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Silvercorp Metals Stock Is my Top Pick for the High-Inflation Environment. (NYSE:SVM).

Silvercorp Metals Stock Is my Top Pick for the High-Inflation Environment. (NYSE:SVM).

United States, Rising inflation. Bar chart with arrow upward and the word Inflation as symbol for increasing inflation.

United States, Rising inflation. Bar chart with arrow upward and the word Inflation as symbol for increasing inflation.

Torsten Asmus/iStock via Getty Images

Introduction

We are currently experiencing the highest level of inflation in decades. The numbers look alarming. even worseIf you use the 1980 methodology to calculate the inflation rate, it is 19.5%. My popularity is increasingFriends ask me how to protect their savings in these turbulent times. My usual answer is to use treasury inflation protected securities (OTCPK:TIPS). Investors in the stock markets are now wondering how to improve their portfolios’ performance under this high-inflationary environment. I’ve been looking at inflation data over the past century and silver is my top pick. Silvercorp Metals (NYSE) would be my top pick if I had to choose from this sector. SVM). Let’s take a look.

Performance of different asset classes during periods when there is high inflation

Since World War II, there were 8 inflationary regimes that existed in the USA. The average annual inflation was above 5%. It has been extensively researched on the performance of different assets. The best publication I have read so far is a 2021 research by researchers from Man Group (OTC-MNGPF) titled “The Best Strategies For Inflationary Times”. It’s available for download Here.

The Best Strategies for Inflationary Times study

The Best Strategies for Inflationary Times

As you can see, most of these inflationary regimes were followed up by a recession. Many economists fear that we may be heading towards stagflation. Let’s get to the point. Where should investors invest their money? It is complicated because so many factors are at play. I like telling my friends that making economic predictions is a lot like forecasting the weather. The chart below shows that traded commodities have a strong track record in high-inflation environments. They have generated positive real return during all 8 US inflationary regimes. They have an annualized real returns of 14%. However, commodity prices are at an all-time high and many analysts believe that this is due to the soaring prices of commodities.

Asset prices during periods of high inflation

The Best Strategies for Inflationary Times

Stocks and realty are both at record highs right now, and historically have been poor inflation hedges. The annualized real returns on U.S. stocks were -7% on average, and real estate had negative real returns under 8 inflationary regimes. If you’re considering a classic 60-40 equity-bond portfolio, the annualized real return is 6%.

Asset investment strategy performance during periods of high inflation

The Best Strategies for Inflationary Times

You might think that there are new asset types that could protect you from inflation such as cryptocurrencies. The price of Bitcoin (BTCUSD) has lost 14.5% since 2022, and it seems to be closely linked with the US stock markets. This could make cryptocurrencies a risk-on investment rather than a store value. Many consider gold a traditional store-of-value, but it has had a troubled past in high inflation environments. It has a 13% annualized return during the 8 inflationary regimes that the USA had, but it fell 41% during Reagan’s Boom. Precious metals and silver also suffered during this period. Nevertheless, all three asset classes performed well during the Iranian Revolution.

Silver and gold performance during periods of high inflation

The Best Strategies for Inflationary Times

What am I trying to accomplish? It is crucial to identify the key factors that drive an inflationary regime to be able to predict the performance of an asset class. There are many moving parts, but most analysts agree that strong economic activity after lifting COVID-19 limitations, supply chain issues and the Russian invasion of Ukraine are the main causes of today’s high inflation rates around the world. Quantitative easing, record money printing by global central bank, and record money printing are just a few of the reasons. This is why I believe that silver and gold will perform well in the coming years. Why did I mention that silver is my pick in the introduction and not gold? Because I believe the fundamentals of silver are better at the moment. According to DataThe Silver Institute reports that silver demand will surpass 1.112 billion ounces by 2022, thanks to strong industrial production. With the expected increase in supply of 7% to 1.092 Billion ounces, this could be our first structural deficit since 2015. This brings us to Silvercorp Metals

Why Silvercorp Metals has been my top stock pick in the current high-inflation environment

I used to do a weekly series called “Best drill intercepts in the Metals Mining Sector” on SA. One thing that I noticed was that exploration-stage mining firms with exciting projects tends to do well when the metal they are digging for heats up. However, they often need capital increases to keep the drills afloat. This can often lead to stock dilution if the price of the metal crashes or their projects stall. How about silver producers? About two-thirds (or three-quarters) of silver is produced as a coproduct of lead, zinc and copper. Few mining companies generate more than 50% of their revenue from silver, and majors like Fresnillo(OTCPK:FNLPF), look quite expensive from a net present worth (NAV) perspective.

The ideal investment in silver is a company in the production stage with low all-in sustain costs (AISC). This will allow me to weather low silver prices if I am wrong about the prospects for silver. It should also have a low debt load, a good track record regarding stock dilution, dividends, and a strong financial position. It would be nice to have investments in exploration-stage companies that could increase its NAV significantly if silver price rises. Silvercorp Metals is the only silver mining company I have found that meets all of these criteria.

The company also owns the Ying Mining District, GC Mine silver projects, and the BYP Mine in eastern China.

Silvercorp Metals project location

Silvercorp Metals

Silvercorp has not issued any new shares since 2014, and has been organically growing its operations. It currently has $212 million in cash and a $0.0125/share semiannual distribution.

Silvercorp Metals valuation

Silvercorp Metals

Silvercorp expects that FY23 will be its best year with 7.6 million ounces silver production. The AISC are expected to come in at $141.6- $143.5 per ton. It is also one of the most affordable silver producers according to any key economic metric including EV/Reserves and EV/EBITDA.

Silvercorp Metals silver production

Silvercorp Metals

Silvercorp Metals valuation compared to peers

Silvercorp Metals

Silvercorp also owns a 28.3% share in New Pacific Metals (NYSE.NEWP), which has large silver deposits in Bolivia. Silver Sand alone has a measured and indicative resource of 155.9 Million ounces of Silver. There is also a 30,000 m drilling program at Carangas. I believe this company could become a major producer of silver in a few decades. Silvercorps stake is valued as $162.3 million at the time of writing.

New Pacific Metals projects

New Pacific Metals

Silvercorp has $212million in cash, New Pacific Metals holds $162 million, and the average analyst mining NAV for the company is $640 million. Silver miners trade at a premium of 1.2x NAV and Silvercorp should be valued at least $1.1billion. That would be $6.20 per share.

You could argue that China isn’t a good country for mining and that there are regulatory and political risk. If you agree with this assessment, it would be prudent for the company to be valued at a lower level than its peers in the Americas.

Takeaway for Investors

I expect inflation rates to continue to rise around the world in the near future. I believe silver stocks will perform well during this time. This metal is a traditional value store and its price has always performed well in times of high inflation. The fundamentals of 2022 look good as demand is expected surpass supply for first time since 2015. This bodes well to prices.

Silvercorp is one of my favorite silver mining companies. I believe it is among the most efficient and well-run in the world. The company is currently looking cheap, and higher silver prices will likely significantly increase its profits as well the value of its stake at New Pacific Metals.

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