Serabi Gold (TSX-V: SBI) - JV on the Cards for Exploration Budget

Serabi Gold Plc is a gold exploration and production company involved in the evaluation and development of gold deposits in Brazil. The company’s primary interests are its 100%-owned Palito Mining Complex and the recently acquired Coringa Gold project, both located in the Tapajos region of northern Brazil. Combined gold production from the Palito Mining Complex is currently around 40,000 ounces per annum, whilst the Coringa Project, when in production, is forecast to produce an average of 38,000 ounces per annum.

Matt Gordon caught up with Michael Hodgson, CEO, Serabi Gold. Mike has worked in the mining industry for over 25 years and has extensive international experience. Most recently, he worked as CEO and Vice President of Technical Services for Canadian-based Orvana Minerals Corporation. Prior to that, he provided consulting services to a number of mining companies in Europe and South America. Previous appointments include Manager, technical services, and operations for TVX Gold Inc., Mining Technical Consultant at ACA Howe International Limited, and similar roles at Rio Tinto PLC and Zambia Consolidated Copper Mines Limited. He has acquired extensive experience in narrow-vein underground mining operations during his career. Originally qualified in mining geology, Mike is a Fellow of the Institute of Materials, Minerals, and Mining, a Chartered Engineer of the Engineering Council of UK, and a “Qualified Person” in accordance with the Canadian National Instrument 43-101 - Standards of Mineral Disclosure for Mineral Projects.

Company Overview

Serabi Gold is an exploration and development company with major operations in Brazil. The company was founded in 1999 and is headquartered in the United Kingdom. Serabi Mineraçao Ltda, Kenai Resources Ltd., Chapleau Exploração Mineral Ltda, Serabi Mining Services Pty Ltd., and Serabi Mining Limited are the company's subsidiaries. The company's flagship projects are the 100% owned Palito Mining Complex and the Coringa Gold Project which are located in the Tapajós region of Northern Brazil. It is listed on the Toronto Stock Exchange (TSX-V: SBI) and the London Stock Exchange (LSE: SRB).

Serabi Gold’s representatives recently attended the 121 Mining Investment Conference in London. This event serves as an opportunity for the company to meet with analysts, along with new and existing investors. Following 2 years of the pandemic, the company has been going steady with its business. It managed to keep the ship afloat during the pandemic and currently, it is recovering from the impact.

Prior to the pandemic, the company was in a strong position. It had recently acquired the Coringa asset and was moving quickly towards doubling production. However, due to the advent of covid in 2020, the company lost production, development, and several skilled talents. As a result, the company had to park exploration for the time being.

This year, the company has been trying to get back into its 2020 position. The effects of the pandemic have been particularly hard in Brazil. The first quarter of 2022 has been tough for the company, largely due to a legacy of delayed development during the pandemic, placing it into a just-in-time mining cycle. The company suffered a poor quarter and lower grades due to a plant-constrained operation.

Heading into the first quarter of 2022, the company was in a challenging position. Since then, the company has bounced back and made a good recovery. By the second and third quarters, the company successfully beat its quarterly guidance metrics. In Q4, the company’s production is on target. It expects to exceed the revised guidance.

At the Coringa asset, the company has gained access to the ore and is working on development. It would need to carry out a lot of development in order to get into the ore body and understand it. It recently started stoping. The Coringa project is expected to be a significant contributor to the company’s overall ounces in 2023.

Funding Considerations

Serabi Gold is cognizant that it cannot fund Coringa’s development from the Palito cash flow alone. A lot of things need to fall into place in order to fund the project. While the Palito asset is generating cash, it’s not sufficient to carry out the exploration or fund the Coringa project. Acquiring licensing at Coringa is critical for bringing in external funding for development. In terms of exploration growth, the company is taking a modest approach at this point in time. In a case where the company can liberate Coringa from the Palito cash flow, it will have some funding available for exploration.

The company has had strong results in its green field exploration from a discovery perspective. It currently has 6-7 large targets that appear to be clusters either containing a lot of veins, similar to Palito, or a larger-scale deposit altogether.

