We were keen to understand how this gold producer has been resolving their balance sheet balancing act of last year. This gold bull run has helped a lot of marginal gold producers build up cash reserve and resolve balance sheet issues. Serabi Gold has cash in the bank and are making money. The Sprott debt has now been paid. The company still owes Equinox $12M but has agreed to pay this off in instalments. And it seems to be coping with the COVID restrictions admirably. Line talks us through their thinking in terms of activity and sequencing to manage expenditure whilst they prepare their new asset Coringa.
Matthew Gordon: Clive. Good morning. How are you sir?
Clive Line: Good morning. I'm very well, Matthew.
Matthew Gordon: Where are you speaking from?
Clive Line: It’s a little bit warm.
Matthew Gordon: Oh yes. You're in the UK like me. It's absolutely ridiculous.
Clive Line: Yes, enjoying the enjoying the heatwave down here.
Matthew Gordon: I’m glad you are. My face is the wrong shade of red. It's getting hotter by the moment. But anyway, less of that. Thanks very much taking our call this morning. We saw the press release. We wanted to take the chance to talk to you about some of those numbers. Generally, what are your thoughts?
Clive Line: I have to say, Matthew, looking in the context of these numbers and where we were at the beginning of the quarter, I think we have to be very, very happy. We went into the 2nd quarter, a huge amount of uncertainty, not even sure whether or not we were going to be able to keep the operations going for the next three months. So to come out of it with what has been a quarter where we've had best cashflow generation that we've experienced, best levels of profitability that we've experienced, has got to be a huge positive, and we've got to be very, very happy and very grateful for what we've managed to achieve. I think there will be disappointments here and the production is lower than we wanted, but that's a direct impact of the pandemic and having to reduce staff numbers on site. We've already talked through that and what we're doing and what we're trying to address with that. But I think overall, it's been a very satisfying quarter.
Matthew Gordon: Take us through a few of those numbers because I do want to talk about the impact of COVID and what additional costs you've had to, or measures you've had to put in place which do have a cost implication to them, because I specifically want to get on to the AISC number, because that is a lot higher than I think you had hoped. Why don’t we kick off first of all with some of the numbers which you've managed to hit?
Clive Line: We've got cashflow that has come through. We started the quarter at just over USD$9M. We ended the quarter at $9.6M in the bank. During that period of time, we paid off, using our cash flow, USD$3.5M out of the Sprott loan that was outstanding. We've got rid of that, and that's why I look at it and say, that's a fantastic quarter for us. We managed to get rid of USD$3.5M dollars’ worth of debt without any real impact on our cash balances. At the same time, we saw excellent profitability coming through, the best quarter for profitability that we've had ever since we started. EBITDA is up substantially, operating profit up substantially, earnings per share up substantially. There's not a lot not to be liked about it.
Matthew Gordon: Let's talk about that before we move on to the AISC component, because like I say, that’s something I want to understand more. Let's talk about those 3 moving parts: so, Sprott - removing them from the equation. You've still got Equinox that you need to remove from the equation and then Greenstone has come in for a larger slice of the pie. First of all, why did you want to get rid of Sprott? Why not refinance with Sprott?
Clive Line: We went through a number of issues and ultimately, lenders such as Sprott are not the cheapest. We have had a very good relationship with them, and we want to go, we will go back to them when we come back to looking for financing with Coringa, I'm sure you've got some questions later on, you'll ask me about that particular subject as well. But the essence here was that we needed to, we have to go back even further, when you go back into the 3rd, 4th quarter of 2019, at that particular point we had the debt with Equinox that needed to be settled. We were looking around at sources of finance. It was a difficult equity market, and ultimately the decision to go with Greenstone to put in place that convertible loan was to give us a little bit more flexibility in terms of how much money we'd need going forward, but to make sure that we had funds available to be able to meet that particular debt with Equinox, which at the time was going to fall due on the 31st December. Now, we pushed that back and pushed that back to the 31st March. Subsequently we've been able to renegotiate that very well into a series of stage payments because of the pandemic. And that's given us a great deal more flexibility, which actually should be beneficial ultimately to shareholders.
I think the decision to want to get rid of, or pay down the Sprott debt rather than refinance, that is because we couldn't see Sprott, given where our cash flows were going to be, wanting to extend a debt facility to us that was large enough to take care of that potential balloon payment to Equinox. Greenstone were able to step in into their friendly shareholder that's providing financial support into the company with a little bit more flexibility than we were likely to get.
Matthew Gordon: It's quite an interesting discussion when you owe people money, you can either be in a position of weakness or a position of strength, but in a way the market worked in your favour with your negotiations with Equinox. I think.
