Jaguar Mining Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Jaguar Mining (JAGGF)

Jaguar Mining (NYSE:JAG)

Q1 2013 Earnings Call

May 14, 2013 1:00 pm ET

Executives

Amira Abouali - General Counsel and Corporate Secretary

David Michael Petroff - Chief Executive Officer, President and Director

Thomas Douglas Willock - Chief Financial Officer

Gordon J. Babcock - Chief Operating Officer

Analysts

David Epstein - CRT Capital Group LLC, Research Division

Michael Hebner

Rishav Puri

Operator

Good afternoon, everyone, and welcome to the Jaguar Mining First Quarter 2013 Financial Results Conference Call. [Operator Instructions] Please also note that today's event is being recorded today, Tuesday, May 14, at 1 Eastern Standard Time. I would now like to turn the conference over to Ms. Amira Abouali, General Counsel and Corporate Secretary. Please go ahead.

Amira Abouali

Thanks, Rachel, and good afternoon, everyone. Thanks for taking the time to participate in our call today. We appreciate your continuing interest in Jaguar Mining. As you know, we distributed our first quarter earnings press release and filed our Q1 2013 financial package last night. They are available through the Investor Relations page of our website and on SEDAR and EDGAR.

We are happy to have this opportunity to discuss our Q1 2013 results and our plans and outlook for 2013 with you, our stakeholders. The members of our management team who are participating on the call this morning are: David Petroff, President and Chief Executive Officer; Doug Willock, Chief Financial Officer; and Gordon Babcock, Chief Operating Officer, who is currently focused on the turnaround of our operations.

As mentioned, after the presentation by our management team, there will be an opportunity for you to ask questions. Please note that the time allotted for this conference call is 45 minutes and the conference call, including the question-and-answer period, shall end at 1:45 p.m., Eastern time.

Before we begin, I need to remind you that the statements made in this presentation which are not historical in nature are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and they are based on current factual information and certain assumptions, which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control. Information concerning those factors is available in the company's annual report, and other periodic public filings on SEDAR and EDGAR.

With those legal formalities out of the way, I'll now turn the call over to David.

David Michael Petroff

Thanks, Amira, and good afternoon, everyone, and thank you for joining in the call today, to hear our comments on the results of the first quarter 2013. With safety top-of-mind, we are focusing our efforts in 5 broad areas: One, stabilization of production; 2, managing short-term cash flow; 3, improving due process; 4, addressing legacy issues; and 5, exploring options to improve the financial position.

The good result of the 2013 first quarter were a manifestation of Jaguar Mining having a highly motivated and talented team that is determined to succeed. In each of the 3 months of the first quarter, production exceeded budget and cash cost per ounce were lower than budget. Production was almost 25,000 ounces, at an average cash cost of $826 per ounce. The turnaround of the mining operations has traction.

Short-term cash flow issues have been very challenging. We budgeted for $1,600 per ounce gold, and clearly there's a lot of pressure from prices that are about $200 per ounce lower. While we have confirmed the availability of the balance of $25 million of the Renvest credit facility, we are determined to try to use it as a safety net. Therefore, we continue to carefully analyze all plans and numbers to find ways to reduce or defer noncritical spending. We have identified some items, however, not enough yet to bring the cash balances into a comfortable range.

The third item is improving due process. Many of our discussions, while making safety top-of-mind, and everything we do is living demonstration of our values: Honesty, integrity, transparency and respect. We are constructing small teams to work together to tackle key issues. By having members from different disciplines we're able to move more quickly to obtain a comprehensive view of issues and find suitable solutions. And in addition, we're adding various policies and processes to how we conduct business.

In regards to the current challenges, unfortunately, there seems to be many additional items that pertain to past circumstances. These legacy issues are being prioritized and addressed in a cooperative, constructive and transparent manner.

Now, at critical prices, it seems unreasonable to expect that we will be able to fully repay our convertible debentures as they become due. Sooner or later, we'll have to engage in discussions to address this situation. And meanwhile, within Jaguar, we're exploring all our options to find a workable path forward.

And with those introductory words, I now like to turn the call over to Doug Willock.

