Serabi Gold (LSE: SRB, TSX: SBI) – “Miraculous” Q2 Results (Transcript)

Serabi Gold PLC
  • TSX: EQX
  • Shares Outstanding: 59M
  • Share price GB£0.83 (16.06.2020)
  • Market Cap: GB£49M

Interview with Michael Hodgson, CEO of Gold-Producer Serabi Gold (LSE: SRB, TSX: SBI)


Our latest update with Brazilian gold-producer, Serabi Gold. Gold has been on a bull run, but Brazil has struggled more than most to mitigate the impacts of COVID-19. Exploration has been curtailed for now, but plenty is on the horizon and it looks exciting for gold investors.

Serabi Gold should be able to finance its exploration from cash flow, and its strong cash position can be used for a variety of strategic purposes. It currently awaits its mining permit for Coringa before gold production can really get moving.

Average grade is down and total mined production is down, but only slightly, and both for logical reasons. The new ore sorter could completely alter Serabi Gold’s value proposition once it is fully integrated into the entire Serabi Gold production process. Promising times are on the horizon for this gold player.

We Discuss:

  1. 2:41 – A Look at Q2 Results: As Good as Expected?
  2. 7:18 – Ore Sorter Capabilities and Significance
  3. 9:48 – Coringa Project Update: Steps Left to Take
  4. 12:50 – Exploration Potential and Plan of Actions
  5. 18:18 – Financing it All: What are the Options?
  6. 20:02 – The Future for Serabi Gold: Back to Normality in Q3/Q4?

CLICK HERE to watch the full interview.

Matthew Gordon: Mike, how are you doing, sir?

Michael Hodgson: Very well, Matt. Nice to talk to you again.

Matthew Gordon: You are still home officing, are you?

Michael Hodgson:  Yes. I’m not quite sure when we are going to  get back into the London office, but I think we are all  pretty used to this new way of working and we are having regular  conversations amongst ourselves and I’m on the phone to site an awful lot so it is okay. It’s working well.

Matthew Gordon: It is working well. We saw a press release come out this morning to submit this quarter’s numbers. What do you make of them? Are you happy with them?

Michael Hodgson: In the circumstances, more than happy. Yes. I think I wrote in the press release. Totally delighted, to be honest. I think when you consider, I think like many companies, where we were at the beginning of the first second quarter, and where we might find ourselves by the end of the quarter, I think to actually come out with 85% of our budgeted production is a miraculous result. As we have talked before, and we have already put to the market, we took measures to really make sure that the safety of our workforce was paramount. We decided to remove nonessential workers from the site to create space so that we could socially distance our workers. We decided to remove anyone and send them home who is older; that sounds ageist, but it was the right thing to do, anyone that had a health issue. And we essentially kept a young, fit, healthy workforce at the site. We introduced what rotation we were doing. The workforce was super flexible. They were restricting, or limiting their rotation so that’s a risk, obviously; every time there is someone coming in or coming out, we reduced that to a minimum. And those coming in were all tested. We got all of the kits and we had them all tested and checked them for symptoms. So then of course, people coming in, we knew, good shape, healthy, that’s it. And we’ve actually managed to basically keep the camp clear and safe.

And it is a great achievement. I was really quite concerned that we were going to really struggle with this. To come out of that with 8,500oz was terrific. And look, it has meant some things we’ve got shelved: exploration, for example, has been shelved. A lot of the project work we were doing is going, but we have kept the core business going. And to produce 85% of the budget with 65% of the workforce – fantastic result, really pleased.

Matthew Gordon: Okay. I buy that. But I also noticed that the grade has gone down. It is sitting at just below 6g/t. You are typically around 8g/t, there or thereabouts.  What’s happening?

Michael Hodgson: Well, a little bit of a technical explanation here: the ore sorter spent a lot of time testing the source water. We know it works terrifically well, and it is designed to work on low-grade material. We set the mine up at the end of 2019 to start mining lower-grade areas, put in more development, which by its nature is lower grades, more diluted, and to feed the ore sorter with it. We committed to these areas. We committed to these areas. The plant was quite simplistically…the plant can do 45,000t per quarter. The mine can do more. The intention was to actually mine, say, 55,000t per quarter and feed that additional material into the ore sorter to screen it, to make the best 45,000t to go to the plant. Now, obviously, we have basically sent home 35% of our workforce so we were still committed to the same low-grade areas in the mine, but actually, we just couldn’t, let’s say, over-mine, because we didn’t have the workforce. And so, essentially, the ore sorter has been somewhat parked for well, used minimally, let’s say, for the last 2-months. We haven’t been able to take advantage of it. So that wrong mine material has gone straight from the mine to the plant without being sorted. So that’s why the grade has basically gone from 7.5g/t down to just around 6g/t. It will be back. No problem. Because in Q3/20, and more so in Q4/20, when we get the mining rate back up again, we will be over-mining, we will be passing through the sorter and the grade will be coming back up. The thing is to understand in a mine, and people will understand with an underground mine, you just can’t, because of an event you just can’t suddenly stop over here and mine grade over there. You eat what you kill, you are committed to an area. And we set this off, nobody knew this was going to happen. And we were there for in 2 areas that were lower-grade anyway, and we can’t suddenly, being plant-constrained with a workforce constraint with a workforce reduction, we didn’t do as well. But that said, I still think it’s a great result. And no fear, we will be back in a good shape towards the end of the year and the ore sorter will be working very, very hard.

