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Executives

David Michael Petroff - Chief Executive Officer, President and Director

Thomas Douglas Willock - Chief Financial Officer

Analysts

Michael Hebner

Zach Sauniers

Jaguar Mining (JAG) Q2 2013 Earnings Call August 8, 2013 1:00 PM ET

Operator

Good afternoon, ladies and gentlemen and welcome to the Jaguar Mining Second Quarter 2013 Conference Call and Webcast. [Operator Instructions] Please note that this being call is being recorded today, Thursday, August 8, 2013, at 1 p.m. Eastern Time. I would now like to turn the meeting over to your host for today's call, David Petroff, Jaguar Mining's President and Chief Executive Officer. Please go ahead, Mr. Petroff.

David Michael Petroff

Thank you and good afternoon, everyone. Thank you for joining us today to hear our comments on the results of the second quarter of 2013. The members of our management team who are participating on this call this morning are myself, David Petroff, President and Chief Executive Officer; Doug Willock, Chief Financial Officer; and Gordon Babcock, Chief Operating Officer, who is currently dialing in, and when he's not focused on turning around our operations.

Before we begin, please be reminded that certain statements made in this presentation are forward-looking statements based on current factual information and certain assumptions, which management currently believes to be reasonable. Financial and operating results for future periods may differ materially from current management projections, as a result of factors outside the company's control. And information concerning those factors is available on the company's annual report and other periodic public filings on SEDAR and EDGAR.

So at Jaguar, safety continues to be top of mind. There were no Lost Time Injuries for the months of May and June. The severity rate, which represents the days missed per LTI for the 6 months ended June 30, is over 88% lower than last year on an annualized basis. And the Turmalina operation, the underground mine and surface mines and the Caeté plant celebrated 365 days without an LTI.

Last quarter, I mentioned that in addition to safety, we're focusing our efforts in 5 broad areas: one, stabilization of production; two, managing short-term cash flows; three, improving due process; four, addressing legacy issues; and five, exploring options to improve the financial position. So allow me to give you an update on these 5 areas right now.

With regard to stabilization of production, results of the 2013 second quarter were an adequate follow-on to the first quarter. Our highly motivated and talented team was successful in mining the ore bodies. However, transporting the ore from the Pilar Mines to the Caeté processing plant was difficult. We're using a new road that bypasses the town of Caeté, and with unusually heavy rain, the road became unusable in several occasions and the roadbed required remedial work. This created a backlog and not all of the mine ore was processed. We will continue to upgrade the roadbed and we're exploring alternative routes.

Second quarter production was 22,500 ounces at an average cash cost of $931 per ounce. And so the turnaround of the mining operations continues to have traction.

On managing short-term cash flows, I must say that it continues to be a very challenging situation. Our total expenditure in the first quarter and the second quarter were similar at about $36 million, which did not lead to positive cash flows for each of these quarters. So we've taken many actions to steer our all-in cost per ounce to $1,200 by the end of the year. And while we drew down the balance of $25 million of the Renvest credit facility, we remained determined to use it as a safety net. And as of June 30 this year, these funds remained in the bank. We continue to carefully analyze all the plans and numbers to find ways to reduce or defer noncritical spending.

On item 3, improving due process, the many strains on Jaguar reveal weaknesses in our policies, processes and procedures. We continue to make adjustments to improve due process and create a lasting benefit for our future. One recent example is a revision of our policy regarding equipment sent out for repairs. Proper tracking of these items will reduce our tax bill by ensuring items sent out for repairs are not treated as sold and taxed accordingly.

Fourthly, dealing with undesirable circumstances from the past, unfortunately, continues to consume a disproportionate amount of our precious time. A vivid example is the unmet reclamation requirements in past mining activities, which we are moving to remediate in a prioritized manner. We are dealing with all these legacy issues by owning up to them and living our strong values of honesty, integrity and transparency. These legacy issues are being prioritized and addressed.

And fifth, exploring options to improve the financial position. We have done a considerable amount of preparation in anticipation of engaging in discussion with the convertible bondholders. Within Jaguar, we continue exploring all our options to find a workable path flow.

So at this point, I'd like to turn over the presentation to Doug Willock.

Thomas Douglas Willock

Thank you, David. The company incurred a loss for the 3- and 6-month periods ended June 30, 2013, amounting to $64 million and $71 million, respectively. And consumed cash in operations of $131,000, an impairment charge of $46.8 million against the carrying values of our 3 mining properties was recorded and accounts for a significant part of the loss reported. The write-down was largely a result of using a $1,400 gold price in years 2014 and forward, and the impairment forecast model to reflect the drop in gold prices in Q2.

