Serabi Gold – highly leveraged gold play #SRB
I’ve been away in the US for over a month with work – sorry! Given recent political events and the rocketing gold price, covering a small cap gold production company seems appropriate.
Serabi Gold is an AIM/TSX listed is a gold mining company based in Brazil. Its market cap at an ask price of 62 pence is £36.5m.
The shares have been volatile over the past year and can be illiquid:
But the Serabi share price has not moved in line with increases in the price of gold:
Balance Sheet – net cash
The company’s balance sheet at end of Q1 was as follows:
What isn’t shown on the balance sheet is that Serabi is due to pay $12m in December 2019 (see slide 8) as part of the consideration for the Coringa mine.
Production asset – Palito
Serabi has given production guidance of 40,000 – 44,000 ounces in 2019 from its Palito project. Having previously been burnt by Hummingbird Resources’ operational issues as discussed on Cube last year, I now look for a track record of production. Serabi’s 2016 – 2018 performance looks good to me:
Development asset – higher margin ounces – Coringa
Coringa is expected to add 10,000 ounces in 2020 and 40,000 ounces in 2021. Based on the previous owner’s BFS (feasibility study), Coringa was estimated to have an AISC (all-in sustaining cost) of $786/oz with capex of about $28m.
Serabi is now in the process of producing an updated Preliminary Economic Assessment which is due later this month. Camp, lab, workshop, access roads are all newly built and a 750 tpb process plant is at site.
See Serabi’s most recent presentation for more information.
My ballpark figures – highly leveraged to the price of gold
AISN at Palito are relatively high at over $1021/oz in Q1, Serabi is highly leveraged to the increasing gold price which means earnings should currently be more than twice what they were earlier in the year.
At $1300 gold: AISC $1050/oz = $250 margin * 10,000 oz’s per quarter Palito should generate about $2.5m per quarter ($10m per year). As an aside I expect Palito’s AISC to drop in Q3/Q4 as costs are spread over H2’s expected 24,000 ounces versus only 20,000 ounces in H1.
At $1500 gold: AISC $1050/oz = $450 margin * 10,000 oz’s per quarter Palito should generate about $4.5m per quarter ($18m per year) excluding PLC costs.
Were the gold price to remain elevated over the next couple of years to 2021, taking a Coringa AISC 800/oz gives a $700 margin which at $1500 gold would see Coringa generating $28m per annum (at 40,000 oz’s production).
I believe that Serabi’s shares are worth taking a look at for three reasons.
- They have not re-rated with the gold price.
- I don’t know any other producers who should have 100,000 ounces of output within the next couple of years valued at less than £40m and without substantial debt.
- They’re trading at a more than a 30% discount to NAV ($70m at end of Q1, p5 – corporate update).
The biggest concern I have (other than a collapse in the gold price) about Serabi is how Coringa be financed. But I don’t see the $12m December payment as an issue given the Q1 cash balance and the price of gold. I believe Serabi will be able to access bank finance for the following reasons:
- Economics of Coringa are likely to be compelling
- Serabi’s track record is good
- There are existing loan facilities
- There are institutional investors who may be able to assist them.
As a shareholder I look forward to seeing whether Serabi management will be able to continue to deliver operationally and corporately over the coming quarters.
At the time of publication the author holds a long position in SRB.