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Executives

Roger S. Hendriksen - Vice President of Investor Relations

David Michael Petroff - Chief Executive Officer, President and Director

Thomas Douglas Willock - Chief Financial Officer

Gordon J. Babcock - Chief Operating Officer

Analysts

Fabio Zamith - CarVal Investors, LLC

Michael Hebner

Rishav Puri

Carmine Di Palo

Jaguar Mining (JAG) Q4 2012 Earnings Call March 25, 2013 10:00 AM ET

Operator

Good morning, everyone, and welcome to the Jaguar Mining Fourth Quarter 2012 Financial Results Conference Call. [Operator Instructions] Please also note that today's event is being recorded. I would now like to turn the conference call over to Mr. Roger Hendriksen. Please go ahead, sir.

Roger S. Hendriksen

Thanks, Jamie, and good morning, everyone. Thanks for taking the time to participate in our call today. We appreciate your continuing interest in Jaguar Mining. As you know, we distributed our fourth quarter and full year earnings press release and filed our year-end 2012 financial package last week, and they are available through the Investor Relations page of our website and on SEDAR and EDGAR.

We're happy to have this opportunity to discuss our 2012 results and our plans and outlook for 2013 with you, our stakeholders. The members of our management team who are participating on the call this morning are David Petroff, President and Chief Executive Officer; Doug Willock, Chief Financial Officer; and Fred Hermann, a member of our Board of Directors who is currently focused on the turnaround of our operations.

Before we begin, I need to remind you that the statements made in this presentation, which are not historical in nature, are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are based on current factual information and certain assumptions, which management currently believes to be reasonable. Financial and operational results for future periods may differ materially from current management projections as a result of factors outside the company's control. Information concerning those factors is available on the company's annual report and other periodic public filings on SEDAR and EDGAR. With those legal formalities out of the way, I'll now turn the call over to David.

David Michael Petroff

Hey, good morning, everyone, and thank you for joining the call. I'll just add the information that Gordon Babcock, our Chief Operating Officer is also here in the room, and he's going to be saying some words later. I trust that you have all seen and read our fourth quarter and full year results. And while we continue to make progress in bringing our costs down, we all understand the imperative of further improvement. I want to emphasize that our full year production was in line with our guidance, demonstrating that we are gaining traction from the operational improvements, and as well, good results have carried into the first 2 months of the year.

In our last conference call, I spoke of 3 key facts that I consider when developing the long-term strategy for the company. The key facts that I mentioned were: One, Jaguar has a solid base of 3 producing underground mines; two, Jaguar has excellent potential to increase reserves and resources at the existing operations; and three, Jaguar has a broad portfolio of quality products and resources that represent excellent growth potential. These facts remain true today. The accounting-based impairment charges on the assets of Paciência and Turmalina have no impact on the economic value of these mines. The long-term potential for these properties remains bright. Our reserves and resources are intact, and we expect to be able to mine them profitably through the continued improvement programs we are deploying.

Another key fact is that we now have competent and experienced senior management in place. Earlier this year, Gordon Babcock, our new Chief Operating Officer, moved to and now lives full-time in Belo. Likewise, Doug Willock came on board in January to take up the role of Chief Financial Officer. Jaguar Mining has a permanent management team focused 100% on achieving success. I'm very pleased with these executive additions, and I'm confident that together, we will be able to accelerate the improvements in all aspects of our company that will drive economic value. To this end, we are broadening the scope of our efforts. Currently, we have several major initiatives directed at treating our employees, suppliers and surrounding communities in a fair and respectful manner.

Now I would like to give Doug a few minutes to provide some details on the financial side of the business.

Thomas Douglas Willock

Thank you, David. All of the elements of our financial strategy that David just mentioned are beginning to come together to improve our overall financial condition. We are aggressively managing our working capital and enforcing controls on authorizations for all expenditures. Importantly, we also generated $5.4 million in cash from our operations in the fourth quarter, compared to consuming $2.6 million of third quarter. In total, we reduced cash consumption during the fourth quarter to just $6.1 million, compared to $12.0 million on the third quarter and $17.9 million in the second quarter. In short, we are getting much closer to becoming cash flow positive.

