Silvercorp in the Hot-Seat

Allegations against Silvercorp, a leading Chinese silver producer, are being investigated by the B.C. Securities Commission.

The British Columbia Securities Commission said on Friday it’s conducting a regulatory investigation into anonymous allegations against Silvercorp Metals (TSX: SVM), a Vancouver-based company with silver mines in China.

The regulator said that certain allegations were made against the company in an anonymous letter dated August 29th, 2011 addressed to the Ontario Securities Commission and various media outlets.

“This is a departure from the BCSC’s usual policy of keeping investigations confidential, but we feel it is necessary in order to conduct a balanced and thorough review to publicly ask the author of the complaint to come forward,’’ said Lang Evans, Director of Enforcement for the BCSC. The news of the investigation came after Silvercorp shares fell 6% on Friday to $8.39. In the past year, the stock has traded between $15.60 and $6.92.

On September 2nd, the company issued a statement saying it had received the anonymous letter which was also addressed to the company’s auditors. The company said the central allegation is that while Silvercorp reported a net profit of US$66 million to the U.S. Securities & Exchange Commission in calendar 2010, financials purportedly available from the Chinese State Administration of Industry and Commerce shows Silvercorp reporting a loss of US$500,000 for calendar 2010.  The letter also alleges that the company’s cash position is grossly overstated.

“This type of manipulative scheme is baseless and which depresses our share price and harms our shareholders,’’ said Silvercorp Chief Executive Officer Rui Feng. Silvercorp noted there has been a dramatic increase in the short position of its shares over the past two months, approximately 23 million, or 13% of the total outstanding shares.

This is not the first case of questionable accounting to hit a Chinese TSX-listed company. On June 8th, 2011, Sino Forest Corporation (TSX:TRE) confirmed that the Ontario Securities Commission opened an investigation concerning the company and the unusual trading activity and volatility associated with the company’s stock in response to a report issued by Muddy Waters Research.

With three projects in Asia’s leading economy, the company reportedly accounts for roughly 5% of the China’s silver output. The BCSC is asking the author of the complaint, or anyone else who may have information related to the allegations, or the identity of the author, to contact them.

CLICK HERE – for our Silver Issue where Silvercorp Metals was profiled in 10 Most Interesting Silver Stocks.

Mike Luft

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