Interim Results
Serabi Mining plc
26 September 2006
Serabi Mining plc Interim Report 2006
Highlights
• Year-to-date production increases to 17,742 ounces gold equivalent from
6,009 ounces in 2005, with successive quarterly improvements of 43% and 24%
for the first two quarters of 2006
• Commercial production imminent at the Palito Gold Mine
• Completion of decline access and increased mechanisation at Palito
leading to much improved mining rates
• Introduction of grid electricity supply to Palito results in a
significant reduction of energy costs
• 74% year-on-year increase in total resources at Palito to 825,900 ounces
gold equivalent
• Successful capital raising of US$4.3 million to finance further
productivity enhancing initiatives at Palito and acceleration of the
exploration programme
Report of the Chairman and Chief Executive
The first six months of 2006 have seen a number of important milestones in the
development of Serabi.
A key focus has been to bring the Palito Mine into a state of sustainable
commercial production and to this
end we have now:
• completed a decline ramp which will provide long-term access to ore
located at depth;
• introduced long-hole stoping operations to improve mining
productivity;
• connected to the grid electricity system, creating significant
reductions in power supply costs;
• expanded and enhanced the crushing and milling circuits to improve
throughput, reliability and plant availability;
• completed expansion of in-house laboratory and geological
facilities; and
• commissioned two underground drilling rigs to improve ore
definition and mining efficiency.
A substantial 74% increase in the Palito mineral resource to 825,900 ounces gold
equivalent was announced earlier in the year providing a strong foundation for
future mine development. Meanwhile, we have been expanding exploration following
the acquisition of two additional surface drill rigs and have now started to
deploy some of this capacity on projects outside the Palito Mine, at Jardim do
Ouro and elsewhere in the Tapajos region.
Palito - operating results (1)
2006 Q1 2006 Q2 2006 H1 2005 H1
Mined t 31,555 34,055 65,610 21,442
Per day 351 374 362 118
Milled t 25,514 29,851 55,365 22,228
Per day 283 328 306 123
Head-grade g/t 9.3 9.7 9.5 8.9
Recovery % 91.9 91.3 91.6 86.7
Gold oz 7,017 8,527 15,544 5,504
Copper t 98.0 107.1 205.1 60.6
Gold equivalent (2) oz 7,927 9,815 17,742 6,009
(1) Provisional (2) Includes copper and silver
Financial results
The Group has reported an unaudited loss for the six months ending 30 June 2006
of US$1.71 million. This loss is after accounting for the amortisation of option
awards in accordance with the provisions of IFRS 20 and also reflects a
depreciation charge on plant and equipment of $572,000 for the period. Net
assets have increased by US$4.9 million to US$31.6 million during the period.
This increase reflects, in part, the fund raising which the Company undertook at
the end of March 2006, which raised net proceeds of US$4.3 million, through the
issue of 6.5 million shares with a number of institutions, at a price of 40p per
share. Cash balances at the end of the period were US$4.0 million with a further
US$1.35 million outstanding for deliveries of copper/gold concentrate made prior
to the period end.
During the reporting period management decided to implement several optimisation
projects with a total investment of up to US$3.0 million identified.
Furthermore, opportunities identified for the acceleration of the exploration
programme could result in an increase to the budget of up to US$3.0 million.
At the time of the Company's listing in 2005 the Board, in conjunction with its
advisers, established a set of operating and financial targets for the Palito
Mine that should be attained in order to reach a point of long-term, sustainable
and commercially viable production, thus marking an important and pivotal moment
for the future of the operation. Up until now the Board has considered the mine
to be operating in a development phase, with significant additional capital
investment required to achieve economic sustainability. As a consequence, during
this time all mine related costs and revenues generated have been capitalised.
As a result of the investment in grid electricity, the decline, new mining
equipment and the process plant, management considers that the targets
established in May 2005 are now close to being met. As soon as the set criteria
are achieved commercial production will be declared and from that point all mine
related costs and revenues will be reported through the profit and loss account.
Operations
Development of Palito over the last six months has continued at a rapid pace as
borne out by the production results.
