Independent audit vindicates Silvercorp – by Brenda Bouw (Globe and Mail – October 25, 2011)

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Silvercorp Metals Inc., the China-focused miner battling allegations of wrongdoing, says an independent audit has cleared its name, but the company won’t claim victory until the anonymous short sellers behind the accusations are punished.

A KPMG Forensics Inc. audit released on Monday vindicates Vancouver-based Silvercorp’s claims that it has not overstated revenues, as alleged in two sets of reports that surfaced last month.

“It confirms our business is real … There is no fraud,” Silvercorp chairman and chief executive officer Rui Feng said in an interview from Hong Kong on Monday.

KPMG was hired by a special committee of the Silvercorp board to investigate the accusations and found its recent cash and short-term investment balances were “substantially correct” and that revenues were not exaggerated.

The findings “support the integrity” of Silvercorp’s accounting system and financial reporting in China and North America, the special committee said. While the review had limitations, including an inability to talk to anonymous accusers, that wasn’t considered to have a big impact on its conclusions.

Silvercorp shares surged more than 20 per cent on the Toronto Stock Exchange on Monday, before ending the day up 17.4 per cent, its biggest one-day gain in more than two years.

Still, Mr. Feng is not calling the report a win given the time and about $2-million it has spent so far fighting the accusations. The have also dealt a severe blow to the company’s stock price and investors that include some Canadian pension funds and large North American mutual funds.

Silvercorp shares plunged by about 30 per cent to below $6 last month as some investors fled, fearing the fallout from allegations that a second Toronto-listed company operating in China had accounting issues.

Earlier this year, short seller Carson Block of research firm Muddy Waters accused forestry firm Sino-Forest Corp. of accounting fraud. Regulators in Ontario have halted trading in Sino-Forest securities, citing evidence of fraud, and are looking into allegations that the company may have misrepresented some of its revenue and exaggerated some of its timber holdings.

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