The World’s Most Profitable Silver Stock

Everyone knows that silver races far ahead of gold in a bull market.

But relatively few know that one of the best ways to play this phenomenon is with Silvercorp Metals (SVM.TO; SVM.NYSE MKT) — the company that multiplied 28 times in value
the last time gold and silver took off.

…And now it could be on the move once again.

By Brien Lundin

’m the editor of Gold Newsletter — the oldest precious metals advisory in the world — and a die-hard gold bull.

So you’d never expect me to say “don’t buy gold.”

But that’s precisely what I’m doing now. Because if you’re going to buy gold…then you need to buy silver.

It’s easy to see why: Silver moves along the same general trend-line as gold — up or down — and for the same reasons. But it moves much more quickly and further than gold.

Essentially, silver is like an option play on gold, leveraging the yellow metal’s moves considerably. Sometimes the leverage is nothing short of spectacular.

Case in point: Silvercorp Metals (SVM.TO; SVM.NYSE MKT).

I initially recommended Silvercorp (then called SKN Resources) to my readers at C$0.53 a share. Over the next few years, investors who heeded my advice saw their money gain a jaw-dropping 2,787% — multiplying more than 28 times in price — as the company rode the silver bull market to a peak price of C$15.30.

It’s not every day that you get a 28-for-one stock winner. And I’m not going to predict that this is going to happen again.

But the fact is, with silver now moving higher once again, Silvercorp has all the elements in place to continue its “Silver Streak.” This is a company that:

• Produced 6.5 million ounces of silver in its 2017 fiscal year…
• Has produced more than 50 million ounces of silver since 2006…
• Is generating cash at a record pace in its most recent quarter…
• Controls one of the highest-grade silver mines in the world…
• Enjoys unparalleled profitability, thanks both to that rich silver ore and substantial lead and zinc credits…
• Boasts decades-worth of silver resources based on current production (and their resources continue to grow)…
• Is one of the lowest-cost, highest-margin primary silver producers in the world — its cash costs per ounce of silver are often negative.

All these factors position Silvercorp perfectly to again generate massive profits as silver prices rise. And, as I’ll show you in a minute, the silver market looks ready to cooperate in the weeks just ahead.

But first, let me tell you how my readers made fortunes — and you have the opportunity now in front of you — thanks to a lucky meeting I had 14 years ago….

A Fortuitous Meeting
With Rui Feng

To give my readers my best recommendations for ways to play the metals markets, I go to a fair number of industry conferences every year (in addition to hosting my own, the New Orleans Investment Conference, each fall).

I’ve heard thousands of mining company pitches over the years. And while I’m always willing to listen to a story, I set the bar very high for companies that I eventually recommend to my readers in Gold Newsletter.

It was at one of the mining investment conferences back in 2003 that Silvercorp Metals’ president and CEO Rui Feng collared me as I was walking by his booth. The mood on the conference floor at the time was still relatively sedate, as the boom years of the bull market for precious metals had yet to kick into high gear.

In truth, I almost begged off listening to Rui’s story, as it was toward the tail end of the conference, and I was satisfied that I had enough ideas from which to cull new recommendations.

But I knew Rui well. Not only smart (he’s a Ph. D. in geology), he was never one to steer me wrong or feed me a line. Moreover, he had extensive contacts in China — a country rich in minerals, but one that was notoriously difficult for foreign capital to access.

In short, Rui had a story about how to make money in China, and I figured if anyone could crack the code, it would be him.

At the time, Silvercorp was operating under the name SKN Resources. But Rui was insistent that I give the company a closer look. He’d just gained control of a silver project in China, and began to excitedly go over their recent sampling results and mine plan.

The silver grades were nearly unbelievable — sometimes over 1,000 grams per tonne of ore — and the ore blocks were wide and extensive. Frankly, the numbers and projections were stunning.

It all sounded a little too good to be true at the time, but when I made it back to the office, I did my due diligence and decided to recommend the company to my Gold Newsletter readers at C$0.53 a share.

That conversation with Rui back in 2003 would prove to be one of the most lucrative of my career, both for my readers and for me personally. By the time silver reached its most recent peak in 2011, Silvercorp’s share price had multiplied nearly 29 times over to C$15.30!

Sure, the silver price was rising. But why did Silvercorp outperform silver to such an amazing degree?

As you’ll see, it’s because this company controls one of the richest and most profitable silver mines in the world.

I’ll tell you that fascinating story in a moment. But first, let’s look at why silver is poised to break out to the upside once again….

Silver Poised To Soar Once Again

Because the silver market tends to move in sympathy with gold, we need to take a step back and look at what’s driven the gold market over the past 15 years and what’s likely to drive it going forward.

Simply put, gold’s been rising thanks to an unprecedented degree of currency and debt creation…and the ultra-low interest rates that are part and parcel of this policy.

As you’ll remember, Fed policy turned decidedly dovish in response to the Tech Wreck at the turn of this century and the terrorist attacks of 9/11. Then came the credit crisis of 2008 and the Great Recession…and the easy-money policies were taken to levels never seen before.

