FAQ

1)     How does Silvercorp mine silver at a negative cash cost?

Silvercorp's Ying mine is one of the richest silver-lead-zinc mines in the world.  In addition to silver, the mine produces a large quantity of lead and zinc as by-products (53 million pounds of lead and 13 million pounds of zinc in FY2009).  In fact, just under half of the company's revenues is made up from the sale of these by-products.  Due to the low cost jurisdiction in which Silvercorp operates, the money made from the sale of its lead and zinc by-products not only covers the entire cost of mining each tonne of ore but also produces a small profit.  When this profit is applied to the cost of mining silver, we arrive at a negative cash cost.  Essentially, Silvercorp is paid to mine out its silver.

2)     How do we get the rights to mine and take out minerals in China?

China established a Mineral Resource law in 1997 which enabled foreign companies to establish joint ventures with Chinese companies that held exploration licenses in an area of interest (usually this is one of the geological team/brigades that were created by the government to explore the country in the 1980s).  The resulting sino-foreign cooperative joint venture can the secure exploration exploration and mining permits through the completion of geological reports and title appraisals.  Mining permits are issued after reserve calculations are completed by a certified Chinese mining engineering firm.  Other reports required include Environmental Impact Studies, Geological Hazard Studies, Labour Safety Review and Soil & Conservation Reports. 

3)     What are the fundamentals of working in China?

Working in China requires a detailed knowledge of the culture of doing business there.  It is extremely important to be sensitive to the main concerns of the local government and the local communities in the areas that we are interested in.  It is also important for senior management to be on the ground and dealing directly with the local officials so that any potential problems can be nipped in the bud.  It is also important for the company to work within the mining framework and, most importantly, make proper tax payment and adhere to high safety and environmental standards.

4)     Are we concerned about having our projects taken away by the government?

As with any other jurisdiction in the world, there is always the risk.  However, to our knowledge this has not happened to a foreign mining company and no Sino-foreign joint venture has ever been formally denied a mining permit. 

5)     Who are the other silver producers in China?

China is the third largest silver producer in the World and Silvercorp is the largest, yet accounting for 5% of the market share.  Most other producers in China are small operations run by local Chinese companies.  This has actually represented a huge challenge for the Chinese government as it is a monumental task to regulate such an immense number of operations.  This has been why there have been opportunities for Silvercorp to consolidate the mines in the Ying district. 

6)     What is the taxation regime on mining projects?

Companies are given a tax holiday in the first two years of operations.  After that we pay half of the regular income tax rate of 25%, which is 12.5%.  This lasts 3 years and then we are required to pay the full rate.

7)     What are the power issues at your projects?

Power issues are not a unique issue that affects just Silvercorp.  Places like South Africa and even in British Columbia are experiencing very critical shortages which have led to companies shutting down entire operations.  We have been given assurances by the local utility bureau that we will not be experiencing any material shortages.  Also, just at the beginning of September 2008, we had a new power transformer come online which will ensure maximum power supply to our Ying mine.  Silvercorp spent $1.5-million last year to improve power usage, power lines and the construction of this power transformer.  In addition, our operations are extremely simple and do not use up a lot of power.

8)     What is the safety situation at your operations?

Silvercorp has one of the best safety records in the industry.  We have a safety superintendent as well as a team of 20 people who provide contract workers with safety training.  We also have a system of bonuses and penalties in place.  If safety measures are breached, our mine contractors may be fined.  In 2007, a total of four lost-time accidents occurred in a total workforce of over 1,200.  At the peak of operations, we have a total workforce of over 2,000 with no major incidences reported.

9)     How do we plan to grow the company going forward?

Silvercorp plans grow in three ways:

Exploration – there is still a lot of growth potential in our existing deposits as we have not fully drilled off our projects (so far, 24 veins have been delineated around the Ying project but resources have been built up on 18 so far).  In additional, we also see exploration in other parts of China as a way of creating long-term value.

Consolidation – China has thousands of mines being operated by small scale companies with very questionable safety and environmental standards and records.  Many of them are also not paying taxes and this has been something that the Chinese government has been cracking down on.  Our new TLP mine is such an example where it was previously run by Chinese companies that not only did not pay their taxes but failed to take proper safety precautions, which resulted in 11 casualties just last year.  They were stripped of their mining permit, and Silvercorp had the opportunity to bid on the project.

Acquisition – We recently acquired the GC/SMT projects in Guangdong province, which increased our silver resource by 30%.  We will continue to seek new projects to acquire which meet our criteria.  Ideally, we would like to repeat the success of the Ying mine where we were able to start making profits while developing our mine infrastructure.   We are seeking projects where we can see a payback of within a year.

10)     Why do we pay a dividend?  Do we plan on paying the dividend going forward?

Given Silvercorp’s strong balance sheet and high profitability, we believe that it is important to reward our shareholders.  With today’s markets, this dividend is equivalent to a yield of around 2.5%.  It is also a way for us to show our investors that we do not have any problems taking our profits out of China, as some investors have expressed that as a concern.  Silvercorp will continue to pay a dividend so long as it is capable of doing so given its financial position and payment of dividends is made at the discretion of its directors.  There is no set percentage that is paid from profits.

11)  If the company is performing so strong, why are we trading at a much lower PE ratio than our peers?

We believe that there may still be a negative perception of China.  People may still fear that we will get our projects taken from under us.  While that possibility exist as they do anywhere else in the world (take a look at South America, or even Canada), the reality is much different and China has been a great place to work, as long as you understand how to maintain the relationships and work within the framework.

Silvercorp is also still a young company relative to our peers.  While we have only had a 5-year history and a 3-year operating history, some of peers have been around for over a hundred years (Hecla).  Perhaps people still don’t take us seriously just yet, even though we have become extremely profitable in a very short period of time.

An additional point is that we are doing things a bit differently in China.  While most North American companies spend years drilling off a project to build up a resource and then spend time and money putting together scoping studies and bankable feasibility studies to get to proven and probable reserves, Silvercorp – in a very short period of time – has gone directly into production very profitably while not having more than resources in the ground in terms of its technical reports. 

For many analysts, not much value is given to just resources and many of them are not sure of how to give valuation to our projects.  This is something that we are working on…but as you can see from our operating history and balance sheet, our projects are extremely profitable.

12)  Who purchases Silvercorp’s concentrates and at what price?

Silvercorp produces a premium concentrate at its mill, which is located within only 160km from three smelters.  The payable prices for lead and silver range depend on the spot prices on the Shanghai Metal Exchange minus smelter charges.  Based on commodity prices, smelters may choose to charge at a fixed rate or at a percentage of spot metal prices.   In the first quarter of 2009 when prices were low, for example, smelters charged a fixed rate of 0.4RMB per gram of silver, 2,900RMB per tonne for lead and 5,000RMB per tonne for zinc.  However, during the fourth quarter of 2009, when commodity prices recovers, the smelters reverted to charging 15% of the spot price for silver, 17% for lead and 30% for zinc.