Serabi Gold PLC

Serabi Gold PLC (LON: SRB) is an FTSE AIM All-Share index listed mining company based out of London, which is engaged production and exploration of gold in the Brazilian region. The Company holds 100% interest in Palito Mining Complex and have interests in the recently acquired Coringa Gold Project located in the northern Brazil-based Tapajos region.

Growth Prospects

• Production Capacity: The Palito Mining Complex includes over 50,800 hectares of land with gold production of around 40,000 ounces per annum. The Coringa project covers about 13,000 hectares with a production capacity of approximately 38,000 ounces per annum. The Company funds future development activities and exploration activities through operational cash flow capabilities.
• Robust Q3 FY21 Gold Production: SRB’s total gold production stood at 9,035 ounces during Q3 FY21, an increase of around 33% from the prior-year levels.
• Exploration & Development Activities: SRB had shown a significant progress regarding the Coringa gold project. Moreover, the Company aimed to begin initial production by 2023. The Company had managed to fund the expenses related to the new plant and equipment, exploration activities from the existing cash flow.

Key Risks

• Failure to Discover Substantial Reserves: The failure in discovering substantial reserves could adversely affect the SRB’s future performance as exploration and development are capital-intensive activities.
• Financial Risk: SRB is exposed to the financial risks associated with fluctuation in the foreign exchange & interest rates, availability of adequate working capital, and credit defaults.
• Covid-19 Pandemic: The new variant of the Covid-19 pandemic, Omicron, has caused a significant decline in the UK Equities.

Gold Industry Dynamics

• Robust Demand Outlook: Several factors such as rising inflation worldwide, the spread of Omicron variant of the Covid-19 pandemic and increasing industrial demand for Gold may support gold price over the medium term.
• Gold ETF: Meanwhile, Gold ETF had witnessed the first inflow since July 2021 during November 2021. The commodity had experienced net inflows of around 13.6 tonnes, equivalent to USD 838 million, as inflows in North America & Europe outweighed the outflows experienced in Asian countries.
• Key Central Banks Decision: The record annual consumer price inflation in the US during November 2021 released last Friday had triggered the hopes of a rise in interest rate as the Federal Reserve had expected to accelerate the asset tapering. Moreover, key central banks like the Bank of England, European Central Bank and Bank of Japan will also make policy decisions later in the week.

(Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,784.20) is sustaining between the lower Bollinger band and the middle Bollinger band, indicating an upside direction for the commodity. At the same time, the 14-days RSI stood at ~46.16 levels.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Serabi Gold Plc.

Fratelli Investments, Ltd is the most significant shareholder as it holds nearly 19.32 million shares as of 30 September 2021.

Financial and Operational Highlights (for the three- and nine-months periods ended 30 September 2021 as on 30 November 2021)

(Source: Company Website)

• Decent Revenue Growth: In the first nine months of FY21, the revenue witnessed a marginal increase of around 2.95% from USD 45.40 million during 9M FY20 to USD 46.74 million during 9M FY21.
• Net profit: The Company’s net profit remained USD 7.66 million for the first nine months of 2021, while it was USD 7.42 million during 9M FY20.
• Balance Sheet: SRB had strengthened its balance sheet by showing a significant increase in the net cash from USD 6.60 million as of 31 December 2020 to USD 15.20 million as of 30 September 2021.
  

Financial Ratios (Q3 FY21)

Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 13 December 2021, at 11:15 AM GMT, SRB’s shares were trading at GBX 58.40, down by around 1.85% from the previous day closing price. Stock 52-week High and Low were 103.92 and GBX 58.05, respectively.

From a technical perspective, the stock price is hovering around the lower Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~19.88 indicates an oversold territory. Hence, there could be an uptick in the stock price.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook

The Company has shown flexibility, commitment, and resilience to navigate through ongoing challenges and is in a good position to emerge stronger in the future. Moreover, the strong gold price and favourable foreign currency movements resulted in an EBITDA of USD 15 million during 9M FY21. Meanwhile, the Company’s development plans regarding the Coringa project remained unaffected by the temporary suspension of the issuance of future licences for the project. Furthermore, the strong gold price in BRL terms would boost the future prospect. Considering the penny nature of the stock, SRB may undergo sizeable corrections because of the rising interest rates prospect, global inflation, and Omicron variant of the coronavirus. Thus, it may depend on the risk appetite of the investors to take a reasonable position in this company having several operational growth catalysts.

Considering the robust production volumes, strong balance sheet, robust financial & liquidity position, higher profitability margins, lower leverage ratios, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Serabi Gold PLC at the current market price of GBX 58.40 (as on 13 December 2021 at 11:15 AM GMT), with lower-double digit upside potential based on 5.48x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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