Why Jim Cramer is Dead Wrong on this Speculative Silver Play

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This week’s Global Bull Market Alert pick shifts your attention to silver, or more specifically, a silver miner, through Vancouver-based Silvercorp Metals (SVM).

I actually first heard of Silvercorp when fellow Harvard Law grad Jim Cramer dismissed SVM as “too speculative.” Now, Jim Cramer may be smart guy… But in this case, I think he’s dead wrong.

Let’s first review the case for silver itself…

The white metal has been red hot. Silver has surged 64% so far this year, peaking at $29.36 an ounce earlier this month. That’s its highest (nominal) price since September 1980. It also has gained substantially more than the 24% gold had when it traded at a record $1,424.60 an ounce on Nov. 9.

It may come as a surprise, then, that silver could more than triple from today’s levels and still be undervalued compared to gold. Standing today at around 50, the historic gold/silver ratio means that it takes 50 ounces of silver to purchase one ounce of gold. But that long-term ratio has held fairly steady around 15 or 16. And if silver matched its previous highs in inflation-adjusted dollars, it would trade at more than $130 an ounce! Yet, silver is trading at around $27.50 today.

This brings us to Vancouver-based Silvercorp Metals (SVM) — a star performer among the world’s silver mines.

The company’s performance vis-à-vis its rivals has been exceptional. Its five-year average gross margin has been 71.81% vs. an industry average of 41.7%. Its five-year average net profit margin has been 41.38% vs. an industry average of 1.09%.

Silvercorp’s recent financial results also have been impressive. Its silver production increased 17% to 1.34 million ounces compared to the second quarter of fiscal 2010. Thanks to higher prices for silver, sales increased 45% to $36.3 million compared to Q2 2010. Its net income of $12.5 million also jumped 40% compared to a year ago. And soaring silver prices mean that this trend is set to continue.

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Silvercorp also is expanding significantly in the lucrative Chinese market. The company recently announced that it has signed a Sino-Foreign Cooperative Joint Venture to acquire a 70% equity interest in Yunxiang Mining Co. Ltd., a local private mining company in Hunan Province, for $33 million. What’s Silvercorp’s secret weapon? Well, the bulk of its senior management is Chinese, giving it a huge edge over its more Western rivals.

So buy Silvercorp Metals (SVM) at market today, and place your stop at $8.00.

Here’s a word of warning. Like Ivanhoe Mines (IVN), this is a commodities-based mining stock. That means you should prepare yourself for some serious volatility. If you really want to push the pedal to the metal on this recommendation, buy the March 2011 $12.50 calls SVM110319C00012500.

Portfolio Update

Credicorp Ltd. (BAP) fell back slightly this past week. But the company’s recently announced record earnings mean that Peru’s biggest bank remains a BUY.

China MediaExpress Holdings (CCME) lived up to its billing as a volatile stock, bouncing 12% just last Wednesday. Having sold off sharply on Friday, this is a good time to add to your position… if you can take the heat. CCME remains a BUY.

iShares MSCI Chile Investable Mkt Idx (ECH) ended the week up, and should resume a more sustained upward trend as markets settle. ECH remains a BUY.

ProShares UltraShort Euro (EUO) ended the week flat, after jumping through the $20 level last week. With the Irish caving in, and accepting a bailout package, the euro rose 0.5% in this morning’s trading. But with the euro’s fundamental woes continuing, EUO remains a speculative BUY.

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ICICI Bank Ltd. (IBN) dropped back this past week. With India’s market up 1.9% overnight, you also can expect this position to bounce. India’s top banking giant remains a BUY.

Market Vectors Indonesia ETF (IDX) rose 3.16% this week, and now is trading back up near record highs. The “Next BRIC” remains a BUY.

Bank of Ireland (IRE) continues to behave like a volatile option, soaring 33% in a single day’s trading last week, and ending the week 15% higher. It’s unclear how the bailout will affect the operations of IRE in the long run. But the bailout has proven my fundamental assertion: like Citibank in the United States, Bank of Ireland is “too big to fail.” This pick remains a speculative BUY.

Itaú Unibanco Holding S.A. (ITUB) rose slightly this week. Buoyed by a boom in its credit portfolio and lower provisions for bad debt, Latin America’s largest private-sector bank remains a BUY.

Ivanhoe Mines (IVN) dropped earlier in the week, but was well on its way to bouncing back strong. IVN is a BUY.

Melco Crown Entertainment Limited (MPEL) rose slightly this week. Use the recent pullback to add to your position on this bet on “Asia’s Las Vegas.” MPEL remains a BUY.

SINA Corporation (SINA) traded back up near record highs before pulling back slightly. Q3 revenue rose 12% to $108 million and earnings per share (EPS) hit 50 cents. Both sales and profits exceeded expectations, with sales of $103 million and EPS of 44 cents. The stock soared 5.84% the following day. “China’s Twitter” remains a BUY.

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iShares MSCI Thailand Investable Market Index Fund (THD) ended the week slightly higher. The Thai government announced last week that its economy grew 9.8% in the third quarter. The top-performing global market of 2010, THD remains a BUY.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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Global markets have gone "on sale" as they are enduring the sharpest correction since August, after a relentless climb upward over the past two months. The current chapter of the European debt crisis and dangers of inflation in China have sent the markets into a tizzy. Two weeks ago, most of your positions were trading at or near yearly highs. After yesterday's sell-off, most are back to where they were about a month ago. The MSCI Emerging Markets Index has dropped 5.8% since rising to

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