We ended 2012 with $13.9 million in cash. Subsequent to the end of the year, we took the initial draw of $5 million on the Renvest facility, as required by the terms of the agreement. The drawdown gives us further financial flexibility as we work to improve our operations and become self-sustaining from a cash flow perspective.

We are keenly aware of the need to restructure our balance sheet at some point in the next 12 to 18 months. We have had many conversations with our creditors and stakeholders, and we are pleased with the expressions of support that we're hearing. We are continuing to review and consider all available options for funding the company's operations and managing our liabilities. We believe our options and negotiating power will improve as we execute our plans and consistently meet our operational targets.

Now I'd like to turn the call over to Gordon for a discussion on our operations.

Gordon J. Babcock

Thanks, Doug, and good morning, everyone. From an operational perspective, we are very pleased to meet our first quarter and full year production targets. We're also pleased with the continuing improvement in production costs. Since we initiated our cost-reduction program in the first quarter of 2012, total average cash cost per ounce declined by more than 28%. Average cash costs per ounce at Turmalina and Caeté declined by 21% and 26%, respectively, from first quarter to fourth quarter.

As David mentioned, we are seeing further significant improvements in the first 2 months of 2013. So while we are by no means satisfied with our current cost level, it's clear that we are headed in the right direction. The keys to lowering costs thus far have been optimizing headcount within the mines, improving flexibility with additional advanced development and a focus on improved ground control to increase safety, productivity and reduced dilution. And as we become more data-driven as an organization, the goal will be to produce more ounces of gold whilst mining and processing fewer tons of ore. We have increased definition drilling to improve the availability of data upon which we base our engineering and decision-making. We are making progress towards our goal of having 12 months of production block out in front of us, but we are not there yet.

Our cycle times at Turmalina are improving following the implementation of new ground control methods and techniques. We see an opportunity for further improvements at Turmalina when we receive the new roof-bolting equipment that is critical to the effective implementation of proper roof support. The equipment is on order and should be delivered in approximately the third quarter of this year, September. Our recent results indicate that with effective management and effective implementation of the plans we've laid out, there's a lot of upside potential in our existing operations. I remain optimistic about Jaguar's future.

Now let me turn the call back over to David.

David Michael Petroff

Thanks, Gordon. Before we conclude our call this morning, I'd like to spend a few minutes to talk about our outlook for 2013. Based on our progress to date and the continuation of the transition in our operations, we have established our operating budget for the year with production in the range of 85,000 to 95,000 ounces of gold. On this volume, average cash operating cost per ounce are expected to be in the range of $950 to $1,100, and capital spending is anticipated to be about $35 million. As a management team, we are committed to meeting or exceeding these targets and our operating teams are already working very hard to make it happen.

As we begin to generate positive cash flow from operations in excess of our debt servicing and overhead costs, we will initially invest in additional equipment to increase the underground activities and production at our current operations. Only when we are operationally stable will we increase our investments to fund growth opportunities such as the restart of production at Paciência.

This concludes our planned comments. I invite you now to ask any questions you may have.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Fabio Zamith from CarVal Investors.

Fabio Zamith - CarVal Investors, LLC

My only question is regarding the cash flow from operations. You made a couple of comments that you expect that to be positive. Are you saying that for 2013? And then can you just clarify, does that include interest on debt? Because my numbers look a little bit different based on the projections.

Thomas Douglas Willock

It does not include interest on debt, to answer your question.

Fabio Zamith - CarVal Investors, LLC

So that's positive cash flow from operations for 2013 excluding interest on debt, correct?

Thomas Douglas Willock

Yes, yes. It's operational as opposed to financial.

