Serabi Gold (LSE: SRB) – Ready or Not At All, So Close Enough to Taste It (Transcript)

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

Off the back of yesterday’s press release, Mike spoke to us to give us a bit more colour on the details about the Public Hearing and the results of the first months test on the new ore sorter.

Interview highlights:

  • 1:30 – Public Hearing: A Positive Outcome
  • 3:43 – Ore Sorter: How Does it Work?
  • 9:56 – Focus for 2020: Exploration, Drilling and Building Value

Click here to watch the interview.


Matthew Gordon: Good. We saw the press release this morning, thought we’d try and catch you, and it sounds like we caught you at a good time, you’re off to Brazil tomorrow. So, why don’t we talk about the public hearing first of all which you told us about last time we spoke, but it seems to have gone well?

Mike Hodgson: Yes, yeah, I mean, you don’t get a definitive answer in the actual public hearing itself but you obviously… it could go very wrong on the day, so I mean if you have a positive public hearing in terms of like, everyone sits down and listens and all the stakeholders have the conversations and are all heard over 6-hours and there’s no… you know, it’s all done in a cordial manner, which is exactly what happened, you can’t have anything more.

So what we actually have there. It’s chaired by the State Environment Agency, called SEMAS, and they chaired it and all the various stakeholders had their say and we had pretty much overwhelming support, which was great. So they will now go away and digest all of those comments, people’s concerns, people’s wishes, people’s wants, and they will then make a recommendation to a governing body which is called KOHIMA. They’re the guys that actually, ultimately, either ratify it and take it to the board. So they’ll listen to all of the, as I say, all the comments and concerns and they’ll come back, hopefully, with an LP for us, we hope within the next sort of six to eight weeks. That’ll be a great result, we’ll be delighted to get it done so quickly.

Okay, it’s slipped a bit compared to what we hoped, but you’ll remember we had to live through all of those tailings dam problems of 2019 with Brumadinho and how that affected everybody in the mining industry in Brazil. We’ll obviously get the EIA resubmitted and the public hearing still early in 2020 and seemingly gone through in such a positive climate in a way. Yeah, I think we did a really… we’re very pleased. Very pleased.

Matthew Gordon: Well I guess you had the benefit of obviously Palito, existing business, running without any issues and you obviously had the support of the local community from that, so that all helps. And I think people mustn’t underestimate the importance of this, and we’ve certainly spoken to a few companies in the last couple of weeks who are suffering from not being able to get through the process, as it were.

Let’s talk about the ore sorter, because I’ve watched the video which kind of explains it all to me and we’ll put the link up above here now so people can go to that. Can you tell us the impact? You’ve been running it for the best part of a month and it seems to be delivering quite well. I’m looking at some numbers here, so you fed in 1,266 tonnes and you’ve identified 1,076 tonnes of waste, so that’s significant.

Mike Hodgson: Those numbers aren’t really terribly indicative. I put them in there because obviously we switched it on just over a month ago and we’ve been putting through some pretty miniscule tonnages, and we’re just playing around with it really, trying to find the sweet spot. And we’re using different types of ore. Some of the ore is actually sort of more massive sulphide ore. So really, I put those numbers in there to show people, hey, you know, it was a pile of rubbish, basically, sub-economic, very uneconomic material.

We passed it through the ore sorter and we just pulled out 200t at, like, 7g/t and the rest of it is a big pile of waste, and that just shows what this thing can do. And the video shows it, that it’s going in, you know, it’s crushed material which is 80% waste rock and if you look at underground face, underground, if you just eyeball that you can see, well hello, 80% of that face there is waste and 20% of it is a band of ore. That’s exactly what the ore sorter does. When that thing’s all been crushed it can actually eliminate all that waste and just scavenge out that sort of high-grade band of the sulphides where the Gold sits, and that’s what it does.

So I think we can see straight away it’s a very… it’s great at just scavenging out the ore out of the waste. And we won’t put our best material through it because it’s not an exact science, there are always going to be losses. Like, you will get ore going into the waste system and you will get waste going into the ore system, but I think the best way of describing it is, it is a waste remover. That’s what it is, it’s a waste remover and it’s an ore scavenger.

