Exploration Successes at Palito West

PRESS RELEASE                                                             20 September 2007

 

 

 

 

 

        
Completion of £12.5 million placing provides strengthened
foundation for resource and production growth

        
Exploration success points to wider potential and basis for
short-term production expansion

        
First half production of 18,718 ounces gold equivalent
represents a 6% year-on-year improvement

        
Mining volumes and plant throughput are at record levels

        
Further improvements to mining and mill productivity are
anticipated during the remainder of 2007

        
Changes to mining methods introduced with noticeable
benefits anticipated at the end of the year

        
Management changes reflect the Company's changing status to
a producer with significant exploration opportunities

        
Operating profits being generated by the Palito mine.  EBITDA for the six months of US$1.1 million
(2006 - calendar year loss of US$0.8 million)

 

 

Having achieved commercial
production at the Palito gold mine last October, the first half of 2007 has brought
with it a number of important successes that highlight the company's future
potential and at the same time a number of new challenges.  Taken together, Serabi has established a
strong platform and is now ready to move forward to the next stage, which is
intended to position the company for significant growth.  

 

Without doubt the exploration
success we have previously reported at Jardim do Ouro over the Ruari's Ridge, Chico
da Santa and Palito West prospects, is one of the highlights of the period and
provides tangible evidence of the wider potential of the Jardim do Ouro
district.  We are confident that as we
step further away from the Palito Main Zone, we will continue to discover new
prospects of similar character which can serve as satellite mining operations
for a central plant and a basis for resource and production growth.

 

With this objective in mind, we
successfully completed the placing of new ordinary shares in July to raise
gross proceeds of US$25 million. 
Combined with cash flow from current operations, the funds will in part
allow us to evaluate in detail the Ruari's Ridge, Palito West and Chico da Santa
prospects.  We would anticipate that a
successful evaluation will enable Serabi to introduce production from these
prospects into our planning for 2008, leading to an annualised production rate
of some 60,000 ounces gold equivalent during the year. .

 

At the same time we are
significantly stepping up our exploration programme across the wider Jardim do
Ouro district and Tapajos region, in order to
identify and evaluate the extent of other targets that we believe exist in this
area.  Following from the success of
ground electromagnetic surveys ("EM") in identifying mineralised areas at Chico
da Santa and Palito South areas, the first stage of this programme will be to
carry out in October a helicopter borne EM survey covering over 5,000 hectares
of the Jardim do Ouro area.  The characteristics
of Palito mineralisation are such that the EM survey highlights potential
'hotspots'.  Combined with information
obtained from other exploration work, the results are expected rapidly to
produce a number of targets for drilling. 
We are confident that such an approach should have a high rate of
success in locating the sulphide mineralisation which is associated with the
gold occurrences at Jardim do Ouro.

 

Meanwhile, evaluation work continues
apace at the Ruari's Ridge, Palito West and Chico da Santa prospects.  We are very encouraged in particular by the
strike extension that has recently been identified on the Palito West prospect,
together with the high-grade intersections that the detailed drilling programme
is producing.  Additionally, we note that
some of the mineralised structures of the Chico
da Santa prospect are located closer

 

 

 

to the Palito Main Zone mining
operation than had been previously thought. 
If this is substantiated  by
further drilling, then it is likely that we will be able to access the Chico da
Santa ore veins for production by the rapid development of a cross-cut drive
from the existing Palito mine, thus avoiding the need for a more costly decline
access solely for the exploitation of this area.

 

In recent months underground mining
has been adapted to a 'cut-and-fill' method. 
Whilst production results for the first half of the year exceeded those
for the same period last year, it has been disappointing that the long-hole
stope mining method introduced at the end of 2006 has not yielded the productivity
improvements that were anticipated.  We
have not abandoned this method and continue to look at solutions that will
allow us to deliver the ore quantities at the desired feed grade to the plant
using this technique.  In the meantime, 'cut
and fill' enables more selective ore extraction and reduces the unplanned
dilution that occurred with long-hole mining. 
The economic benefit of the higher stoping grade that can be achieved by
the more precise cut-and-fill technique substantially offsets this slower and
slightly more costly option.