JV Considerations

One of these targets is the Matilda discovery, which is principally a copper discovery. Serabi Gold has invited 6 companies to come on-site. The companies have shown interest in the asset and are currently working on proposals. Serabi Gold is interested in carrying out a joint venture exploration alliance with these companies. If Matilda ends up being a porphyry copper deposit, it would be out of reach for the company. A joint venture alliance will help fund the drilling at the 6-7 deposits.

The company is looking to advance a lot of drilling until something of value and scale is found. While there is a probability of making a lot of discoveries, it won’t be sufficient for the larger companies but would be highly favourable for Serabi Gold.

The company is looking to give the assets a first pass in 2023, which will enable it to advance the properties and submit the final exploration reports, which are due in 2024. This will allow the company to turn the concessions from exploration properties to mineral properties and move them forward.

Serabi Gold is looking to conduct around 2,000m of drilling on each target, which comes out to 12,000m-15,000m of total drilling. Since the deposits feature open-pit, near-surface type mineralization, the drilling is expected to go beyond 200m at depth.

Following the appointment of a new leader in Brazil, the company is waiting to see whether the leader is supportive of the mining industry. Since the company has a small underground footprint, it isn’t anticipating any problems resulting from the change in administration. The assets are based in a forest, where the operation of big super pits could be challenging. The region also faces energy constraints. If there is a substantial discovery in the future, the company might face potential issues.

This week, the company’s representatives will be in Brazil, attending a congress in Ouro Preto, the old capital, which is located near Belo Horizonte, the mining capital of Brazil. The event is called Someexim, which is usually held every two years, however, the last one was cancelled due to the pandemic. As a result, Someexim is being held for the first time in 4 years.

The event is expected to be a great networking opportunity. The majority of the people from the mining industry in Brazil are expected to attend the conference, including the JV (Joint Venture) alliance companies. The company anticipates that before the end of 2022, it will have something in place and by January next year, it will have funds to expend on the project.

Some of the groups that have been involved in active discussions have shown interest in the copper portion of the deposit. As Serabi is a gold mining company, the copper operations will remove any conflicts. All the potential JV partners are larger companies. Serabi Gold is looking for modest interim growth while the JV partners are looking at a big-scale operation. While exploring for larger-scale discoveries, the companies will also end up making smaller discoveries that will directly benefit Serabi Gold. Interestingly, Rio Tinto and BHP have also shown interest in the assets.

Even if no discoveries are made, the drill and exploration will provide the company with a lot of valuable data. The company intends to run drill operations for the next 12 months and based on the findings, it will make a decision. The data collected over time will help the company in running the program.

Ongoing Operations

In Brazil, mining companies are granted a 3-year exploration licence along with a 3-year extension. At the end of the 6-year period, the company is required to submit a final exploration report, which can either lead the entire property to be converted into a mineral licence or observe a reduction in the land package. In a case where the company does not carry out a reduction in the package, the country’s administration ends up reducing it. This could potentially cause the company to miss out on the ore body.

Notably, the company does not need to drill the entire ore body, but the guts of it. It has identified anomalies and carried out geochemistry and geophysics on the deposit. The company is cognizant of the targets and is looking to drill around 2,000m on each property. This would be followed by a final exploration report which is due by January 2024.

Serabi Gold anticipates that Coringa will effectively double its production numbers. The Palito asset will produce a steady 30,000oz-35,000oz, while  Coringa’s production will bring the overall ounces up to 60,000oz-70,000oz/year.

At the Coringa asset, the company is running a dual process. The mine has started and is currently in development on an affordability basis. This is because the company is currently funding from Palito’s limited cash flow. The company is running its cash down, which is a strategy that cannot be sustained on a long-term basis.

The permitting process will be the key for the company to acquire funding and take the project to the next level. For the past 6 months, the company has been working on acquiring a LI, a construction permit for a full process plant. The company was asked to carry out an indigenous study, which caused a delay in the process. The study is currently underway. The company has also faced bureaucratic delays.

