December 13 will be a red letter day for the management and staff of Serabi Gold (LON:SRB) as it marks the switch-on of the group’s Palito plant in Brazil’s Tapajós region.
Three months down the line, Serabi should be a fully fledged producer of the precious metal; an achievement to which many juniors aspire but few achieve.
There are two mining clichés and one mining truism that the development of Palito bears out.
The latter first: grade is king. Good grades can turn a mine into a money generator even in this low-price environment for gold.
Now for the clichés.
Palito and the follow-up development of Sao Chico, 25 kilometres (km) down the road, reveal that good things come in small packages.
Meanwhile, the stellar work done by Serabi shows good projects can be ruined by poor management.
What do I mean by that last comment?
Well, Palito in a former incarnation and under another team was mining 120,000 ounces, but was so burdened by overhead it closed.
Palito, under Hodgson and an experienced Bolivian crew expects to extract a “solid 25,000 ounces”, generating US$5-6mln of cash a year.
Okay, this brownfield development had a lot going for it when Hodgson took over in 2010; not least an established mine and production infrastructure (though this had to be largely rebuilt).
But it took a change in tack based on experience to realise it had to be mined in a completely different way – with the accent on higher grade material (of circa 9 grams a tonne).
It also meant keeping a lid on costs, which is why the camp functions with just 200 employees where it required many more in the past.
That’s where experience wins out over blind ambition in this game.
“Underneath the high overhead of the company, we recognised that Palito was a high quality asset, that mined correctly, at the right time, could be nicely profitable,” Hodgson says.
“We realised we had to go back and mine it in a selective high-grade way. To do this we really needed a bigger resource and more ounces to make this thing work really well.”
Mine-site drilling uncovered three Palito-style deposits within three kilometres of the mine.
With these discoveries on board, plus a circa 700,000-ounce gold resource, a permitted and licensed mine, Serabi felt the time was right to “seek production”.
Earlier this year it raised US$26mln (£16mln) from investors that will allow it to develop the mine.
If this was the entire story, then one might be tempted to say: so what?
But there is more to this. Palito is part of the plan to fill a plant that used to process 600 tonnes of ore a day.
It will restart at 250 tonnes, while production from Sao Chico would add a further 100 tonnes when it comes on stream in 2015.
This is a small resource at 100,000 ounces, which it picked up for US$9mln in an all-paper deal with Kenai Resources.
However, this is an extremely high-grade deposit at 26 grams per tonne, though exploration drilling has intercepted concentrations of the precious metal of over 100 grams per tonne.
The drilling undertaken by Serabi since acquiring the asset suggests the resource could double in size. Meanwhile, the incremental effect of adding 100 tonnes of Sao Chico gold to the mix will be to bring down cash costs to a very acceptable US$670 an ounce of the precious metal.
By 2015 Serabi will be producing 40-50,000 ounces a year and generating US$15-20mln of cash from that.
Remember, the ore can be trucked to Palito and processed there, so there is no need for infrastructure above surface.
Work will begin early next year on a ramp that will be a prelude to production, but will also allow underground diamond drilling that will let Serabi to build on that initial resource at Sao Chico.
“The grades are spectacularly high,” Hodgson says of the deposit.
“It is not massive volume, but it is open. I believe we have a bit of a tiger by the tail.
“In the first instance we just want to demonstrate sufficient ounces to support the application to convert the current exploration licence to a mining one; however, with a trial mining licence in place already, we are going to start development immediately.”
El Dorado Gold’s Tocantinzinho deposit is the giant of the Tapajos region at 2.4mln ounces, but it has its disadvantages, being in the jungle well away from infrastructure such as roads and electricity.
It is also likely to require vast tracts of vegetation to be cleared to make way for a massive open-pit – which obviously has environmental implications.
The Serabi developments have none of these impediments; in fact Hodgson believes underground is the way things are going in this corner of Brazil.
“The days have gone where you can put big holes in the ground in this part of the world,” notes the Serabi boss.
This also, perhaps, points at the requirements on Hodgson’s tick list when it comes to making acquisitions.
There are opportunities to build a regional play here, he contends, although he and the team will probably only look at those projects hooked into the local infrastructure and where the grade passes muster.
“We need a scale change,” he says of Serabi’s plans to grow in the future.
“We will be generating decent money under our current plans but there are some assets out there that would benefit from the management and technical team we have.”