Initial decline access to mineralisation at Palito was completed by the
contractors at the end of February, on time and on budget. Development of the
decline forms the basis for long-term exploitation of the Palito Main Zone
mineralisation at depth. This first phase gives access for mechanised equipment
at two underground levels of 210 mRL and 192 mRL, directly beneath the 'Palito
Hill', which has to date been a significant source of ore at the higher levels.
Prior to this development, access to the 200 mRL was via a small shaft, located
to the south east of the decline portal. We will in the future continue the
decline development on an incremental basis in order to access mineralisation at
deeper levels.
In some areas of the Palito Main Zone, core drilling has identified good
mineralised intersections to a depth of up to 200 metres beneath the current
limits of the decline. The ore body remains open in all directions and for
reasons that are discussed later, we are confident the resource base can
continue to be expanded further over time.
Benefiting from commissioning of the decline and introduction of mechanisation,
mining production rates have continued to increase significantly and we
anticipate a successful second half performance, with a noticeable pick-up in
the fourth quarter as milling rates also improve. Some increase of ore dilution
is expected to accompany the higher mining output, leading to a lower
run-of-mine grade. This reflects the increasing proportion of ore from new
development drives accessed from the decline, which are required in order to
establish eventually, the mining of high-grade ore from the long-hole stopes. A
significant investment since February 2006 has been in the preparation of these
mining stopes from the development drives. The first production from this higher
grade, long-hole stope ore is expected to commence soon.
For the future, rather than directly processing mined material from lower grade
development drives with high grade ores, we plan to introduce a beneficiation,
upgrade circuit. We can then blend this upgraded material with the main ore and
maintain high head-grades to the main mill feed, prior to it entering the
primary flotation and CIP extraction processes.
Thus by lowering the total mass and keeping the head grade up we negate the
requirement to expand this major part of the process plant. Testwork to date
with lower grade ore indicates that the gold can be concentrated with a
relatively simple gravimetric process following only coarse milling, without an
excessive loss of gold. Further testwork is ongoing to determine the optimum
process route and in the meantime, mining will be carefully directed in order to
deliver the best available grade to the plant.
Towards the end of 2005, process capacity was expanded with the addition of a
third ball mill, in order to achieve sustainable daily capacity of at least 350
tonnes. However, as the mill capacity has been impacted by unscheduled downtime
and mining volumes regularly exceed 400 tonnes per day, a fourth larger mill is
now being sourced. The introduction of such a mill would also allow redeployment
of existing mills for use in the planned beneficiation circuit.
Amongst a number of important capital projects, the introduction of grid
electricity earlier in the year is noteworthy, providing a long-term cost saving
of around $20 per ounce, compared with the previous diesel generated power
costs. Initial problems with lightning strikes causing outages, which we
experienced at the end of the wet season up to April,
have now been addressed.
Exploration
At the beginning of 2006 Serabi reported a major increase in the Palito Mine
resource from 416,000 ounces to 734,000 ounces gold or 825,900 ounces gold
equivalent (including copper-gold equivalent). The JORC resource classification
also increased the proportion of ore classified as indicated resources from
being only 12% in 2005 to 90% in 2006. The remaining 10% of ore remains in the
inferred category. Mineralisation on the Palito Main Zone remains open along
strike, at depth and also across strike. Important features of the new resource
are the increase in the number of veins identified from 20 to 54 and a 50%
increase in gold per vertical metre through the main section of the resource,
both with potentially significant positive economic implications for the Palito
operation.
As most drill holes are orientated at an angle, in order to test the depth of
the mineralisation of the Palito Main Zone it is necessary to 'step back' from
the zone in order to obtain deeper intersections. In doing so additional
parallel veins have also been intersected. Such structures had already been
identified at places such as Palito West, which lies 200 metres to the south
west of the Main Zone, and the Chico do Santo area, some 300 metres to the north
east. Whilst further work is required, these results indicate the possibility
that a series of mineralised veins could extend between the Palito West and
Chico do Santo areas, encompassing those already identified within the Palito
Main Zone.
The new resource also showed a close correlation between the number of
drill-hole intersections and the gold per vertical metre. The resource
identified to date is mainly concentrated above the 150 mRL level and its
distribution at each level correlates closely with the density of drilling
undertaken so far. Such a result suggests that as further drilling is undertaken
at depth the resource should continue to grow proportionately.
