I took a pretty big position in Jaguar this week. I thought that the stock was getting too cheap at $4.50 so I bought some there. I thought it was too cheap at $4.25 so I bought more there (I disobeyed my usual rule to never add to a losing position in order to do so). And then I thought it was really too cheap at $4.15, so I bought more there.
So what caused me to ignore my own rules and buy a stock that is falling like a knife? Well, Jaguar has had a lot of problems. The stock is hated or ignored by analysts have been burnt on it. Yet when I look at the problems that they have, I do not think that they are unfixable. In fact, I think the company may be fixing them right now. If they are, then the stock is worth a whole lot more then $4 and change.
In this post I am going to recap the issues that have led to the higher costs, and what Jaguar is doing about that.
Jaguar has 3 mines. There is Turmalina, Paciencia, and Caete. Caete is a new mine, producing for 2 quarters now, while Turmalina and Paciencia have been producing much longer. Turmalina and Paciencia have historically, on average, produced about the same amount of gold.
The main problems that Jaguar has had is at Turmalina. Costs have risen too high. See the chart below and note the escalation in costs.
Why have costs risen so high? Its been a grade issue. Mining costs, on a costs per tonne milled basis, are fairly flat, particularly in Brazilian Real's. Even in USD, mining costs have not risen substantially. If the company was producing the same grade they were in 2009, there would not be a problem at Turmalina.
Unfortunately, they are not. Grades fell dramatically in the last 3-q's of 2010:
So what is the cause of the grade problem? Well, some grade problems are due to issues with the resource model. This is like what Gammon Gold experienced. I wouldn't touch those kind of situations. If the resource model isn't right, then who really knows what the mine is worth.
But that doesn't appear to be the case with Turmalina. On the Q4 conference call management stated that they had reviewed the resource model with an independent advisor and are confident it is accurate.
The problem at Turmalina has been dilution and mine management. The mining method that they were using was diluting the good ore with too much waste rock. The company said that they were seeing 30-40% grade dilution due to the excess waste rock going through the mill. As well, the mine management was not developing a sufficient ore stockpile and a sufficient number of stopes to smooth out natural grade variability in the mine.
Jaguar has done 3 things to address these problems.
- Mining technique was switched from selective stoping to back and fill
- Mine Management was replaced
- An extensive development program was undertaken to make available more stopes and stockpile ore
On the Q4 conference call the company described the progress they had made. They have moved ahead. Dilution is down to 10-15%. The chart below illustrates the gold production at Turmalina.
Ore body A is the main high grade ore body where the problems have occured.
Finally, it is worth noting that the operations at Turmalina should be helped by the grades of the next levels being mined. Below is a cross section of Turmalina provided in the Q3 conference call material. You can see how in later this year higher grade material should begin to be mined.