Jaguar Mining Inc (TSX: JAG) is a junior gold company based in Brazil that focuses on the acquisition, exploration, development, and operation of gold-producing properties.

Key Investment Rationale:

• Increase in Mineral Reserve: The company reported a higher mineral reserve of 507koz in FY21 net of mined depletion, which increased from 478 koz in FY20. The growth was primarily attributed to additions from the BIF package of Orebodies where drilling and development has demonstrated strong mineralization extending down plunge to depth from the lowermost levels of the mine. A higher mineral reserve is a key positive as it adds value to the exploration, production and mine life of the company.  

Source: Company Reports

• Robust Profitability Margins: At the end of FY21, the company reported higher profitability margins as compared to the industry median, which is a key positive and indicates higher operational efficiencies. Notably, EBITDA margin and operating margin stood at 45.3% and 29.7%, respectively, in FY21, as compared to the industry median of 39.6% and 19.5%, respectively. Moreover, the company’s net margin stood higher at 22.6%, as compared to the industry median of 13.7%.

Source: REFINITIV, Analysis by Kalkine Group 

• Surge in dividend payment: In FY21, the company reported a surge in the dividend payment of USD 13.9 million, which is significantly higher than USD 8.8 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. Moreover, the stock of JAG is carrying an annualized dividend yield of ~3.912%, which looks attractive considering the futuristic interest rate scenario.

• Positive results from Faina Metallurgical Testwork: During Q4FY21, the company conducted Metallurgical Testwork across the Faina deposits, and reported a potential economic recovery from the floatation processes. Currently, Faina deposit holds a total mineral resource of ~400,000 ounces of gold at a grade of 7g/t Au. Notably, the JAG started a development work from Turmalina to Faina along the structural trend of Turmalina’s current orebodies. This is expected to open an additional mineral resource along trend and would provide access to the Faina deposit directly from the Turmalina Mine, and provide additional mineral discovery in the coming days

• Strong Balance sheet: The company is virtually debt free, with debt-to-equity ratio of only 0.03x in FY21, as compared to the industry median of 0.22x. Moreover, the company’s long-term debt in terms of total capital stood at 1.1% in FY21, which is considerably lower than the industry median of 13%. This indicates that the company has no balance sheet risk associated with its operations.

• Trading at Discounted Valuations: The company’s shares are available at a significant discount when compared to the industry median. Notably, JAG is trading at an EV to Sales multiple of 1.3x on NTM basis, compared to the industry (Basic Material) median of 1.7x. Moreover, on an NTM Price to Cash Flow multiple, the stock is trading at 3.6x compared to the industry (Basic Material) median of 4.7x.

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with the Investment:

Volatility in the international commodity price is likely to dampen the realization of the company. Moreover, the company registered a lower gold production in FY21, and the continuation of the above trend is likely to impact the company’s upcoming performance.  

  FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Slide in top-line: In FY21, JAG posted its revenue of USD 151.4 million, compared to USD 160.2 million in FY20. The decline was primarily due to a sales volume of 84,638 ounces of gold, as compared to 91,853 ounces in FY20. This was partially offset by a 3% y-o-y increase in average realized gold price from USD 1,745/oz in 2020 to USD 1,790/oz in 2021.

• Lower Gross profit: The gross profit declined to USD 60.0 million from USD 85.7 million in FY20, due to a surge in the operating costs and higher depreciation.

• Rise in input costs: The company witnessed a significant rise in exploration & evaluation expense (USD 5.1 million v/s USD 1.8 million in FY20) due to the installing of tailings filtering system at the Pilar plant, coupled with a higher exploration drilling activities conducted during FY21. Moreover, care & maintenance costs stood higher than the previous year. This was partially offset by slightly lower General & administrative expense and a decline in the stock-based compensation expenses. The group’s operating income fell to USD 44.9 million from USD 86.9 million in FY20 due to the above-mentioned reasons coupled with impairment reversals of USD 14.0 million recorded in FY20.

• Decline in Net income: Net income in FY 2021 stood at USD 34.1 million against USD 72 .2 million in pcp. This was due to a lower operating income and higher other non-operating expense, partially offset by lower finance costs and a decline in income tax expense.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 74.28% stake, 2176423 Ontario, Ltd., Sprott Asset Management LP are the major shareholders in the company with an outstanding position of 48.81% and 9.82%, respectively.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

In Q4FY21, the company reported a 2% y-o-y jump in its consolidated gold production of 22,903 ounces, compared to 22,533 ounces in Q4FY20. This suggests a production recovery after a sluggish H1FY21 production due to the pandemic. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Majestic Gold Corp, Mandalay Resources Corp etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of JAG at the current market price of CAD 4.04 at 10.13 AM Toronto Time on April 06, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 06, 2022). Analysis by Kalkine Group

*Recommendation is valid on April 07, 2022, price as well.

  Technical Analysis Summary

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