Silvercorp Metals Inc., the Chinese silver miner accused of fraud in an anonymous letter last month, plunged 20 percent, the most in seven years, after Carson Block’s Muddy Waters LLC said it’s shorting the stock.
Silvercorp shares fell C$1.58 to C$6.20 yesterday on the Toronto Stock Exchange, the biggest decline since Sept. 1, 2004. The shares have dropped 26 percent since the British Columbia Securities Commission announced last week it’s investigating allegations made against the company in the Aug. 29 letter as well as the source of the accusations.
Muddy Waters in June alleged overstated holdings by Sino-Forest Corp., another Chinese company traded in Canada. The research firm said in a Twitter posting yesterday that it’s shorting Silvercorp, linking to a report by Alfredlittle.com, a website that posts research on companies doing business in China. Contributors to the Alfredlittle.com report are also shorting the stock.
“We read the Alfred Little report upon its release, and it supports some concerns we developed when researching Silvercorp,” Block said in an e-mail yesterday. “I’m not able to comment further on Silvercorp at this point.”
Lorne Waldman, a spokesman for Vancouver-based Silvercorp, didn’t respond yesterday to e-mail and telephone requests for comment. An e-mailed request for comment to Alfredlittle.com brought no immediate response.
Shorting a stock involves selling a borrowed security with the expectation that it will decline in value.
Sino-Forest, a Hong Kong- and Mississauga, Ontario-based tree-farm operator in China, fell 67 percent after Muddy Waters alleged it overstated its holdings. Trading in the company has been suspended since Aug. 26 after the Ontario Securities Commission said officers and directors may have engaged in acts they “knew or should have known” perpetuated a fraud.
Deer Consumer Products Inc., a China-based maker of household products that trades on the Nasdaq Stock Market, filed suit against Alfredlittle.com in March, alleging “an orchestrated scheme to manipulate and depress Deer’s stock.” The company said “Alfred Little” is a fictitious figure.
Silvercorp says it’s the largest primary silver producer in China. The anonymous Silvercorp letter alleges it reported a 2010 profit to the U.S. Securities and Exchange Commission while posting a loss for regulators in China, the company said in a Sept. 2 statement. It also said the company’s cash position was overstated.
The investigation by the British Columbia market regulator “is going to be a major undertaking for us,” Lang Evans, the agency’s director of enforcement, said yesterday in a telephone interview, saying he doesn’t expect a quick conclusion. “I’d compare it to renovating your house -- it always takes longer than you expect.”
The provincial agency’s probe will be separate from an investigation by the Integrated Market Enforcement Team, an arm of the Royal Canadian Mounted Police, to avoid tainting any possible criminal charges, said Evans.
Silvercorp has been cooperating, he said.
The company has denied the allegations in the letter, saying its four Chinese subsidiaries taken together had net profit of $73 million. It provided tax and bank statements to prove its profit and cash position.
Silvercorp Chief Executive Officer Rui Feng bought 100,000 shares of the company at an average price of $7.87 a share on Sept. 6, according to Canadian regulatory filings.
“It’s important to fight back,” Feng said Sept. 12 in a telephone interview from New York. “This is a real company with real cash flow and real metals production. The shorts are just playing games.”
The percentage of Silvercorp outstanding shares held by short sellers rose to 14 percent as of Sept. 12, up from 1.9 percent two months ago, according to Data Explorers, a New York-based research firm.