Matthew Gordon: You gave us some idea last time we spoke about the ore sorter. You said it has been used minimally, so what do you know about its capabilities? Is it going to be able to significantly enhance your production going forward?

Michael Hodgson: Well, year to date, it’s basically lifting the grade around seven times. The thing about it is, what you have got to remember is that it does come at a price. It’s not a perfect piece of equipment. You still get losses with it. So for example, broadly speaking, we fed it with about 3,000t so far at a grade of around 2g/t, and it has turned 3,000t at 2g/t into 500t at 9g/t, which is real high-grade feed, but it has created 200,000t of low-grade, but you do get losses in that low grade. So when you are in a situation like we have been for the last two months and what’s coming out of the mine, the plant can handle, you don’t really want to pass that through the ore sorter because you will be losing Gold if you do. The whole purpose of the ore sorter to us was actually to treat surplus production, and we haven’t had surplus production in Q2/20 because of the manpower reduction. That’s the key. We will have surplus production again in later Q3/20 and Q4/20. his is when it will be used again.

Matthew Gordon: Just to stick with the ore sorter. People do like to understand what the capabilities are. So do you think the ore sorter, given the information that you have about it now, will allow you to  play some level of catch-up if you do get back to some sense of normality by the end of the year or even Q1/21 next year?

Michael Hodgson: Yes. I think it gives us an ability to increase our annual ounces by 15% to 20%. If we had actually not had this, and we kept going, normally we would have produced in Q2/20 probably 10,500oz, it will allow us to do an extra 2,000oz, 1,500oz, 2,000oz per quarter. That is what we know from test work and what it did start doing in Q1/20. That’s what it will give us. We are nominally a 40,000oz limited operation, because that’s what the plant can do today. If you screen 25% of your feed before it goes to the plants through the ore sorter, that 40,000oz p/a becomes 48,000oz p/a. That’s where we are going.

Matthew Gordon:  So you are very keen to get back to normality in that case. Tell me about the planning. I get the 8,500oz, and you are pleased with that. You said you are pleased with it, and under the current circumstances you are probably right to be pleased with it. We talked about what’s going on with Coringa. What is going to get the new asset started? We are not going to be able to say that soon because you have been on it a while. Where are you with that? Because I want to join up the dots for people. So where are you with Coringa?

Michael Hodgson: Coringa – behind the scenes, we obviously had a public hearing back in February. I’m absolutely relieved that we actually got that done because that was a huge milestone. And strewth, if we had been a month later, we would be stuck in limbo now completely with getting the public here. And can you imagine the public hearing now with social distancing? To get that done was huge, absolutely huge. And it allowed us in the meantime to do a lot of the follow-up work, which has been doing and froing with the environmental agency, answering their final questions on environmental impact, adjustments to the EIA. Because this environmental agency – SEMAS as they are called, these are the guys who ultimately have got to sign on a piece of paper to the court saying we fully recommend that Serabi are given the preliminary license. And this is the key license for any mining operation in Brazil. It’s the one where you need public support, authority support, agency support, court support – everyone. Once you get this one, the remaining licenses are basically procedural, really. We are so, so close. And the fact that we’ve now been going to and fro with SEMAS in the background doing this. I was on the call on Friday, we are so close to getting these guys to basically, in fact, they’re going to write the letter this week to the court. Now, the next step in all of this is the court, which is called Kohima. They have to meet to basically discuss the Serabi case. And they just look at the recommendation and go well. The guys that know which are, that’s got an environmental counsel claim, they meet, but the fact that they are made up of the same people, or part of the same people that have actually just advised that they recommend the license to be granted to the company, we are very hopeful that’s going to happen. The key is just getting that meeting to occur.

