SERABI GOLD PLC
- LON: SRB
- Shares Outstanding: 58.91M
- Share price: GB£0.77(15.01.2020)
- Market Cap: GB£45.36M
There is no doubting the last few years have been tough for gold mining explorers & developers, and mining investors. However, gold producers have seen an uptick in share price since the end of August 2019 and the price of gold emerged from the $1,200 doldrums. Some gold producers have done better than others and have broken away from the pack. Serabi Gold looks to have safely made that cut by more than trebling their share price since the lows of May 2019.
Serabi had a quiet if unspectacular time until mid-2018 until May. A small, high-grade, high-cost, underground South American mine doesn’t usual capture retail investors’ interests, but it was consistent in its output and didn’t encounter any production problems. However, despite having an experienced and lively management team, they were loaded with debt, low margins (if any), and were unable to raise funds cheaply; there were lots of reasons for investors to look elsewhere.
The big move in May was due the market finally seeing the data from the acquisition of another underground gold asset, Coringa Gold Project, which is near their core project, Palito Mining Complex. A break in the gold price in August saw a further resurgence of interest in Serabi Gold and in the share price. In addition, it became clear there could be an opportunity to restructure their debt. Investors became very interested.
The acquisition of Coringa is the game changer for Serabi. Not only will it reduce their AISC to nearer the magical $950 mark, but it also will double their production to c.80,000 oz pa. This small, sleepy gold producer is suddenly on the radar of institutional investors, which should drive volume of trading and solidify the shareholder register.
Today’s record production news caps off a great 2019 for Serabi. The company achieved its highest quarter gold production of the year, 10,223oz. This brings the total annual gold production to 40,101oz, a 7% improvement over the course of 2019.
The total mined ore for Q4 was 44,092oz, at a high-grade of 6.69g/t of gold. 44,794t of run of mine (ROM) ore was processed through Serabi’s plant (combining the Palito and Sao Chico orebodies) at an average grade of 6.81g/t. On the exploration side of things, a sizeable 2,908m of horizontal development was completed in Q4. Serabi has managed to optimise its assets at little detriment to its share price or cash position: the company sits at GB£0.78 on the LSE today (moving back towards 2019’s peaks of GB£0.89), and claims year-end cash holdings of US$14.3M.
In terms of infrastructure, Serabi has also seen great improvements; chief of them is the installation of an ore sorter (sited between the crushing and the milling sections), which entered its final stages at the end of 2019, beginning electrical and mechanical testing. Investors should take note of this. Based on similar ore sorter data, this could improve productivity by as much as 20%. That is significant economically.
Serabi’s step out drilling campaign at Sao Chico has significantly extended the resource beyond current mine limits. A projection of full year production for 2020 stands at 45-46,000oz: a further improvement on an already strong figure as systems continue to be optimised. Serabi Gold has been positively moving along with consistent results.
Rough Assessment Of Serabi’s Current Debt Situation
Serabi currently owes c.USD$12M to Equinox Gold Corp. and c.USD$7M to Sprott Resource Lending Partnership, which it agreed to pay back over 22 months, (30/09/18-30/06/20), in addition to providing 145,479 new ordinary shares of £0.10 each (a 10% discount to the closing price on 14 September 2018).
The company is going to need to give guidance as to how it plans to restructure this. We would imagine Sprott would roll over as Serabi has been consistent with their debt payments. There is cash in the bank to pay back Equinox, but either that gets deferred at the deference of Equinox, which we think unlikely, or Serabi replaces that with cheap debt, serviced by their much-improved net cash production. If this indeed proves to be the case, Serabi holders will not be diluted and should be satisfied with how management has performed for them this year. The big question is how many will take the opportunity to cash-in and who will replace them? I suspect that this is now attractive to institutional gold funds.
The Palito Mining Complex, a high-grade, narrow vein underground mine, is already producing good results with an AISC of US$1,078 per ounce. However, Serabi’s aim to bring that figure down below the $1,000 mark. This is where the Coringa Gold project comes in. Serabi acquired Coringa from Anfield Gold Corp. in December 2017 for US$22M, and they have plans to get in to Production by end of 2021. Coringa is far more than an option: the team at Serabi feel it has an almost identical setup to Palito in terms of geology, size and necessary mining operations.
Coringa has a higher grade than Palito, at 8.34g/t, with a total gold production of 288,000oz, and a life of mine standing at around 9 years. Typical fully-operational annual production should stand at 38,000oz. Corringa would require an initial capital investment of around US$25M prior to sustained positive cash-flow, followed by sustaining capital expenditures of around US$9M that would likely be funded by project cash-flow.
To continue developing Coringa, I expect to see a revised PEA to whet the market’s appetite. Once Coringa is up and running, an annual production average of 38,000 oz pa, in addition to an AISC of US$852, could create a quarterly net revenue of c. US$2.5M within 12-18 months. When combined with the US$1.5M of stable cash flow from Palito, Serabi Gold could be churning out a net profit of US$3.5M per quarter for years to come, and this is without Palito’s ore sorter’s impact on results being taken into account.
The sense in the market has always been that Serabi will aim to be a 100,000oz per year gold producer in the not so distant future; institutional investors will likely push for further acquisitions, as mentioned in a recent Crux Investor interview with Nicolas Banados, Managing Director of Family Office Megeve Investments and investor in Serabi Gold.
To conclude, Serabi is performing well. It has a clear plan to create a business with a cross-mine AISC, production level and revenue that investors will welcome. With permitting at Coringa continuing to progress (the date for the public hearing is set for 6 February 2020), this ambition is moving closer to reality, and assuming public and stakeholder support, this is the solid final step for Serabi before receipt of the Licencia Previa (the Preliminary License). My message to the company is more of the same please with both assets; show us success with the drill on your exploration targets. We are watching.
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