So we are only really using it at the moment and will be only using it until we’ve got this absolutely nailed, we’ll only be using it on our lower grade ore development, which is where we’re just driving along the belt in its most diluted materials, that’s the material with all the waste rock in, and it’s great for just recovering the ore out of that material and not having to pass all that stuff through the process pond which up until now had been completely constipating our process plans with this material.

So if we get rid of that, first of all we save ourselves, just by getting rid of that material and going for 500 tonnes a day at 7g/t, 400t per day at, say, 9g/t, you’re going to save yourself about USD$1M a year at cost which means the payback on this machine is about 18 months. But, more importantly, what it will do is it will liberate 100t a day of free space, which we can then use again to add more high grade or make our little process plant produce, instead of 40,000 ounces, which it can do today, the same plant with the same size and through-put can do 50,000 ounces. That’s the beauty.

Matthew Gordon: That’s truly remarkable. But it doesn’t actually identify Gold per se, does it? Explain to people what it’s actually doing? They can watch it in the video but I thought it was interesting to…

Mike Hodgson: Very, very important, the distinction. When you look at that video you see that yellow shiny stuff, people I know would be very excited if that was a band of Gold. It’s not. That is a band of sulphides, mostly charcoal pyrites which is a copper sulphide and pyrites which is an iron sulphide. And all of our Gold is very fine-grained contained within those sulphides. So, our ore sorter has two metals that actually split differentiating between ore and waste. What you’re always after with any type of ore sorting, whether it be diamonds or, as we’re doing, Gold, or whatever, you need contra between your ore and your waste, dark contrast. So it won’t work terribly well on a disseminated ore body? On an ore body like ours, which is very sharp, it will. So, what it’s actually doing, you crush it down to about a quarter of an inch, half an inch, so you can see there, an inch to half an inch, and you pass it through either a colour sorter or an x-ray sorter. So, let’s take the colour sorter first. In our case as you’re dealing with video, pink-based and the rest is ore. So you can just simply say, right then, I want to collect anything that’s not pink and it will just literally identify any stone that’s not pink and throw it off on to different belts as you saw in the video and the pink, the granite, will just fall off the edge as waste. Alternatively, you can sort on atomic density which is where you use the x-ray sorter, so it’s a piece of equipment not dissimilar to what we have at airports, you pass through it, and it’s actually penetrating every stone on 1mm centres, so it’s hugely detailed. And there’s a 3D sample so every stone gets analysed for a percentage or its atomic density and, of course, the granite rocks are much less dense than the sulphides and the ore rocks so, again, there’s a big contrast in density between what is the ore and what is the granite. So, again, we can sort on x-ray as well. And, if we really want, we can’t do it at the same time but we can – we haven’t tried that yet – but what we can do, we can sort once on, say, density, save the pile, and then you can pass the pile again and sort on colour. So, the permutations are endless and we’re just at the beginning of this journey really. But we’ve just simply by sorting on x-ray. It seems to be brilliantly separating the waste and putting some more add to the waste. The closing shot of the video you see that little pile and the big pile. We pulled that little pile. That’s now a big pile and before it was just lost in that big pile.

Matthew Gordon: It’s amazing. We were talking to a lot of companies about bringing ore sorters in to improve their productivity and throughput. As you say, the savings are, or can be, immense. You had a great year last year in terms of the share price. Obviously, shareholders, the share register must be quite pleased with your performance. I know you’re excited obviously about the ore sorter here but you’re obviously more excited about bringing Coringa into production. You’re off to Brazil tomorrow you tell me, before we started the call. What are you going to do?

Mike Hodgson: Well, we’re closing in on our sort of three-year, we’re doing, we’re updating our mine plans and our resource estimations. So that’s basically what I’m going down there to actually sort of oversee, have a good look at that. We’ve got some exciting drilling going on at Sao Chico. I just to make sure we can as much of those results into this resource estimate we’ve just done There will be an update coming out too some very couple of intersections on the further step outs yet. That’s not probably get the results on, quite, even the official results, but certainly it’s looking very good. We’ve got some very nice-looking introspection, visual at this moment in time so I’m going to be looking at all of that.