The Fed and other central banks drove interest rates to zero and below while pursuing quantitative easing with wild abandon. As a flood of liquidity gushed into the markets, gold and silver, along with mining stocks, soared as investors expected inflation to take off.

But the expected price inflation never came. Instead, it was held captive inside Wall Street and the financial markets. And when the Fed began to make noises about cutting back QE and “normalizing” interest rates in 2011, metals prices began to fall.

What followed was a painful four-year bear market in gold and silver, as traders kept selling the metals in anticipation of the Fed’s first rate hike.

But then a funny thing happened: When the Fed finally raised rates for the first time in December of 2015, gold and silver began to take off.

Because investors realized that the Fed would never raise rates faster than inflation. Thus, “real” interest rates (rates adjusted for inflation) would remain negative.

Low real interest rates are bullish for gold and silver. Negative real rates are even more so.

And here’s the deal: Because of the monstrously large Federal debt, the Fed will never be able to “normalize” interest rates again. At $20 trillion and growing rapidly, the costs of servicing the Federal debt at historically normal interest rates of 4%, 5% or 6% would eat up most of the annual budget.

The American public is never going to accept sending most of our money to our lenders like China and Europe before spending a dime on Social Security, Medicare or national defense.

So interest rates will never be “normal” again. In fact, they’ll remain at ultra-low levels…supporting the prices of gold and silver…for years and years to come.

Even the St. Louis Federal Reserve Bank is predicting negative interest rates through 2019!

This is the primary reason why gold and silver are headed higher over the long term. But a Trump administration that supports a weaker dollar and low interest rates is also certainly a big help too.

The question then becomes: How do investors like you and I play the next big surge in gold and silver?

The answer, as in past bull markets, is to leverage gold with silver…and then leverage silver with the best silver mining stocks.

The Leveraged Way To Play Silver Bull Markets

So if silver provides leverage to gold — rising more quickly than the yellow metal in a bull market — how do silver mining stocks provide even greater leverage?

First off, silver miners simply make more money when silver prices rise. Sometimes a lot more.

That’s because, once their costs are covered, every single cent rise in the price of silver is pure profit. It goes straight to the bottom line.

But there’s another reason why these silver miners can rocket higher as silver rises: The law of supply and demand.

You see, most of the world’s silver comes as a by-product of copper, zinc and gold operations. As a result, there are relatively few companies (and mines) that produce silver as their primary metal product.

When silver takes off, the mainstream investment crowd pours into the sector, looking for any way to maximize returns. In this environment, the demand for primary silver producers greatly exceeds the available number of viable investment opportunities.

The result, as my friend Doug Casey famously put it long ago, “It’s like trying to force the contents of the Hoover Dam through a garden hose.”

That means extraordinary gains for gold and silver bugs with the foresight to build positions in primary silver producers before the rest of the market comes galloping in.

The profits that primary silver production stories spun out for investors in the 2000s and the 2010s testifies to the wisdom of investing in this asset class.

And while the majority of the primary silver producers that have been Gold Newsletter recommendations during this period have delivered multi-bagger returns, almost none have matched Silvercorp Metals’ tax-bracket-changing performance.

Silvercorp Leads the Pack

The reason Silvercorp has outshone its competitors is demonstrated well in the chart below.

With a gross margin of 54% for its Fiscal Year 2017, not only is Silvercorp the highest margin producer of its peers, but it is producing silver at a negative cash cost of $3.03/ounce, net of lead and zinc credits.

That’s right: Silvercorp is actually being paid to produce silver, once you account for the lead and zinc value.

Yet Silvercorp still gets the majority of its revenue from silver production, making it a go-to silver play.

The news gets even better in Silvercorp’s most recent quarter. The company averaged a cash cost of negative $3.65 per ounce during that period. That netted out to a gross profit margin of 60% for the quarter — substantially beating every one of its competitors in the sector.

Equally as important, as the graph on the right shows, Silvercorp is the lowest cost producer based on all-in sustaining costs, a number which adds in all the capital expenditures for mining operations to the cash costs. The company’s next closest competitor has AISC more than double Silvercorp’s AISC of $3.82.

Silvercorp’s exceptional profitability is explained by two factors, both related to the ore it is mining at its flagship Ying Mining Complex in China’s Henan Province.

First, the silver the company is mining at Ying is very high-grade. As I said at the outset, silver head-grades (the grade of the ore sent to the mill) have exceeded 1,000 g/t in some cases. Over the last four quarters, they have averaged more than 300 g/t. Looking ahead to FY 2018, Silvercorp expects Ying to produce average head grades of 260 g/t silver.

But rich silver content isn’t the only reason Ying and Silvercorp are so profitable. Another key reason is the rich lead and zinc mineralization contained within Ying’s ore. In its 2017 fiscal year, Ying produced 69.3 million pounds of lead and zinc to go with 5.9 million ounces of silver.