Clive Line: It did. Circumstances helped. We were clearly coming up to a point at the end of March where we needed to do something. We thought that we'd have the facility in place. Of course, then coronavirus virus hit us, but I think circumstances then, that did work in our favour in some ways because Equinox looked at the situation, were sympathetic to where we were as a small junior producer, and gave us the leeway to be able to look at a stage payment basis rather than putting the company into a difficult situation. We were very grateful for that and we've been very grateful for Greenstone to continue to support it as well because we couldn't, again, fulfil all of the needs and requirements. Ultimately, although they're a shareholder, they're a business; they've got their own thresholds to meet with their investor groups as well. I'm sure that the convertible doesn't necessarily meet all of those thresholds, but that's the sort of gesture of their support and longstanding support for the company.
Matthew Gordon: Like I say, timing and luck come into this a lot. Equinox also have been going on quite a rally. I think it has also helped you that they've done exceptionally well at building out their business. But just on Greenstone though, because obviously they are a very well-known investment group with very specific mining skills. They are very clear about the sorts of companies that they will invest in. That's a real endorsement to the market that you've got something going on there, but they've also come in for a pretty big stake now. So what are their demands of you as an organisation in terms of performance?
Clive Line: Clearly, we have to perform on a day by day, month by month basis. They are represented on the board as is Fratelli, who is another large shareholder with the company. We work both closely with both groups, trying to understand what their long-term motivations are. But they are both long-term investors looking for a window in 3, 4-years out. They're not looking for an instant return tomorrow. They will weather the storms with us and take a view on near-term and longer-term macro issues that are going to affect the company.
Matthew Gordon: Let's look at AISC. I mentioned it earlier. It's up. It's not where you want it to be. Why is it so high?
Clive Line: I think you've got to look at it in context, Matthew; at the beginning of each quarter, our production plans and our manpower requirements, et cetera, are set out and we're not going to be able to change those now, although we weren't sure where we were going to be in terms of production at the beginning of the quarter, we set out with a mine plan and we've continued to try and follow that. The consequence of that has been that we've had slightly lower production. We've had reduced manpower at site. I know Mike talked to you about the reasons for lower Gold production in the quarter, when he did an interview with you a few weeks ago, looking at our operational results.
Our production has been down some 15% over what we would like it to be. Our cost base, however, whether or not we're trying to do 45,000t at 8g/t or 45,000t at 6g/t is pretty much fixed and there's not a great deal we can do about it.
So, the production being down over the quarter has directly influenced our AISC. And as a result of that, the ASIC is higher. Looking forward at Q3/20, I think we're probably going to see a similar sort of situation; we're not anticipating that production will start to get up. We're working in Q3/20 to get the manpower levels up so that we can get the mine back up to the production rates that we would anticipate. Then hopefully in Q4/20, once production starts getting up about 10,000oz again, per quarter, we'll see the AISC start to come back down again.
Matthew Gordon: Mike did mention that. He said that there's a plan and you can't be bouncing around the property, just aiming for the high-grade stuff. You are systematically working through it. I know people should refer to that interview of a couple of weeks ago on that one.
Let me talk to you about Coringa please. I want to try to understand how you, I'm delighted we've got a CFO on, talking about proper numbers rather than generalities. So how do you go about planning and managing cash flows and having the funds in place to be able to move Coringa forward at the speed that the rest of the management team or the operational team is hoping to? The balance sheet seems to have been tidied up a lot with the discussions with Sprott, Greenstone, and Equinox, and you are generating cashflow, certainly at these prices. But there's a plan for Coringa; this year you've got COVID to deal with, but you've also got to get this thing moving forward at some kind of pace. Have you got the cash to be able to do it? Is there going to be more balance sheet management activity to be able to get that through to the point where it can get into production?
Clive Line: The first priority for me is to get Coringa fully secured. Let's get Equinox’s debt paid down. With that in place, we will be able to go out to lending groups, we're already in conversations with various lending groups, we're sharing with them our models for that. And they're looking at that with a view to what sort of levels of debt they're prepared to provide, what sort of terms they'd be considering and all the other parts that you would normally expect. But the first priority is to get 1 - Equinox paid off, because until that's dealt with the lenders are not going to part with any money. And of course, as we've spoken about in the past that you've spoken with Mike about in the past, getting the licensing process up to a particular stage where the lenders will feel comfortable that everything is satisfied.