Coringa, a year, well that’s obviously going on very well. We’re, as you know, we talked about this last time, we have Greenstone the convertible loan note coming in at the end of next month, and that will, of course, be the catalyst to us to start work at Coringa, start on the decline and getting on the ground. And, again, the exciting thing about that is getting underground, getting the bulk sample done or getting that earth moving, see how that responds to ore sorting as well. So, I’m completely sold on the whole thing. I mean I must admit when it was all, when we all talked about it, it was about two years ago the scary thing was it basically going to amount to USD$2M on something like this was you know… Well, I don’t want it just to be an ethical success. We really hope it works in earnest. I’m completely sold. I think it’s a paradigm shift in this part of the world with all of its sulphite hosted Gold deposits. It’s going to be terrific.

Matthew Gordon: I think that’s what the shareholders bought into last year when the share price was moving rapidly up having been stagnant for so long. A couple of million bucks and a payback of, as you said, less than a couple of years, 18 months to 24 months. Fantastic. But, also the ability to double your production and get up towards that wonderful 100,000 ounce a year number it has got to be in the crosshairs for you. I mean Coringa could get you up to 80,000 and with your exploration at Sao Chico you’ve got to be aiming higher, haven’t you?

Mike Hodgson: Yes definitely, I think the ease of mining at Sao Chico ore body, that’s why we put a lot of effort on exploration now. We obviously get a bigger bang for our buck with our exploration work that we do there. If we do get a bit of a tiger by the tail there and, at the same time, the space that we’re liberating by cleaning up the Palito ore creates more space to put through more Sao Chico ore, but we’re not dismissing the possibility of being able to sort the Sao Chico ore as well. It might be a different way of doing it, but we are beginning to get some pretty good results on that. So, it’s three deposits. Coringa, Sao Chico and Palito as being sortable in the end. We’re going to squeeze, I was always saying, my comment there, low-grades and tonnes cost, we’re always going to try and get the grade up as much as possible and not just chase scale but chase quality so we can actually get to, you know, 100,000 ounces with mining as high a grade as possible so we don’t actually have the enormous through points that a lot of 100,000 ounce producers have to have to get that level of production. That’s the name of the game.

Matthew Gordon: And that’s the focus for this year or, have you got more surprises on the horizon?

Mike Hodgson: I think if we get a nice big resource increase at Sao Chico and we get successful or we get on the ground at Coringa and we bring back a bulk sample and that works very well with the ore sorter and Palito’s achieving its 45,000oz, I’d be very happy with that outcome.

Matthew Gordon: Very good. Thanks very much. I appreciate you taking our call with regard to this morning’s press release. We were keen to speak to you because it was one of the stories, success stories, of last year, certainly in terms of share price, which is the name of the game after all. So, we’re kind of keen to see how you get on this year and see if you can repeat that success. Stay in touch.

Mike Hodgson: I will Matthew. 


If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Serabi Gold (LSE: SRB, TSX: SBI) – You Broke The Bonds, And You Loosed The Chains (Transcript)

Serabi Gold - Palito

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

2019 was a good year for most gold companies, including Serabi Gold, who saw its share price treble. Now Serabi is looking to push on to achieve the Gold returns shareholders will demand.

Serabi’s debt to Sprott Lending Partnership, c. US$6.5M, and Equinox Gold Corp., US$12M, has been looking. Rather than raising equity to resolve the problem, Serabi Gold has opted for US$12M of convertible notes with existing shareholder Greenstone Resources, which will enable them to pay back Equinox. The remaining debt owed to Sprott will be settled from cash reserves. This wards off dilution for now, but if Greenstone decides to convert notes into shares rather than cash that would suggest the company has delivered on its production targets and the share price has bounded on further.

Serabi Gold will now look to push forward with the development of Coringa, which is geophysically and metallurgically similar to Palito, but with a higher gold grade of 8.34g/t. They will likely use their freed-up cash flow to bring Coringa through to production by Q1/21, with the target of a combined, cross-mine AISC of c.$950. Investors will want to see eventual production doubled.

Serabi will use the majority of the c. US$14M in the bank to develop Coringa, introduce an ore sorter at Palito and continue exploration at Sao Chico. Serabi Gold appears to be well set up to build on last year’s 40,000oz+ gold production figures. Let’s keep watch and see if they can deliver.

