Jaguar Mining: A Disappointing Start To The Year (TSX:JAG:CA)

2022 was a tricky yr for the Gold Miners Index (GDX) with largely flat manufacturing, a major improve in prices and little assist from the gold value. The tough yr resulted in a number of firms packing up all collectively like Pure Gold (OTC:LRTNF) and Nice Panther Mining (OTC:GPLDF) and whereas there have been a few exceptions like Orla Mining (ORLA) and Lundin Gold (OTCQX:LUGDF), most miners did not even come near assembly steerage. Sadly, for traders in Jaguar Mining (OTCQX:JAGGF), the corporate missed steerage but once more and reported a excessive double digit improve in working prices and all-in sustaining prices [AISC]. The consequence was a major decline in free money stream technology, a dividend minimize, and unfavorable margins on an all-in value foundation.

The excellent news is that whereas the gold value supplied little reprieve to stability inflationary pressures skilled final yr, it’s cooperating in 2023 and is without doubt one of the best-performing asset courses year-to-date. Nevertheless, Jaguar has began out the yr with a limp as soon as once more, reporting a sub 20,000-ounce quarter due to a tough wet season in Minas Gerais. Because of this it is going to be promoting fewer ounces right into a $1,900/ouncesplus gold value than hoped within the quarter and its prices might be pressured just a little with a full yr of inflationary pressures plus a stronger than anticipated Brazilian Actual. Let’s have a look beneath:

All figures are in United States {Dollars} except in any other case famous.

FY2022 Outcomes

Jaguar Mining was one of many final firms to launch its FY2022 ends in the mining sector, and much like final yr, they didnt save one of the best for final. Not solely did FY2022 manufacturing are available miles beneath its preliminary steerage midpoint of 90,000 ounces at simply ~81,000 ounces, however money prices soared 26% year-over-year to $1,052/ounceswhereas AISC spiked to $1,483/oz. The latter determine was up 22% year-over-year and practically 24% above the steerage midpoint, eroding any confidence traders might need had relating to relying on administration to ship towards steerage. In equity, Jaguar was hardly the one firm to overlook value steerage, however its miss was among the many largest in 2022 and it was the second consecutive important annual miss that made final yr’s efficiency much less forgivable.

Given the decline in ounces offered mixed with a barely weaker common realized gold value ($1,780/ouncesvs. $1,790/oz), annual income slid to $142.5 million and working money stream dipped to $40.8 million, representing important declines on a one and two-year foundation. In the meantime, Jaguar elected to droop its dividend, with the beforehand industry-leading yield being one of many few consolations to proudly owning a inventory that has dropped like a stone since its peak two years in the past. In reality, whereas the Gold Juniors Index (GDXJ) is down 20% since its 2016 highs, Jaguar Mining has declined over 65% and it continues to be one of many worst performers sector-wide throughout practically each timeframe.

Happily, Jaguar reported constructive free money stream for the yr, and ended the yr with an honest money place of $25.8 million due to the smart choice to droop its dividend final yr. Nevertheless, free money stream constructive or not, this was hardly a yr to jot down dwelling about with AISC margins sliding by 48% to $297/ouncesand This autumn 2022 AISC growing to a number of the highest ranges {industry} large at $1,597/oz, leading to roughly non-existent margins at a $1,800/ouncesgold value. Worse, all-in value margins have been truly unfavorable for the yr, with all-in prices growing to $1,864/oz (consists of progress capital and exploration /analysis prices). This definitely pales in comparison with producers like Orla Mining with comparable manufacturing profiles (~100,000 ounces vs. ~80,000 ounces) like Orla Mining at Camino Rojo, which generated $82.0 million of free money stream final yr, or 5 occasions as a lot free money stream as Jaguar.

Latest Developments

Transferring over to latest developments, Jaguar Mining launched its preliminary Q1 outcomes final week, and the manufacturing figures disillusioned. Whereas the headline numbers confirmed a 9% improve in gold manufacturing year-over-year to ~18,200 ounces, the corporate was up towards very straightforward year-over-year comps, with Q1 2022 being its second-worst quarter from an output standpoint up to now 4 years. This has resulted in Jaguar monitoring at simply ~21.1% of its FY2022 steerage midpoint (86,000 ounces) suggesting that we may have one other steerage miss on deck if it may well’t string collectively three strong quarters. The corporate famous that the wet season impacted haulage from its Pilar Mine to its Caete Plant, however with the weather excuse getting used final yr as properly, it might need been prudent to information just a little extra conservatively.

