UPDATE 5-China-focused Silvercorp denies fraud, stock sinks

Fri Sep 2, 2011 3:47pm EDT

* Toronto-listed miner says letter accuses it of fraud

* Silvercorp strongly denies any wrongdoing

* Company vows legal action to recover damages

* Shares drop as much as 16 percent on TSX (Adds investor comment, details on share buyback; updates stock price move)

By Euan Rocha and Julie Gordon

TORONTO, Sept 2 (Reuters) - China-focused miner Silvercorp Metals (SVM.TO) denied anonymous allegations of fraud on Friday, but its stock swooned on fears that charges like those that sank Sino-Forest TRE.TO were claiming another victim.

Shares of the Toronto-listed Silvercorp, which operates silver mines in China, tumbled as much as 16 percent after the company said it had obtained an anonymous letter alleging a $1.3 billion fraud. The shares were among the most active on the Toronto Stock Exchange on far higher than average volume.

Silvercorp strongly denied any wrongdoing and threatened legal action to recover damages, an aggressive response that prompted praise from BMO analyst Andrew Kaip.

"BMO views the company's proactive approach toward disclosure to repudiate allegations of fraud as a positive step," Kaip said in a note to clients. He reiterated his "outperform" rating on the stock.

Silvercorp shares had already fallen more than 35 percent this year, as a slew of accounting scandals triggered a sell-off in stocks of companies listed in North America but active in China.

Big losers include Toronto-listed Sino-Forest, not long ago the largest forestry company listed in Canada, but now facing fraud allegations that the Ontario Securities Commission, Canada's main regulator, believes hold merit. [ID:nN1E77U1JO] [ID:nL4E7JM2B1]

Other companies have faced trading halts, delistings, lawsuits and regulatory probes.

CO SLAMS ALLEGATIONS

Silvercorp said the letter alleged that it reported a net profit in 2010 to North American regulators, while reporting a net loss to Chinese regulators, and that statements about the grade of its ore deposits were "too good to be true."

Silvercorp firmly denied both allegations, said it has noticed a sharp increase in short positions taken out on its shares over the last two months.

Short-sellers like Carson Block, whose initial research report led to a 75 percent drop in Sino-Forest stock, profit by borrowing shares they believe will drop, selling them, buying them later at a lower price to repay the loan and pocketing the difference.

"This type of manipulative scheme is baseless, ... depresses our share price and harms our shareholders," Chief Executive Rui Feng said of the letter, which the company said it obtained on Thursday.

In a statement, Silvercorp said it would pursue all legal options, whether in Canada, the United States, or China, to recover damages incurred as a result of the allegations.

CO BEGINS PROBE

Silvercorp said the letter, dated Aug. 29, was addressed to the Ontario Securities Commission, the company's auditors and to various media outlets.

The author said his firm held a short position in Silvercorp and intended to publicize its concerns through Internet postings, the Silvercorp release added.

Silvercorp said it had not confirmed whether the letter had been sent to all the addresses or whether it had been posted online. But given the threat, the company said it had chosen to respond to the allegations immediately.

The company's top shareholder as of June 30, Royce & Associates, said it does not comment on stocks that it owns. A smaller shareholder, the British Columbia Investment Management Corp, said it was monitoring developments.

"We are aware of the allegations and will be monitoring the developments as new information becomes available," a representative said in an email. The firm owns some 2.3 million shares of Silvercorp, according to Thomson Reuters data.

Silvercorp said it has appointed a panel of independent directors to work with regulators to discover the letter-writer's identity.

Shares of Silvercorp were down more than 12 percent at C$7.21 on Friday afternoon on the Toronto Stock Exchange. The company, which in June announced a share buyback plan aimed at bolstering its share price, said it plans to continue to buying shares in the open market.

As of Aug. 31, the company had bought just over 2 million shares at an average price of C$8.11. Its board has authorized the buyback of up to 10 million shares, or roughly 6 percent of its outstanding shares. The company is scheduled to host its annual shareholder meeting in Vancouver on Sept. 23. ($1=$0.98 Canadian) (Reporting by Julie Gordon and Euan Rocha; editing by Frank McGurty and Janet Guttsman)

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