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LONDON (Alliance News) - Brazil-focused gold miner Serabi Gold PLC on Thursday said gold production in the second quarter has continued to follow the trend set by the first quarter when the miner significantly upped production.
Serabi Chief Executive Mike Hodgson, in a statement to the company's annual general meeting, said gold production from the Sao Chico and Palito mines in the second quarter of 2016 has been in line with the first quarter, but no production figures were published.
Gold production in the first quarter of the year rose over 23% to 9,771 ounces from the 7,925 ounces produced in the final three months of 2015 - a record level since operations began back in 2014.
"Gold production from our Palito and Sao Chico Mines continues to be excellent with the second quarter following the trend set by the first quarter of 2016 and our strong finish to 2015," said Hodgson.
Notably, the rise in production came at the same time as gold prices began to rise, significantly improving the miner's margins and financial performance.
Gold prices have climbed by 23% since the start of the year, closing 2014 at only USD1,062 per ounce before rising above the USD1,300 threshold at the start of May. On Thursday, gold was trading at a similar level at USD1,303 per ounce.
Serabi Gold shares were trading up 15% to 5.30 pence per share on Thursday, and have risen by almost 68% since the start of 2016, partly thanks to the rise in gold prices which has seen the wider pool of London-listed gold miners experience increases in their valuations.
"The gold price has clearly been favourable over recent months, and whilst our focus for 2016 is to use cash flow to retire the borrowings that the company has with Sprott, we have been able to set aside some funding for the start of the next stages of wider exploration activity at Palito and Sao Chico," said Hodgson.
Serabi agreed to extend its repayment period for the remainder of the loan with Sprott Resource Lending Partnership back in February, which stood at USD4.0 million at the end of 2015. That was due to be repaid at the end of March, but Serabi will now pay that off in nine equal monthly instalments, which started at the end of April this year and will end at the close of 2016.
The interest rate on that loan is 10% per year and Serabi could face paying a penalty fee equal to 5.0% of the outstanding balance if it decides to make an early repayment, but that appears unlikely following the extension agreement.
To put the rise in prices since the start of the year into perspective, Serabi's gross margin in the final three months of 2015 was around USD198 per ounce compared to USD307 per ounce in the first quarter of 2016.
The all-in sustaining cash cost in the first quarter was USD858 per ounce - comfortably within the miner's full year guidance range of USD840 to USD870 per ounce - with expectations for that cost to have remained flat or fallen further in the second quarter.
However, Hodgson warned on Thursday that there is potential for its dollar costs to be negatively impacted by the strong inflows of currency into Brazil.
Hodgson confirmed the miner is still expecting to produce a total of 37,000 ounces over the course of 2016. Based on production in the second quarter being broadly flat from the first, Serabi should have produced just over 19,500 ounces in the first half - almost 53% of the full year target.
"At this current time and barring any unforeseen circumstances, I anticipate that gold production for the second quarter will be at a similar level," said Hodgson.
In 2015, the miner produced 33,000 ounces of gold, which was just shy of its 35,000 ounce target due to power problems at Palito. Hodgson is aiming to get production up to 50,000 ounces in 2017 if it can deliver its 2016 target.
Both producing mines are improving production rates and lie around 30.0 kilometres apart, with Sao Chico, which began producing in January, being used as a satellite operation to feed the gold plant at Palito, which started producing back in July 2014.
Palito is now being extended horizontally rather than vertically, meaning the company is not having to deepen the mine. Horizontal development is also delivering cost and efficiency benefits, improving the level of gold production from each vertical metre.
Production at Sao Chico has improved after Serabi found a "very good solution" to the geological complexity of the deposit that hindered mining and extraction rates in 2015. The miner is focusing on the central portion of the deposit and evaluating downward extensions and possible strike extensions to the east and west of the central zone.
In terms of underground development at Sao Chico, Serabi is moving toward 150.0 metres below surface before identifying underground drilling locations. The company has purchased an underground exploration drilling rig and that is currently being commissioned before being put to work.
Serabi said a contractor-operated drill rig has also arrived on site to accelerate the overall drill programme over the next four to five months.
The overall strategy at Sao Chico, in the short term, is to ensure the mine has enough resources to maintain production for an 18-month period, a similar approach to what the company has done at Palito, giving it a cushion to enable further exploration to continuously build the resource and life of mine.
"A similar programme will also be undertaken at Palito once the initial phase of work is completed at Sao Chico. Initially work will focus on the extension at depth of the main zone comprising the G1, G2 and G3 veins, but will also look for parallel structures which lie between the main zone and Palito West and Chico da Santa with the expectation that a number of small but viable veins will be identified that can be easily accessed from the existing mine development," said Hodgson.
Serabi also said it planned on introducing a third ball mill to the Palito gold plant during the second quarter, but said one of the existing ball mills suffered from a key component failing, meaning Serabi took the component from the new ball mill to replace the existing one in order to maintain production levels.
"A new bearing has now been delivered and the commissioning of the third mill will start in the coming week. Despite this small setback, our recent production has not been impacted and illustrates the requirement for building contingency and flexibility when operating in the more remote locations, which in this instance has allowed the company to maintain operations at close to maximum levels," said Hodgson.
Although both producing mines are moving in the right direction, Hodgson recognised that the company is a single asset entity, with Sao Chico and Palito effectively creating one single project, and said he is keen to look at acquisitions, but stressed the right deal would have to be sought.
"I am far from complacent about our two existing mines, but I feel that we are now able to divert some time and resources to growing the company. We have already implemented the first part of the potential for organic growth by starting to evaluate some of the potential within our existing tenement holdings," said Hodgson.
"We will also continue to look at the opportunity for potential acquisitions of other projects," he added. "I am keen to grow the company, as I believe that we will benefit from greater critical mass and runway to attract wider investor support and a concurrent re-rating of the company's shares in due course."
"Whilst a strong market is good for all of us and should be welcomed after the experience of the last few years, I have concern that some valuations and expectations may spiral and become unrealistic," said Hodgson.
Hodgson has previously stressed no acquisition would be pursued if it would lead to a rise in the all-in sustaining cost of the company and told Alliance News earlier this year that there was plenty of distressed companies operating within Brazil that hold assets with "a lot of problems".
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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