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Aug 14

Turning the Corner? Jaguar Mining Q2

I just finished reviewing Jaguar’s conference call and results for Q2. There is a chance, and I do say a chance, that they are turning the corner.

Turmalina

It appears that the worst is over for Turmalina. Costs in Brazilian Real were constant with Q1. Feed grade was reasonable at 3.3g/t. Below are Turmalina’s operating results.

Caete

Caete had the already disclosed problem with the mill break down. $hit happens. Mines inevitably run into operating blips. This affected costs in the short term. But that is a lot different from a grade problem, or a sequencing problem. Those are long term issues. A dysfunctional gear box is not something to worry about.

I think its important to note that while the mill had problems, Caete mining costs remained stable compared to Q1. The company is also moving forward with the expansion of Caete from a 700,000t/y operation to a 900,000t/y operation. Management said that this would raise gold production to a 100,000oz/y level, though I have to say I don’t understand the math on that one.

The company said that they expect significant improvements to Caete in Q4. That means that you shouldn’t expect too much from Q3, apart from a reversal of the one time issues. I think Q3 will look more like Q1, meaning $850/oz costs and 13,000 oz. That would be ok.

Guidance

The company wouldn’t give a mine by mine breakdown of production so far in Q3. However they did provide an aggregate estimate. They said production in July was similar to June, which was 15,000 oz. August was expected to be better than July. Extrapolating to September and adding it all up, one might expect Q3 production to be in the 46,000-49,000 range. That would be a solid quarter and would generate some serious cash flow.

Gurupi and CAPEX Worries

The company gave some details about what to expect for Gurupi. They are investigating other sources of funding. I got the impression that there was a JV of some sorts in the works. I think this would be positive. First of all, Gurupi sounds like its growing, which is great but it also means higher CAPEX. Second, I think that one dead weight on the share price is that when you work out the company’s CAPEX requirements versus cash flow for the next 5 years, there isn’t a lot of wiggle room.

Below is a snipit from Jaguars own press release on February 10th. The tables show how Jaguar expects to fund its capital expenditures over the next 5 years. The most important row to look at is that “Beginning Cash Balance” row. In the first couple of years the cushion is only about $100M. I don’t think the market is comfortable with that cushion given Jaguar’s problematic production past. A cash inflow for Gurupi would allieve these concerns.

Short Sellers

The last thing that was talked about on the CC was the short interest. As I’ve pointed out before, Jaguar has an enourmous short interest. Management believe that most of it is linked to the convertible, where hedge funds short the stock against the convertible to hedge the downside risk. I don’t really know what management can do about this, but they seem to think they can do something. A divided seems unlikely given the CAPEX requirements described above. I don’t think a share buy back would do much. They expect to announce measures to counter the short selling in the next few months. We’ll just have to see what they come up with.

Aug 13

Week 6 Portfolio Update – Running on the Spot

I’m on a road to nowhere…

Its kind of amazing that with all the volatility this week, my portfolio ended in about the same place it began.

I was up about 1% on the week, which I do not consider too bad. I am down about 1% since the portfolio inception on July 1st, which is not great but given that the TSX is down some 6% and the S&P is down 11% in that same period it is not too bad either.

I did, however, end up with quite a different portfolio composition than I began the week with. I sold out of Mercer, Home Federal Bank of Louisiana, Second Wave Petroleum, and Prophecy Coal, while I bought new positions in Argonaut Gold and OceanaGold, and added to my position in Coastal Energy.

I’m very happy with my buying of Coastal in particular. I have a large position in my practice portfolio I track here, but an even larger position (both percentage-wise and in the absolute sense) in my actual portfolios. I expect good things to come from them.

In general though, I am concerned.

I do not like what the market is doing. It is eroding confidence. The US is so intent on budget balancing that you have to wonder who is going to be the consumer of last resort. And I have the suspicion that we are edging closer to the moment when the Euro zone implodes.

On that last point, there was an excellent article (IMO) by Michael Lewis in Vanity Fair this month where he talked about Germany and its relationship with Europe. You don’t come away from it with an upbeat sense of how this is all going to play out.

More generally, what one has to remember is that the gold bugs argument is not without merit. They have history on their side. We are still in the midst of a 40 year experiment to determine whether or not a human society can operate with fiat currency. I don’t mean to sound like some crazed hard money fanatic, but its true. Maybe it works out but maybe it doesn’t.

To be honest, the gold bugs look more sane by the day.

Next week will likely see me increase my cash position further.

Aug 12

Coastal Energy – never let a good crisis go to waste.

I think that was said by someone in the democratic leadership when 2008 hit. In 2008 it took me a while to get over the fear of a plummeting market but I did eventually take advantage of the crisis and pick up some bargains that really helped my portfolio recover and exceed its highs in the following 2 years

Well this isn’t 2008 (yet), but there have already been some bargains. This crisis and volatility has been good for one thing only so far and that has been to increase my position in Coastal Energy. I’ve bought more of the stock in the $8’s over the last few days and its now my largest position.

Coastal Energy released more good results last night. First, more extremely positive results out of Bua Ban North.

The Bua Ban North B-05 well was completed using an electric submersible pump (“ESP”) and is currently producing 2,500 bopd from the Miocene interval. The Bua Ban North B-01 well was completed using an ESP and is currently producing 600 bopd from the Oligocene interval. Total production from the Bua Ban North field is averaging approximately 7,100 bopd.

Putting together some rough production numbers, in Q1 Coastal was producing 6,384bopd from Songhkla and another 1,916boed of gas onshore. Add to that the 7,100bopd from Bua Ban North and another 1,000bopd from the recent success at Songhkla and you get about 16,500boed current production. The company has 112M shares outstanding and 78M of debt. At a $10 share price that means they are trading at 78,000/flowing boe. That does not appear overvalued to me given that Bua Ban North production will still grow quite a bit more in the next couple quarters.

Songkhla production should also grow with the new discovery of the H-01 well. The company said the following

The results of the Songkhla H-01 appraisal indicate an oil column of approximately 200 feet. We are pleased with the Songkhla H discovery as there are numerous other prospects which can be drilled nearby and, if successful, developed from a central Songkhla H production facility.

Now if we could only get the french banks to stay afloat.

Aug 11

Why you have to understand the short term funding stresses of French Banks to invest in a small company drilling for oil in Alberta

Why? Because our world is f#$!d up.

Its all about the French banks these days. And you can’t ignore it.

If 2008 taught me something, its that banks can fail even if it appears that they should not fail. And that when banks fail the fall out cannot be predicted. As FT Alphaville pointed out today:

No bank can exist when counterparties lose confidence and withdraw their funding – even if the loss of confidence is triggered for the wrong reasons.

Perception is reality when it comes to banking. This is why, I think, it is so hard to stop the snowball once it starts rolling.

Unfortunately the snowball is already rolling. Three charts from three european banks as provided by FT Alphaville:

Look, yesterday I made back all the losses that I have had over the past week and a half. I am back to pre-banking crisis levels (though not to pre-debt ceiling crisis levels). I’m not thrilled to giving that all back again because some French bank is going to blow up ala Lehman. In my actual account I added a short to Bank of America yesterday. Today I plan to sell a bit more of some oil stocks, even though they will be my beloved ones (ARN.v and CEN.v) to raise even more cash.