Greenstone takes 30% stake in gold miner Serabi

Private equity group Greenstone Resources is investing US$15 million for a 29.82% stake in Serabi Gold (TSX: SBI; LON: SRB), a junior with two operating gold mines in Brazil.

The company produces 40,000 oz. gold a year from its two underground mines but aims to increase that to 100,000 oz. within two years.

Serabi restarted its Palito mine in the Tapajos region of northeastern Brazil in July 2014 and put its Sao Chico deposit, 30 km south, into production in January 2016. The company also owns the Coringa project, 200 km south of Palito, which it acquired in December 2017, and says is a carbon copy of Palito’s geology.

The investment by Greenstone Resource II L.P. brings a number of benefits, among them a higher profile and an improved capital structure, Michael Hodgson, Serabi’s CEO, says in an interview from London.

“Hopefully this is our road to improved liquidity, as we improve our capital structure,” he says. “We’re very illiquid. Our main shareholder is a family office in Chile and we trade very little in Toronto … the company is viewed as being almost private, some days we didn’t trade at all, and volume trading on the TSX was almost non-existent.”

Working underground in Serabi Gold’s Palito gold mine in Brazil. Credit: Serabi Gold.

The Solari family — Chilean based and of Italian descent — is one of the country’s richest families, and its principal business is retail. It is the biggest shareholder of Falabella, a chain of supermarkets across South America.

The family’s holding company Megeve has numerous funds ranging from education, energy and timber to resources and retail. Its resource fund, Fratelli, is the fund that — until the Greenstone investment — held 55% interest of Serabi.

“Back in the days of the great financial crisis and illiquid markets in 2012–2013, Fratelli took the risk and supported us when few others would,” Hodgson says. With the Greenstone investment, the Solari stake is diluted to 38.69%.

“They’ve taken this dilution out of the money but they do recognize that after operational success, the capital structure of the company is adversely affecting the share price and liquidity,” Hodgson says. “They never wanted to be such a big shareholder. It was just that we were building Palito and there was no money available in the public markets, and so they just underwrote the financing. We couldn’t place as much of that stock as we wanted, so they ended up with over 50% of the company, and have stayed there since. So this investment by Greenstone is getting them back to where we really wanted them to be, and where they want to be.”

A 2010 file photo of artisanal miners panning for gold at the Coringa gold project in Brazil’s Amazon basin.

In addition, Greenstone’s money will help the company “accelerate organic growth” at the Palito deposit, and provide working capital to advance Coringa, which requires a year of permitting before it reaches the construction stage, Hodgson says. His goal is to have Coringa produce in 18 months.

The mining executive, who once worked at TVX Gold, notes that Coringa already has a plant in good condition, and it will be relatively straightforward to get the project up and running. “We can make it work because we’re only repeating what we already did at Palito — build a high-grade, underground mine and get it into production,” he says, adding that capex will probably run to between US$23 million and US$24 million.

Hodgson reckons the funding for Coringa will be a combination of cash flow from operations, debt and equity, all depending on the gold price and what cash flow current operations can generate. Earlier this year Sprott Resource Lending Partnership loaned Serabi US$3 million for more working capital and to replace funds it had used to make the initial US$5-million cash payment for the Coringa acquisition. (Says Hodgson: “We’ve got a good relationship with Sprott … we have already paid off their debt once — US$8 million — so we have developed a good relationship.”) Future equity financings aren’t being ruled out, either.

“I daresay there could be more equity, as equity events are one way to further improve the capital structure of the company,” Hodgson says. “Down the track there will be another need for cash and an equity opportunity, and it’s the wish of our major shareholder, too. Illiquidity remains a challenge, with probably about 10% free float. It isn’t much, and that’s still a challenge for us to deal with.”

The Greenstone investment was many years in the making.

“We’ve known Greenstone and they’ve known us for a long time,” Hodgson says, noting the relationship started three years ago, when Serabi first tried to buy Coringa from its previous owner, Magellan, which later sold the asset to Anfield.

Processing facilities at the Palito gold mine, which also processes ore from Serabi Gold’s Sao Chico mine, 30 km south. Credit: Serabi Gold.

“They’ve looked for an opportunity to put some money in, they like us,” he says of Greenstone. “They’ve been to our operations in Brazil twice — about two years ago — and we came close to another acquisition last year, and they were going to back us, but unfortunately that didn’t come off. So we’ve been looking for an opportunity for them to come on board for quite some time.”

Hodgson also says that Serabi has “terrific opportunities to extend the resource at Palito, because it has these higher-grade veins and is open at depth, and so we think we can increase our production there.”

One of the reasons the company hasn’t done this yet, he says, is that after Palito started production, management put its cash flow into getting the Sao Chico satellite deposit into production. (Ore from Sao Chico is processed at the Palito mine.)

But Greenstone’s involvement will help put Serabi on the radar screen of more retail investors.

“We put our first mine into production but we were very invisible,” Hodgson says. “When we bought Coringa from Anfield Resources — one of Ross Beaty’s companies — the asset was better known than us, so it gave us a bit of market attention in North America.

“But until we have stock available to trade, no amount of marketing will solve our problems,” he says. “The Greenstone investment will help and we’re going to try to free up the company and some of the stock, and I think some people are going to realize that we’re a very undervalued company.”

News of Greenstone’s investment in a press release on March 23 sent the junior’s Toronto-listed shares up 1¢ to 7¢ apiece. At press time they were changing hands at 7.5¢ per share within a 52-week range of 5¢ (February 2018) to 10¢ (April 2017).

At the end of February, Serabi had a US$6.1-million cash balance.