Building on success: Silvercorp’s acquisition of Adventus

By Francois Kalos

Background

Silvercorp Metals (NYSE-A:SVM; TSX:SVM) is a Canadian silver-focused mining company with a strong track record of profit generation and production growth. Over the past two decades, Silvercorp has established its presence in China by revitalizing underdeveloped and overlooked mineral deposits and building efficient mines and processing facilities through innovative techniques and expertise. Fast forward to today, Silvercorp is strategically positioning itself as a geographically diversified green metals company with its recently announced acquisition of Adventus Mining.

Growth Strategy

Silvercorp’s growth strategy consists of three key elements:

• Organic growth from existing operations.
• Strategic investments and incubation of exploration companies including its 27.4% interest in New Pacific Metals.
• Acquisitions of high-margin, ready-to-build projects with reasonable capital costs and development timelines, such as Adventus, an exploration company operating in Ecuador, a mining-friendly jurisdiction.

Over the years, Silvercorp’s M&A team has worked diligently to assess complementary mining assets globally that hold hidden value. Adventus is the latest prospect to receive an offer from Silvercorp.

Why Adventus?

Adventus presents an attractive acquisition opportunity due in large part to its two advanced mining assets: the permitted, ready-to-build El Domo open pit project and the Condor project, which has completed a Preliminary Economic Assessment (PEA).

Adventus owns a 75% interest in El Domo, which was the subject of a feasibility study published in 2021. Key highlights from the study include:

• Proven and probable mineral reserves of 6.5 million tonnes at 1.93% Cu, 2.52 g/t Au, 2.49% Zn, 45.7 g/t Ag and 0.25% Pb.
• A 10-year mine life with average annual production of 10,463 tpa copper and 21,390 tpa copper equivalent over the life of the mine.
• Production C1 cash cost of US$1.14/lb and AISC of US$1.26/lb copper equivalent.
• Initial capital cost (including refundable VAT) of US$248 million.
• Payback period of 2.6 years, after-tax IRR of 32% and NPV8% of US$259 million, utilizing US$3.50/lb Cu, US$1,700/oz Au, US$1.20/lb Zn, US$23.00/oz Ag and US$0.95/lb Pb.

In addition to these attractive operating metrics and compelling economic projections, Adventus checks all the boxes (and more) when it comes to Silvercorp’s stringent investment criteria:

• Diversification: The El Domo project provides immediate asset, geographic, and metal diversification, with increased exposure to gold and metals that are key to a low carbon future.
• Secured Permits: Key permits for El Domo are already in place,including the environmental license, tailings storage approval, and investment protection agreement with the Government of Ecuador.
• Secured Funding: The El Domo project is fully funded through an existing US$175.5 million stream with Wheaton Precious Metals, combined with Silvercorp’s existing cash and cash equivalents of approximately US$185 million.
• Accretive Transaction: The transaction is accretive on a net asset value per share basis as well as on a mineral reserves and mineral resources basis with pro forma results suggesting +118% increase in precious metals M&I resources and +85% increase in base metals M&I resources.
• Re-rating Opportunity: There is a compelling re-rating opportunity versus peers, as the pro forma Silvercorp is expected to have a more attractive cost and growth profile.
• Upside Potential: Adventus’ PEA stage Condor mining asset offers additional upside potential, with a projected 12-year mine life with average annual payable production of 187,000 ounces of gold and 758,000 ounces of silver at a by-product AISC of US$839/oz over the life of the mine.

Dr. Feng Rui, Silvercorp’s CEO, insightfully summarized the acquisition in a recent press release saying, “This transaction will create a new globally diversified green metals producer. It presents the opportunity for us to leverage our technical expertise and strong balance sheet to unlock value for all shareholders by constructing the El Domo project.”

Silvercorp’s Solid Track Record as an Explorer and Developer

Silvercorp’s track record of efficiently developing mining projects from the ground up is exemplified through its achievements in China. Its successful trajectory is set to continue in Ecuador.

According to a survey by S&P Global Market Intelligence, the average time from discovery to commercial production of the 127 metal mines discovered in the world since 1980 is 15.7 years, with a range of six to 32 years. Despite these industry standards, Silvercorp’s SGX silver-lead-zinc mine within the Ying Mining District transitioned from exploration (2004) to commercial production (2006) in just two years, showcasing exceptional efficiency and precision.

Here’s How They Did it:

SGX, an underground mine, features at least 75 veins within eight major and two minor vein systems that account for over 40% of Ying’s reserve base. The operational success of SGX is rooted in Dr. Feng’s research and demonstration of the Mineralization Rate Prospecting Theory, based on economic geology. The theory advocates that by developing a series of tunnels along the veins, mining experts can statistically assess the mineralization of each vein and perform an economic analysis. This approach, combined with underground and surface drilling, transformed isolated mineralized zones into a cohesive, economically viable ore body, as successfully demonstrated at SGX.

Simultaneously, Dr. Feng implemented Silvercorp’s integrated business model of commercial mineral exploration and development to expedite the production process. In the early stages of exploration, Dr. Feng swiftly arranged for pre-production work such as mine design, shaft excavation, engineering, environmental assessment, and mineral processing testing. Most notably, in 2005, despite having only 300 tons of proven geological reserves, Dr. Feng initiated construction of SGX’s main shaft, a bold yet calculated move that paved the way for rapid production.

The successful application of the Mineralization Rate Prospecting Theory marked a breakthrough in China’s exploration and development landscape, offering a sustainable approach to mining companies and invaluable experience in large-scale mining of narrow vein mineral resources in western Henan Province. It also became a blueprint for all of Silvercorp’s mining assets, collectively yielding over 100 million ounces of silver and 1.3 billion pounds of lead and zinc to date.

Over the course of its 20+ year history, Silvercorp has built eight mines along with three flotation mills, similar in scale to El Domo, with a 1,500 tpd flotation mill expansion currently under construction at Ying. This extensive portfolio underscores the Company’s technical prowess to bring El Domo into production on an accelerated basis.

A key component of Silvercorp’s success is its robust R&D capabilities, marked by continuous investment in cutting-edge technologies, processes, and equipment. Silvercorp’s mining operations also adhere to strict environmental and health and safety practices, as evidenced by the ISO certification of all its operations for environmental management (ISO 14001) and safety management (ISO 45001), alongside a recent A level ESG rating from MCSI.

Conclusion

The acquisition of Adventus signifies a strategic step for Silvercorp towards becoming a growth-focused, geographically diversified, green metals company. By leveraging its technical expertise and financial strength, Silvercorp aims to mitigate risk in projects like El Domo while creating synergies that benefit all stakeholders involved. This proposed acquisition aligns with Silvercorp’s long-term strategy and ultimately positions the Company for continued success in the evolving mining landscape.

For more information about Silvercorp, please visit silvercorpmetals.com/welcome.

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(Top photo of Silvercorp operations at the Ying Mining District. Silvercorp Metals)