LockieCurrie
A Hold Rating for Jaguar Mining Inc.
This article assigns a Hold rating to shares of Jaguar Mining Inc. (OTCQX:JAGGF), which is a Toronto, Canada-based junior gold mining, development and exploration company operating in the Iron Quadrangle, a productive greenstone belt in the state of Minas Gerais in Brazil.
The Reason for the Hold Rating
Due to its extremely positive correlation with the Gold Spot Price (XAUUSD:CUR), it makes sense to continue holding shares of JAGGF as long as gold prices continue to rise due to strong demand from investors seeking the metal as a safe haven to protect portfolios from devaluation threats arising from risks to global economic growth due to tight monetary policy and geopolitical tensions. At the moment, it looks like the bullish catalysts for safe-haven gold may last a long time, and soon they may welcome another component to their family of gold price upside factors as the first-rate cut could now be on the way, which traders say is very likely at the September 18 US Federal Reserve meeting. At the time of writing, interest rate traders believe that a 25 basis point cut from the current target rate of 5.25-5.50 to 5.00-5.25 has a 65% probability of occurring.
JAGGF could also remain in the portfolio for the long run if its tendency to outperform its peers is taken as a yardstick to assess this growth opportunity. Over the past 5 years, JAGGF is up 75.97% versus its peers or the VanEck Junior Gold Miners ETF (GDXJ) +11.99%. And, if investors consider the opportunity to take due account of the cycles, JAGGF may also have the potential to beat the U.S. market, which is up 92.74% over the past five years according to its benchmark SPDR® S&P 500® ETF Trust (SPY).
But now is not the time to add to the holding because while at the upper end of the price cycle, under the influence of near-term headwinds, this analysis predicts that JAGGF stock has the potential to offer significantly more attractive levels. If you buy from lower levels, your holding will rise faster and better than if you increase the investment when the shares are in the upper part of the stock price cycle, provided that gold, as it appears, remains bullish. Of course, you have to be very careful not to have too much fat of a position, as with JAGGF as a stock with low liquidity, it can be a problem to adjust the holding quickly enough if a sudden downturn in gold strikes or bearish sentiment spreads among US-listed stocks as a reason to demand a change in strategy.
JAGGF is a poorly liquid stock on the US Over-The-Counter market of “OTCQX”, as evidenced by only a meager volume of 50,479 shares changing hands on average per day over the past 3 months (scroll down this Seeking Alpha page to the “Trading Data” section). The stock has 79.15 million shares outstanding, but of those, 41.49 million are “Float”, which in turn is 21.08% held by institutions.
Jaguar Mining Gold Deposits In Operation
Currently, the company produces gold ounces from:
- its satellite “Faina” gold deposit, which is part of the Turmalina gold mining complex located 99 km west of Belo Horizonte, Brazil, and consists of the Turmalina Mine, a processing plant (the “Turmalina Plant”) and approximately three satellite deposits (Faina, Pontal and Zona Basal).
- Pilar, which belongs to the Caeté mine complex, which consists of the Pilar and Roça Grande mines (placed under care and maintenance since April 2019) and the Caeté plant. The complex is located approximately 8 km southeast of Caeté, Brazil.
These two assets produced 33,006 ounces of gold in the first half of 2024, slightly less than the 34,906 ounces in the first half of 2023, and sold 34,714 ounces in the first half of 2024, a bit less than the 35,925 ounces in the first half of 2023, but with the trend that appears to have turned positive in the second quarter of 2024, as mining areas development activities yield higher metal ore grade: Jaguar Mining produced 16,829 ounces in the second quarter of 2024, compared to 16,750 ounces in the second quarter of 2023, and sold 19,022 ounces in the second quarter of 2024, compared to 16,917 in second quarter of 2023 with higher grade offsetting the lower tonnage during processing.
The company also owns the Paciência gold mining complex, located approximately 80 km southwest of Belo Horizonte, which has been on care and maintenance since 2012. The complex hosts two underground gold deposits, Santa Isabel and Margazao, and a plant with a processing capacity of 1,800 tonnes per day. The complex produced 154,000 ounces of gold and processed 1.755 million tonnes of ore with an average gold grade of 3.06 grams of gold per ounce and recovered the precious metal at a rate of 89% before care and maintenance status was established.
The Share Price Drivers: Upward Catalysts for Earnings, Margins and Cash Flow
Jaguar Mining offers a great way to take advantage of the positive sentiment in the gold price rather than investing directly in the physical metal, as not everyone has the huge funds required for the allocation, as is the case with large investors and banks instead.
As an effective share price driver, Jaguar Mining’s cash flow and earnings are growing amid higher prices for ounces of gold sold, and the company’s share price is reaching higher levels on the stock market.
Jaguar Mining’s share prices should continue to benefit from rising prices on sales driven by strong demand for gold, particularly as a safe haven given the risks and uncertainties in the global environment.
