In my previous blog titled “Has Gold Peaked” I had argued that notwithstanding the recent gyrations and a short term downward swing, the prospect for gold is supported by macroeconomic factors in the foreseeable future. It did not take long for us to receive some validation to the fact that threats to the global economy are for real. Last month, the world’s largest economy, the U.S economy, reported that it had created no jobs. The U.S. manufacturing index dropped 0.3 percentage points to 50.6 in August to its lowest point in two years. A reading above 50 indicates an economy that is barely clinging to growth and furthermore signals a rapidly slowing economy. Progressively economic indicators are turning negative for the developed world. Every day the headlines from Europe remind us of an impending debt crisis about to blow over. Japan continues to chug along with unremarkable growth and the U.S economy continues to muddle through with the risk of a double dip recession hanging over its head.
With a backdrop of global economic slowdown, huge debt crisis in rich countries and the threat of inflation looming large in most fast growing emerging countries, gold looks like sounder investment with every passing day, notwithstanding the recent fluctuations in gold prices.
A way to profit from this uptrend in gold could be to identify interesting gold companies with strong prospects. We believe that junior gold producers or companies that have producing assets and advanced exploration assets that can be brought to production in the near-term will attract attention from bigger miners hungry to replace depleting reserves.
One such interesting company is Jaguar Mining Inc. (NYSE/TSX), a $527 million market cap company that trades an average of 2 million shares per day on the AMEX. It is an established mid-tier gold producer with a diversified portfolio of producing and development projects in Brazil. The company enjoys healthy cash margins supported by efficient cost operations. It has an experienced operating and management team with proven track record.
The company has three producing mines and one development project in the Belo Horizonte mining district in Brazil. The company has rising revenue year-over-year of $170.79 million for 2010 vs. $140.73 million for 2009. During the first half of 2011, the company reported total revenue of $115.7 million, net income of $19.3 million and cash generated from operating activities of $41.1 million, or $0.49 per basic and fully diluted share.
If you believe that gold will stay strong for the next 2-3 years, the case for JAG seems strong. Jaguar has shown steady revenue growth, growing by over 20% each of the last 5 years. The company is an unhedged gold producer and expects to produce 400,000 to 420,000 oz of gold by 2013. Based on the current trends, the company can earn up to $3 per share if it hits that production target and the price of gold remains above $1500/oz. That will amount to 2x cash flow for projected cash flow in 2013 at the current share price, a cheap valuation by industry standards.
Obviously there are several risks as well with a company like Jaguar Mining and investors should be aware of those. These risks include its ability to continue to advance its projects and to add additional resources for future production. If gold prices drop significantly, it would negatively impact Jaguar’s prospects and can even make its production unprofitable.
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Disclosure
The author and his firm do not hold any shares position in the company mentioned in this blog.
Except for the historical information presented herein, matters discussed in this document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements.
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