Serabi Gold - Why I Remain Invested

Updated: Apr 13, 2021

A strong element attached to any gold investment right now is surely centred around where investors believe the gold price is heading, over the foreseeable future.

My own position is very much one of substantial medium-term growth in gold prices, be it that we may well see some stumbles along the way. In my view, this will be driven by the ever-expanding US debt pile, which is becoming more and more unmanageable, which I just cannot see keeping gold down for long. This is perhaps already visible in the fact that gold is able to trade above $1,700, even with such positive economic headwinds in its face.

We may well see an interim drop in prices, either due to a relief rally in equity markets driven by shorter-term better investment opportunities elsewhere, or by the same sort of sharp reactive correction that was witnessed in March 2020, as a rush to cover positions, led to a sell-off of anything that was easy to dispose of.

Whatever comes to pass, my main strategy is a longer-term one, holding the course and keeping my eye on the longer-term prize.

As this is the basis of my approach, I see any gold miner worth their salt, thriving as gold prices push much higher over said medium-term. However, within that scope, I see much greater opportunities, through 'junior' players that are embarking on either substantial exploration or production expansion. With my main pick #SerabiGold, I feel I have the best of both worlds.

Currently hovering around a market cap of c. £51m and having raised the c. $17.5m they felt was necessary to continue their multiple plans, I believe there's much to come from this little company, as we move through the next 2-3 years.

The company's latest presentation can be found here.

The main reason I like this play so much is because of the potential in its acreage but also the fact that I see Brazil as a solid jurisdiction, that enables miners there to maintain 100% ownership of their mines and currently has a very favourable exchange rate, for businesses making their money in dollars but spending them in Brazilian Reals.

To date, Serabi's biggest hindrance was access to funding to enable it to exploit a number of opportunities within its portfolio. This was compounded by the fact that the company has had to pay off a considerable amount of outstanding debt, associated with its buy out of the Coringa gold mining project from previous owners Anfield. All of which progressed during the Covid pandemic, which in Brazil brought about considerable disruption to their 2 operational mines, at Palito and Sao Chico. Despite this, the company was still able to enjoy strong revenues in 2020 due to an elevated gold price, which at times sat over $2,000 per oz.

However, despite this partial cash flow bonanza, the demands of their various projects led the company to announce said recent sizeable placement, which wasn't to everyone's liking, myself included. As they say though time is a great healer and gives us investors an opportunity to remove the emotion from any argument and apply logic, in order to help decide the true merits or not, of the situation.

Here's the extract from the Launch Announcement that covered what the funds were raised for.

First and foremost the company cleared its final debt for the Coringa gold project, a project that the previous owners, spent a whopping c. $50m on, prior to selling it to Serabi Gold.

Next, the company committed $5m to the continuation of its regional exploration, which includes multiple targets and a long reach >3m oz resource.

Now that the funds are there, I feel far more assured that the above 5 main targets planned as part of the 2021 >32,000m exploration programme, will deliver multiple updates as the year progresses, with ultimately the completion of a resource upgrade at both those Palito feed mines, Palito and Sao Chico. All of which should more than offset any potential impact from lower gold prices this year, which as I say are for me purely temporary in nature.

In addition, SRB is expected to commence construction of the Coringa mine, which will initially add 38,000 oz of production, taking SRB to over 80k oz.

Following this contribution,

"The Company anticipates that it will be able to finance the balance of the capital requirements for the full development of Coringa using a combination of debt and the cash flow being generated from its existing operations."

A statement that was made when gold was already trading around $1,700.

So if true, then the current valuation has the potential to be significantly enhanced, assuming the bottom doesn't completely drop out of the gold market, which for me is highly unlikely. On the upside, all of these developments could well take place in a rising gold price market, making their potential impact all the greater.

On the downside, there is Covid, which is once again expanding its presence in Brazil, with cases back over 80k, as I write. On the plus side again, Serabi has invested heavily in Covid related site infrastructure, which simply wasn't there when Covid first struck. That doesn't guarantee their protection from an outbreak or interruption to their works but it's certainly better than early 2020. We also have the very sad news that the company had a death at their Palito mine, with an investigation underway. As I say very sad but shouldn't have any long-lasting effects on the company's prospects this year.

Additionally, the elevated gold price is not guaranteed to hold but as I have said earlier, whilst gold stocks have taken a back seat to other sectors, the idea that gold does not strengthen over the medium term, given the money printing going on in the US at the moment, is for me highly unlikely, leading me to believe the percentages lie in my favour, given the extensive development that SRB is planning in the foreseeable future.

Right now, because SRB lost a lot of expected production in 2020 (32,000 oz achieved vs 45,500 oz planned), the valuation remains subdued and the return to c. 45,000 oz (expected in 2022), isn't currently being respected in the valuation. So that's my starter for 10. Just achieve what you said you would prior to the Covid pandemic.

To that, we can then add Coringa, which as I say is reported to be fully financed on the equity side of things. Then come the exploration and resource expansions, which should be regular and substantial over the coming 12-24 months.

There's enough there to warrant substantial additional value, even if gold prices remain subdued (note - $1,650 - 1,700 gold is hardly subdued). However, as I've already said, if/when gold prices begin to factor in these new rapidly expanding debt levels, then if nothing else the likes of Serabi can help give me a good hedge and their now impressive fully-funded plans, could well lead to a bigger re-rate in a market where gold is exploding north once more.

Note - This article represents the opinion and research of the author only and the author currently holds a position in one or more of the stocks mentioned. Nothing shared in this article is to be deemed financial advice. Where possible all facts have been checked and references provided, however, it is the responsibility of the reader to check all details for themselves before making any financial decisions. Please also refer to the disclaimer policy


Recent Posts

See All