Serabi Gold PLC: A Runner with a Weighted Vest

As far as investment opportunities go in the gold mining space, there are a multitude of choices.

Serabi, the focus of this article, can be categorised as a junior company. That is not to say it is not is a good company and we have more than a passing interest. In late September 2022 we saw that the risk / return of the London listed minor was strongly skewed to the upside.

In the interests of full disclosure we held Serabi from September 2022 until February 2025. The position was working well as the price of gold gradually rose.

Our thesis was largely simple at the time, in that the market valuation then was only circa £25.0m. Which had assessed as being well below replacement cost for the asset, let alone any other reasonable valuation method. This proved to be true, and we exited Serabi in February 2025 with a 5.5x return. By then, we identified and opened a position in a larger producing miner that, in our view, represented a true 10x opportunity. More on that later.

Looking back, the Serabi investment may seem obvious given the strength of the gold market, but for context, over the summer of 2022 the gold price struggled to climb over $1,900oz. We could barely find a soul who believed us when we said the price of gold would break $2,000 in short order and not look back.

Now, the purpose of this article is not to self congratulate ourselves but to look closely at the performance of Serabi and why we exited the position, and assess why the upside may not be as asymmetric as what it was back in 2022.

This is all not to say that the Serabi upside from here is capped, far from it, but that there are some dynamics at play which we believe will drag cash on cash returns and add a ‘weighted vest’ effect to the stock.

 Operating Performance

We should acknowledge that Serabi, in the context of a junior has been a very steady performer over the last three years, and the rising gold price added tailwinds to profits, particularly and most notably in FY24.

The core asset is the Palito Complex, which consists of the main mine being Palito and also the smaller Sao Chico deposit. Historically Palito generated circa 30 to 40k oz per annum.

Serabi’s management have long aspired to get to a 100k per annum producer but this is unlikely to be achieved with these core assets, there is still quite a lot ground to cover before that milestone is achieved. Coringa, the other main project is still in the development stage. Most of the profits from Palito are being recycled into this project.

There has been incremental progress with Coringa with the installation of the classification plant, but eight years on from its acquisition a full license has still not been obtained.

September 2025 Exploration Update

Bull case

• Discovery of Serra South at Coringa shows the orebody is still open — potential to materially extend mine life.
• Multiple high-grade intercepts (e.g. 0.87m @ 137 g/t; 0.32m @ 322 g/t) demonstrate the area's strength.
• Brownfield drilling means new ounces could be added efficiently, with existing infrastructure nearby.
• Management’s stated goal of growing resources from ~1Moz to 1.5Moz looks achievable on drill results alone.

Bear case

• Drill hits are not reserves. The conversion path is long, uncertain, and still subject to permitting bottlenecks.
• Exploration spend ($9m in 2025) is heavy for Serabi, and delays real free cash flow returns.
• Resource update due in Q1 2026 — meaning no near-term cash return.
• History shows Serabi has long promised growth, yet ounces produced remain stubbornly in the range of 30k to 40k ounces, (the “weighted vest” effect).

Financial Performance 

¹ After all financing and investment

After a difficult environment for many years the Serabi is now up and running, and it is a runner. The profit volume is coming through and the margins are being lifted to what is now a strong level. Albeit volume growth has historically been modest.

There are no major issues with the balance sheet. There is a $5m loan that has been in place for several years. Whilst in times were the price of gold only just or was less than the costs of production this would have been useful as a genuine backstop for flexing liquidity needs around capex. At this point it is not clear if this is really needed any longer.

Given their stated ambition for M&A there is possibly a good reason to keep banking relationships ‘live’ to facilitate financing around any prospective deal. Although for reasons explained further into the piece there doesn’t seem to be any obvious rationale for corporate activity in the near term.

On one seemingly innocuous accounting point, in FY24 management decided to exclude inferred resources (source: page 107 of FY24 annual report) from its asset base for the purposes of amortising its Palito mining asset. Whilst this may seem a minor adjustment it is a significant step for Serabi, indeed any producer to take.

If this were a mid-tier producer with a portfolio of assets the change might be reasonable, but for a company with one asset it is revealing. The inferred resources have given Palito significant scale so that these are now excluded suggests that management are telling us something. In that these resources may not be economic or easily produced for technical or geologic reasons.

The financial report does not elaborate which suggests management do not believe it significant (it is) or it has been ‘overlooked’.

 Valuation

This valuation is a rough cut based on management's targets. It is important to state that these are stretch goals, therefore there is no guarantee the forecasted ounces produced are realised. The forecasted outcome shows cumulative free cash flow from 2025 to 2027 is $132.1m. This represents a significant 74% notional equity return over a relatively short period.

It assumes Serabi’s heavy capex profile reflects the reality that Palito is a short-life project unless inferred ounces are drilled out and converted (the change in the amortisation policy suggests not). Palito generates cash, but almost all of it is recycled into development and exploration, leaving little by way of realised returns. If those exploration dollars don’t yield mine life extensions, shareholders are left with a dead end of sorts in that free cash flow would have been deployed on uneconomic prospects.

We struggle to discern what capex is spent where, what is genuine growth capex and whether it is being deployed prudently.

Notwithstanding this, the valuation is not demanding even after the strong run in the share price, but there may be a reason for that.

Relationship Agreements – No más

On 22 April 2025, the two key institutional investors, Greenstone and Fratelli sold 15.7m shares — more than 20% of Serabi — via an accelerated bookbuild to institutions at 135p. Greenstone exited entirely, Fratelli cut its stake in half. Serabi itself saw no proceeds. In practice, the company lost both of its cornerstone backers in one coordinated move whilst raising no capital.

