In The IKN Weekly issue IKN157, published last Sunday May 6th way back when Jaguar Mining (JAG.to) (JAG) was still a $2.32 stock, we ran a (overly) long analysis on the company’s financials. The idea behind the nine pages of text and charts was to look at the stock and decide whether its lower share price was offering a potential buy opportunity. Here’s an excerpt from the body of the text with a couple of the charts and then the conclusion to the note as well. The only changes are a couple of words and a couple of typos found.
Body (excerpt):We now move to financial results and this is where things start to get complicated for JAG on the costs front (and why we said earlier that the cash costs number JAG uses is a crock). Put simply, there are three parts to the costs inputs as per the JAG earnings reports. The company breaks things down into “mine production costs”, then other “operating expenses “ (that sounds like it’s the same thing but isn’t; it’s things like exploration, admin, management fees, stock based compensation etc), and after those come the purely financial adjustments that affect bottom line profits but don’t affect the day-to-day profitability of the enterprise at an operational level. For our purposes, we’re going to largely ignore the “financials” section for reasons that will hopefully become apparent. However, the combo of the mine costs and the other op costs do matter, because those two set against sales revenues show us the real state of financial health at JAG.Here (above) is a chart which does just that and as we can see, the “mine production costs” aren’t just less but a lot less than the total opex that includes mine production and all the other things that are left out of the cash operating costs calculations normally. It’s a deceptive part of trusting a non GAAP number such as cash costs, because the company in question can easily leave out key costs that do matter when it comes to overall profitability and JAG is a worse sinner than most in this respect. When you see something like “gold was produced at $1,000/oz cash cost and sold at $1,600/oz”, the reaction of many (especially those new to this game) is to assume the company is running a $600/oz profit. This is not the case and at JAG, it’s far from the case as this next chart that follows on from the above chart clearly shows.There’s a lot of financial blah-blah and boring numbercrunching in this week’s NOBS report, but I want to make it clear that this is one of the charts that really matters. What we see here are bars showing the total op-ex at JAG (that does NOT include that financials-only section of the P+L) compared to revenues, than the blue bar shows the difference between the two.In this table, we’re backing out the effect of derivatives charges, interest payments/dues on financials and just zeroing in on 1) the amount of cash JAG gets for its sales compared to 2) the amount of money it costs to produce its wares. The chart that documents the quarterly net profits and losses at JAG shows the influence of those financials components, as sometimes the bottom line is hammered and other times it gives the company chance to report a $15m or $20m profit. But back the “noise” out and what we see is a company that struggles to make a profit of even $6m on its quarterly operations.
Conclusion (excerpt)On both an operational and financial level the company has been woefully mismanaged, the net result of which is the crushing of equity value. It’s also clear that the current management/director team has no intention of resigning or coming to a deal with any buyer that’s in the best interests of is shareholders, unless of course the buyer is willing to pay over the odds for a bunch of underperforming assets and assume the welter debt burden too. Until the present board is replaced, there’s no reason to believe that the serial failures we’ve seen in JAG will come to an end.The bottom line to today’s somewhat disparate analysis is that on the financials alone, JAG doesn’t add up and the heavy waterfall drop we’ve seen in the stock price these last few weeks has only brought it down to the level at which it deserves to be priced today. There is the potential for share price appreciation and there’s even the chance that some third party that thinks it can do a better operational job at its assets might move to make a hostile bid on the company, but right now I doubt that will happen. The problem here is that if things stay the way they are, the current $2.32 share price can go a lot lower just by letting JAG keep on keeping on and dragging itself further down so why should a potential buyer pay $4 or $3 per share when it can wait a while and pay $2…or even $1? These last few weeks have seen the market change its attitude towards JAG, the trust and hope is gone and the world is turning its back on this company, and that’s about the worst thing that can happen to any going concern. We’re now at the point where JAG can put in a good quarter and people will still mistrust it as an investment vehicle and consider it a single blip. Until something happens to change JAG at its most basic level it’s not a stock I’d want to take a risk upon, even at these low prices.Those of you that like them distressed and very high risk may feel like running a trade on JAG, but if you do, be clear that the company might have come down from $6 but it’s not going back up there again in the near future, and unless things change drastically at the company (e.g. debt removed, gold goes to $2,500/oz, qtr production jumps to 60,000 oz) it will never see those levels again. The chances of further depreciation in this share price are high, so the risk of buying at today’s levels should not be understood as “well, it could drop to $2 i suppose”, because the low end potential is zero. If current management is thrown out and people that actually know how to mine at a profit move in, it might be worth revisiting JAG but under status quo conditions there’s too much risk and not enough reward potential here