 

In anticipation of the need for
equipment for the development of Ruari's Ridge, Palito West and Chico da Santa, and the
lead times involved, orders have recently been placed for key additional
underground equipment.  This includes the
introduction of narrow scooptrams, which we expect will result in a significant
improvement of the feed grade achieved from development drives by reducing the
levels of dilution by waste rock still further. 
The plant is as a consequence of lower dilution able to produce the same
level of gold whilst treating less ore and in so doing free up plant capacity
and reduce plant operating costs. 
Current lead times for delivery indicate that this equipment should be
on site towards the end of 2007 with the resultant benefits becoming evident
early in 2008.   In the meantime the mine
plan for the last quarter of 2007 does include a higher ratio of stoping ore to
development than we have seen to date and at this stage we project full year
production to show a small increase on 2006 levels.

 

The plant continues to function well
with recoveries in excess of 90%.  In
anticipation of changes required to meet the increased level of production in
2008, we are considering the installation of additional CIP capacity.  At current production levels, studies
indicate that this would increase total recovery by at least 2%, generating a
capital pay-back within six months. 

 

In reviewing the financial
statements for the period it is necessary to bear in mind that the comparative
full year 2006 figures comprise Revenue, Operating Expenses and Depreciation of
the Mine Asset for a 3 month (fourth quarter) period whilst the remaining
expenses are for the full 12 month period. 
This reflects the commencement of Commercial Production at the end of
September 2006 and the concurrent cessation of the policy of capitalisation of
costs and revenues associated with the mining operations up to that date.  This principal has been discussed in more
detail in the 2006 Annual Report.

 

The company is generating operating
profits from the Palito mine, with EBITDA for the six months of US$1.1 million,
against a loss for the 2006 calendar year of US$0.8 million.  Higher unit costs than the preceding period
are related to the already reported lower production, rather than an escalating
cost base. As is expanded on below, at a head-line level we believe the financial
results for the first 6 months of 2007 do not reflect the long-term outlook or
the continuing efficiency drives that are being implemented. 

 

Operating cash costs for Q4 2006
before accounting for copper and silver credits was BrR$ 10.1 million compared
with an average quarterly cost in the first half of 2007 of BrR$ 10.2
million.  Notwithstanding the obvious
effect of lower gold production resulting from reported lower feed grades, two
other factors have also influenced our current unit costs of production.  In line with industry standards costs per
ounce are calculated after deducting by-product credits from the base operating
costs.  In Q4 2006 we produced 224.6
tonnes of copper and generated a by-product credit of $1.75 million.  For the first half of 2007 copper credits were
$1.7 million, based on production of 252.6 tonnes.  Secondly, the continued appreciation of the
Brazilian Real has increased our US$ denominated costs by 6.3%
against Q4 2006. 

 

In the short term, plans to increase
feed grades are expected to deliver direct bottom line improvements.  If we are able to maintain current ore
volumes at higher grades there will be minimal effect on the cost base, which
is primarily linked to volumes processed and not grade.  Our reported Q4 2006 cost per ounce gold equivalent
was US$252.  On a like-for-like basis
(exchange and by-product credits) the figure would have been $344 per ounce
gold equivalent.  Given that our
production for the first six months was below plan and averaged 80% of the Q4
2006 levels the cash cost of $442 per ounce whilst disappointing does not
reflect a long-term trend and we expect to see direct improvement with better
grade and thus production.  The average
cash costs over the six month period were significantly influenced by low gold
production in the first two months of the year and since March we have seen
improvements with cash costs averaging $370 per ounce over the last four
months.  The short-fall in production in
the early part of the year also placed short term pressure on cash flow during
this six month period and required the Company to enter into some short term
arrangements in Brazil
with a consequent

 

 

 

 

 

impact on interest charges in the
period.  These arrangements have been
eliminated and we would expect a significant reduction in this cost in the
second half of the year.

 

The potential to develop new areas
within Chico da
Santa, Palito West and Ruari's Ridge will increase flexibility further and
generate economies of scale as mined volumes increase through 2008.  In the meantime we are, given current prices
and our balance sheet strength, in a strong financial position to achieve our
medium term objectives.

