Jaguar Mining Inc (TSX: JAG) is a junior gold mining company which is engaged in the acquisition, exploration, development, and operation of gold producing properties in Brazil. Its principal operating assets are located in the Iron Quadrangle, a prolific greenstone belt in the state of Minas Gerais and include the Turmalina Gold Mine Complex and Caete Gold Mine Complex which combined, produce more than 95,000 ounces of gold annually. The company also owns the Paciencia Gold Mine Complex.

Investment Rationales

• Gaining momentum on Sequential basis: On a sequential basis, the company is gaining traction, with revenue, gross profit, net income, and cash from operations all increasing, which is a significant positive. All of this demonstrates the company's strength and adaptability. This lovely voyage is depicted in the graph below.

Source: Company Filing

• An income play: Given the strength of a business over the past number of quarters, improved cost structure, strong balance sheet and solid cash flow, the company has paid a consistent dividend. Recently, the company paid a quarterly dividend of CAD 0.4 per common share. Moreover, at the last closing price of CAD 3.86 as on December 14, 2021, the stock offered a healthy dividend yield of 4.145%, which looks decent considering the current macros and interest rates.
• Virtually Debt free balance sheet: The company is virtually debt free, with Debt-to-Equity ratio of 0.03x compared to industry median of 0.22x as of June 30, 2021. Moreover, the company’s long-term debt as a percentage of total capital stood at just 1%, significantly below the industry median of 12.7%, which implies no balance sheet risk associated with company.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 1.9x compared to the industry (Metal & Mining) median of 2.4x. while on NTM EV/Sales multiple the stock is trading at 1.1x compared to 1.8x. This implies that the shares are trading at deep discount against the industry. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group

• Healthy Cash Position and Working Capital: The company's cash balance was USD 38.1 million on September 30, 2021, compared to USD 34.4 million on June 30, 2021. While the working capital stood at USD 33 million, compared to USD 29 million as on December 31, 2020. The rise in cash balance was mostly due to cash earned from operating activities, which totaled USD 16.4 million.

• Risks associated with investment: The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.
  

Financial overview of Q3 2021 (In 000 of USD)

Source: Company filing

• Lower production: The company’s consolidated gold production decreased by 6% to 22,603 ounces in Q3 2021, compared to 24,094 ounces in Q3 2020, reflecting the reduction of 18% in the average head grade of 3.59 g/t in Q3 2021, compared to 4.40 g/t in Q3 2020.
• Revenue for Q3 2021 decreased 6% to USD 40.7 million, compared with USD 43.5 million in Q3 2020, mainly due to a reduction in the average realized gold price of USD 1,753/oz in Q3 2021, compared to USD 1,896/oz for Q3 2020.
• Operating Expenses In Q3 2021, an operating cost stood at USD 19.4 million compared to USD 14.1 million in Q3 2020. The increase in operating production costs was due to inflation, combined with 16% increase in tonnes of ore processed from 192,000 in Q3 2020 to 222,000 in Q3 2021.
• Gross profit in the reported period fell to USD 15.7 million, compared to USD 25.7 million in the previous corresponding period, primarily due to lower revenue and higher operating cost.
• Operating income in Q3 2021, stood at USD 12.7 million against USD 21.9 million in pcp.
• Net Income On the back of higher foreign exchange gain and lower income tax expense the group’s net income in the reported period stood at USD 11.4 million compared to USD 16.5 million in the previous corresponding period.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 74.89% of the total shareholding. 2176423 Ontario, Ltd. and Sprott Asset Management LP hold the company's maximum interests at 48.83% and 9.83%, respectively. The company's institutional ownership stood at 26.08%, and ownership of the strategic entities stood at 49.41%.

Source: Refinitiv, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

*1USD=1.29CAD

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock recommendation

On a sequential basis, the company is gaining traction, with increases in revenue, gross profit, net income, and cash from operations, all of which indicate the company's strength and durability. However, due to lower gold average realization prices and lower gold production, its performance in Q3 2021 was comparatively weak compared to Q3 2020. Nevertheless, we believe the company is fundamentally sound, with a strong balance sheet, persistent debt reduction, a strong liquidity profile, and a profitability profile that is roughly comparable to those of its larger peers. Furthermore, with a dividend yield of 4.145 percent, its shares are yielding more.

Furthermore, the company generates free cash flow, which provides present and potential investors with a margin of safety. Also, given the elevated gold price as a result of heightened inflationary pressure, we expect fundamentals will strengthen further in the coming period. Any negative action, on the other hand, could have a negative impact on the company's financial health. Hence, considering the aforesaid rationales and risks involved, we recommend a “Buy” rating in the stock at the closing price of CAD 3.86 on December 14, 2021, with double-digit (percentage term) upside potential.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Price Chart (as on December 14, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Recommendation is valid on December 15, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.