BUSINESS
10/24/2011 03:09 EDT | Updated 12/24/2011 05:12 EST

Silvercorp says investigation finds its accounting, finances are accurate

Shares of Silvercorp Metals Inc. gained more than 15 per cent Monday after a forensic auditor's report backed the TSX-traded Chinese miner's financial statements which had been called into question.

Silvercorp (TSX:SVM) chairman and chief executive Rui Feng said the report clears the company, whose accounting practices had been questioned by anonymous short sellers.

"All the cash is there. Our revenues are there ... all the financial numbers are good," Feng said in an interview from Hong Kong.

The Vancouver-based miner said the report by KPMG Forensic Inc. confirmed that its cash and short-term investment balances reported Dec. 31, 2010, and March 31 of this year "were substantially correct."

KPMG had been hired by a special committee of the company's board to look into the accusations.

Feng estimated that investigating the anonymous allegations has cost the company at least $2 million so far.

"That's not fair for our investors," he said, noting that those making the allegations have still not come forward.

Feng said dealing with the investigation has distracted him and the company from its core business of mining silver.

"It has been hard for me to focus on my job which is producing more money for shareholders," he said.

"I've had to spend all my time dealing with these allegations and dealing with regulators."

Silvercorp is China's largest primary silver producer, with about 3,000 employees, and four silver-lead-zinc mines at the Ying Mining Camp in the Henan province of northeastern China. In Canada, the company is developing a silver project in northern British Columbia.

The company said the full report by the forensic accountant will be delivered to the British Columbia Securities Commission, the Toronto Stock Exchange and the New York Stock Exchange.

The B.C. Securities Commission declined to comment Monday other than to say it appreciated the company's continued co-operation.

Silvercorp shares have been under pressure since an anonymous letter dated Aug. 29 and addressed to the Ontario Securities Commission, the company's auditors and various media outlets accused the company of a potential $1.3-billion accounting fraud.

Shares in the company closed up $1.42, or 17 per cent, at $9.60 on the Toronto Stock Exchange. The stock had traded for $8.23 before Silvercorp announced on Sept. 2 that it had received the letter.

BMO Capital Markets analyst Andrew Kaip had a $13 price target on Silvercorp shares.

"BMO Research reiterates an outperform (speculative) rating for shares of Silvercorp," Kaip wrote in a report Monday.

The allegations followed a scandal at Chinese forestry company Sino-Forest (TSX:TRE), which has been accused of exaggerating its sales and assets.

Sino-Forest, once the most valuable forestry company listed on the Toronto Stock Exchange, came under regulatory scrutiny after short-seller Muddy Waters Research alleged the company was a fraud.

The Ontario Securities Commission has since filed a cease trade order against the company and Sino-Forest chief executive Allan Chan has resigned as chairman and chief executive, but remains founding chairman emeritus.

None of the allegations have been proved in court.

The review at Silvercorp by KPMG included staff from the accounting firm visiting banks and local tax authorities in China to verify information.

The firm sent employees to 10 cities in five Chinese provinces to obtain information covering the eight Chinese subsidiaries including in the review.

The KPMG report did not address the allegations that questioned the ore grade and production at the company's mines.

However Feng said: "If there are no reserves there, then where did our revenue come from."

When the allegations against Silvercorp first surfaced, the company responded by posting more than 90 pages of accounting and other financial information on its website to disprove the allegations.

Silvercorp also noted an increase in the short position against the stock. Short sellers profit when the price of a stock falls.

A second anonymous letter raised questions about the company's production at its mines in China, ore grades and sales to related parties. The company pointed to taxes and dividends paid to dispute those allegations.

None of the allegations against the company have been proven.

Silvercorp Metals has filed a lawsuit in New York against several companies and individuals for spreading lies about the company as part of a short-sell manipulation scheme.

The company has accused Chinastockwatch.com, Jerry Katz, Alfredlittle.com, Alfred Little, Simon Moore, and several "John Doe" defendants of spreading "false, defamatory and fraudulent" information about the company.

Feng said something must be done to identify those who make anonymous allegations.

"We need to stop this nonsense by market manipulators from hurting other people," he said.