Interview highlights:

  • Press Release: $12M Convertible Loan
  • What is a Convertible Loan and What Terms Bind it?
  • Had They Looked into Equity Options Beforehand?
  • Greenstone Group’s Support
  • Year of Delivering: What Will They Do With the Money?

Watch the interview here.


Matthew Gordon: You have a press release out this morning: USD$12m convertible note. Why have you done that?

Mike Hodgson: I think everyone will know, Serabi investors and people who have been following us, that we have the Coringa project which we have been advancing, making good permitting progress. It’s a very similar deposit to our Palito operation, so we see it as quick organic growth. We are working through the permitting process and have a license to start the underground operation and that is something that we are eager to do. One outstanding condition on that has been that we have one final payment to make to the company we purchased the asset from, called Equinox. They were called Anfield in the past, but they have since become Equinox, and we owe them USD$12m. Whilst we are eager to start our underground operation at Coringa, it is something that we wouldn’t be comfortable doing until we have fully owned the asset. So the payment will be used to settle the final payment to Equinox which is going to be happening, all being well, at the end of February 2020.

Matthew Gordon: And you also have debt with Sprott outstanding. Will you be tackling that or is that something you can roll over?

Mike Hodgson: The good thing about this USD$12m convertible loan is that it frees us up to use our own cash. We have been running up our cash position quite nicely during 2019. We opened the year with USD$8m and we ended the year with over USD$14m. We have been building up cash. The whole idea, the original intention was to build up that cash as much as possible and to actually make the Equinox payment, but instead, we will use that cash to pay off Sprott, and to actually end that debt as well, which is sitting at a little over USD$6.5m. We will pay that out of cash flow; this is what this convertible loan allows us to do. It liberates our cash to do that, and continue with our various work programs at Palito and Sao Chico. We are actually drilling a lot to try and increase the Resources and to fund that underground development which we are going to do at Coringa from Q2 onwards in this coming year.

Matthew Gordon: What is a convertible?

Mike Hodgson: Okay, well, a convertible loan is essentially money where a lender puts money to the company on a condition over a term, in this case, 16-months, they then have the right to take shares, at a pre-agreed price, the exercised price, which will be set at the beginning of the loan. In other words, in the next few days, they have the right to actually acquire those shares at a fixed price, at the end of the term. They may want it to be converted, so in this case, it would be fairly close to the market price, but they could choose to actually get paid back in cash instead. The company also needs to demonstrate that they can pay the money back in cash as well. At 16-months, cashflow is actually strong enough to do that, but we would obviously expect the conversion with Greenstone to take it in shares.

Matthew Gordon: It is at their election; if your shares are moving up, or if they feel your shares will probably move up, they will elect to take shares. Or they could just treat it as debt and you repay them at the end of the term if you have the cash, or perhaps you refinance it if you didn’t have the cash.

Mike Hodgson: That’s correct.

Matthew Gordon: It is an interesting device which some Juniors use. Did you look at the option of equity, because I imagine that last year, or towards the end of last year, it was a tricky period for equities? I think most companies were asking for a 10% to 15% discount. Did you have those conversations?

Mike Hodgson: We did. Last year started, production-wise, we had a terrific year and as I just said, we generated cash; we generated USD$6m to USD$7m during the year, which was a great effort. We had a poor share performance in Q2/19 when we had two shareholders: one an institution in London, and one a private lender, invested some time ago, both selling their positions and that really took our share price through an all-time low for the last few years of £0.23p. So, at that point, equity was absolutely out of the question.

Despite that, we did see a price recovery during the year. Serabi, like many Juniors has suffered over the year, with liquidity – we did actually find over the second half, on this Gold run on H2/19 – we saw a lot of investors come into the stock and that really drove the price up. For once, in quite a while, we had some real liquidity, share price went back up to about to £0.70p/80p range, which certainly brought the prospect of equity into question. But having investigated it, speaking to the brokers, the board, major shareholders generally, it was still expensive money. Most of the equity deals kicking around wanted 20% discount to the market, so it was still going to be quite an expensive way of doing this.

So, Greenstone; they are fairly new investors with us. They have been very supportive. They offered us a convertible loan, so it seemed favourable, the cheapest money and the best option to take.