The Outlook for the Gold Price
Carl Surran, news editor at Seeking Alpha, seems to suggest that more analysts are joining the consensus that gold price forecasts are being supported by safe-haven interest, “which is at least partly due to geopolitical risks in the Middle East.” This comes on top of dovish signals from Federal Reserve Chairman Jerome Powell, who, in his speech at the Jackson Hole Symposium on Friday, August 23, raised hopes of a pivot at the September 18 meeting. Carl Surran also reported that analysts at Citigroup Inc. (C) are confident that “the price of gold will reach the $3,000 mark by mid-2025”, simply because of the upcoming looser monetary policy from the Fed, which is already supporting demand for ETF gold. This raises the suspicion that the price forecast could potentially even be above $3,000/ounce if the safe-haven aspect of gold were included in the estimation model. But the current uptrend in the gold price through Citi’s estimate for mid-2025 is expected to continue without relevant interruptions because already in the short term “large ETF flows as well as ongoing speculator demand when the Fed actually makes its first rate cut” said UBS Group AG (UBS), according to Bloomberg, are leading UBS analysts to forecast prices of $2,600 for this year’s Q4, reflecting a 4.8% upside from XAUUSD:CUR’s $2,481.16/oz at the time of writing. Trading Economics analysts support views of a near-term rise in gold prices, forecasting a gold price of $2,532.66 per ounce by the end of this quarter and an even higher price of $2,623.27 per ounce in 12 months.
Easy to Deliver on Growth with a Stable Financial Ground
In addition, the company’s growth initiatives, supported by a solid financial position, provide a solid floor to increase sales volume.
Thanks to higher gold prices achieved through the sale of gold ounces, the company’s liquidity increased by 70% to $37.4 million as of June 30-2024 from the end of 2023. In addition, the company is not burdened with debt but has an inventory of $14.6 million. Plus, with cash flows likely to come solidly on board due to bullish gold, there will be more than enough financial resources to keep production consistent with Jaguar Mining’s development plans, leading to a downward trend in operating costs. The latter dynamic will be enabled by the development of mining areas, such as the Turmalina Complex’s Faina, which lays the foundation for a major expansion of profitable mining resources within months. At the Pilar of the Caeté Complex, the focus remains on “achieving consistent production in 2025” as the BA Torre structure again exhibits high-grade mineralization on levels 15 and 16 and drilling can extend the growth potential that appears to be abundant in multiple directions from there, providing a solid base for what will actually be significantly improved production in a relatively short time frame.
Costs Are Down Trending
Third, profitability may be boosted by falling operating costs as fixed costs await to be further diluted on a higher base of gold ounces mined now that the growth strategy has laid the groundwork for increased production at Turmalina’s Faina or at least consistent gold production at Cadet’s Pilar.
In fact, All-in Sustaining Costs (“AISC”) decreased to $1,517/oz in Q2-2024 from $1,781/oz in Q2-2023 and decreased to $1,558/oz in H1-2024 from $1,672/oz in H1-2023.
Improved Profitability Metrics
Supported by the bullish sentiment that drove the yellow metal’s market price to its “fifth straight weekly rise with Middle East risks rising” on April 19 and to score “a place on the podium of the Metals Olympics” on May 21 in the wild game of commodities, the sharp rise in the “average realized gold price” for Jaguar Mining to $2,228/oz in H1 2024, up 16% from $1,922/oz in H1 2023, resulted in robust profitability compared to AISC/oz.
The AISC/oz margin increased to $670 in H1 2024 from $250/oz in H1 2023. Adjusted EBITDA margin was 43.6% of total revenues of $77.356 million in H1 2024 compared to an Adjusted EBITDA margin of 33.4% of total revenues of $69.036 million in H1 2023. Thus, revenues increased by 12.1% year-on-year.
Net income for the first half of 2024 was $0.21/share, compared to net income of $0.02/share for the first half of 2023.
Free cash flow for the first half of 2024 was $18.74 million, a significant increase compared to free cash flow of $5.72 million for the first half of 2023.
BRL to USD Exchange Rate Heading to Play in Favour
The attractiveness of Jaguar Mining’s profitability in the market will also increase, as the expected weakening of the Brazilian Real (“BRL”) against the US Dollar (“USD”) will be reflected in lower US dollar-denominated costs in the company’s income statement.
Compared to the US dollar (“USD”), the Brazilian real (“BRL”) is expected to weaken from BRL 5.6152 at the time of writing to BRL 5.75 within 12 months as the value of the BRL increasingly comes under pressure from concerns over Brazil’s fiscal instability triggered by widening budget deficits and “fears of a more inflation-tolerant stance” following “President Lula’s appointment of Gabriel Galipolo as central bank chief for next year.”, reports Trading Economics.
With the tailwind of gold prices and the weaker Brazilian real, along with continued development and exploration in the Faina area and the Pilar area on track to deliver stable or higher ounces with lower operating costs, not only H1-2024 but also the following quarters through robust generation of earnings and cash flow will give the share price sufficient reasons to move up.
