Jaguar Mining (JAG) recently released its Q4 2012 earnings report and financial statements and conducted a 30-minute conference call with question and answer on the progress of the turnaround.
There is not much meaningful information in the headline earnings numbers for the quarter as the company took large non-cash write downs on the implied value of its mining operations. In order to determine the actual state of the company, you have to dig deeper into the actual cash flows.
During the conference call, management discussed the cash flow numbers in greater depth, highlighting the difference between operating cash flow and financial cash flow. While Jaguar may become cash flow positive on an operating basis during 2013, it is unlikely it will be cash flow positive on a financial basis when all of the interest payments are considered.
In the following discussion I am going to focus on the cash flows from the core operations and what it indicates for the remainder of the year.
4th Quarter Results
Jaguar had an average cost of production of $915 per ounce in Q4 and an average sales price of $1714; this gives a gross margin of $799 per ounce on 21,676 ounces of production, which results in roughly $17M in gross margin. Jaguar's Q4 report shows gross profit of $9.3M to reflect the $7.7M in capital expenditures that went into the mines to keep them going (Turmalina and Caete capex as well as Paciencia care and maintenance). After that $9.3M, the company still needed to pay all of its SG&A and interest payments. SG&A totaled $4.5M and interest payments totaled $7M, that left Jaguar with a negative $6M in cash flow.
Jaguar gave production guidance for 2013 of 85,000 to 95,000 ounces. This means average production of 21,250 ounces per quarter at the low end, up to 23,750 at the high end. At its peak production numbers in 2011, the two open mines (Caete and Turmalina) produced 28,000 ounces per quarter.
Taking the average of the production guidance (90,000) and average of the costs guidance ($1,025) and the gold price assumption of $1,600 per ounce provided by the company, JAG would generate gross margin of $51.8M for the 2013 year. It would still need to pay an additional $35M of ongoing capex for the mines for 2013, which would drop the available cash flow to $16.8M. From that point, the company would still need to pay SGA of $16M and interest payments of $28M. This would result in negative cash flow of $27M for the year (approximately $7M per quarter). At the end of Q42012, Jag had roughly $14M in cash on its balance sheet. Based on these projections, JAG would run out of cash by the end of Q2 2013. If it chose to tap the Renvest facility for the remaining $25M credit line (the company has already drawn down $5M of the $30M), then it would buy itself until early 2014.
Unfortunately, based on this guidance from management, it would leave the company with little cash at end of the year and in bankruptcy or some other type of restructuring shortly thereafter.
What variables does JAG still have in play (both positive and negative):
- Guidance. New management is more conservative than the prior team, and maybe sandbagging guidance to some extent. Guidance of 85k to 95k ounces of production is lower than 2012 (when Paciencia was open) and cost guidance of $950-$1100 per ounce is significantly higher than Q4 numbers. When Q12013 results are released in June we should have some idea of how conservative management has been.
- Gold Price. Gold price could finish the year substantially higher or lower, thereby affecting results. JAG is not hedging any future production at this point so it will be exposed for better or worse.
- Gurupi. JAG's development asset in Northern Brazil can be sold to a third party, contributed to a joint venture, or licensed to a streaming company for a cash payment. This number is a real wildcard and is really the main chip that management has to make a go of things. I think it is too optimistic to expect it to pay off all of the debt. The ideal strategy would be to create some liquidity via a joint venture or streaming deal. Jaguar purchased the asset from Kinross for $39M in 2009. Depending on the structure selected, Gurupi could generate cash of some number as low as $10M in a streaming deal up to $300M in an outright sale. Management is playing this one very close to the vest and I would be surprised if we heard anything about structure or valuation until the deal is actually inked and a PR is issued. If there is reader interest, I can put together an article this spring that explores these three options in more depth and uses some comparable market transactions to try to make some better estimates what value each option could generate.
- Debt Restructuring. This is not something I had considered prior to the Q4 conference call, but it is clear that barring a windfall from Gurupi, it cannot repay the convertible debt. The creditors might agree to be restructured to equity (but likely not at an accretive price to current shareholders) and nowhere near the terms in the original convertible loan documents. Alternatively, the management team may be able to negotiate some type of extension on the maturities, buying themselves an extra year or two. In order to get any extension in time, the executives would need to show that they can continue to service the debt in the interim at current or higher interest rates. So, the cost cutting program is a crucial component of convincing the lenders that a workout is in their best interests.
- Delisting. The company cannot wait around another 60 days to see if the share price goes back above $1; it needs to do a reverse stock split now.
- Paciencia. Restarting Paciencia production could add somewhere between 10,000 ounces to 40,000 ounces in annual production based on its historical results.
Management did not give investors a lot to look forward to with this report. What it has done so far is establish credibility and the capacity to deliver what it promised to investors. This has been sorely missing in the past and is a crucial first step to regaining investor confidence and negotiating with the convertible bondholders. I was impressed with the ongoing reduction in cost per ounce during Q4, but was disappointed with the forward guidance, both for production and cost per ounce.