The company produced 6.5 million ounces of silver in its FY 2017 (including 0.6 million ounces from its GC Mine) and estimates it will produce 5.7 million ounces of silver for its full FY 2018. It anticipates producing 81.4 million pounds of lead and zinc during that period as well.

As you’ll see in a moment, that substantial lead and zinc production does more than just lower Silvercorp’s cash costs and AISC, it provides solid downside protection for investors as well.

But first, let’s spend some time reviewing the company’s impressive silver resource.

A Massive Resource

One thing I’ve always admired about Silvercorp is the hurry it was in to get into production and take advantage of rising metals prices. Even as tunneling and drilling were generating uber-high-grade silver-lead-zinc mineralization in the mid-2000s, the company was already moving toward monetizing that ore.

As the chart below indicates, the company ramped up its production profile quickly, and has already generated 50 million ounces of silver to date.That doesn’t factor in the 752 million pounds of lead and zinc the company has generated during that period.

It all adds up to a massive resource, one that Silvercorp has continued to grow with an ongoing, aggressive drilling and development program. Since 2004, the company has conducted more than a million meters of underground and surface drilling at Ying.

It’s an impressive body of work, and it has translated into decades of mine life. The latest summary of Silvercorp’s metals reserves (inclusive of both Ying and GC) stand at 115.3 million ounces of silver, 523,060 tonnes of lead and 295,990 tonnes of zinc.

That’s one of the largest and richest silver reserves that you’ll find in any junior mining company.

And that’s just the reserves, opening the measurement up wider to the measured, indicated and inferred resource categories yields totals of 267 million ounces of silver, 1.25 million tonnes of lead and 776,800 tonnes of zinc.

Better still, management plans to stay aggressive on the exploration front in FY 2018. The company is forecasting a budget of $18.0 million for its Ying and GC operations during this fiscal year, a budget focused primarily on Ying, which will see 66,000 meters of the 66,300 meters of drilling planned for the two projects.

What these impressive numbers tell you is that Silvercorp is here to stay. With almost $100 million in the treasury and operations that are generating cash at an impressive clip, Silvercorp will not only be in operation for the foreseeable future…it will also be one of the most strongest companies in the industry.

Which leads me to the company’s next big selling point…

Your Downside Is Well-Protected

Well-positioned silver miners like Silvercorp offer the kind of leverage to metals prices that reminds us of options.

But the problem with options is that your downside is very much exposed. In fact, you could lose your entire investment if the market moves against you.

And while the junior mining sector certainly comes with its own set of risks, the advantage of an investment in Silvercorp is that a number of very powerful factors work to protect your downside.

First, the massive lead and zinc credits that contribute to Silvercorp’s low cost profile also give you upside potential as these base metals rise.

And that’s precisely what’s been happening over the past year. In fact, zinc is one of the hottest metals plays out there, and Silvercorp’s tremendous zinc production remains largely unrecognized in the market.

I’m confident that’s going to change, very soon, as investors scour the sector for undervalued zinc plays.

But let’s consider the downside: Because of Silvercorp’s ultra-low production costs, the silver price would have to drop more than $10 from current levels before the company would risk losing money on silver production.

Whatever your view of the metals, the idea that silver would crater to that extent — which would be far below the production costs of virtually every other silver miner — seems pretty far-fetched.

As I noted earlier, low-to-negative interest rates for as far as the eye can see virtually guarantee much higher gold and silver prices.

Still, it’s nice to know that Silvercorp is in such a plum position. It can make even more impressive profits in the silver bull market I see ahead…and stands to weather virtually any sector downturn you could dream up.

Moreover, the company offers investors something rare in junior mining speculation — a dividend. While currently modest, this C$0.02 per share quarterly dividend still pays us more than we’d get from putting our money in our local bank.

In short, Silvercorp Metals offers investors that ideal combination of upside potential and downside protection, the chance to significantly grow your wealth while enjoying the relative safety of a large resource base spread among both precious and base metals.

Another Multi-Bagger Performance
In The Making?

I’ve been covering precious metals and mining stocks for well over three decades. And I can tell you this: In the last bull run, Silvercorp posted one of the most explosively profitable performances I’ve ever seen.

My readers in Gold Newsletter multiplied their money as much as 28 times over. I was one of the investors who reaped these windfall profits, and I can tell you they were life-changing.

I’m writing you now to say that all the pieces are in place for yet another money-multiplying run in the Silvercorp.

• It is operating at a world-class level of profitability.
• It’s destined to generate ever larger profits and cash flows on any significant rise in silver prices.
• It is mining ore of exceptionally high-grade and producing significant lead and zinc quantities that provide a generous cost cushion.
• It is the world’s most profitable primary silver producer, making it the pick of a very small litter when it comes to silver equity investing.

It would be foolish to count on another 28-bagger…but it would also be foolish to say this company won’t multiply in value when and if silver prices rise to where we expect.

In the meantime, all the pieces are in place for a strong rebound in silver over the weeks just ahead.

In light of this, buying Silvercorp at today’s relatively low levels…before silver catches fire again…may be one of the best investment decisions we could make this year.