Matthew Gordon: Quite an endorsement by Greenstone. For people who don’t know who Greenstone is, they are a geologically technical fund in London. This takes their position to 37.8% potentially, or something like it.

Mike Hodgson: Yes.

Matthew Gordon: So quite an endorsement from them. You must be pleased to have them onboard and supporting you?

MIKE HODGSON: Absolutely. They took a big role in our company in that we have regular technical discussions. We have had a lot of support. They have got a good engine room; people who we can call on. They have obviously got a huge reach in terms of things that the company can be doing as well. They are super helpful and it is good to have a shareholder of that type of calibre in our stock.

Matthew Gordon: Smart money with deep pockets. Very nice. Can we talk about what you are actually going to do with the money? You have talked in the past about obviously getting into production. I also want to look at what you’ve been doing at Palito and Sao Chico because you have talked about exploration in the past, so what is happening this year with this new restructured Serabi Gold company?

Mike Hodgson: Yes. Well we are really, really busy at the moment. We had a great year. We broke 40,000oz for the first time ever, which was a huge achievement. We ended a quarter, Q4/19 with another 10,000oz which was really pleasing. So that means that 5 out of our last 6 quarters have broken 10,000oz, so we really are in regime, established at 40,000oz. Very steady – which is not something you usually see with a small producer. It is very consistent. The grades are very solid. Production and throughputs are going well at the mines. We still remain a plant-constrained operation; which I will come onto in a moment. We are doing something about that, but it was still very, very pleasing. We expect this year to be more of the same with the good news that we have our ore-sorter, which is being commissioned as I speak. I am actually going out very quickly next week, to site to see this machine working. We are commissioning it right now. We have got the manufacturer at site. We are calibrating it.

Now, the effect of this ore-sorter is that, the most diluted ore that we have got, which is generally the Palito development ore, and some of the lower-grade Stope ore, we can pass this material through this ore sorter, which essentially removes waste. Either by optical; by colour, or by density. Now, we are a plant-constrained operation. Our restriction is the milling section which is around 550tpd. If the grade is sitting normally at about 7g/t or 8g/t, that means that at the end of the day, the maximum output is around 40,000oz.

The ore sorter is going to sort of screen out some of that waste rock which is currently entering the process plant and will actually liberate some space so we can actually add more higher-grade ore and get that plant processing the same volume but of a slightly higher-grade. So if the grade can go up, from say 8g/t to 10g/t, we can squeeze that plant to get something like 45,000oz to 46,000oz out of it this year.

That, obviously, might not sound a lot but it is 12.5% to 15% more. It goes straight to the bottom-line – literally. The additional mining cost is there, but the additional processing cost is not. So it makes a huge amount of sense. So that is going to be a great plus in the actual operation.

At Sao Chico, which is our satellite ore body, we feel that that is probably the place where the extra ore production, mine production, will come from, to take up the slack that I have just talked about; add these extra ounces of higher-grade ore. And we are drilling there at the moment and have been drilling for around 2-months now and that will continue for the next 3 or 4-months. We are doing step-out drilling there. It is going very well. We are just literally drilling extensions to the current mine limits. If you can imagine an ore body – it is open to the East, it is open to the West, and open at depth, we are doing underground drilling with a contractor. Doing deep underground diamond drilling, to test the ore body at depth. We will be doing the same on strike at the surface with the contractor as well.  So that aggressive drill program is going to go on for the rest of…until Q2/20, with a view of hopefully drilling a new Resource update at Chico at the end of Q2/Q3. But most importantly, it is going to actually allow us to run our mine plan a bit longer. That’s the key there.

We also have at Sao Chico, outside the mine limits, but in our exploration licensed areas, some really exciting geophysics anomalies which we actually discovered back in 2018. We have finally got a drill rig in those as well so we are actually drilling those at the moment, we are only into our second hole. The results of which will be coming out in the next 2-months. So we are going to see a steady stream of drill results, coming particularly from Sao Chico, the mine itself, the step-out drilling, and drilling anomalies during the first half of this year.

So all of this is being funded out of our cash flow. We ended the year with USD$40m cash in the bank. We are going to pay USD$6.5m off to Sprott at the end of next month, and the rest of the money will be used, along with contributing cashflows we continue that exploration program. And finally, as obviously, and the real reason we are doing the convertible loan, is the work as well at Coringa.   

