TD pretty negfative on JAG after the latest results
Jaguar Mining Inc.
(JAG-T, JAG-N) C$8.29
Operational Challenges Appear Here to Stay; Guidance Slashed
Event
Jaguar reported its Q2/10 results.
Impact
NEGATIVE – We believe these results go beyond a mere quarterly miss.
Production was well below our estimates with cash costs spiking to $746/oz
in the quarter. Operational difficulties appear to be here to stay with 2010
guidance down almost 20% and 2011 guidance down 35%. Based on our
forecasts, we believe the company will have burned through its current cash
balances and may require additional financing by the end of 2010.
Management assured that gold 2010/2011 grades would be above 5.0 g/t at
Turmalina and 4.0 g/t at Paciencia just 4 months ago. Now grades are
expected to remain below 4.0 g/t at both operations. This shortfall will likely
create a serious credibility gap in the minds of investors. Until we see
evidence that Jaguar’s operations can be self sustained, we are unable to
recommend purchasing the stock.
Details
Q2/10 Operating EPS of -$0.12
? Jaguar reported Q2 operating EPS of -$0.12, well below our estimate of
$0.03 and consensus of $0.04. Earnings were well below our estimates
on significantly lower than expected production and higher costs.
? Reported EPS were -$0.07; this included a $5.0m ($0.06/sh) gain on the
disposition of iron ore assets and $1.0m ($0.01/sh) fx loss.
? CFPS were $0.05, well below our estimate of $0.13.
Operational Results Are
? Production: 30,613 oz, below our estimate of 38,579 oz and down from
Q1 production of 31,223 oz.
? Production was below expectations at both assets although Turmalina
was the biggest contributor to the miss. Feed grades at Turmalina of
3.13g/t were well below budget for the quarter of 5.15g/t and the reserve
grade of 3.87g/t.
? The company attributed this to geo-mechanical issues at the mine which
boosted dilution to 30%, well above planned dilution of 15%.
Gold & Precious Minerals
Recommendation: HOLD?
Unchanged
Risk: HIGH
12-Month Target Price: C$9.50?
Prior: C$12.00
12-Month Total Return: 14.6%
Market Data (C$)
Current Price $8.29
52-Wk Range $7.56-$14.18
Mkt Cap (f.d.)($mm) $839.8
Dividend per Share $0.00
Dividend Yield 0.0%
Avg. Daily Trading Vol. (3mths) 449838
Financial Data (C$)
Fiscal Y-E December
Shares O/S (f.d.)(mm) 101.3
Float Shares (mm) 101.3
Net Debt/Tot Cap 20.2%
NAVPS (current)(f.d.) $9.53
Estimates (US$)
Year 2008A 2009A 2010E 2011E
EBITDA ($mm) 20.7 30.9 51.1 112.4
EPS (f.d.) (0.05) 0.03 (0.02) 0.39
EPS (f.d.)(old) -- -- 0.35 0.92
CFPS (f.d.) 0.18 0.51 0.49 1.05
CFPS (f.d.)(old) -- -- 0.85 1.77
EPS (f.d.) Quarterly Estimates (US$)
Year 2008A 2009A 2010E 2011E
Q1 (0.02) 0.03 (0.01) --
Q2 0.00 0.04 (0.12) --
Q3 0.00 0.04 0.03 --
Q4 (0.02) (0.08) 0.08 --
Valuations
Year 2008A 2009A 2010E 2011E
P/E (f.d.) nmf 269.0x nmf 20.7x
P/CFPS (f.d.) 44.8x 15.8x 16.5x 7.7x
All figures in C$, unless otherwise specified.
Steven Green, CFA Scott Parsons, CFA (Associate)
Action Notes August 10, 2010
Equity Research 11 of 45
? The company is in the process of transitioning to the cut and fill mining method and believes this will
improve the dilution issue; however the transition has been slow and they expect lower grades for the
remainder of 2010.
? At Paciencia, lower grades were also largely to blame for the weak production and higher costs. ROM
grades have trended below expectations at the Santa Isabel Mine and as a result the company is in the
process of verifying grades at level 4 with a series of drill holes.
? Cash Costs: $746/oz, well above our estimate of $593/oz and up from Q1 costs of $597/oz.
? Sales: of 30,646 oz were in-line with production at a realized price of $1,203/oz.
Exhibit 1: Q2/10 Operational Results
Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q2/10 QoQ
Production (oz) Actual Actual Actual Actual Actual TDN Estimate Difference Change
Sabara 4,952 1,409 0 0 0 0 na na
Sabara Op.Costs (US$/oz) $633 - - - - - na na
Turmalina 19,867 22,249 21,184 16,987 15,896 21,482 -26% -6%
Turmalina Op.Costs (US$/oz) $404 $411 $523 $551 $788 $568 39% 43%
Paciencia 15,939 17,927 18,707 14,236 14,717 17,096 -14% 3%
Paciencia Op.Costs (US$/oz) $491 $468 $556 $646 $701 $625 12% 9%
Total Production
Gold (oz) 40,758 41,585 39,891 31,223 30,613 38,579 -21% -2%
Cash Costs - (US$/oz) $466 $451 $539 $597 $746 $593 26% 25%
Source: Company reports, TDN estimates.
Exhibit 2: Quarterly Production Profile
0
10,000
20,000
30,000
40,000
50,000
60,000
Q1/07
Q2/07
Q3/07
Q4/07
Q1/08
Q2/08
Q3/08
Q4/08
Q1/09
Q2/09
Q3/09
Q4/09
Q1/10
Q2/10
Q3/10E
Q4/10E
Gold Production (ozs Au)
50
150
250
350
450
550
650
750
Cash Operating Costs (US$/oz)
Gold Production Cash Operating Costs ($US/oz)
Source: Company reports, TDN estimates.