Fabio Zamith - CarVal Investors, LLC

Okay. And then if you were to include the interest, are you still positive on your projection?

David Michael Petroff

Well, historically, we haven't been positive on our projection. We've generated cash from operating activities. We've -- by and large, we've invested a little bit more than that in capital. So before -- strictly speaking on before interest basis, we've been spending money, not collecting money. And so what we hope to do -- like if you look in the fourth quarter, you'll see that operations minus capital would be minus $1 million. We're looking forward to making that positive, and then we'll, obviously, we're looking forward to increase it so that we can be paying our debt service as well.

Fabio Zamith - CarVal Investors, LLC

Okay. And you mentioned that you're already in discussions to restructure your balance sheet, does that mean you're in conversation with the holders of the convertibles for a potential debt extension or haircuts or reduction of interest? Can you give us a little bit more guidance on those discussions?

David Michael Petroff

Sure. In September, Doug and I went to New York and had some meetings there and in Toronto and we met, for the first time, many of the convertible debenture holders. And really, it was a meet and greet kind of conversation. We didn't really put anything specific on the table. We listened to ideas. And it's sometime between now and November 1, 2014, we're going to need to have serious conversations to address those obligations.

Operator

Our next question comes from Steven Chin [ph] from Aegis [ph] Financial Corp.

Unknown Analyst

As you've noted, the cash costs per ounce have been coming down sequentially through 2012, and we exit the year at or below $915 cash cost per ounce. And then you mentioned that the first 2 months are continuing this trend. So can you help me understand why your cash cost guidance is for $950 to $1,100 per ounce? And then if you can also discuss how much in tax credits you think you can use this year on your CapEx?

David Michael Petroff

Okay, Steve, I'll take the first part of the question and ask Doug to answer the second half. I would say that, first of all, through the course of 2012, we -- with the closing of Paciência, that was a big help in reducing the cash cost per ounce. And certainly, the numbers reflect that. The other thing is -- one other thing is that we instituted these new ground control measures, and it's a little bit more costly to do that than what we've been doing in the past. And so those costs are baked into the 2013 numbers. Certainly, that hasn't been done for many of the months in 2012, but it will happen for every month in 2013. And I will say that our approach to budgeting is that we expect improvements. We know improvements will happen, but we don't budget for them until they are demonstrated and they're consistent and sustainable. And we had to -- a good start to the operations in 2013. But you have to remember that Gordon, in particular, has just been here for less than 2 months. Doug's been here for less than 2 months. So there's quite a bit of things that we are yet discovering and learning and we're being cautious about making too much of saying every 1 of the 12 is going to be as consistent. Does that answer your question on operating costs?

Unknown Analyst

It does. And then again on the tax credits for CapEx?

Thomas Douglas Willock

On part 2, the tax credits. We sold roughly $20 million last year and that's what we're targeting this year in 2013. In other words, there'll be virtually no change.

Unknown Analyst

Okay. And then how much we have left?

Thomas Douglas Willock

$60 million plus.

Unknown Analyst

Okay. And then just a final question. Do you anticipate any additional headcount reductions this year? And also, can we use the fourth quarter cost run rate for Paciência care and maintenance?

David Michael Petroff

Well, in terms of headcount reduction, I think that the lion's share of that has occurred. We are going to continue to fine tune and that may be -- that may include a few new [indiscernible] and a few new reductions. So we're going to deal with those issues as we progress through the year. With regards to Paciência, I think it's $250,000 a month, the run rate cost for the care and maintenance.

Operator

[Operator Instructions] Our next question comes from Mike Hebner from Wunderlich Securities.

Michael Hebner

First of all, I'd like to thank Roger. I think Roger's last day is going to be at the end of the month here for his IR work. And I've had a little problem reaching the new management, I know they've been busy with the audit. What do you guys going to do to reach out and do some better things on IR? And what about -- when can management step in the open market and do some insider buying?

