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Jaguar Mining (JAG) is a relatively small gold producer with three operating mines in Brazil, one of which was put on care and maintenance in May 2012 as part of an effort to reduce costs.

The company reported its third quarter results on November 12 and although it seems that the company's efforts to reduce costs have been successful on a quarter-over-quarter basis, the company failed to do the same on a longer-term basis.

Operating Cash Costs per Ounce:

As the table above indicates, average cash operating costs in the third quarter increased 9 percent to $963 from $886 per ounce in the same period last year. The increase in costs was prevalent in both of the company's operating mines as the Paciência operation was put on care and maintenance. The increase in operating costs stems primarily from two factors: grade and production.

At the Trumalina operation, head grades declined about 13 percent to 2.7 grams per tone which in turn helped to increase operating costs by 9 percent. Grades at the Caeté operation remained unchanged at 3.24 grams per tone. Overall, average head grade remained unchanged as the company ceased operations at the Paciência mine, which was a lower grade operation compared to the two other mines, thereby stabilizing the average grade on a year-over-year basis.

Head Grade (g/t):

The decline in production was also a factor in the increase of operating costs. At the Turmalina operation production declined by 43 percent, while Caeté also suffered a 13 percent decline. The declines pushed the cost per ounce higher as fixed costs were now spread over fewer ounces when compared to Q3-2011.

Gold Ounce Production (in thousands):

In general, total production fell to 23,026 ounces in the third quarter, a 43 percent decline over the same period last year. A material portion of the decline, or about 21 percent, can be attributed to the company's ongoing cost saving program which put the Paciência mine on care and maintenance.

The drop in production impacted the top-line materially. Revenues for the quarter amounted to $38.4M, a 45 percent drop from $70M in Q3-2011. In addition, the combination of a slightly lower gold price and rising operating costs squeezed margins to $685 per ounce, a decline of 15 percent from $806 in the same period last year.

Investors can clearly find better opportunities elsewhere as more clarity is needed with regards to the company's operations. Although the company did manage to reduce costs on a quarter-over-quarter basis by 17 percent, costs on a year-over-year basis continue to rise, while production continues to fall. This is a lethal combination as the company's balance sheet is not exactly pristine. Therefore, Investors should remain out of the stock until it is apparent that the company can continue to cut costs on a sustainable basis.

Source: Jaguar Mining Production Down 43%, Revenue Down 45%, Costs Up 9%