The company had a working capital deficit of $7.6 million as at June 30, 2013. We ended June 30, 2013, with $29.9 million in cash in our balance sheet, which reflected the $25 million drawdown from the Renvest credit facility on June 26, 2013. The cash balance, as David has mentioned, will be used to ensure the company's business plans in the near term are not adversely disrupted by liquidity concerns.

While 2013 guidance for our gold production and forecast cash operating costs remains unchanged, the company did reduce the capital expenditure plan for 2013 by $7.7 million, from $36.6 million to $28.9 million as part of the company-wide efforts to conserve cash in a weak gold price environment. The cash operating cost for the 3 months ended June 30, 2013, was reduced approximately 9.3% to $931 per ounce as compared to $1,027 in June 30, 2012. This excludes Paciência. Had we included Paciência, the cost would've been higher in June 30, 2012, at $1,162 per ounce. Our June quarterly financial statements included going concern note to reflect the uncertainty in finding a mutually agreeable solution to restructuring the $268.5 million in convertible debentures that come due in 2014 and 2016. The decline in gold prices was also a factor in determining our going concern note would be appropriate.

At this point, I would like to the presentation over to Gordon Babcock. Gordon?

David Michael Petroff

Apparently, as typical of talking with Brazil, Gordon hasn't made it on the phone yet. I guess all the lines are busy and something else. So let me do the review of the operations. Our safety progress has been and continues to be a focused effort. We've implemented regular talks on the importance of safety, root cause analysis on all accents and the 7-point golden rule policy and accomplish a program on safety. This marks the second quarter since we transferred ownership of responsibility for day-to-day operations to the general managers, which has resulted in full and enthusiastic engagement in all activities, especially in the capital expenditure's reductions, site innovations, team-building and support achievement made on sites. A new manager of human resources immediately immersed a new team [indiscernible] of overhauling HR policy and procedures and reaching a new collective bargaining agreement with the union. The mine geologists continued to work closely with the operational team in development, decisions and mining decisions being based on geological information and great control. So we are becoming more data-driven, which is one of the key objectives of the new management team.

And let me give you a quick overviews of some of the key development [ph] areas. With regards to the safety and health, the corporation, which you've heard already, but it's important for us to all repeat, corporation work Lost Time Injury improved for the month of June and connect 2 consecutive months. And the year-to-date corporate LTI frequency is now 3.05, which was still above our target of 2, is on a downward trend, and is 14% lower than the 2012 rate.

With regard to some significant milestones at the Turmalina operations, the ground and plant operations both celebrate a 1-year LTI-free period, and more significantly the LTI frequency rate has really improved for the past 12 months, is now 0.99 significantly below our target of 2. And clearly, Turmalina is the leader in the safety program.

Our focus in the next quarter will be on the Jaguar golden rule, which will bring our combined focus on safety programs at both sites. With regard to environment, mining concessions in land, a highly respected technical consultant reviewed the site of clearing stand facilities, and our practices and knowledge of the technical issues. And as a result, our technical team made some changes with Turmalina clearing stand facility with regard to how we're going to raise the level we want. And the changes will increase storage capacity by another 5 years at a significantly reduced capital costs. Similarly designed concepts are being investigated for our other facilities.

In the environmental and land groups, a headway on several fronts regarding the compliance with the government regulations and continued efforts in revegetation programs in legacy areas.

In just a short overview on operations. Total group year-to-date, we produced 47,339 ounces, which is 1,000 ounces -- more than 1,000 ounces above plan and at the highest side of our guidance for the year. At the Caeté complex, second quarter production totaled 22,500 ounces, which was short of the plan and we've talked about the difficulties with regards to transportation. And we're confident in any event that this shortfall may be recovered in the third quarter. At Turmalina, the quarter -- during the quarter, they operated consistently above plan, they've made an important steady contribution to overall production since the beginning of the quarter as the results show. And both development and production are both on track already in this third [ph] quarter. We went to a new level of ground support and [indiscernible], which we've talked about in the past. And the underground crew at Turmalina successfully completed the first sublevel stope with this new ground support system of the [indiscernible]. And also, we completed the installation of the trial test facility to recover more gold, and the first month of testing that's been working well.

