Serabi Gold Enters Into Exploration Alliance With Vale

Summary

Serabi Gold plc (AIM:SRB, TSX:SBI) is a Brazil-focused gold production and exploration company involved in the evaluation and development of gold deposits in Brazil. The company recently announced an exciting strategic exploration alliance with Vale S.A. focused on discovering large-scale copper projects at Serabi's properties in the Tapajos region of Brazil.

The exploration alliance will be implemented over several phases, with Vale providing all funding. In the initial phase, Vale will fund up to $5 million in exploration at Serabi's properties over 12 months. In the second phase, Vale may continue funding exploration activities to advance selected copper projects to pre-feasibility studies.

If Vale then wants to progress a project, it will pay Serabi $5 million for a 75% interest in a joint venture company that will be formed. Vale would then sole fund the project through a definitive feasibility study, while Serabi retains a 25% interest. Vale also has options to acquire a further 15% and then 10% interest in the project.

The exploration alliance allows Serabi to leverage Vale's expertise and resources to evaluate its significant copper potential, while Serabi maintains its focus on gold exploration. Vale's involvement validates the copper potential at Serabi's properties.

This is an exciting development for Serabi Gold that provides a clear path for advancing and derisking its copper assets. The deal structure allows Serabi to participate in the upside, while shifting the funding burden to its well-resourced partner Vale. Investors should view this positively, as it enhances Serabi's exposure to potential copper discoveries without dilution.

Interview with Serabi Gold

Risks & Opportunities

Risks

• Exploration and mining operations carry inherent risks and uncertainties around resource estimates, costs, and execution. The company may not realize expected production growth.
• Operating in Brazil exposes the company to political, regulatory, and social risks. Allegations around improper permitting could impact operations if true.
• Additional funding needs may dilute current shareholders if required to develop projects.
• The company has a small market capitalization and could face volatility in its share price.

Opportunities

• Exploration alliance with Vale provides a strong endorsement and funding for evaluating copper potential.
• Production growth projected from 35,000 oz in 2023 to mid-40,000s in 2024 offers potential operating leverage if executed.
• Funding from Vale allows Serabi to advance core gold exploration targets in parallel.
• High gold prices combined with quality ore sources help project strong cash flow as production ramps up.
• Assay results and new resource updates could provide positive catalysts for share price.
  

5 Takeaways for Investors

1. Production growth planned - Serabi is forecasting gold production to grow from 35,000 ounces in 2023 to the mid-40,000s in 2024, providing potential operating leverage.
2. New exploration alliance - Partnership with Vale brings funding and endorsement of exploration potential at Serabi's projects.
3. Positive assay results - Recent assay results and expected resource updates in 2022 could act as share price catalysts.
4. Focus on high-margin production - Trucking higher grade ore and adding ore sorting aims to maximize cash flow in the current gold price environment.
5. Funding needs - While the balance sheet has improved, Serabi may need additional capital to fully fund expansion plans, which could cause dilution.

Conclusion

With robust production growth on the horizon, a strengthened balance sheet, and a premium gold price environment, Serabi Gold represents an attractive investment opportunity at its current valuation. The exploration alliance with Vale also provides external validation of the assets and upside potential. Interested investors should evaluate initiating a long position in Serabi Gold to capitalize on the near-term catalysts and favorable macroeconomic tailwinds for gold producers. The company's small size does introduce additional volatility, but the risk-reward profile appears skewed to the upside at current levels. Acting now to build a position could enable benefiting from the next leg up in Serabi's ongoing growth story.