The drill programme for 2005 resulted in some 18,000 metres being completed on
the Palito Main Zone. This productivity was greatly enhanced by a programme of
close-spaced, shallow drilling that was undertaken towards the end of the year
and is unlikely to be repeated this year. During the first eight months of 2006
we have completed a total of 7,600 metres of drilling on the Palito Main zone
itself, and a further 6,000 metres at satellite areas around Palito and on
Serabi's other tenements.
During the earlier part of 2006 we have improved and expanded our exploration
facilities with the acquisition and commissioning of additional drilling rigs
and the expansion of our 'in-house' preparation and laboratory facilities.
The exploration programme outside the work being undertaken on the Palito Main
Zone is focused on two strategic goals in order to provide short/medium and
longer term growth potential. Correspondingly the approach to this programme is
divided into two areas:
1. Jardim do Ouro - the district immediately adjacent to the Palito Mine where
there is a number of advanced projects with good resource potential which could
become satellite deposits feeding the Palito operation.
2. The Tapajos - the wider region in which Palito is situated has historically
hosted extensive artisanal gold production from alluvial and weathered bedrock
sources and has potential for large tonnage, low-grade style deposits as well as
further Palito style, high-grade gold mineralisation.
Within the Jardim do Ouro region we have been undertaking extensive geochemistry
and surveying of existing and new targets, assessing various garimpeiro workings
and commenced preliminary drilling programmes on Bill's Pipe, Ruari's Ridge,
Copper Hill and Rio Novo South.
Rio Novo South, which lies 5 km south of Palito, is an area of old garimpeiro
workings where sampling has confirmed the presence of extensive gold
mineralisation. A follow-up geochemical survey has now identified widespread
gold and copper values at two locations, which remain open and are now being
investigated further. A preliminary drill programme will commence shortly.
Preliminary drilling at Bill's Pipe has encountered high-grade gold
mineralisation on several structures near the surface, where infill drilling is
now being planned. At Ruari's Ridge the first drill hole encountered massive
sulphides at depth, returning encouraging gold and high-grade copper assay
results. The ongoing programme will continue to test the strike and depth
extension of this strong gold geochemical and electromagnetic anomaly.
Within the wider Tapajos region geochemistry and initial drilling has identified
mineralisation at the Sucuba project area, located approximately 10 km west of
Palito. The drilling undertaken has confirmed the occurrence of a poly-metallic
structure that will now be further evaluated along strike and at depth.
Meanwhile at the Pombo project situated in Mato Grosso state, drilling has been
undertaken along the main west-east structure, with results confirming extensive
gold-copper mineralisation across the central section, which includes values of
16.41 metres at 2.28g/t gold and 0.174% copper, including 9.95 metres at 3.5 g/t
gold and 0.23% copper. Drilling has moved west and east of the central
mineralised section, where initial holes completed some 100-150 metres along
strike indicate continuing strong alteration with associated sulphide
mineralisation.
Further information on the exploration programme is contained in the update
release of 13 September 2006.
Meanwhile, Serabi continues to review other opportunities in Brazil. It remains
our goal to build up the production capability of Serabi through the
identification, evaluation and development of areas that have a history of gold
mining, with appropriate infrastructure, enabling them to be brought into
production for an attractive capital outlay.
People
As a final comment none of the Company's achievements this year would have been
possible without the support of our staff. They have shown great loyalty and
commitment to ensuring that the Company achieves the goals which your Board has
set. Our thanks and gratitude continues to be extended to all of them.