In the area of exploration, Turmalina is concentrating on the Faina 2 deposit, which provides [indiscernible] with the early returns. And [indiscernible] geologists completed the exploration program necessary to maintain the expiration license.

So that's the review of our operations. And maybe as an overview, I have to say that I continue to believe that Jaguar has a solid base of producing underground mines. Jaguar has excellent potential to increase reserves and resources at the existing operations. And Jaguar has a broad portfolio of quality projects and resources that represent excellent growth potential. These facts were true when I joined the company and these facts remain true today. In creating value comes with these assets, I can see having an appreciation of the many challenges we face and the measurable progress so far. [indiscernible] Jaguar [indiscernible] and we expect to see more positive steps in the years ahead.

So that's -- those are our comments. And thank you for listening. And operator, now we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we do have a question from the line of Mike Hebner with Wunderlich Securities.

Michael Hebner

What would the prospects of -- what can you talk about on that convertible debt discussions? Where are you at, and what more color can you add to them?

David Michael Petroff

Mike, thanks for asking the question. I have to say that these are private talks held confidentially. And all I can tell you is -- what I did tell you is that we've done a lot of preparing. It's an issue we have to deal with. And when we have a material fact, we will certainly disclose those, we are required under securities legislation.

Michael Hebner

On the road and the situation with that, how important is it that we fix that? And what's the probability us fixing it and finding the solution in the next 30 to 60 days?

David Michael Petroff

Okay. So the road has been fixed and it's critical that it's fixed because that's our pipeline from the mine to the processing facility. Certainly, we are exploring alternative routes and continue -- it's fixed, it's working well now. Well, but it's an issue that we have to closely monitor and may need to continue to fix it first, certain areas of the road become difficult.

Michael Hebner

So did we actually lose production or was deferred production? And what would you qualify -- quantify that number?

David Michael Petroff

Well, I would say that the production at the mine will continue. What we're losing is the ability to move it over to the plant and process it. And so, we didn't lose any production in totality, but certainly it'll be a good -- if that occurred again it'll be a deferral of milling and, therefore, a deferral of [indiscernible]. And about this point in time, we may not have to quantify it.

Operator

[Operator Instructions] Your next question comes of the line of Zach Sauniers [ph] with GMP Securities.

Zach Sauniers

First, I wanted to just jump to the cash cost figure, and I saw you kept the full year guidance the same and obviously came in this quarter below that guidance as well. I mean, when we look into the back half, I mean is it fair to assume maybe the second quarter like that type of run rate and you just haven't revised guidance lower because you'd like to see where third quarter comes in? I mean, how should we be thinking about that trend given you left guidance the same?

David Michael Petroff

Well, certainly, [indiscernible] we try and lower that number as we go forward. A big impact on that will be beating our production targets. Obviously, when you increase the divisor, the number goes lower. I think the other thing that's going to impact us in the second half of the year, which you need to be cognizant of the fact that the union contract was renewed effective the middle of the year. And the inflation rate in Brazil was about 7%. And so the workers got a little bit more than 7%. So therefore, we're not changing the number until we have some more experience with the higher [indiscernible] cost structure.

Zach Sauniers

And you may have mentioned this in the past, but as far as your breakdown of costs, could you give us a sense on how much labor does account for in that number?

David Michael Petroff

So I don't have those numbers in front of me. Gordon, are you on the line? No, Gordon hasn't cleared. He's still dialing in. So I can't answer that for you. I'm sorry.

Zach Sauniers

No, that's okay, that's fine. And then, my second question is sort of on the same topic. But you had mentioned a -- an all-in sustaining cash cost guidance, I believe, of $1,200. I'm just wondering if you could give what that figure was in the second quarter?

David Michael Petroff

Okay. So it's not a guidance. It's a target. And it's a target that we're going to kind of get to by the end of this year. And those numbers, if we do for the first quarter and second quarter, would be $1,627 for the first quarter and $1,827 for the second quarter. And those were calculated by taking out total expenditures on everything, including interest, including G&A, including capital, which I mentioned was about $36 million in each quarter and just divided by the production.

Zach Sauniers

Got it. So the $1,827, that's not the -- so that world gold counsel all in sustaining number. That's including all your growth spending and your cash interest?

David Michael Petroff

All in spending.

Operator

[Operator Instructions] And we have no further questions at this time. I turn the call back over to the presenters.

David Michael Petroff

Thank you very much, everybody, for dialing in and listening. And we look forward to making more progress on the turnaround of the operations in the company, and reporting it to you in a timely manner.

Operator

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

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