These two investors weren’t just cornerstones. Given the company’s relatively small size, they were effectively the sponsors. It may not even be a case of “giving up” — like many investments, sometimes they simply run their course and capital is redeployed elsewhere. However, this is not a positive development. Through their respective relationship agreements, these institutions provided oversight and direction over the board.

The April 2025 placing shifted Serabi’s shareholder base from two long-term sponsors to a diffuse set of institutions and retail. A Brazilian private equity firm has picked up Greenstone’s holding, which in some ways may bring local expertise. On the other it is not clear how a local investor aligns with Serabi’s existing investor base, across its listings in London and Toronto. In the meantime it should partially reduce the stock overhang from the two institutions exiting.

It is good to talk (and some more reasons we exited)

Normally it is prudent to have a section in a piece such as this about the wider macro risks, or speak about geopolitical risks or indeed the jurisdictional risk. (We consider Brazil a sound jurisdiction for what its worth). However we want to highlight what we see as governance issues, specifically communication concerns.

Management's 'blue sky thinking' in producing circa 200,000 ounces per year, without the benefit of M&A lacks credibility. If a larger, well-capitalised producer has not shown interest in acquiring Serabi then there is a reason for this. Equinox also disposed of the asset for a reason.

Grand production targets without the clarity of how they will be achieved come across less as strategy and more as promotional noise.

And if we may take a moment to take a sensitive and more delicate turn – and another reason that gave us pause for thought – has been the number of fatalities at the mine in recent years.

Of course, mining is a dangerous profession, if not the most dangerous. It was true in Victorian British coal mines and it is true today despite the advances in safety protocols and technology. Whilst any fatality is one too many, we could not help think there was a lack of meaningful follow up following the deaths.

There is little by way of meaningful market updates. Even the statutory financial statements somewhat gloss over the incidents, and the FY24 financial statements mention additional ‘safety measures’ and ‘training’. Which leaves the question of could these not have been implemented prior to the tragedy. In the FY24 annual report it refers to the fatality as ‘disappointing’, but this is not a missed production target or an incidence of a supplier defaulting so the wording could have been more sensitively chosen.

...however it is disappointing to report that we had one fatality at the Palito mine in 2024.

As an aside, none of the executive team wear ties in their corporate photos, despite them being stewards of capital for a publicly (and dual) listed company. Yes presentation isn’t everything, but it is not nothing either. When management present themselves casually while extracting cash LTIPs, the impression of stewardship is not enhanced.

LTIP

A further issue that we stumbled across up from this analysis is the long term performance bonus paid to management.

In June 2025, management announced the vesting of its 2022 LTIP awards. Nearly half a million shares were due as compensation, but the Board elected to settle in cash instead of taking the paper (shares). This being a £446,000 cash outflow for a company still carrying heavy capex demands. The CEO followed up by buying 45,000 shares (c. £76,000) in the market, bringing his total holding to 0.18%.

The optics were clearly managed here with the partial follow on purchase, but the question that lingers is; should performance awards vest over a period when reserves are thin, fatalities occurred, and free cash flow was under pressure from capex?

Yes, management would no doubt cite the share price performance over that period. But this is only because market participants were willing to buy the shares, not because management delivered cash returns. Also, the share price is unrealised value until one disposes of their holding. Free cash flow and the dividends are the real yardstick that investors ought to be concerned with. Serabi is still to deliver on that. As mentioned, we exited our Serabi position in February. At the time, we were not aware that this LTIP cash settlement was coming. The discovery of the issue did not make us question our decision to exit.

Serabi’s management justified paying LTIP awards in cash by citing its “strong cash position.” Yet that cash wasn’t strong enough to fund a dividend or buyback. In any event, management have extracted half a million pounds in cash for themselves while private investors patiently wait for returns.

The optics of the LTIP cash settlement are also revealing. It almost makes it seem as though shareholders are working for management, not the other way round. In a capital-intensive junior where meaningful free cash flow remains elusive, the priority should be to protect and return capital to the owners of the business.

Now, just to pause here for a moment — we are not presenting this to denigrate management, but simply to lay out what has happened as per Serabi’s own market announcements. The facts, if you will.

It is up to the reader to interpret and consider whether the cash bonuses are appropriate and reasonable. With that being said we will move on to closing thoughts.

Conclusion

In some ways, this Company would have benefited from an activist who could have pushed management to manage the Palito complex for winddown, profit maximization and dividends. This would have still afforded investors with an opportunity to benefit from the rising price of gold. Without heavy exploration capex, the income and profits could have then been distributed to investors who could have then decided where to allocate (i.e. other explorers / mid market producers). However this decision has been made by management and it has all been ploughed back into growing the producing base.

Capex requirements are high and it is not clear as to what timeline Coringa will be a fully fledged producing asset. There has been no sign of the installation license in eight years.

Additionally, the exit of the only two cornerstone investors should concern private investors. Being honest —  we didn’t know all this at the time. When exiting in February, we weren’t thinking about LTIP settlements or the exit of Greenstone and Fratelli. We simply judged that the risk/reward wasn’t as attractive as when we first opened the position. Looking back now, stepping aside was the right thing to do. The subsequent events only reinforce why in our view it was the right call.

On a profit perspective Serabi is a reasonable runner, but if one has purchased shares in Serabi recently, one might well ask oneself: what knowledge do you possess that Greenstone and Fratelli did not? Is the capex a weighted vest around a steady if not spectacular asset?

Should all of the investments pay off then Serabi could generate strong equity returns. The issue is we just cant say for certain which makes it a little too speculative, and the lack of guardrails means the board have a high degree of unchecked latitude.

As said at the outset, there are a multitude of listed mining companies – in our view there are many which offer a better risk/reward profile.

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The author held an interest in the company before exiting in February 2025, and therefore does not currently hold shares in the equity and is unlikely to again.