Despite the setbacks, the company has its workforce on-site, carrying out field work, which is expected to be completed by February 2023. By the end of Q2 next year, the company is looking to conclude the indigenous study, following which, it expects to acquire the LI from the environmental agency. This would give the company the authorization to build a process plant. However, due to the current market position, the company isn’t looking to build a process plant.

At the Coringa asset, the company has gone underground and identified the ore body for the first time. It started transporting the high-grade and medium-grade ore to Palito, where the material is put through the ore sorter. The resultant material grades were exceptional. The company realised that it does not make sense to build a process plant in the current market environment, given the strong results from the ore sorter. The ore sorter essentially reduces the material volume to half or one-third while doubling or even tripling the material grades. This means that if the ROM (Run-of-Mines Ores) grade is 6g-7g/t coming out of the mine, the company will end up transporting grades between 12g-15g/t.

The cost of ore transportation is about 1g/t. If the company moves 5g/6g to the Palito plant, it will generate revenue, but a large chunk will go out into transportation costs. However, if the material is pre-concentrated to 12g/t before it leaves the facility, the grades at Palito will be at net 11g, which is about 2 trucks a day.

The company was unable to do this in the past as the road wasn’t paved 3 years ago. Jair Bolsonaro paved the federal highway, which greatly improved the road infrastructure around the land package. Furthermore, the oversupply of trucks due to the soya business has also resulted in a significant drop in transportation costs. These developments have made trucking a highly attractive option in recent times.

The company is looking to acquire the LI which would enable it to build a process plant. However, it isn’t looking to build the plant at this point in time because it would require the company to redo several studies. Its current strategy is to work with a crushing plant and ore sorter as the front end of the process plant. This is an interim step in the process.

This decision will save the company a lot of money in terms of the project CapEx (Capital Expenditure). Notably, the project already has a BFS (Bankable Feasibility Study) done by Anfield, the previous operator. Serabi Gold conducted a PEA (Preliminary Economic Assessment) on the project, which concluded that building a process plant between 2017 to 2019 will cost around $30M. Factoring in the increased costs and additional factors, building a process plant would require about $40M. This means that the company would need to raise $10M in funding.

This would not have any impact on the mine plan or the growth in ounces. The company will simply end up trucking more material to Palito. It is important to note that the company already has a space in the Palito plant to accommodate it. For its 2022 production profile, the company is looking to produce a little over 30,000oz-32,000oz. Next year, the company expects to be in the high 30s. The year following that, it is looking to ramp up its production to 50,000oz. Serabi Gold is looking to raise $10M through debt. Due to the asset’s production profile and the growth in ounces, the company believes that it can tolerate the debt.

Targets 2022 and Beyond

Coringa is an underground mining asset. In order to grow the asset at a faster pace, the company would need to expend significantly more capital. Coringa, like any other mine, would need 3 years to reach its peak production capacity. This was also the case with Palito, which was reopened in 2013.

Serabi Gold is looking to ramp up production by 9,000oz-10,000oz next year, 20,000oz in the year after, and around 35,000oz in the year that follows. The company intends on increasing production by 10,000oz each year, which will almost go into the bottom line in terms of the cash generated. It anticipates that it will take around 3 years for the production to reach 60,000oz.

According to the company, a large portion of the mining industry in Brazil is disappointed by the election results. Bolsonaro has been highly supportive of the mining industry and has been great for infrastructure development. However, it is yet to be seen how things progress in the future. The state of Brazil’s economy has provided really good exchange rates for the company. In Brazil, the state government has ruling power as opposed to the federal government.

Serabi Gold’s share price has been impacted by inflationary pressures, a widespread trend across the mining industry. Operationally, the company has done really well post-Q1 this year. Due to a limited cash flow, the company is looking to raise additional capital through debt for the Coringa asset. The company isn’t looking to dilute shareholders at the current prices. It has limited funds to conduct deals but is looking forward to acquiring permits, which would enable it to realise its plan. The company is open to the possibility of a potential M&A (Mergers and Acquisitions), in the meantime, it is looking to achieve a yearly production of 60,000oz within the next 2-3 years.

To find out more, go to the Serabi Gold website