Thomas Douglas Willock

Thank you, David. During the first quarter 2013, Jaguar sold 25,316 ounces of gold in an average realized price of $16.26 per ounce. This compared to sales of 30,138 ounces of gold at an average realized price of $16.91 per ounce in the 3 months ended March 31, 2012. Average cash operating cost per ounce were $8.26 in the first quarter of 2013 compared to $12.68 in the first quarter of 2012. The decrease in company's average cash offering per ounce during the first quarter 2013, as compared to the first quarter of 2012, was attributable to Jaguar's ongoing cost reduction and operational improvement program. This included a place in the Paciência operation on care and maintenance, beginning in May 2012, reducing the headcount at the mining operations and continuing to focus on safety, productivity and reducing dilution.

We ended March 31, 2013, with $18.4 million in cash, up from $13.9 million in December 31, 2012. During the quarter, we took the initial draw of $5 million on the Renvest facilities required by the terms of the agreement. Last week, we announced that we had completed our security arrangements with Renvest and now have full access to the remaining undrawn $25 million credit facility.

As David has noted earlier, we are trying to keep it as a safety net and not as a source of cash, as we work to improve our operations and become self-sustaining from a cash flow perspective. We are keenly aware of the need to address our capital structure and are actively involved in analyzing all potential alternatives. In light of the recent reduction of the price of gold, the company is re-examining all sources and uses of cash with a view to reducing net cash outlays, while maintaining the turnaround efforts. We are focused on execution of our operational initiatives and parallel and intent to engage our stakeholders at the appropriate time.

Now, let's turn the call over to Gordon for a discussion on our operations.

Gordon J. Babcock

Thank you very much, Doug. Well, as David mentioned, we're spending a lot of time on safety. Safety to us is paramount. We conduct regular crew meetings on the importance of safety. We've had 2 shutdowns at both sites, and that involved the 2-hour break within the course of our shift, and the focus was safety. We're reviewing the root cause of every accident and determining and implementing corrective actions, and proper follow-up. Site managers have developed a safety policy with 7 key points, in consequences for not following the rules. This is for staff, as well as our employees. We are developing a profit share program which we believe will add a large incentive to meet safety goals.

All of our experience indicates that improved safety comes with improved efficiencies and we are committed to operating these operations in a safe manner. We have given ownership of the operations to the general managers. This has allowed them to become engaged in all the activities. It gives them the operational flexibility to make decisions and in the course of operations and reduces operational delays. It also provides them with the opportunity to build a better team, both at site and with senior management. Finally, it gives them an opportunity to recognize and feel proud of their accomplishments. We have put mine geologists on all operational teams, and they are the drivers in our grade control programs. Development decisions and mining decisions are routed in geological information. Grade control is proven to reduce dilution. Geological sampling techniques that better guide our development crews.

We continue the amount of outsourcing -- pardon me, we continue to reduce the amount of outsourcing. Outsourcing to us, and to anyone in the business, is expensive. And with some exceptions such as selective expertise, we can do many of these things ourselves, we have a lot of talent on site. We are modifying our jumbos to handle smaller spaces. We are maintaining our own fleet of light-duty vehicles, and we are slowly moving away from the fix-and-break mentality to a preventive maintenance cycle. Our recent results indicate that with effective management and effective implementation of the plans we've laid out, there's most definitely a lot of upside potential in our existing operations. And that brings my opinion to be very optimistic about Jaguar's future.

Now, let me turn the call back over to David.

David Michael Petroff

Okay, thanks, Gordon. Before we conclude our call this morning, I'd like to spend a few minutes to update our outlook for 2013. Rather than update, it's really just repeat it.

Based on our progress today, and the continuation of transition in our operations, we've established our goals for the year, with production in the range of 85,000 ounces to 95,000 ounces of gold. And on this volume, average cash operating cost per ounce are expected to be in the range of $950 to $1,100, and capital spending is anticipated to be about $35 million.

As a management team, we are committed to meeting or exceeding these targets, and our operating teams are already working very hard to make it happen. As we begin to generate positive cash flow from operations in excess of our debt servicing and in excess of our overhead cost, we will initially invest in our current operations. Only when we have surplus cash, will we increase our investments to fund growth opportunities, such as the restart of production of Paciência.

So, this concludes our planned comments, and I would like to open up the call now to any questions that may come about.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of David Epstein from CRT Capital.

David Epstein - CRT Capital Group LLC, Research Division

The projections you're giving for cost in production, I guess, particularly on the cost side. I can appreciate that you want to set some bar that you can beat, but I want to know if there's anything going on that would potentially cause some deterioration from Q1. I remember, on the March call, you guys said that you instituted new ground control measures, and to quote, "it's a little bit more costly to do that than we've been doing in the past. So those costs are baked into the 2013 numbers." And that was -- you explained at a time that that's one reason why the costs for 2013 might be worse than your 2012 exit rates. So, I want to know, have those cost been burdening Q1 or are they just going to start burdening the future quarters? And is there anything else going on that the improvements in Q1 won't last?