The excellent news is that the gold value has surged because the begin of the yr, suggesting that FY2022 could mark trough AISC margins at ~$300/oz. That stated, one would hope that these could be trough margins for the corporate after a 55% decline in AISC margins on a two-year foundation and this is not something to jot down dwelling about. Plus, whereas it isn’t clear if Jaguar will meet its FY2022 manufacturing steerage this yr after the softer Q1, assembly its value steerage midpoint may be tough. It’s because its FY2023 steerage midpoint of $1,325/ouncesassumed a BRL/USD ratio of 5.20 to 1.0 and this ratio is presently sitting nearer to 4.80 to 1.0, with the Brazilian Actual breaking out towards the US Greenback. A mix of barely fewer ounces offered and a stronger Actual may trigger prices to come back in nearer to $1,350/oz.

So, what’s the excellent news?

Whereas I am not overly optimistic about Jaguar Mining beating its steerage midpoint after two consecutive misses and a sluggish begin to the yr, we should always see a cloth enchancment in margins this yr even beneath the idea that the gold value averages simply $1,900/oz. It’s because even on the increased finish of value steerage ($1,360/oz), AISC margins would enhance from $297/ouncesto $540/oz, serving to the corporate to have a greater yr from a free money stream standpoint. That stated, a lot depends upon the gold value, and Jaguar might want to have a a lot better Q2 by way of This autumn than its Q1 efficiency, which was uninspiring for traders that have been hoping for a greater yr operationally and have suffered by way of a 75% share value decline in only two years.

Valuation

Primarily based on 75 million absolutely diluted shares and a share value of US$2.08, Jaguar trades at a market cap of $156 million, which pales in comparison with most different junior producers with comparable manufacturing profiles. Nevertheless, and as famous beforehand, Jaguar operated at unfavorable all-in margins final yr and even when we assume a median realized gold value of $1,900/ouncesthis yr, I might nonetheless count on razor-thin all-in value margins, leading to restricted free money stream technology. So, with Jaguar being a marginal producer with a depressing observe report of assembly steerage and property that lack of economies of scale, I proceed to see the inventory as an inferior method to play the sector. That is very true on condition that Jaguar shouldn’t be returning capital to shareholders, whereas traders can count on returns of ~5% from Barrick (GOLD) this yr.

Some traders will argue that the natural progress profile right here makes Jaguar an attention-grabbing story and should level out that the inventory is undervalued on this foundation. Though this progress is definitely constructive, this was a five-year plan introduced in Q1 2022, and I would not count on the corporate to see manufacturing sustained above the 125,000-ounce degree till at the least 2026. In the identical interval, we’ll see different junior producers like Orla Mining and i-80 Gold (IAUX) develop annual manufacturing by ~120% and 600%, respectively, and they need to have a lot better margins than Jaguar Mining with AISC margins north of fifty%. So, whereas Jaguar does supply progress, I see names providing extra engaging progress in additional engaging jurisdictions with higher margin profiles like i-80 Gold.

Lastly, even when we assume Jaguar generates ~$50 million in money stream this yr, this may translate to a money stream a number of of ~3.1 which is not that out of line with bigger producers like Aris Mining (ARIS:CA) and Calibre Mining (OTCQX:CXBMF). And whereas these producers could also be in much less engaging jurisdictions (Nicaragua, Colombia), I do not see a valuation of ~3.1x money stream as that a lot of a disconnect for a sub 100,000-ounce gold producer that hasn’t been capable of meet its steerage that boasts unfavorable all-in value margins. Utilizing what I imagine to be a extra conservative a number of of 4.5x money stream and FY2022 estimates of $50 million, I see a good worth for Jaguar Mining of $225 million or US$3.00 per share.

Though this factors to significant upside, I’m on the lookout for a minimal 45% low cost to honest worth for micro-cap producers to make sure there’s an satisfactory margin of security. In Jaguar’s case, the present setup doesn’t even come near assembly this criterion, with a forty five% low cost from US$2.67 inserting the best purchase zone at US$1.65 or decrease. So, whereas Jaguar ought to see margin enchancment this yr and does commerce properly beneath honest worth, I believe there are higher methods to get publicity to gold on a risk-adjusted foundation, and would solely turn out to be desirous about Jaguar nearer to US$1.70.

Abstract

Jaguar Mining has performed a strong job of delineating targets throughout its huge land bundle within the Iron Quadrangle and is ready as much as develop manufacturing to 120,000+ ounces later this decade. Nevertheless, whereas this represents ~40% progress, a few of that is merely a restoration again to FY2020 ranges and prices have risen considerably within the interval, offsetting the impression of this future progress from a money stream standpoint. As well as, whereas that is strong progress, it is tough to depend on a crew that hasn’t even are available remotely close to steerage the previous two years. And whereas this progress is significant, there are a number of progress tales with extra torque elsewhere within the sector.

To summarize, I proceed to see Jaguar Mining as an inferior method to play the sector and I might view any rallies above US$2.44 earlier than June as a possibility to e-book some earnings if I have been lengthy the inventory.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.