 

Finally, shareholders were recently
made aware of significant management changes that took place at the end of
August.  We would like to reiterate our
gratitude to Bill Clough and Sergio Aquino, the co-founders of the Company, for
their efforts and commitment in bringing Serabi to where it is today.  As Serabi enters the next stage in its
development, we are pleased that both Bill and Sergio will remain closely
involved with Serabi as both shareholders and executives.  This continued contribution is highly valued
and we take this opportunity to express sincere thanks to them both. 

 

Mike Hodgson, our new Chief
Executive, and Wanderlan Almeida, our new Managing Director of Serabi
Mineracao, are two individuals with almost 50 years of operational experience
between them, which bodes well for Serabi being able to meet its production
growth plans.

 

 

19 September 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The interim financial information has
not been audited and does not constitute statutory accounts within the meaning
of Section 240 of the Companies Act 1985.  The Group statutory accounts
for the year ended 31 December 2006, prepared under IFRS as adopted in the EU, has
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.

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)   Exploration
and development expenditure of the Group for 2006 is stated net of
pre-operating income of US$2,839,018 ($1,990,800 to 30 June 2006).

 

 

 

 

 

These interim accounts are for the
six month period ended 30 June 2007. Comparative information has been provided
for the unaudited six month period to 30 June 2006 and the audited twelve
month period from 1 January to 31 December 2006.

 

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 Financial Statements are presented in US Dollars.  They are prepared on the historical cost
basis or the fair value basis where the fair valuing of relevant assets and
liabilities has been applied.  The
financial statements whilst not statutory accounts have been prepared otherwise
in accordance with International Financial Reporting Standards and their
interpretations issued by the Accounting Standards Board and adopted for use
within the European Union (IFRS);

 

(ii)    
all costs related to the exploration of mineral properties
are capitalised and deferred until either the properties are demonstrated to be
commercially feasible or until the properties are sold, allowed to lapse or
abandoned, at which time any capitalised costs are written off to the income
statement.  All costs incurred prior to
obtaining the legal right to undertake exploration and evaluation activities on
a project are written off as incurred.

Exploration and evaluation costs
arising following the acquisition of an exploration licence are capitalised on
a project by project basis, pending determination of the technical feasibility
and commercial viability of the project. 
Costs incurred include appropriate technical and administrative
overheads, but not general overheads. 
Deferred exploration costs are carried at historical cost less any
impairment losses recognised.

Property, plant and equipment used
in the Group's exploration activities are separately reported;

 

(iii)  inventories are valued at the lower of cost
and net realisable value;

 

(iv)  property, plant and equipment is depreciated
over its useful life;

 

(v)   the Group commenced commercial production at
the Palito mine effective 1 October 2006. 
Prior to this date all revenues and operating costs were capitalised as
part of the development costs of the mine. 
Effective from 1 October 2006 the accumulated development costs of the
mine were re-classified as Mining Property costs and such cost is being
amortised over the anticipated life of the mine on a unit of production basis;

 

(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.

 

 

Taxation represents a provision for
corporate taxes due on taxable profits arising in Brazil.  No deferred tax asset arising from carried
forward losses incurred outside of Brazil has been recognised in the
financial statements because of uncertainty as to the time period over which
this asset may be recovered.

 

 

 

(1)   Exploration
and development expenditure of the Group for 2006 is stated net of
pre-operating income of US$2,839,018 ($1,990,800 to 30 June 2006).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On 11th July 2007, the
Company issued 29,069,768 new ordinary shares pursuant to a placing at a price
of 43 pence per share, which raised gross proceeds of approximately US$25
million (UK£12.5 million).

 

 

 

 

 

8. Transition to IFRS

 

The Company adopted the provisions
of IFRS in preparing its financial statements for the year ended 31 December
2006.  The effect on the Group's
financial statements of the transition to IFRS was explained in the Transition
Document published on 13 March 2007.  For
the purposes of comparison the financial statements of the group as at 30 June
2006 have been restated in accordance with IFRS as follows;

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The adjustment between UK GAAP and
IFRS represents the need to vary the Group's previous UK GAAP compliant policy
on translation of non monetary assets denominated in foreign currencies to
comply with IFRS.