Jaguar Mining Inc. (TSX: JAG) is a junior gold mining company based in Brazil that focuses on the acquisition, exploration, development, and operation of gold-producing properties. The Turmalina Gold Mine Complex and the Caete Gold Mine Complex, which together produce more than 95,000 ounces of gold annually, are located in the Iron Quadrangle, a rich greenstone region in the state of Minas Gerais. The Paciencia Gold Mine Complex is also owned by the corporation.

Investment Rationales

• Shared FY 2021 and Q4 2021 Production numbers: Recently, the company announced its FY 2021 production results, where annual consolidated tonnage processed for FY 2021 was 856,000 tonnes at 3.47 grams per tonne (g/t), an increase of 6% in tonnes and a decrease of 13% in grades compared to 804,000 tonnes at 3.98 g/t in FY 2020. Also, the consolidated tonnage processed in Q4 2021 was 213,000 tonnes at 3.81 g/t, an increase of 9% in grade and a decrease of 7% in tonnes compared to 228,000 tonnes at 3.50 g/t in the previous corresponding period.

• 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 the business over the past number of quarters, improved cost structure, strong balance sheet and solid cash flows, 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 4.00 as on February 8, 2022, the stock offered a healthy dividend yield of 3.96%, which looks decent considering the current macros and interest rates.
  

• 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.
  

• Virtually Debt free balance sheet: The company is virtually debt free, with Debt-to-Equity ratio of 0.03x compared to industry median of 0.24x as on Sep 30, 2021. Moreover, the company’s long-term debt as a percentage of total capital stood at just 0.8%, significantly below the industry median of 14.1%, 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 2.0x compared to the sector (Basic Material) median of 4.5x. while on NTM Price to Cash Flow multiple the stock is trading at 2.8x compared to 4.1x. This implies that the shares are trading at deep discount against the sector. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.
  

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 

• 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 cost in Q3 2021, stood at USD 19.3 million compared to USD 14.0 million in Q3 2020. The increase in operating production costs was due to inflation, combined with 16% increase in tonnes of ore processed.

• 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 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 was at USD 11.4 million in the reported period 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 74.34% 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 25.52%, and ownership of the strategic entities stood at 49.40%.

Valuation Methodology (Illustrative): Price to Cash flow-based Valuation Metrics

*1USD=1.27CAD

Analysis by Kalkine Group 

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. 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, the stock offered a healthy dividend yield of 3.96%, which looks decent considering the current macros and interest rates.

Moreover, the company is generating free cash flow, which provides present and potential investors 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. Additionally, the company expects to produce gold in the range of 86,000 - 94,000 ounces at an AISC range of USD 1150 – USD 1250 per ounce in FY2022, which will be higher compared to FY 2021, which is another positive aspect. Hence, considering the aforesaid rationales and risks involved, we recommend a “Speculative Buy” rating on the stock at the current market price of CAD 3.95 at 09:54 A.M Toronto time on February 9, 2022.

One-Year Technical Price Chart (as on February 9, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

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