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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 recently released its fourth quarter and 2012 annual production results on January 17 and production continues to decline. In addition to declining 35 percent on a quarter-over-quarter basis, fourth quarter production declined 5.9 percent from 23,026 ounces in Q3-2012 to 21,676 ounces in Q4-2012. On a full year basis production declines are as pronounced as annual gold production dropped 34 percent from 155,764 ounces in 2011 to 102,823 ounces in 2012.

Mine

Q4-2012

Q3-2012

Change

Turmalina

8,206

9,186

-10.7%

Paciancia

0

0

0.0%

Caete

13,470

13,840

-2.7%

Total

21,676

23,026

-5.9%

Although a large portion of the declines can be attributed to the company's ongoing cost saving program, which put the Paciancia mine on care and maintenance, continued declines in the Turmalina operation should be concerning. As the company produces fewer ounces, the fixed costs incurred by Jaguar are spread over a shrinking production base and thereby increasing the cost per ounce produced. The increase in cost per ounce will continue to cast a shadow over the company as a risky high cost producer and will compel potential investors to reconsider for a lower cost gold producer.

Production declines are not the only challenges the company is facing. On December 3, 2012 the company announced that it has received a notice from the New York Stock Exchange (NYSE), informing the company that it has fallen below the NYSE listing standard relating to the price of its shares. Under NYSE rules, Jaguar has 6 months to get its 30 trading-day average price above $1.00 a share or risk being delisted from the exchange. A delisting from a major exchange has a major psychological impact on retail investors and if realized, the company's shares could suffer a significant depreciation to factor the risk of illiquidity.

Looking forward, a material writedown could be undertaken by the company. As mentioned earlier, the company put its Paciancia operation on care and maintenance to reduce costs. This essentially means that the operation is not profitable at current gold prices and could mean that the company is carrying the asset on its books at more than it actually is worth. If that happens to be the case, in the future the company will have to writedown the value of Paciancia on its balance sheet and take an equivalent loss on its income statement.

Given that the production base is shrinking and costs are rising, it is prudent to remain on the sidelines for the time being. It is uncertain if management can turn the company around and the risk of being delisted from the NYSE poses a substantial risk to the company's share value. Lastly, the possibility of a future writedown of Paciancia is just one more reason to be weary of the stock.

Source: Jaguar Mining's Production Update Is Not Encouraging