Serabi Gold PLC
- LSE:SRB, TSX:SBI
- Shares Outstanding: 59M
- Share price GB£0.83 (15.05.2020)
- Market Cap: GB£50M
With the spot price of gold hovering above US$1,700/oz, gold producers have been taking advantage of a cost environment that makes any reasonable gold operator economic.
One gold story we’ve followed closely for the last year is Serabi Gold. The Brazilian gold developer has been quietly going about its business, perhaps a little under the radar, and has been working hard on its latest acquisition: the Coringa Gold Mine. Coringa adds to the already wholly-owned Palito Gold Mine and should double the company’s production profile.
Before COVID-19, to fund the development of Coringa, a proposal of US$12M in convertible notes was put on the table by an existing shareholder, Greenstone Resources. It was proposed to allow Serabi Gold to finance Coringa while maintaining its leverage without the need for further dilution. It would have allowed Serabi Gold to have greater control over its financing strategy, repaying debts owed to Equinox and Sprott. Greenstone Resources may have eventually owned 37.8% of Serabi Gold.
However, COVID-19-related disruptions, including Brazilian travel restrictions, have made the deal drag out. Progress has been particularly slow because Greenstone Resources wanted to evaluate the changing market conditions with the intention of ensuring an appropriate sum of capital is available for the company. They have now reached an elegant solution.
Serabi Gold has agreed on a payment plan with both Equinox and Sprott. Repayments will be conducted to ensure Serabi’s cash flow isn’t adversely impacted, and it will allow the company to pay off all the Sprott debt by the end of June. Serabi will maintain cash on hand at all points and, therefore, options. When mining does finally get back to normal, this means Coringa can proceed, with Serabi Gold targeting doubled total gold production of c. 80,000oz and a cross-mine AISC of just c. US$950/oz across Palito and Coringa.
What About The Here And Now?
A few weeks ago, in an interview with Crux Investor, the CEO of Serabi Gold, Michael Hodgson, discussed the company’s strong year-end 2019 financial results.
What Are The Headline Stats?
- Cash position – US$14.23M at year-end
- Net cash – USD$5M.
- AISC slightly up on 2018 – US$1,081/oz.
- EBITDA – US$17.2M (2018: US$6.3M).
- Average gold price received – US$1,376.
- Total mined ore up 8% (at an average grade of 7%).
- Earnings per share of 6.51 cents for 2019.
- Net cash generated in the year of US$5.0M, resulting in cash holdings of US$14.23M at year-end (31 December 2018: US$9.2 million).
- Post-tax profit of US$3.83M, reflecting a higher level of gold sales realised during the period compared with 2018 as well as higher average gold prices in 2019 when compared with 2018.
While the AISC is slightly up, resulting in US$295/oz profit, the rest of the specifications look promising. Serabi Gold is in a much stronger cash position than most gold juniors, and the EBITDA of US$17.2M gives them options. Operations are clearly improving, as additional optimisations, such as the ore sorter, continue to come into play, evidenced by the total mined ore increasing.
2019 was solid for Serabi Gold, but the real catalyst moment will be bringing Coringa into production. To see the kind of growth gold investors are craving, Coringa needs to come into play. Until that time, Hodgson’s task is to manage the company’s growth plans, hopefully taking advantage of the bull market.
How has Q1/20 treated Serabi Gold so far? The company released its Q1/20 gold production results just a few weeks ago, and Hodgson explains them.
Q1/20 Operational Results
- Gold produced in March 2020 – 3,674oz, the highest monthly level since the operation opened.
- Q1 gold production – 9,020oz
- Ore mined during the quarter – 42,036t at 6.54g/t gold
- ROM ore processed through the plant from combined Palito and Sao Chico orebodies – 40,465t at an average grade of 6.66 g/t gold
- Horizontal development completed during Q1 – 2,878m
- Ore sorter in full-scale operation in March following completion of commissioning during the quarter.
- Coringa Project public hearing was held on 06/02/20 with positive feedback. Serabi is now awaiting submission of the final recommendation to, and approval of, the State Environmental Council (“COEMA”) for the award of the Licencia Previa (the Preliminary License)
COVID-19 is slowing down a lot of gold companies, but despite operational difficulties generated by domestic policy, Serabi Gold managed to achieve record production in March.
That is some feat, especially considering the excuse we’re hearing from gold CEOs around the world is that COVID-19 has ruined their share price. Hodgson isn’t making any excuses, and perhaps the presence of Serabi’s big institutional partners is reassuring the market.
February production was disrupted by the unanticipated failure of a ball-mill; it was down for 2 weeks. However, with Serabi’s ore sorter at Palito now in its test period, results have been incredibly impressive. Q1/20 ended up ever so slightly down on Serabi’s forecast, but the message is clear: with the ore sorter now in play, things are really looking up. April should be a different story altogether.
At 6.54g/t, the average grade is strong, and c. 2.9km of horizontal development shows that operations are proceeding rapidly. We can’t wait to see how quickly Serabi Gold moves forward once lockdown restrictions are relaxed and Coringa is brought into production.
For a gold stock of this type, with a coherent business model and intelligent management, GB£0.83 per share looks an absolute steal. If you have faith in the gold macro story, Hodgson and his team, the business model, and Serabi’s strategic partners, it may well be worth considering as a gold investment proposition.
While this gold environment is making it much easier for gold producers to turn a profit, for long-term investors, it is worth considering if a company has the longevity to last through a full gold cycle, or maybe even multiple cycles. Serabi Gold appears to have the capacity for sustained growth, alongside the potential catalysts needed for short-term returns. It’s an intriguing opportunity, and we’ll definitely be researching the Brazilian miner more as the weeks pass by. Will you?
We have interviewed the CEO of Serabi Gold, Michael Hodgson, on several occasions. After you’ve listened to those, why not read a different gold article, or even watch one of our latest gold interviews?
Company Website: https://www.serabigold.com/
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