The Stock Price: A Dip Is Possible. Hold Shares for the Time Being
The share price has a rosy outlook, but now it is still trading in the upper part of the price cycle, investors should continue with a Hold rating for the time being, as it is not time to buy yet.
At the time of writing, JAGGF shares are trading at $3.39 apiece on the US OTCQX over-the-counter market, giving it a market cap of $268.32 million.
Shares are trading above the MA Ribbon and are currently well above the midpoint of $2.285/share of the 52-week range of $0.83-3.74/share.
Also, looking at the 14-day Relative Strength Indicator at 63.96, there is downward momentum building and the room for the share price to move lower is significantly greater than adding more from here. To rise significantly from these levels, shares need room to rise, so they must first fall back to healthier levels before another good rally can begin.
Based on previous trends, Jaguar Mining shares traded lower towards the end of June 2024 due to more subdued gold prices, as signalled by analysts at ING Groep N.V. (ING), and in early August 2024 as global equity markets experienced “chaotic and large sell-offs”.
The first stock price drop was due, ING analysts suggested, to market optimism about a Fed rate pivot being pushed back from the July meeting to the September meeting, putting pressure on gold prices as the metal provides no income, unlike US Treasuries, which were again interesting for investors on the back of a hawkish Fed still operating under the motto “higher for longer”.
The second drop of early August 2024 followed panicked investors fearing a US recession after unemployment had earlier risen from 4.1% to 4.3%, and with US-listed shares falling sharply, involved Jaguar Mining shares also feeling the blow but more than the average stock in line with 24-month Beta of 1.33.
Therefore, Jaguar Mining shares may fall again for the following 2 reasons:
- The Fed will cut the benchmark interest rate by 25 basis points, which has been incorporated for weeks now in the market valuation of securities, disappointing market participants as they will see their hopes definitively dashed for a cut of 50 basis points at the September 18 meeting. Dovish signals from Fed Chairman Jerome Powell’s Jackson Hole speech on Friday, August 23 not only bolstered market hopes that interest rate cuts will finally begin in September, but also gave “further impetus to the hypothesis of a 50 basis point cut.” XS.com senior market analyst Samer Hasn told Dow Jones as reported by Carl Surran, Seeking Alpha News Editor on August 26. Anyone who wants to believe that market participants are seriously mistaken in expecting a 50 basis point cut need only consider recent developments in the US economy: Disinflation continues, but with consumer spending seemingly immune to the Fed’s hawkish stance on interest rates, as demand had a positive impact on the Conference Board’s consumer confidence index in August, which rose to 103.9 and pushed annual US GDP growth up to +3% from +1.4% in the first quarter, there is no reason for the Fed to make the biggest cut of 50 basis points. In addition, the US services sector, which accounts for the largest share of US GDP, is showing signs of expansion rather than contraction. Those who think a 50-basis point cut is possible must see the 818,000 fewer jobs created between April 2023 and March 2024 than originally expected as a clear sign of economic deterioration due to the impoverishment of the labour force component, the Fed’s preferred rate-setting target rates alongside core inflation. However, the market will have to wait until February 2025 for “the annual adjustment on payrolls,” to know whether today’s concerns about labour conditions are justified or disproportionate. Meanwhile, a soft landing remains popular among analysts and consumers continue to bravely maintain positive sentiment around growth despite more than 2 years of Fed policy tightening to curb galloping inflation. In light of the current overall situation, the Fed is likely to cut its policy rate in September, but with great caution, as the consequences of a bold decision would still involve too much guesswork in the estimation.
- Although the “soft landing” scenario is popular among analysts, this does not rule out the possibility of a new wave of recession fears hitting US equities, which could also temporarily create negative winds for Jaguar Mining shares, as the following two indices continue to signal an impending downturn in the US economic cycle: Economist Claudia Sahm believes that the US economy could enter a recession sometime between late 2024 and early 2025. Claudia Sahm is the designer of the Sahm Rule, an indicator that, performed on the last nine US recessions since 1970, has convinced most in the market about its ability to predict a subsequent one. The inverted yield curve indicator (three-month US Treasury yields are currently higher than ten-year US Treasury yields: 5.11% versus 3.852%), developed by Duke University professor and Canadian economist Campbell Harvey, also signals that a recession may be just a matter of time for the US economy. Since World War II, this index has reliably predicted a recession 8 out of 8 times.
Conclusion
This article assigns a Hold rating to shares of Jaguar Mining Inc. or JAGGF, which is a Toronto, Canada-based junior gold company with mineral assets in the Iron Quadrangle, a prolific greenstone belt in the state of Minas Gerais in Brazil.
The stock, in turn, has various tailwinds that will help its profitability, a key driver of share prices: rosy outlook for gold price sentiment, sufficient financial resources to support projects to deliver consistent or increasing ounces of gold, which ultimately continues to have a positive impact on operating costs, and expected favourable BRL to USD exchange rates.
Jaguar Mining shares are good to hold in the portfolio from a long-term perspective, but for now, it is better to stick with a Hold recommendation while investors can confidently expect a more attractive share price. The current level is high compared to the latest trends.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.