Graham Roberts Bill Clough
Chairman Chief Executive
26 September 2006
Profit and Loss Account
for the six months to 30 June 2006
(expressed in US$)
Group
Six months to Six months to Three months to
30 June 2006 31 July 2005 31 December 2005
(unaudited) (unaudited) (audited)
Administration expenses (1,320,150) (792,791) (621,422)
Share-based payment costs (331,338) (597,260) (422,298)
Write-off of exploration and development cost - (43,051) -
Depreciation (plant and equipment) (572,364) (157,459) (339,552)
Loss on ordinary activities before interest and other (2,223,852) (1,590,561) (1,383,272)
income
Foreign exchange gain/(loss) 582,390 (789,612) (35,703)
Interest payable (116,992) (19,072) (69,929)
Interest receivable 48,531 103,556 21,044
Loss on ordinary activities before taxation (1,709,923) (2,295,689) (1,467,860)
Taxation - - -
Loss on ordinary activities after taxation (1,709,923) (2,295,689) (1,467,860)
Earnings per ordinary share (basic and diluted) (1.61c) (2.62c) (1.42c)
Statement of Total Recognised Gains and Losses
for the six months to 30 June 2006
(expressed in US$)
Group
Six months to Six months to Three months to
30 June 2006 31 July 2005 31 December 2005
(unaudited) (unaudited) (audited)
US$ US$ US$
Loss for the period (1,709,923) (2,295,689) (1,467,860)
Exchange gain/(loss) on foreign currency net investment 1,521,633 (233,410) (175,330)
Total recognised loss for the period (188,290) (2,529,099) (1,643,190)
Balance Sheet
as at 30 June 2006
(expressed in US$)
Group
As at As at
30 June 2006 31 December 2005
Notes (unaudited) (audited)
Fixed assets
Intangible assets
Goodwill on acquisition 1,752,516 1,752,516
Tangible assets
Property, plant and equipment 4 6,367,766 5,375,621
Capitalised exploration and development expenditure 5 17,569,792 15,831,875
Investments - -
Current assets
Stock and work in progress 3 2,754,891 1,825,479
Debtors due within one year 3,124,395 2,818,551
Cash at bank and in hand 3,973,212 2,152,452
9,852,498 6,796,482
Creditors: amounts falling due within one year (3,326,254) (2,451,537)
Net current assets 6,526,244 4,344,945
Total assets less current liabilities 32,216,318 27,304,957
Creditors: amounts falling due after more than one (210,846) (244,724)
year
Provision for liabilities and charges (448,121) (428,944)
Net assets 31,557,351 26,631,289
Capital and reserves
Called up share capital 6 19,170,496 17,974,336
Share premium reserve 6 15,045,251 11,818,128
Share-based payment reserve 3,381,121 2,690,052
Profit and loss account (6,039,517) (5,851,227)
Equity shareholders' funds 31,557,351 26,631,289
These unaudited results do not amount to statutory accounts within the meaning
of Section 240 of the Companies Act 1985.
The statutory accounts for the three months ended 31 December 2005 have been
filed with the Registrar of Companies. The auditors' report on these accounts
was unqualified and did not contain a statement under Section 237(2) or 237(3)
of the Companies Act 1985.
Consolidated Cash Flow Statement
for the six months to 30 June 2006
(expressed in US$)
Group
Six months to Six months to Three months to
30 June 2006 31 July 2005 31 December 2005
(unaudited) (unaudited) (audited)
Net cash inflow/(outflow) from operations 157,177 (2,673,961) (2,725,970)
Returns on investment and servicing of finance
Interest received 48,531 103,556 21,044
Interest paid (116,992) (19,072) (69,929)
Net cash (outflow)/inflow from returns on investments
and servicing of finance (68,461) 84,484 (48,885)
Capital expenditure and financial investment
Purchase of tangible fixed assets (1,564,509) (1,501,953) (1,627,113)
Exploration and evaluation expenditure (1,378,186) (3,474,197) (967,746)
Net cash outflow on capital expenditure and
financial investment (2,942,695) (4,976,150) (2,594,859)
Cash outflow before financing (2,853,979) (7,565,627) (5,369,714)
Financing activities
Issue of ordinary share capital 4,423,283 17,053,752 -
Net cash inflow from financing activities 4,423,283 17,053,752 -
Increase in cash at bank and in hand 1,569,304 9,488,125 (5,369,714)
Reconciliation of Operating Loss to Net Cash Flow from Operating Activities
for the six months to 30 June 2006
(expressed in US$)
Group
Six months to Six months to Three months to
30 June 2006 31 July 2005 31 December 2005
(unaudited) (unaudited) (audited)
Operating loss (2,223,852) (1,590,561) (1,383,272)
Depreciation 572,364 157,459 339,522
Increase in stocks (753,002) (541,237) (1,003,810)
Share-based payment costs 331,338 597,260 422,298
Increase in debtors and prepayment (518,212) (215,737) (1,754,743)
Increase/(decrease) in creditors and accruals 770,837 (31,519) 709,714
Foreign exchange 1,977,704 (1,049,626) (55,679)
Net cash inflow/(outflow) from operating activities 157,177 (2,673,961) (2,725,970)
Reconciliation of Cash to Net Funds
for the six months to 30 June 2006
(expressed in US$)
Group
Six months to Six months to Three months to
30 June 2006 31 July 2005 31 December 2005
(unaudited) (unaudited) (audited)
Cash at bank and in hand beginning of period 2,152,452 474,059 7,557,138
Cash flow 1,569,304 9,488,125 (5,369,714)
Exchange gain/(loss) 251,456 (727,005) (34,972)
Cash at bank and in hand at end of period 3,973,212 9,235,179 2,152,452
Notes to Interim Financial Statements
1. Basis of preparation
These interim accounts are for the six month period ended 30 June 2006.
