Jaguar Mining Inc. (TSX: JAG) is a gold mining company engaged in acquisition, exploration, development and operation of gold producing properties in Brazil. The Company holds mineral concessions comprising approximately 54,000 hectares in the Iron Quadrangle mining district of Brazil.

Investment Rationale

• 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.
  

• An Income Play: At the last closing (November 16, 2021), JAG shares were offering a lucrative dividend yield of 3.232%, which is significantly higher than the Canada’s 10-Year Government Bond yield of 1.77%. Also, the company is consistently paying dividend since September 2020.

Dividend History. Source: REFINITIV, Analysis by Kalkine Group

• Strong Gold prices: Gold hovering near USD 1,850/oz , after nearly hitting USD 1,880/oz in the last trading session. Gold has been rallying in the past two weeks amid investor concerns over rising inflation and central bank refusal to signal a hawkish tone. Stronger gold prices will bolster the company’s financials in the upcoming quarters.

Gold Spot Chart (as on November 16, 2021). Source: REFINTIV, Analysis by Kalkine Group

• Lower Cash Cycle days: The company cash cycle days is significantly lower compared to the industry median. As of June 30, 2021, the company’s cash cycle stood at 25.4 days compared to industry median of 54.4 days. This shows that the company is able to convert its raw material into cash at bank faster than its peers.
• Bullish Momentum: The leading momentum indicator, the MACD is rising, with the difference between 12-day and 26-day EMA is positive, and MACD oscillator hovering above 9-day SMA signal line, a bullish indicator. Further, the 14-day RSI hovering in a neutral zone with bullish bias at 64.63, implies that the bulls are getting control over bears.

Technical Chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group

• A Golden crossover formed on Daily price chart: On daily price chart, a golden crossover formed where short length 21-day SMA crossed long-length 50-day SMA, a bullish indicator. Moreover, JAG shares are trading above its crucial short-term support levels of 21-day and 50-day SMAs, another bullish indicator.

 Technical Chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Risk Associated:

JAG is exposed to variety of risks ranging from adverse movement in the underlying commodity prices (Gold), a strength in dollar index against the majors could also have a weigh on the gold prices, increase in interest rate and resurgence in the COVID-19 cases could hamper production, operation and supply chain of the company.

Financial Highlights: Q3FY21

Source: Company

• Revenue: During the quarter under review, the company’s reported revenue for Q3FY21 decreased 6% to USD 40.7 million, compared with USD 43.5 million in Q3FY20, largely on account of reduction in the average realized gold price of USD 1,753/oz in Q3FY21 as compared to USD 1,896/oz for Q3FY20.
• Production Highlights: In the Q3FY21 consolidated gold production decreased by 6% to 22,602 ounces as compared to 24,094 ounces in Q3FY20.
• AISC: During the third quarter of fiscal 2021, Company’s all-in sustaining costs (AISC) increased to USD 1,184/oz, compared to USD 1,011/oz for the same period in 2020 because of inflation, increase ore tonnes mines and processed, and higher development meters.
• Operating Cash Flow: In the Q3FY21, company reported operating cash flow was USD 16.4, compared to USD 21.9 million in Q3FY20. The change is mainly because of 8% decline in the average realized gold price.
• Free Cash Flow: Free cash flow was USD 9.8million for Q3FY21, as compared to USD 14.9 million in Q3FY20.
• Divided declared: The board of directors has declared a cash dividend of CAD 0.04 per common share of the Company, to be paid on November 30, 2021, to shareholders of record as of the close of business on November 23, 2021.

Top-10 Shareholders

Top-10 shareholders are holding approximately 66.82% stake in the company, with 2176423 Ontario, Ltd.  and Sprott Asset Management USA Inc.  are the major shareholders, holding ~48.83% and ~9.83% stake in the company. Institutional ownership in the company stood at 18.19%.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow-based valuation

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

The company’s performance in the third quarter of FY21 was relatively poor on the back of the lower gold average realization prices and relatively lower gold sold on YoY basis. However, the company is fundamentally very sound with robust balance sheet, consistently reducing debt, solid liquidity profile and margin profile broadly at par with its larger peers. Moreover, its shares are also yielding  higher with a dividend yield of ~3.23%.

Further, the company is generating free cash flow which provides margin of safety to the existing as well as potential shareholders.

Also, we believe that fundamentals are going to bolster further in the upcoming quarter given the elevated gold price on the back of the increased inflationary pressure. However, any adverse move could also have a weigh on the financial health of the company.

Moreover, from the technical standpoint, it seems that bulls are getting on the share as JAG shares have moved above its 20-day and 50-day SMAs.

Hence, based on the above rationale, we recommend a “Speculative Buy” rating on the “JAG” shares at the closing price of CAD 4.95 (as on November 16, 2021).

*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

1-Year price chart (as on November 16, 2021). Source: REFINITIV, Analysis by Kalkine Group 

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

*Recommendation is valid on November 17, 2021, price as well.

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Disclaimer

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