I think with COVID, we've had our challenges at Palito. I think we have to make sure that we've got the Palito, Sao Chico operations back up and running full steam before we want to start taking on another operational issue with Coringa. We've got to work that one into the equation at the moment.
Cashflow for the time being is going to be used primarily to get rid of the Equinox payments and pay those down. We're going to try and do that as much as we can out of cashflow. We originally put Greenstone in place to give ourselves the ability to get rid of that in a single payment. Given how the situation has evolved we almost want to use that as a standby facility to draw down if and when we need to. And we will also have that funding available to use to start building Coringa, or developing Coringa, and doing some of the things once the licensing reaches its next stage. Once we get our LP approved, I know Mike's talked about wanting to get in, do some underground development, get some bulk samples sorted, try and de-risk the geological aspects of the project for lenders - they're all key parts of it, which will reduce our cost of borrowing going forward as well. I want to be able to blend that going forward and use a little bit of the Greenstone funding to be able to do that, provide sort of the equity capital, as it were, to get through those studies, and then we'll go out to the lending groups to raise the debt capital that we need to be able to build the project and take it forward.
Matthew Gordon: It is interesting times at the moment, because obviously, this week it's been interesting with regards to Gold price moving negatively. But the general trend has been phenomenal for the past couple of months. Isn't this the time to be having discussions with lending groups because all sorts of companies, which I never thought would get funded are having money thrown at them, vast sums of money. Have you considered going and talking to some of these groups and taking Equinox out quicker? I know you've got this facility in place, but is that a discussion that you're having?
Clive Line: We are having discussions with different groups to see what we can do. Whilst we've got a particular issue there with getting rid of Equinox and wanting to move things forward, there is a timetable within which we can move Coringa, and it's not tomorrow. The immediate urgency is not there. That's not to say that if we can't find a new group to come in, it's not the end of the world. We'll continue to pay down Equinox according to the stage plan. If we can find a solution that is not going to be detrimental to existing equity holders, we don't need to raise equity at this point to pay down the Equinox debt then it doesn't seem appropriate to put dilution in place just for the sake of it.
Matthew Gordon: Exploration is something that Mike's talked about, he's very keen to work out what you've got on your properties. Obviously, there's been some exploration happening, but it's been restricted in the sense that you can't get the crews in there. You don't have the people to be able to do it at the moment. How much budget have you set aside for exploration for the rest of this year?
Clive Line: It will be limited and we'll only really pick it up in Q4, and realistically in Q4, there'll be a limit to how much we can spend anyway. It's less about what budget can I set aside as to actually how fast can they spend it? Because there is a practical consideration there, that you can set aside a substantial budget, but actually if it's not spent wisely, you'll end up wasting 50% of that budget anyway. It's always a case of making sure that we maximize the return that we're getting on what we're doing. We don't want to bring in crews and half of them drilling blind and having just doing work for the sake of doing work. We know that this takes time, these sort of narrow vein deposits, you really need to understand them, and we need to work out what we're doing each step of the way. It's almost the pace at which we can do exploration sets its own budget. I think fourth quarter we'd be looking at spending USD$250,000, $300,000 on exploration and then looking to step that up into Q1/21.
Matthew Gordon: With regards to getting people back on site, getting back on location and actually working, Mike mentioned that you were building new dwellings, new facilities for people to be able to work safely and live safely on the camp. How's that going? What's that going to cost you? That's an additional cost that you probably haven't factored in, isn't that?
Clive Line: It is. We've had a lot of additional costs here during this last quarter: we've had extra doctors on site to conduct testing. We've used third-party clinics to be able to test staff before they're coming into site. As you said, we took a lot of the exploration staff away because we couldn't control those 3rd-party contractors and how they were managing their own personnel. That was another reason why we stopped the exploration activity. In terms of the accommodation, most of this is containerized accommodation blocks, we'll spend probably in the region of a few hundred thousand dollars on the upgrades that we need to do onto the camp. Hopefully they will get those through by the end of Q3 and we'll then be in a position to accommodate a full complement of staff and start bringing those people back on site. I don't think it's going to happen instantaneously. Again, there'll be a program to make sure that the rosters are working well and that these guys are coming in on a scheduled basis. We won't be back up to the full complement on 1st October, they'll come through and we'll probably get there towards the beginning part of November.
Matthew Gordon: When you say a few hundred thousand, do you mean at the $200,000 or the $900,000?
Clive Line: I think we're looking in the sort of USD$250,000 to $300,000 range up towards the USD$500,000 range.
Matthew Gordon: So, Q4/20 you are starting to bring people back in and they will start to ramp up and you'll get back to sort of, I don't know what normal means anymore, but normal levels of operational productivity.
