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 in the production and exploration of gold in the Brazilian region. The Company holds 100% interest in Palito Mining Complex and has interests in the recently acquired Coringa Gold Project located in the northern Brazil-based Tapajos region.

On 22 April 2022, the Company will release FY21 financial results.

Growth Prospects

• Accelerated Mine Development: SRB had shown 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 and planned to complete design work and award of the Installation License before the end of Q2 FY22.
• Increase in Mineral Reserves: The Company had updated Mineral Reserves and Resources estimate at Palito and Sao Chico as of 31 December 2021 on 07 March 2022. Moreover, the total Proven and Probable Reserves increased from the 2020 level of 61,720 ounces to 67,344 ounces as of 31 December 2021.

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.
• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine can continue to weigh on the equity market.
• Financial Risk: EUA is exposed to the financial risks associated with fluctuation in the foreign exchange & interest rates, availability of adequate working capital, and credit defaults.

Gold Industry Dynamics

• Growth Catalysts: Gold price got support from three key factors such as the Russia-Ukraine war, reduced probability of a 50 basis points US Fed interest rate hike by March 2022 and rising inflation worldwide.
• Key Events: The Federal Reserve meeting scheduled for 16 March 2022 may result in first interest rate hike since 2018. Thus, it may create pressure on the gold price.
• Gold ETF: Gold ETF witnessed a net inflow of 35.3 tonnes (equivalent to USD 2.1 billion representing around 1% of AuM) in February 2022 amid high inflation and geopolitical risk.

 (Source: REFINITIV; Analysis done by Kalkine Group)

On a daily chart, COMEX Gold Futures' price (USD 1,963.10) is sustaining above the 50-days simple moving average of USD 1,863.70 and 100-days simple moving average of USD 1,833.10, 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)

• Decent Growth in 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 March 2022 at 10:02 AM GMT, SRB’s shares were trading at GBX 52.31, down by around 1.30% from the previous day closing price. Stock 52-week High and Low were 80.00 and GBX 52.00, 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 ~38.28 indicates an oversold territory. Hence, there could be an uptick in the stock price.

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

Business Outlook

The Company has achieved a significant year-on-year growth in top-line revenue and bottom-line profitability for the first nine months of 2021. 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. On the operational front, the Company has achieved the first intersections in the Serra Zone with the three veins intersected by underground development at its Coringa Gold Project. In a nutshell, SRB remains focused on pushing forward with its exploration campaign to drive resource growth.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the strong financial ratios, accelerated operational progress, decent production volumes, strong balance sheet, 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 52.31 (as on 14 March 2022 at 10:02 AM GMT), with lower-double digit upside potential based on 5.31x 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 decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that 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.

Note 4: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

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 the 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 unfavourable movement in the stock prices.

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