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Allegations of fraud mount against B.C. mining corporation amidst official investigation

A report published on a China-focused investment blog this morning is the second anonymous source in two weeks to accuse one major B.C. silver mining company of cooking its books.

The analysis, published on the blogsite, Alfred Little, accuses Silvercorp Metals Inc., a Vancouver-based company that operates two silver, lead, and zinc mines in China, of grossly inflating the value of its mining output in its reports to Canadian and U.S. regulators.

This most recent set of allegations comes just four days after the British Columbia Securities Commission (BCSC) announced that it was opening an investigation into Silvercorp prompted by allegations of fraud made late last month in an anonymous letter sent to Silvercorp's auditors, Canadian financial regulators, and major news outlets across North America.

The authors of both the Alfred Little report and last month's letter remain anonymous.

Looking at Silvercorp's Yang mine specifically, The Alfred Little report found that the 2010 accounts of output and metal purity that the company filed with North American financial regulators were consistently and significantly higher than those submitted to the Henan Provincial Land & Resource Bureau.

The authors of the report go on to accuse Silvercorp of failing to disclose that it held a 15 per cent ownership stake in one of its biggest customers and of purchasing a gold mining company from the relative of Silvercorp's chairman at an artificially high price.

Though The Tyee was unable to obtain a copy of the anonymously written August 29 letter, The Globe and Mail reports that it makes similar allegations of misrepresentation, estimating a $1.3 billion disparity between the figures reported to North American and Canadian authorities respectively.

Taken together, the report and letter portray a company that deliberately inflated the value of its mine holdings.

"If the allegations are correct, the company would have benefited a huge extent," explains Kin Lo, a professor of accounting at UBC. "In the last financial, Silvercorp issued $115 million of shares and those share prices are influenced a lot by financial information-- particularly the trajectory of growth that the company has been showing."

A spokesperson for Silvercorp was not willing to comment specifically on the details of any of the allegations, but said that the company welcomed the official investigation and was cooperating fully with provincial regulators.

According to Lang Evans, Director of Enforcement at the BCSC, the Alfred Little report will be incorporated into the BCSC investigation along with the allegations made in the August 29 letter.

"We haven't ruled out anything," Evans told The Tyee in a telephone conversation this morning. "Generally, we're looking into both the allegations against the company that relate to their disclosure record, but we're also looking at the bonafides of the complainant."

Given that both major allegations come from anonymous sources, there are concerns the financial interests of the authors could have played a part in their decisions to levy the allegations against the company.

The introduction of the Alfred Little report, for example, acknowledges that "contributors to this report are short [Silvercorp]" -- meaning that they stand to make money from the financial distress of the company.

However, Simon Moore, managing editor of the Alfred Little blog, sees no inherent conflict of interest in both maintaining a financial position against a company .

"Our reports contain evidence from various sources but there is always one underlying factor -- the information is always the truth," Moore wrote in an email to The Tyee. Referring to those who contributed information or research to the report, he continued: "Just as someone deserves to profit from discovering the next Google or Apple, their hard work merits a proper return."

Today, share prices of Silvercorp Metals fell by over 20 per cent.

Conceding that the element of anonymity "adds a level of difficulty to the investigation," Evans at the BCSC said that they would not and do not dismiss such sources out of hand.

Evans went on to say that allegations against Silvercorp did not necessarily suggest a larger of trend of corporate malfeasance among Canada-based companies operating in China specifically or overseas generally.

"I haven't seen anything widespread in B.C. to warrant a review," says Evans. "But investors should consider the possibility of geographic or geopolitical issues in the companies in which they invest."

Ben Christopher reports for The Tyee.

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