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.
• 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 recently intersected the first orebody for the project in Northern Brazil.

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.
• Federal Meeting: As the Federal Meeting has signalled the interest rates hike and monetary policy tightening, it can keep the equity market under pressure.
• Inflation Concern: Due to the inflationary pressure, the Bank of England increased the Bank Rate by 25 basis points to 0.50%. It can keep the equity market under pressure amid the rising US Dollar index.

Gold Industry Dynamics

• Robust Demand Outlook: Several factors such as rising inflation worldwide, Russia-Ukraine geopolitical tensions, and increasing industrial demand for Gold may support gold price over the medium term.
• Gold ETF: Meanwhile, Gold ETF had witnessed a year-on-year drop of around 5% to 3.57 kilo tonnes during 2021. While the Asset under management declined year-on-year by almost 9% to USD 209 billion at the end of 2021. The losses of 2021 were dominated by North American funds.
• Growth Drivers: The recent Federal Reserve meeting indicating a sooner-than-expected interest rate hike and the US inflation touching record high had weakened the US Dollar Index. Thus, it had benefitted the gold price.

(Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,856.70) is sustaining above the 20-days exponential moving average of USD 1,823.30, indicating an upside direction for the commodity. At the same time, the MACD line has given the bullish crossover against the signal line.

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 31 December 2021.             

Production Highlights (for the year ended 31 December 2021 as on 24 January 2022)

(Source: Company Filings)

• Pleasing Production: SRB has achieved a 6% growth in gold production in Q4 FY21, thus resulting in total gold production for FY21 of 33,848 ounces (remains in line with guidance), a year-on-year growth of 7%.
• Operational Progress: The total ore mined in FY21 at 170,261 tonnes at a grade of 6.59 g/t gold showed a healthy improvement of 17% in mined grade compared to the average for 2020.
  

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

(Source: Company Filings)

• 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 14 February 2022 at 11:29 AM GMT, SRB’s shares were trading at GBX 53.81, down by around 2.16% from the previous day closing price. Stock 52-week High and Low were 90.00 and GBX 53.00, 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 ~34.76 indicates an oversold territory. Hence, there could be an uptick in the stock price.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

SRB remains focused on pushing forward with its exploration campaign to drive resource growth. The company intends to complete approximately 700 metres of horizontal development in the next six months, of which over 400 metres will be ore developed within the Serra Zone. Furthermore, driven by robust Q4 FY21 performance, SRB managed to meet its guidance as it exits FY21 with approximately 34,000 ounces of gold production, a growth of 7% on 2020 production. Besides, the Company has achieved the first intersections in the Serra Zone with the three veins intersected by underground development at its Coringa Gold Project.

Considering the penny nature of the stock, SRB may undergo sizeable corrections because of the rising interest rates prospect, global inflation, and Russia-Ukraine geopolitical issue. 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 decent production volumes, strong balance sheet, 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 at the current market price of GBX 53.81 (as on 14 February 2022 at 11:29 AM GMT), with lower-double digit upside potential based on 5.71x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios. 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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