Jaguar Mining Inc (NYSE:JAG) – Newly Lowered Production Plan, Additional Risks

Jaguar Mining Inc. (NYSE:JAG), the Canadian-chartered gold producer with operations in Brazil and headquartered in New Hampshire, recently reported weaker earnings on lighter production and higher costs. Is this a sign of things to come? Or, just a bump in the road?

We turn to Chris Mayer, Agora Financial’s editor of Mayer’s Special Situations, for the inside scoop:

“Jaguar Mining (NYSE:JAG) is a Brazilian gold miner, and it reported earnings last week. They were not particularly good, as the company’s production was light and costs were up. In part, costs were up because of currency costs. The Brazilian real has been a strong currency and contributed to higher costs for JAG. Also, JAG reported lower grades at its Turmalina mine, which raised costs.

“A number of things going at JAG are now changing the firm’s story. JAG’s growth profile was one of the best among the smaller gold miners. Events forced a change in plans.

“As Robert Kirby, one of the old portfolio managers for Capital Group, once said: ‘There’s no such thing as a long-term plan. That’s true because most long-term plans won’t survive short-term fluctuations.’ Plans are made based on variables that are as reliable as a weather forecast, which is to say not very.

“The year 2008 was the rain that delayed the party. And JAG, like most everybody else, cut spending and reigned in its ambitions during the credit crisis. JAG originally planned to get to 700,000 ounces of production by 2014. Now it plans to get to 650,000 by 2014. But this plan includes quite a bit of risk. Mining plans are not so easy to stop and start.

“In short, I don’t think JAG will get there without some pain. For one thing, it’ll need at least $500 million over the next three to four years to get to that production number. That’s money it doesn’t have and is not likely to earn. That means we can expect a dilutive capital raise of some kind — or an abandoning of the said expansion plans.

“Management so far has been reluctant to do dilutive deals, but they will have their backs against the wall soon. They will have to tone down their aggressive expansion or do that offering.

“They’ve already idled their Sabara mine. There are probably more write-offs to come from that. JAG bought a mine from Kinross (Gurupi), which is a low-grade, but potentially big, mine. It’s also open-pit, as opposed to underground — which should help costs.

“I think you could make a good case that JAG is probably worth $12 or so per share. Maybe, if everything goes well — and it hits its production and cost targets, which it hasn’t really done in the past — it could be worth as much as $16 in the next couple of years. But I have come to doubt the story some.”

Going forward, Mayer sees significant risks associated with Jaguar Mining’s forecasts. Combining those facts with his concerns about the potential for some kind of a dilutive offering and there’s plenty of reason to lose enthusiasm for JAG.

You can read more of his opinions on Jaguar and other miners by subscribing to his Mayer’s Special Situations newsletter. The details on how to do that are at the Agora Financial research page, found here.

Also, Chris Mayer will be speaking in person at the Agora Financial Investment Symposium which is being held in Vancouver. You can follow this link for information about to attend the July event.


Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]