Gordon J. Babcock

David, it's Gordon here. In as far as a burden to the future, I don't think that's going to happen. The first quarter is pretty solid. The ground control practices that were implemented at the mid-2012 and end of 2012, and the filling process is working very well. So, as far as I'm concerned, I think that we're looking at much greater stability in the mine operations. So, the program that was laid out by SRK is definitely working really well. I think things are stabilizing now.

David Epstein - CRT Capital Group LLC, Research Division

So, is there anything that would cause you to deteriorate from, what was it, $826 in Q1? That you're still guiding to $950 to $1,100 for the year, are there any other major headwinds? I could appreciate that you guys want a little cushion but is there any possible reason you could even hit $950 or above?

David Michael Petroff

So, David, I think that our caution is based on the fact that we want be able to repeat the quarter, quarter in and quarter out, and that may be a challenge as we go forward, we don't know. So we believe we need more of a track record to be able to be on firmer ground to suggest a reduction or a change in those cost profiles. The other thing, in terms of a headwind, is that the union contract is negotiated annually. And as a minimum, the government mandates what the cost-of-living increase will be and that's going to be pretty close to 7% this year. So that's baked into the -- most of that's baked into the numbers and then we'll have to see what other demands that the union's going to put on the table and how we negotiate through those.

Operator

[Operator Instructions] And your next question comes from the line of Michael Hebner from Wunderlich.

Michael Hebner

Just on the degree of difficulty of refinancing the debt and dealing with it. Just give us the numbers, when that's due again?

David Michael Petroff

Okay, so we have $165 million due November 1, 2014, and approximately $104 million due at the end of March 2016.

Michael Hebner

What's the degree of difficulty of getting something done with that? What probability would you assign to success?

David Michael Petroff

Well, so we haven't started discussions yet. The only time we met the convertible debentures holders or some of them was in January, which was really a meet-and-greet session, for them to meet new management. So, without having any discussions, it's hard to say, but I generally believe that reasonable people, acting and talking reasonably, can usually come to some resolution of differences.

Michael Hebner

What are the potential options you have to solve that? Selling properties, selling shares, giving them shares? What's the laundry list you've worked out? I know you guys are already looking ahead.

David Michael Petroff

Well, we have a laundry list and we've looked at all of them and I'm sure you can imagine everything on that list, without detailing it for you.

Operator

Your next question comes from the line of Rishav Puri.

Rishav Puri

This is Rishav Puri from Linden. I just wanted to know if you're still planning on refinancing the bank debt and what's kind of the progress at that front?

David Michael Petroff

Well, so we have -- other than the converts, we have the Renvest facility, which is newly opened to us. And I think the ink's not quite dry on all of it yet. So I wouldn't say that we're currently approaching them with any discussions. The other bank that we have is Bradesco and Itau, 2 local banks. One of the things we've been very mindful of is keeping lines of communication open with them, and keeping them appraised of the progress and the actions we're taking. So we view them as key financial partners and we hope that they stay in the game and continue to support us. Did that answer your question?

Rishav Puri

It kind of does but like -- I mean, I thought you have like around $20 million to $25 million of like bad bank debt coming to you this year. So, I mean, I understand that you have a long-term relationship with them and whatnot, but is there like a Plan B, like for some reason they decide not to maintain that relationship?

David Michael Petroff

So the nature of the debt is it's linked to our exporting of gold. And so what happens is that -- to the extent, for example, that they've advanced $5 million of their line, when we sell gold they would take the $5 million and then they say, okay, now we're going to extend it again, anywhere from 3, 6, 9 or 12 months. And so it's kind of a rolling facility linked to our cash flow on the export size. So they're very comfortable with their position and we talk to them. And in fact, in the last couple of weeks, they've been more supportive of what we're doing in our business than they have been if you go back 6 months ago.

Operator

There are no further questions at this time. I'll turn the call back over to our presenters.

David Michael Petroff

Okay. Well, it's David Petroff here. Thank you, everybody for joining us and listening in, for asking the question that you had. And we look forward to making more progress in our restructuring and turnaround plan. And hope to be able to report that to you in the near future. Thank you very much.

Operator

This concludes today's conference call. You may now disconnect.

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