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Silvercorp Metals the latest Canadian company accused of fraud

An anonymous investor claims Silvercorp's numbers don't add up.

Another Canadian commodity company, with operations in China, is being accused of fraud.

Silvercorp Metals Inc. a Vancouver-based company that explores, develops and acquires high-grade silver in China and Canada, distributed a press release on Sept. 2 saying that on Aug. 29 it received an anonymous letter (also sent to the Ontario Securities Commission) claiming there was a “potential $1.3 billion accounting fraud at the company.

The company strongly denies the allegations and says it sent out the press release to be proactive.

The release also mentions that in the past two months, there has been a dramatic increase in the number of its shares that have been shorted—about 23 million.

The anonymous author of the letter claims that his firm was holding short positions and planned to tell the world, through Internet postings, about the fraud.

Here’s what the anonymous letter claims, according to Silvercorp’s press release:

The central allegation is that while Silvercorp reported net profit of US$66 million to the SEC in calendar 2010, financials purportedly available from the Chinese State Administration of Industry and Commerce (SAIC) shows “SVM” reporting a loss of US$0.5 million for calendar 2010. This allegation is false.

2. The letter further alleges that the Company’s cash position is grossly overstated. In fact:

(a) Silvercorp, as at June 30, 2011, had a cash position of $230.5 million—more than all the cash ever raised in the Company’s history. Copies of Silvercorp’s current bank statements (July 31, 2011) are available on the Company’s website. (Attachment D);

(b) Since 2004 Silvercorp has raised in total $202.5 million through equity financings. Over the same period of time it has paid out $40 million in dividends, and has spent $31 million repurchasing its own shares, including $16.5 million in the currently ongoing Normal Course Issuer Bid announced June 17, 2011; and,

(c) The Company has $544.6 million in total assets and no long term debt as at June 30, 2011.

3. The letter also states that the grade of the Company’s deposits is simply “too good to be true” compared to comparable companies. The Company acknowledges that its SGX Mine within its Ying mining district does have some of the highest grades in the industry. As disclosed in its most recent NI 43-101 report measured grades at the SGX Ying mine are 845g/t for silver. The mineral resource estimate for SGX was prepared by Mel Klohn L.P. Geol. of Spokane Valley, Washington, who is a Qualified Person with the firm of B.K Exploration Associates. Details of QA/QC procedures and assay lab information are described in the Technical Report filed on SEDAR under the Company’s profile and available on the Company’s website.

Time will tell if the anonymous tipster’s allegations are correct, but with so many people on edge after the Sino-Forest scandal, there’s no doubt the Canadian investment community will be watching this closely.