Obviously, the crisis is making it difficult for those guys to physically meet. I understand that they have never actually met with Zoom before and it’s something they are considering. We are hoping it is going to be first for us. And we are actually going to get our court hearing before the end of this quarter. And we will get our preliminary license at Coringa, which will be just great. Great. , it is somewhat out of our control, but we have done everything now and we are just waiting for that meeting to occur.

Matthew Gordon: The market got excited when you decided to buy Coringa because it is almost a cookie cutter asset. With Palito it is high-grade underground mining, which you understand how to do that, and you do it very well. I got excited though when you started talking to me, last time we spoke, about exploration. Because, you’ve got two assets, but in between, you’ve also got a big land package. You’ve got some anomalies, which you talked to me about, and to me, that struck me as even more exciting than Coringa – no disrespect to Coringa. Coringa will produce cash and you will do well there. But talk to me about what you have been able to do since we spoke? Because, obviously, you haven’t got people back on site. You haven’t got the exploration team on site. But has your thinking evolved in terms of how you are going to approach this over the next couple of quarters?

Michael Hodgson: Well, I want to talk about Palito and the Sao Chico operation before we walk away from Coringa itself, which we have never talked about to you about before, it has amazing potential exploration, potential upsides around it.

Matthew Gordon: Okay, talk to me about that then.

Michael Hodgson: It is a garimpo, an artisan mine that produced 30,000oz Gold. And it is a huge step. I don’t want to underplay Coringa, it is a producing asset, but it can be so much more. But you are absolutely right; we were flying with exploration before the pandemic really meant that we would actually have to stop. And unfortunately, the exploration guys, as is often the case when something negative happens, like the company has got no money, which was not that case, but there’s some need, they are the guys that get stopped. And unfortunately, it was with huge reluctance that we stopped the drilling at Palito and Sao Chico. But we needed the bed space. As I explained before, we have a camp good for 360 people, in normal conditions, in pandemic conditions we don’t have the camp to accommodate those people. The exploration people, we had to kick them out of bed and say, sorry, guys, you are going to have to go home for a few months because we need the space for the producing guys and the workforce to actually have more social space. So that was the key, and everyone understood it; keeping the workforce safe, etc, the right thing to do.

I am pleased to say you remember that we were doing basically, the exploration was on all 3 fronts, but the main one we are doing at Sao Chico, we were doing deep drilling in the mine itself. Exploration drilling really going tremendously well. We got some fantastic minable intersections, 200m below, off feet, below our lowest level. It is going down at depth, which is great. It is open going in that direction. And of course, we were drilling to the west, particularly of the main deposit, and we had done step drilling going forward up to nearly 400m West of the mine limit, which basically doubles the strike length of the deposit. And then a further 700m. We have these geophysical anomalies, which we found from the survey in 2018, which we had done our first intersections into those, bearing Gold of a minable width. You don’t have to be a rocket scientist to go: hang on, this all lines up and if it all joins up, we’ve got a very nice 2km-long potential ore zone here. And, if that all comes through with drilling, improving up, we are looking at a resource that can certainly support our minable rate far greater than what we do today. Which then brings the question, are you still going to keep trucking ore from Sao Chico all the way to Palito? Surely, you’re going to want to put some kind pre concentration or a little plant down yet. We are not there yet, but this question needs answering.

Between Palito and Sao Chico, the other big work that we did was the geo-chemical program we were doing. And that was, we got to the culmination of that in April time. And we found we have got this tremendous Copper anomaly, soil of anomaly, which sits over a big geophysics’ anomaly. And we got very excited about that because that may show potential of many deposits, it has actually got multiple ones, but it could also be an indicator of bigger, large-scale type mineralisation, which is something which, , mining high-grade veins is great, but if we can find some scale in there too, that would be brilliant.

And 2 in particular lie to the south of Palito, called Juka and Calico, and these, we have actually done more work on low, tighter space geochemistry, et cetera. And they have got really nice coincidental, really nice high-grade Gold anomalies in the geochemistry as well. And these really do look like Palito lookalikes, both of them. And the good news about those two is that they are only 5km from Palito. So again, we can drill those out.

So we have got a really interesting conundrum: it is almost like a race between what is actually happening at Sao Chico and what’s going to happen to Juco and Calico and, where’s the plant expansion going to be? Because today, we have a plant that is too small. The ore sorter liberated some space, but it’s not going to liberate, if these things start coming off, it won’t be able to handle what the mine can throw at it. We do need to expand the plant somewhere. The question is, we don’t know where. The only way we are going to find out is to push off the exploration, so I’m keen to get going with that. Hopefully we are going to get everyone back at site, probably in September, and the contractors, and it will be back to where we left off.

