It seems that just about everyone has suddenly turned negative on the precious metals sector. A mere month ago, leading industry names such as Goldcorp (GG) were hitting new all-time highs. Since the recent July 15th peak of gold just shy of $1,000 an ounce, there has been widespread carnage throughout the mining industry. No miners have been spared; the gold mining ETF (GDX) has fallen from 51 to 34 in the past month. While that is a shocking enough decline, some of the junior miners have fallen on even harder times.
The Concord, NH based Jaguar Mining (JAG), for instance, has seen its stock fall 45 percent in the past month to hit an 11 month low of $6.26 before recovering slightly. The company announced bad news, but I believe the market has vastly overreacted to it. Between negative news and a rapidly declining spot gold price, it is easy to lose sight of the fundamental value that Jaguar provides investors at this price level.
For those of you unfamiliar with the Jaguar story, the company acquired the leases to a large portion of land in the Brazilian gold belt and has had success discovering substantial amounts of economically recoverable gold. The Turmalina mine is clearly Jaguar's top jewel at the moment. It has produced 33,478 ounces of gold for the first half of the year and production is expected to rise to roughly 45,000 ounces in the second half. The mine boasts a cash cost of roughly $375 per ounce—this is below industry averages and will make a mint for the company.
The Sabara mine is also currently operating but is only expected to produce 20,000 ounces this year at a cash cost of roughly $610 an ounce.
Jaguar's third project is the Paciência mine, which was supposed to have come online but was delayed due to an improperly installed tailings liner. This error caused expected production for the mine to fall from roughly 49,000 ounces this year to a range of around 25,000 to 30,000 ounces of gold.
While this is bad news, the cash cost for this mine is anticipated to be roughly $525 an ounce.
Thus, the selloff related to this news is an overreaction; Paciência was not key to this year's earnings. Turmalina is the core asset here, and its production is continuing to grow. Turmalina has been so successful in fact that the company has been able to turn a profit the past two quarters—the first two profitable quarters in the company's history.
For their most recent quarter, Jaguar turned a profit of nine cents a share versus a significant loss for this quarter last year and a one penny per share profit in Q1 of 2008. Besides the emergence of profits, other metrics at Jaguar are also looking increasingly positive. Revenue grew 86% in Q2 of 2008 versus Q2 of 2007. The company made 21 million in revenue in 2006 and more than doubled this figure to 47 million in 2007 and are on pace to make 80 to 90 million in revenue this year. Gross profit nearly tripled from 2006 to 2007 and is on pace to double again this year.
Clearly Jaguar is a growing company with competent management that has a bright future. The company plans on boosting production to 700,000 ounces of gold a year over the next few years from their current 120,000 ounce capability.
While that is a tall goal, I believe management is capable of delivering, just look at Jaguar's Canadian shares which have gone from under a dollar to 14 per share before falling back to see management's past ability to meet investor expectations.
The company is well-capitalized and production is growing despite a small setback. I don't see how the stock price can lag behind Jaguar's torrid revenue and earnings growth for much longer.
Disclosure: Author holds a long position in JAG