We have the mining license. Coringa, our new asset which we are going to bring on stream in the next 18-months. We are making great progress on the permitting.  We are very close to getting the first license, the most difficult license to get which is called the Preliminary License. That is conditional upon a public hearing which we are going to have. The date has now been set; it’s on 6th February. That’s when all of the stakeholders go to a public meeting which is in the region. It is important that it is in the region because it is in the town where Serabi is already one of the biggest employers and therefore, we are a big fish in a small pond. We have great local support. One really important note is that on December 6th, we actually got a sign-off from FUNAI – the Federal Agency for indigenous communities which these days, one can imagine in the Amazon, that is a very important group of people, which you do really need their support. They actually signed off with full support for the project. There will be no negative impact for them, in fact, positives, so that was a tremendous piece of news for us.  Which means that we will go into that public hearing well placed, albeit the public hearing will go well and we will get the preliminary license on the back of that.

That is the hardest license and where you are going to get stopped. You are going to get stumbling blocks but we feel pretty confident. We have made the project pretty water-tight. We have got no tailings there anymore. All of the environmental impact studies etc in our plan will be to not use tailings and dry-stack tailings, again, it is as good as it can be so we feel very confident on the back of that meeting on February 6th, we will have positive news.

Just to finish on that point, we already do have the license to start the underground mine. We are going to get that underway as soon as possible. It is important to demonstrate that we are a company that is really committed to the project in the region. Getting it started, putting jobs in the local community at the earliest stage and getting that all-important geological information for lenders and equity down the line. However, we finally fund the project, at the back end of 2021, we want to advance the project and get more confidence on the asset itself.

We want to know our AISC. We have actually managed about USD$1,050 for the year in 2019 with our production, and Coringa is going to bring in an additional 35,000oz to 40,000oz. Similar cost, but whilst there won’t be direct operational synergy, as they is 200kms apart, there will obviously be maintenance synergies, management synergies, some shared facilities like assay facilities and we are trying to locate some of those facilities between Palito and Sau Chico and in a city called Nova Polesa, which basically sits equidistant between the two assets. It is a town of about 40,000 people. There are a lot of positives there and that, I think those extra ounces will come in low-$900s so overall, we will be an 80,000oz producer with around an AISC of USD$950 as opposed to USD$1,050 today. So, with today’s Gold prices and today’s exchange rates; that’s a pretty nice place to be for a company of our size.

Matthew Gordon: Last year your share price trebled. You finished with a lot of cash in the bank. You are re-structuring. Trying to give yourself a good start to the year. What we need to see from you is delivery of all of these things; getting into production, doubling your production with the addition of Coringa, so it is a case of delivering and doing what you say this year, isn’t it, for you?

Mike Hodgson: It is, but it is not something we haven’t done before; at the end of the day, it is repetition of Palito so we are not leaving our comfort zone, we are just doing the same again.

Matthew Gordon: Step and repeat: cookie cutter approach. Mike, thanks for that update. We will stay in touch and do let us know how you get on with that Preliminary Licence. It sounds like a big step for you.


If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Serabi Gold - Palito

Serabi Gold (LSE: SRB, TSX: SBI) – A Big Step Forward?

A cartoon man, dressed in a shirt and tie, cuts himself free from the shackles of debt.
SERABI GOLD
  • LSE: SRB
  • Shares Outstanding: 58.91M
  • Share price GB£0.76 (21.01.2020)
  • Market Cap: GB£44M

Gold is a hot commodity at the moment, and promising juniors like Brazil-based gold exploration and production company Serabi Gold have been a central focus for many investors. Serabi Gold has been trying to create a positive outcome for investors from its debt situation for over a year. However, according to today’s press release, they seem to have reached a solution. What sort of package has been formulated and how will this impact investors?

The Background

With gold now sitting at c. $1560/oz, many gold companies reaped the rewards and performed reasonably well last year. However, Serabi’s trebled share price in less than 6 months during 2019 is something of an anomaly; it seems to dispute the notion that Serabi Gold has simply benefited from a good year for gold, or has just recovered well from the sale of shares from two key investors. There appears to be more to this story.

