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Analysts react positively to Silvercorp Metals' acquisition of Zhonghe silver project

Published: 01:38 23 Jan 2021 AEDT

Silvercorp Metals Inc -
Roth Capital Partners and Canaccord Genuity put out notes following the news

Silvercorp Metals Inc's (NYSEAMERICAN:SVM) (TSE:SVM) (FRA:S9Y) newly-acquired Zhonghe silver project in Henan province provides the miner with much-needed growth potential for minimal initial investment, says broker Roth Capital Partners, which has repeated a 'Buy' rating and hiked its target price. 

Yesterday, the group reported it had successfully bid for the exploration rights for the asset via an online auction, offering RMB 495 million, or around US$76 million. 

READ: Silvercorp Metals set to expand portfolio in China as it wins online auction for Zhonghe silver project

Silvercorp said it planned to begin drilling at the project in the first quarter of 2021, with work to be completed by 2022.

"If there has been one issue for SVM in recent years, it is that the company has lacked a clear avenue for production growth, in our opinion," said Roth analyst Joe Reagor.

"The addition of this project provides this previously missing growth opportunity, in our view. We estimate the company will spend $8-10 million over the next 18 months drilling the project and will then look to advance it towards development."

The analyst also notes its proximity to the miner's Ying mill, which could allow the company to develop it as a satellite project initially.

Under the terms of the auction, Silvercorp must make an upfront payment of $15.2 million, or 20% of the purchase price of $76 million. The remaining 80% is payable on an annual basis once a mining license has been granted.

The Roth analyst noted that valuing Zhonghe at this early stage was difficult, but believes Silvercorp would "not have committed to such an aggressive drill program unless it believed the project could host a minimum of 10-20 million ounces of silver".

The broker has assigned a value of $50 million to the project as an initial resource estimate is awaited, driving an increase of $0.07 per share to its discounted cash flow (DCF) valuation.

"We also updated for the recent increase in our silver price forecast. As a result, we are increasing our price target to $10 and reiterating our 'Buy' rating," it said. The previous target was $9.50.

Broker Canaccord also described the acquisition of the Zhonghe rights as "another smart transaction by SVM management". It repeated a 'Buy' stance and its C$11 price target on the stock.

Shares in Silvercorp closed yesterday in New York at US$5.98 each. In Toronto, they finished at C$7.54 each.

Contact the author at giles@proactiveinvestors.com

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