Clive Line: We'd like to think that we would be looking at a normal, if we'd have met our original guidance, Q2, Q3, Q4, we would probably be looking at sort of the 12,000oz a quarter. That's probably with the ore sorter of working well, getting additional lower-grade ore out of the Palito and Sao Chico deposits, being able to upgrade that through the ore sorter. Working with the residual flotation tailings that we've got, that's the sort of levels of production that we'd like to be looking at, what we would have been expecting to achieve. We're looking at getting back up to the 10 to hopefully 10,000oz in Q4/20 and hopefully starting to build on that into Q1/21.
One thing that we do have to factor in there is again, because there's been lower numbers of crews, we've got a mine development that we're going to have to catch up a little bit on. We've been trying to do that as best we can. That's vitally important for keeping the mine sustainable and sustainable production going forward and keeping development ahead of us. We'll just have to balance that out and look at what we need to do in the early parts of 2021 to make sure that we're not falling behind on that and that we're back up to the levels that we need.
Matthew Gordon: One final one: you're the guy that's got to balance the books, right? You've got Palito, it is producing cash for you. We've talked about ramping up and optimizing, COVID conditions allowing, but is it producing enough cash for you to be able to develop Coringa? That's kind of the balancing act, I'm assuming you'll deal with Equinox in the best possible way. You're saying that you are trying to do it in the most anti-dilutory way for shareholders, but what you've got is 2 assets: Palito, which is throwing off cash, which you're going to need to spend to develop Coringa. At some point when you're totally debt free, both sites will be operating at some sort of optimal productivity. When is that? When is that moment? And how do you balance that with all the money that you're going to need to plough into the blue sky of the exploration?
Clive Line: It is a juggling act. As I say, we've got to look at where our priorities are and where we hope the best returns will be. We will push forward with Coringa. Where we're sitting at the moment, I'd like to think that we can meet those commitments, certainly in the near term, USD$1M/pm from our existing cash flow and start paying those down. Now, that means that the facility that we have with Greenstone can effectively sit in the background, then as Coringa is ready to be developed and we do those first bits and pieces with, of course, with Greenstone's blessing, but that's part of the agreed use of proceeds for that convertible, we'll be able to start drawing down on those funds if we think that that is the best source of capital available to us at that point in time.
We have that as a facility to utilise. Coringa, in the near term, we're not into a suddenly needing USD$20M worth of cash available. And I wouldn't want to get into making substantial commitments to the build of Coringa. The first bit is to deal with a little bit of underground development done, getting the bulk samples done and de-risking it from geological standpoint from lenders. And that is a USD$3M to $4M cost that we can deal with from our existing cashflow and the existing finance that we've got available to the company and continue to pay down the Equinox debt.
Exploration on top of that: exploration, unfortunately, is the tap that gets turned on and turned off when things get a little bit tough. If the cash flow is there, then we'll try and step up the burn on the exploration and move that forward and accelerate it. And if the cash flow and the Gold price doesn't stay where it is and the real doesn't stay where it is, then that'll unfortunately be the thing that probably will get turned down because it's longer term, it's more speculative and it's not immediately being able to be turned around into cashflow.
Matthew Gordon: There’s a bit of consolidation happening in the marketplace. Have you had any inbound phone calls?
Clive Line: I wouldn't be able to tell you, even if I could
Matthew Gordon: I just thought maybe, maybe Clive doesn't know how this thing works, but apparently you do. It is interesting times at the moment around consolidation, M&A activity, and obviously, Gold being where it is today, there's a lot of people sniffing around and having conversations.
Clive Line: I think what is interesting as well though with the markets is looking at people that have been starting to come to London looking for capital, realising that there is a lot of investors looking for opportunities. At the moment, maybe Serabi doesn't register onto some of those radars. It's a little bit small, and we've always said that we need to grow and that we are always looking for those opportunities to do it. It's not lost on us that some of the bigger Canadian groups have suddenly decided that actually, London doesn't have too many options when it comes to generalist investors and larger institutions looking for exposure into the Gold space. Hopefully we'll be able to take advantage of that going forward.
Matthew Gordon: Clive, thank you very much. That's a great update. Thanks for getting into the weeds with regards to these, they can be quite dry affairs. You have had an interesting year with regards to balancing books and moving money and liabilities around. It's a good environment for you guys at the moment. So best of luck with the rest of this year, we'll speak to you soon.
Clive Line: Thank you very much. Indeed. Matthew, take care.
Company Website: https://www.serabigold.com/
If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.
Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.
Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.