Matthew Gordon: How do you go about planning something like that? Because, we are getting into juicy, interesting areas. If the plant isn’t big enough to deal with the potential, potentially, you’ve got to work out how you finance all of this as well. Does this come out of cashflow? What is the opportunity that it opens up? People want to know, are we talking about some fund raising, or actually, we are petitioning enough cash to actually develop this into the next iteration, the next step change in the company’s organic growth?

Michael Hodgson: Yes, so we are certainly, well, I’ve just explained to you, that’s coming out of the cashflow. We are not looking at that. We are not doing that. Yes.  When it comes to building the plants, we will have to see where we are. But when we do put a plant in, or wherever we might do it, now all the exploration work we are talking about, that is coming out of the cash flow. Maybe I didn’t really talk about that earlier on, but I’m on the cash side. People will notice in the press release: we started the quarter with USD$9M in the bank. We ended the quarter with USD$9.6Bn in the bank. We paid off Sprott. We are debt free. We paid out of cashflow. We also in that quarter paid down nearly USD$4M to Sprott. So the irony was despite the backdrop of COVID and all the problems financially Q2 2020 was Serabi’s successful quarter on record, which the irony is it’s remarkable.

We are sitting today with nearly double the cash that we thought we were going to have within the budget. Even though we didn’t produce the ounces, we actually have enjoyed a tremendous run. It is continuing; we don’t see any reason why Q3/20 won’t be similar to Q2/20. And we are hoping to be back to normal by Q4/20 and going into next year. I don’t see, with current economic conditions, we can fund all this with cashflow.

Matthew Gordon: Well, that’s interesting. So Q3/20, we don’t know what Q3/20 holds because we are in the middle of it. You think by Q4/20, you are taking steps to ensure that you can get the rest of the people back on site. And is that a process you’ve started? What does that look like?

Michael Hodgson: Indeed, we’ve been basically expanding the camp. We have been making more lodges for people to basically be accommodated in, in much better socially distanced conditions. So the whole idea is, we just have to make the camp half as big again to accommodate the original 360 people back at site under much better conditions in terms of socially distancing. So yes, we think we can have all that done by the end of the August. We would like to think that September will be a month of transition. We should be able to get to Q4 with a resumption of normal conditions. We will be testing forever, I think, but that’s just, and the under huge difference is that we have actually enjoyed it. We have been rotating our workforce. If there is anything good, that has come out of this crisis; we’ve been rotating our workforce 20:10 -20-days in the camp, 10-days out. We have all agreed, the workforce has agreed, the unions have agreed, that we are going to go 40:20. So people are at camp 40 days at site and 20 days on break. That means half as many changeovers. That means half as much travel costs for us. And it allows people, once they get to site, to really get their teeth into the job and work for 40 days. And then when they go home, they have a good rest for 20-days. We have been wanting to do this for like about two or three years -not a chance. Because of the crisis, everyone now realises this is the way to work. So that’s a great result for us.

Matthew Gordon: I think there are a lot of people and a lot of different sectors who are going to have to find a new way of working. And obviously, that does sound like a good solution for you guys. What I’m hearing is that production numbers are good. You are happy with what you’ve got. I’m hearing that when the ore sorter comes back online, whenever you have got everyone back at site, that should enhance your numbers by 15%. By Q4/20, you hope to have everyone back up and running so exploration can start again. That’s the bit that I’m really excited about. You are waiting on that permitting license on Coringa, obviously, once people feel safe enough to get back to the office and they can give that to you and that will be fantastic. What else have we got to look forward to? I know you are in planning mode, but for investors, what do you think? Is there anything more that they should be looking forward to here?

Michael Hodgson: If the cashflow, if the economic conditions are right, there is nothing to stop us starting at Coringa with the underground mine. The reason we didn’t start, we were poised to start in Q2/20, we were just worried about the money situation. The irony is we’ve actually got the money to do it, but we didn’t want to start another, in the middle of all of this, it’s been enough of a challenge to actually keep people safe in Palito and in Sao Chico. To have another centre where we are going to have to another area of concern and tracking the virus and all that, let’s let the dust settle on all this before we start that. So as soon as we think it’s safe enough, we’ll start at Coringa. We will start digging that mine and we will start going underground. That’s it. I’m really hopeful that’s going to be before the end of this year. And that would be a great. It is always great fun starting a mine.

Matthew Gordon: Mike, good update. Well done with the numbers. As you say, it is in a tough environment. We speak to a lot of companies who are struggling. You’ve done well to keep the assets coming in and the cash coming in and to pay down debt. I like that. Well, stay in touch with us, let us know how you get on, as things progress, I would be delighted to take that phone call from you.

Michael Hodgson: Okay. Thanks very much, Matt.

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