Cash Burn Becoming a Concern – May Necessitate Additional Financing
? Jaguar was free cash flow negative in the quarter to the tune of -$39.4m (-$65.1m YTD). Total cash fell
by $36.5m to close the quarter at $58.6m. Total debt stood at $143.9m, the bulk of which consists of
senior unsecured convertible notes set to mature 2014.
? Based on our forecasts for the remainder of the year and company guidance for H2/10 capex of
$72.7m, we estimate the company will run out of cash by the end of the year and may require
additional financing.
Action Notes August 10, 2010
Equity Research 12 of 45
Outlook – 2010 & 2011 Guidance Cut Significantly
? 2010 production guidance was reduced to 163,000 - 168,000 oz at cash operating costs of $650 -
$660/oz. This is down approximately 19% from previous guidance of 200,000 - 210,000 oz at cash
operating costs of $515-527/oz. This is the second guidance cut this year.
? This largely reflects the ongoing grade and dilution issues at Turmalina, although guidance was also
reduced at Paciencia.
? 2011 production guidance cut 35% - the company also significantly reduced 2011 guidance in their
conference call presentation to 225,000 oz, from 347,000 oz as included in the Analyst presentation from
April. This represents a 35% cut to guidance and raises concerns about the longer term expectations from
these assets.
? Year over year, most of the growth is expected to come from Caete, with minimal growth coming from
the company’s two existing operations. Production is expected to increase marginally at Turmalina, from
what is already a disappointing 2010 YTD. Paciencia is also expected to show minimal growth having its
guidance cut by the most in 2011.
? We continue to believe the company’s lofty growth expectations remain aggressive and unachievable
with the current resource base.
Exhibit 3: 2010 & 2011 Production Guidance Slashed
2010 Guidance 2011 Guidance
Production (oz) New May-10 % Change New Apr-10 % Change
Turmalina 69,000 98,000 - 101,000 -31% 75,000 124,000 -40%
Paciencia 64,000 72,000 - 74,000 -12% 70,000 126,000 -44%
Caete 30,000 30,000 - 35,000 -8% 80,000 97,000 -18%
Total Production
Gold (oz) 163,000 - 168,000 200,000 - 210,000 -19% 225,000 347,000 -35%
Cash Costs - (US$/oz) $650-660 $515-527 26% - -
Note: % change based on mid-point of guidance
Source: Company reports, TDN estimates
Exhibit 4: Annual Production Profile (TD Estimates)
0
100,000
200,000
300,000
400,000
500,000
2008A 2009A 2010E 2011E 2012E 2013E 2014E 2015E 2016E
Gold Production (oz Au)
$300
$400
$500
$600
$700
Total Cash Costs (US$/oz)
Sabara Turmalina Caete
Paciencia Gurupi Total Cash Costs
Source: Company reports, TDN estimates.
Action Notes August 10, 2010
Equity Research 13 of 45
Conference Call – The company will be hosting a conference call this morning (August 10th) at 10:00am EST
to discuss Q2 results. The dial in number is 1-800-218-5691 or 213-416-2192 (replay: 1-800-675-9924 or
213-416-2185; passcode: 81010#)
Exhibit 5: Changes to Our Estimates
Gold Production (000 oz) Cash Costs (US$/oz)
2010E 2011E 2010E 2011E
New 158 225 $667 $642
Old 188 296 $559 $532
EPS (US$/sh) CFPS (US$/sh)
2010E 2011E 2010E 2011E NAV (US$/sh)
New -$0.02 $0.39 $0.49 $1.05 $9.53
Old $0.35 $0.92 $0.85 $1.77 $12.41
Source: TDN estimates.
Valuation
We calculate a NAV for Jaguar of $9.53 (down from $12.41 reflecting the guidance cuts and lower production
and higher cost assumptions going forward). Jaguar currently trades at 0.9x NAV. Junior/intermediate gold
producers currently trade at an average NAV multiple of 1.0x (range of 0.8 to 1.3x).
Exhibit 6: Gold Producers – P/NAV
1.64x
1.39x
1.36x
1.34x
1.13x
1.07x
1.06x
0.90x
0.87x
0.76x
0.93x
0.97x
1.03x
1.16x
1.56x
1.60x
1.16x
Avg P/NAV - 1.2x
Avg Large Cap P/NAV - 1.4x
Avg Jnr/Intermediate P/NAV - 1.0x
0.00x
0.25x
0.50x
0.75x
1.00x
1.25x
1.50x
1.75x
AEM
RBI
ELD
G
ABX
SGR
IMG
NGD
AGI
YRI
LSG
K
MFL
CG
GAM
JAG
NGX
Source: TDN estimates.
Justification of Target Price
We have arrived at our target price of $9.50 (down from $12.00 reflecting our lower NAV) by using a 1.0
times NAV multiple. We value Jaguar at the low end of our target range for junior/intermediate producers of
1.0 to 1.5 times.
Action Notes August 10, 2010
Equity Research 14 of 45
Key Risks to Target Price
The main risks facing the company include forecast, financial, technical and political risks. Among other
things, these include risks related to gold prices, fuel prices, the governing fiscal and legislative regimes, the
timing of key developments, market conditions, capital and operating costs, foreign exchange rates, resources
and reserves, operating parameters, permitting, environmental, indigenous peoples, and staffing and key
personnel retention.
Investment Conclusion
This latest announced shortfall will likely create a serious credibility gap in the minds of investors. Until
we see evidence that Jaguar’s operations can be self sustained, we are unable to recommend purchasing
the stock. We continue to believe Jaguar’s stated longer term growth plans are too aggressive for these assets.
We are maintaining a HOLD recommendation and reducing our target price to $9.50 (previously $12.00
