Chinese companies such as Puda Coal. In the spring, Alfred Little published a report alleging the company's chairman had misappropriated the company's assets. Puda Coal recently confirmed allegations that its chairman transferred ownership of its majority-owned Chinese unit to himself in September 2009 without seeking a formal shareholders' approval.
With Silvercorp, researchers made multiple visits to the Ying mine province and found the ore grade was much lower than the company reported in U.S. filings.
"Geologically the information found for Silvercorp projects suggests varied reporting, inconsistent reserve numbers, high labour, numerous challenges and not easy to build a large resource," the report states.
Alfred Little also alleges Silvercorp's latest 43-101s, the technical reports intended to independently assess the company's silver reserves, were likely based on earlier reports, rather than new information because Silvercorp's own external geologists have not visited the company's main mine since 2008.
The report also alleges that Silvercorp failed to disclose that its largest customer is a related party and that its acquisition of Yangtze Gold in 2008 gave a relative of Silvercorp's chairman and chief executive officer a 1,500 per cent gain on capital that was invested for only six months.
Silvercorp's Mr. Waldman said the new report raises questions about related party transactions that are separate from the allegations of a $1.3-billion fraud in the initial anonymous letter.
"One of them they are pointing out is that our CEO, rather than taking his salary as employment income, takes it through a consulting company. But that's fully disclosed. That's not a crime, but it is being brought up to try to give merit to false allegations based on fabricated documents and that's a crime," he told investors in New York on Tuesday.
Mr. Block of Muddy Waters announced Tuesday on Twitter that he was short Silvercorp, and posted a link to the Alfred Little report.
In an interview, Mr. Block said he's had an eye on the company and was particularly wary of an alleged related-party transaction when Silvercorp bought Yangtze Gold.
"It seems there are a number of people looking at the company," said Mr. Block.
-With a report from David Ebner