In terms of productions figures, last year Serabi Gold broke the 40,000oz mark for the first time ever with grades of well over 6g/t from Palito Gold Mine. In addition, 5 out of their last 6 quarters have seen them reach 10,000oz. This level of consistent, strong performance is rare in junior mining companies; most trip over many hurdles before attaining stable productivity.

Serabi seems to have hit the ground running, and with the imminent introduction of an ore-sorter that is currently being calibrated on-site, Serabi will hope to see its production capacity increase further. This will be courtesy of liberated processing space at their plant. The ore-sorter will reduce the amount of ore going into the processor, and increase gold output, to see a 10-15% rise in production with the equivalent rise in mining costs but no increase in production cost.

A photo of Serabi Gold's Palito Gold Mine
Palito Gold Mine

However, this is all a long way off. Serabi has been drilling at San Chico for 2 months, performing step-out drilling and extensions to current mine limits. Deep underground drilling and strike at surface drilling will continue into Q2. Geophysical anomalies first discovered in 2018 now finally have a drill rig assigned to them and a resource update is expected by the end of Q2. Investors will want to see the share price rise again.

If everything goes to plan, this means Serabi Gold could see an increase in its US$6-7M revenue to add to the US$14M cash that sits in its coffers at present. However, Palito can only take Serabi’s share price so far. In order to gain access to a higher-grade resource, increase production, and reduce its AISC, Serabi’s Coringa Gold Project needs to be brought into production. How will this financial restructuring free up the Serabi’s management team to make decisions in 2020?

The Debt Package

The encouraging story of Serabi Gold has always had something of an Achilles heel. Serabi’s debt to Sprott Lending Partnership, c. US$6.5M, and Equinox Gold Corp., US$12M, has been something of an elephant in the room.

We imagine one option Serabi may have considered would be the standard route of raising equity, but this isn’t the option they have taken; perhaps Coringa’s status, at a PEA stage without significant underground development, may have deterred some potential investors. The solution Serabi has opted for is US$12M of convertible notes with existing shareholder Greenstone Resources, which will enable them to pay back Equinox. The remaining debt owed to Sprott will be settled from cash reserves. The convertible loan is a flexible arrangement that enables Greenstone to be repaid via cash or shares at their own discretion. Based on the terms set out in their release, conversion of the convertible loan notes would see Greenstone’s stake in Serabi Gold potentially rise to 37.8%. Will large shareholders Megeve Investments be happy? Is this good for liquidity in the long run? We shall see.

Investors will be happy to see dilution warded off, but a convertible loan can still lead down this path at the end of the 16-month term.

Coringa – Full Speed Ahead

With this loan in place, Serabi Gold can now look to push forward with the development of Coringa. It has not just been an inability to spend that has held Serabi back on this front; the collapse of the Valé tailings dam, in Brumadinho, Brazil in January 2019, meant mining companies had to spend a great deal of 2019 adjusting their tailings plans to create safer, more environmentally friendly dry-tailings arrangements. Serabi were not immune from this requirement. This also delayed Coringa’s preliminary permit hearing, because of the need to complete a new Environmental Impact Assessment (EIA).

However, with the tailings issue resolved and payments to Sprott and Equinox settled, Serabi will no doubt look to replicate their success at Palito. On the face of things, this does appear to be a bit of a rinse and repeat story. Coringa is geophysically and metallurgically similar to Palito, but with a higher grade of 8.34g/t. This is reliable, consistent and relentless underground mining which is exactly what Serabi has been demonstrating for the last couple of years.

Serabi’s team says Coringa is close with their preliminary licence, a hearing scheduled for the 6th February. Serabi claims to have worked with the local community to ensure the project will run in an environmentally and socially sound manner; the indigenous communities in the area have signaled their approval for the development.

Serabi now has plenty to do; the management team is certainly going to be busy! They will likely use their freed-up cash flow to bring Coringa through to production by Q1/21, with the target of a combined, cross-mine AISC of c.$950. Investors will want to see eventual production double. Until then, it remains to be seen exactly how this debt arrangement pans out and if Serabi Gold has what it takes to get Coringa up and running. History would suggest they do, but this is mining. Let’s remain quietly upbeat. There’s a long way to go.

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A cartoon man, dressed in a shirt and tie, cuts himself free from the shackles of debt.