Serabi Gold (SRB) – “Miraculous” Q2 Results

Serabi Gold PLC
  • 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).

What is the latest news from Brazilian gold producer, Serabi Gold?

The company previously recorded record gold production in March, courtesy of the introduction of an ore sorter. However, the impacts of the COVID-19 crisis in Brazil, which have been exacerbated by the government’s response to the COVID-19 pandemic, have been unavoidable. Q1/20 production was down c. 1,000oz from the original guidance. In a situation this difficult, the question for Serabi Gold revolves around how successfully the company has managed to motivate the ramifications of these most difficult of circumstances.

Let’s start with the Q2 results. Hogdson is “totally delighted” and this “miraculous result,” considering where it was at the beginning of the quarter. At 65% of its total workforce capacity, the company is emerging from this turbulent period with 85% of its budgeted production intact: 8,500oz gold. Hodgson has grabbed this situation by the horns; maybe the Brazilian administration could learn a thing or two. By imposing a strict social distancing policy alongside removing at-risk workers from the site, Serabi Gold has been able to continue churning out success.

The grade has fallen from c. 8g/t to c. 6g/t, but Hodgson attributes this to a planned operational decision. Serabi Gold’s ore sorter is designed to work on low-gade material, and at the end of 2019, the mine was set up to develop and mine lower-grade areas. The company committed to lower-grade material, hoping to make use of its 45,000t PQ plant and +45,000t PQ mine to mine extra ore, c. 55,000t pq, feeding this additional material into the ore sorter to screen it and ascertain the best 45,000t to go to the plant. Serabi Gold was simply unable to mine this much ore given its weakened workforce. Investors should expect this grade to bounce back in Q3/4, as the company begins “overmining” again. Exploration has obviously been shelved for the time being, and a lot of the project work has been placed on the backburner. The foremost focus has been on keeping the core project up and running.

The ore sorter is an immensely capable element of this story that isn’t quite being given the attention it should be. Moreover, Serabi Gold does not currently make use of anywhere near its full potential. In the YTD, it lifts the average grade around 7X, and this is without it being fully integrated into Serabi Gold’s production process. However, it’s not a perfect piece of equipment and still creates losses by making more room for low-grade material in the plant. The originally intended purpose for the ore sorter was to treat surplus production, and this is clearly something Serabi Gold hasn’t had access to recently. The ore sorter gives the company the ability to increase its annual ounces by 15-20% (c. 2000oz PQ); could this mean it catches up on lost production? Watch this space.

What is there left to do at Coringa? Handily, Serabi Gold got the public hearing over the line in February before things went awry. There has been a lot of back and forth with the environmental agency, but Hodgson is keen to placate them; this is the group that will have to approve the issuance of Serabi’s crucial preliminary licence. The remaining licences are basically procedural, and Serabi Gold looks on the verge of getting everything over the line. The letter to the court is going out this week. This starts the next step: an environmental council review. It is difficult to arrange a physical meeting right now, but Serabi Gold expects to participate in its court hearing and receive ita preliminary licence by the end of the quarter. Great news.

On the exploration side of things, Coringa has “amazing exploration potential;” it can be so much more than a producing asset, and that’s without even getting into the Sao Chico Gold Mine or the Palito Gold Mine. The company’s exploration plan had been soaring before COVID-19, and Serabi Gold will look to recommence this as soon as possible. A large number of geophysical and geochemical anomalies have demonstrated mineralisation at a depth of c. 200m below ground, and Serabi’s land package is looking like it could form a much larger operation if consolidated successfully. Let’s wait to see of all of the stars align, but the signs are promising.

The company has ended Q2 with US$9.6M in the treasury, up from US$9M at the start of it. It has paid off Sprott and is debt-free. However, Serabi Gold does not plan to dip into this cash until the plant construction/ore trucking discussion becomes a more pressing issue. With current economic conditions, all of this exploration can be financed out of cash flow.

What did you make of Michael Hodgson and Serabi Gold?

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