Comparative information has been provided for the unaudited six month period to
31 July 2005 and the audited three month period from 1 October to 31 December
2005.
The accounts for the period have been prepared in accordance with the policies
which the Group will adopt for its annual accounts, notably:
(i) the accounts have been prepared on the historical cost basis;
(ii) the Group capitalises exploration and development costs relating to each
of the licence areas that it holds and will amortise these costs over the life
of any mine that is developed once commercial production has been achieved;
(iii) stocks are valued at the lower of cost and net realisable value;
(iv) property, plant and equipment is depreciated over its useful life;
(v) the Company is currently undertaking mining from an area known as Palito
Hill. Given the history of the development of the Palito mine and in particular
the ability, unlike many mines, to generate cash flow at a very early stage of
mine development through the availability of an existing plant at the site, the
Board has considered that the current activities represent development activity
rather than commercial production. At this stage, the operations have not
reached the targets set by the Board for commercial production and accordingly
all mine and plant costs have been capitalised as ongoing development costs. All
sales revenue to date has been set off against the development costs;
(vi) revenues are recognised only at the time of sale. Any unsold production and
in particular concentrate is held as inventory and valued at production cost
until sold.
2. Taxation
The Group as a whole has been in a loss making situation up to balance sheet
date and consequently has made no provision for any income tax charge. No
deferred tax asset arising from carried forward losses has been recognised in
the financial statements because of uncertainty as to the time period over which
this asset may be recovered.
3. Stocks
30 June 2006 31 December 2005
(unaudited) (audited)
Bullion and work in progress 1,029,596 424,950
Consumables 1,725,295 1,400,529
2,754,891 1,825,479
4. Property, plant and equipment
30 June 2006 31 December 2005
(unaudited) (audited)
Cost
Balance at beginning of period 6,042,815 4,415,702
Additions 1,564,509 1,627,113
Disposals - -
Balance at end of period 7,607,324 6,042,815
Depreciation
Balance at beginning of period (667,194) (327,672)
Charge for period (572,364) (339,522)
Balance at end of period (1,239,558) (667,194)
Net book value 6,367,766 5,375,621
5. Exploration and development costs
30 June 2006 31 December 2005
(unaudited) (audited)
Balance at beginning of period 15,831,875 14,609,905
Net additions 1,737,917 1,221,970
Write down for impairment - -
Balance at end of period 17,569,792 15,831,875
6. Share capital
30 June 2006 30 June 2006 31 December 2005 31 December 2005
(unaudited) (unaudited) (audited) (audited)
Called up capital Number $ Number $
Balance at beginning of period 102,991,636 17,974,336 102,991,636 17,974,336
Issue of shares 6,500,000 1,134,055 - -
Conversion of employee share options 343,306 62,105 - -
Balance at end of period 109,834,942 19,170,496 102,991,636 17,974,336
30 June 2006 31 December 2005
(unaudited) (audited)
Share premium reserve $ $
Balance at beginning of period 11,818,128 11,818,128
Issue of shares 3,402,165 -
Conversion of employee share options 78,980 -
Share issue expenses (254,022) -
Balance at end of period 15,045,251 11,818,128
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