International Financial Risk And Control

Published Date: 02 Nov 2017

Company: Jaguar Mining Inc (http://www.jaguarmining.com/)

Jaguar Mining Inc is a name of the gold mining and producer in Brazil and operating in a creative greenstone belt in the state of Minas Gerais. Jaguar Mining Inc. is holding approximately 210,000 hectares of land resources for mining purposes in addition to working on Gurupi project. These significant features of the company are good indicator of its future growth and financial strength. This is a Canadian – chartered company and the common share of the company are listed on the Toronto Stock Exchange and the New York Stock Exchange under the index JAG (www.jaguarmining.com, 2013). The company’s main objective is to increase the number of shareholders by adding new mineral resources and ore reserves to its existing mineral inventory. The following assessment is structured to review the strength of the company to be involved in the activity of expanding its mining inventory.

Significant Risks:

Resource nationalism has been the most alarming threat to the mining and ore sector. Most of the governments around the world are taking maximum out of this sector in the form of introducing new requirements including certain beneficiation; export levied and limited foreign ownership (Young, 2012-2013). The gold mining sector of the day is facing different and a variety of challenges in their operations and resource management capabilities. The inclusion of handful considerations to the challenges of this industry can reduce the chances of its failure and can generate an emergent, linear and the fitter form of business (Mogotsi, 2004). Jaguar Mining Inc stated factors (Inc, 20102) including the inherent risks involved:

Operational Risks

Technical

Professional skills

Financial risks

Credit risk

Liquidity risk

Currency risk

Interest rate risk

Price risk

Stock-based compensation risk

Explain the frequency and severity of each risk.

Operational Risk

Operational risks involve technical and professional skills. The frequency and severity of the technical operation risk have been reduced by the previous projects with the adaptation of new and innovative techniques of mining. However, the inherent technical constraints of mining companies and the labour intensive mining working are consistently declining the grades of the production and therefore focusing companies to increase their level of efficiency in terms of productivity like a higher ratio of mined tonnage per mine worker and higher production volume at minimum cost (Mogotsi, 2004). The frequency and severity of technical operation risk are of high level in the business of mining. Technical incapability of a company can increase safety risks, increase lead time and the risk of production of excessive quantities of development waste. The company has access to ore bodies through 5 meter by 5 meter decline ramp, haulages, crosscuts and stop development headings. The company’s equipment has the loading and unloading capacity of thirty tones with the facility of modified bench and mining techniques.

Financial Risk:

Large capital investment and high – tech equipment are required for deep level gold mining in addition to long period of time for mining to actual production. However the financials of the company are indicating the following risks associated to its financial strength:

Credit Risk

Credit ratings published by rating agencies depict the general opinion about the credit risk of the company (Poors, 2013). A company facing credit risks because of cash detained with banks, credit exposure to customers and financial instruments with a positive fair value. The severity of credit risk faced by the company is limited to the carrying amount on the balance sheet that is because of the non- performance of the counterparts in the derivative financial instruments hence these counterparts are expected to meet their financial obligations.

Liquidity Risk

The company appeared to have liquidity risk of finding deficit of amount $21.3 million working capital as at December 31, 2012. The company still has to pay accounts payable, and accrued liabilities, current portion of notes payable, reclamation provisions, deferred compensation liabilities, income taxes payable, other provisions and other liabilities within the current operating period.

Currency Risk

The company is exposed to a medium level financial risk because of the fluctuations in foreign exchange rates that are affecting company’s net earnings (Seema Menon and K. G. Viswanathan, 2005). In this context the Brazilian reais and Canadian dollar denominates cash and cash equivalents, recoverable taxes, accounts payable and accrued liabilities, notes payable, taxes payable, reclamation and other provisions, and deferred compensation liabilities. The sensitivity and severity of the risk associated with a company because of currency fluctuations while keeping all variables constant is as follows. This table shows unsettled currency risk that describes the effect of different variables on income before tax.

Jaguar Mining Inc.

Notes to the Consolidated Financial Statements

Years ended December 31, 2012 and 2011

Exchange Rates

Change for Sensitivity Analysis

Impact of Change to 2012 Foreign Exchange Gain / Loss

Impact of Change to 2011 Foreign Exchange Gain / Loss

U.S. dollar per Brazilian reais

10% change in Brazilian reais

$1,971

$ 5, 606

U.S. dollar per Canadian dollar

10% change in Canadian dollar

56

81

Interest Rate Risk

The outstanding borrowings and short term investments are exposing the company into interest rate risk. Therefore the volume of investment activities has been reduced to $51.3 million for the year ended December 31, 2012 as compared to $110.5 million for the year ended December 31, 2011 with the primary focus of the company on underground development, equipment renovation and replacement throughout the company’s southern operations and explorations.

Price Risk

The company is facing price risk because of the inverse relation (Betts, 2005) between gold prices and gold production. For example during business 2012 the company placed hedge contracts for 7,900 ounces of gold but had no gold hedges in place as of Dec. 31, 2012.

Stock based Compensation Risk

The increase in share price increases the rate of compensation leading to increase in company’s expenses. This increase in expenses is because of the volatility of increase in share price and to the value of that specific stock based compensation programme.

3: Risk Management

Operational Risk Management

Risk related to technical equipment and mining capabilities can be reduced by operational adjustment leading to get optimize mining stability and support. Some of the root causes of company’s technical failure in projects are as follows:

Sensitivity of potentially weak planes to bending deflection

Failure mechanisms in drifts and stops

Integration of rock reinforcement and surface support in drifts and stops

Effective installation of support,

Excavation size,

Shape and orientation,

Drilling accuracy and

Blasting control

These issues can be minimized by using good scaled equipment, accurate drilling, careful breaching of walls and use of appropriate equipment at the time of installing element of support. The new operational adjustment will reduce the dilution of mines by a minimum of 25 % with 3.0 meters by 3.5 meters reduction in the size ore excavations. These risk management policies will help the company to investigate and implement the optimum size of the excavations and helping it to reduce cash expenditures and increase company’s cash flows (Froot et.al., 1993).

Financial Risk Management

The flexible capital structure will help the company to support its capital structure in context to acquisition, exploration and development of mineral properties of the company. The better capital structuring (Doherty and Neil, 2000) will help the company to increase its return on investment and to maximum return will lead to maximum return to its shareholders. The flexible structure of the capital will help the company to make capital adjustment in proportion to risk and in light of changing economic conditions and according to the risk associated with other hidden market activities in addition to manage long term debt that are weighted to market values can be used to measure the cost of financial distress of the company ( Dionne and Garand, n.d.) , new credit facilities and new equity.

By actively monitoring and controlling the cash position will help the company to manage its working capital to better implement the under progress plans. The company can continue its exploring and development activities by generating cash through its selling of mines and increasing capital ratio by taking debt and equity offerings. Similarly the risk associated with interest rate can be minimized by entering into long term investment with a fixed interest rate of 100% of its debt with interest rates ranging from 0% to 8.9% annually.

Conclusion and Recommendation

The company financial stability is not good because of the increasing liquidity risk and other financial risk. Though the company is striving to manage its capital structure by using a variety of financial investment in its production and selling side but still not be recommended to invest in any new mining opportunity. The present financing is only going to meet the current exploration and development projects.