David Michael Petroff

Well, we took over an operation that needs lots of work. And really, our primary focus is that work. When we have some good results on a consistent basis -- I mean, we've had some good results, but we have to demonstrate quarter-over-quarter that it's repeatable, I think then we're going to get out and do some marketing. But only a modest amount because there's lots to do here, there's lots of work here. In terms of insider buying, you asked. Well, most of the time we've been here, we've been blacked out for quarter end and year end. And the other thing is that we have a lot of irons in the fire that are evolving and some may become significant and some may not, and so with all that information, even though everything significant has been disclosed as required by regulation, there are things that are evolving, and so we just think it's with the benefit of prudence not to the buying at the current time.

Michael Hebner

Now when you look at operations down there, 10 being you have a lot of work to do yet and 1 being you got everything fixed, where do you see yourself?

David Michael Petroff

I wouldn't hesitate to -- I would not answer that question. There's lots to do.

Operator

[Operator Instructions] And we have an additional question from Rishav Puri from Linden.

Rishav Puri

My question was, is there any chance of not closing on the RC facility? I saw some language around how the closing has been delayed and there's some jurisdiction risk and all that, so could you speak about that a bit?

Thomas Douglas Willock

At this point, we fully intend to close on Renvest. It's just reflecting the realities of the Brazilian legal system, and it's out of an abundance of caution that we put that language in there. I can assure you, we are working flat out. And Brazil's quite an experience when it comes to legals. But we're getting there, we're making progress.

Rishav Puri

Okay, good to you. And then the other thing I want to touch on with Gurupi. Again, we've had some talks on gold before around kind of showing the value of that asset, and I just wanted to see if there -- has any progress been made or any other color you can give us?

David Michael Petroff

I would say that in terms of daylighting the value of Gurupi other than putting all our reserves in resources or together in our latest numbers, I think that there has not been significant progress in that regard. It's understanding a very complex circumstance and really defining the next steps that we need to take to move things along and acquire the mining leases.

Rishav Puri

Do you think it will have any progress in 2013? Or is it -- or is that not the focus for 2013?

David Michael Petroff

Well, the focus is turning around the operations we have. And while we start generating some cash that we can work -- apply to growth initiatives, Paciência is probably first in line, but it's possible that we may do some work on Gurupi as well. It's hard to tell at this point in time.

Operator

And we have an additional question from Carmine Di Palo from Revere Partners.

Carmine Di Palo

My question is really related to one note in the financial statement regarding the right of first refusal on the properties next to Gurupi, which were sold by Kinross and your decision not to exercise the right of first refusal. I was wondering whether that transaction has highlighted any new information about the value of Gurupi and all the mining licenses in addition to what is already disclosed publicly.

David Michael Petroff

Yes, okay. So 2 things with that particular transaction. First of all, I would say that, that our understanding of the geology in the area is that the ground that we have is very highly prospective, and the particular ground that was up for sale didn't rank very high in our list of potential, first of all. And second of all, it was a cash offer and cash is not something we have in abundance. So it was a reflection of those 2 things, where we had to not exercise our right of first refusal. Does that answer your question?

Carmine Di Palo

No, I understand that the decision was the one not to exercise the right. I was wondering whether comparatively, with the properties that Jaguar Mining has in Gurupi, there is an indication of what could be the market value of Gurupi or whether the properties are so different such that actually there is no meaning there in whatever was the price offered was for those properties.

David Michael Petroff

I think extrapolating from that single piece of ground to what we have is fraught with difficulty, and I would suggest to you that you can't really use it as a basis for value in Gurupi.

Carmine Di Palo

And the second question I had is probably on the line on the previous question. I understand that there is a lot of work to do -- and by the way, my assessment is that the work you are doing is excellent. In terms of what is the potential of the asset base without defining any time frame, but just trying to assess what is the potential on a long-term basis of the mines that are currently operating and including the Paciência, do you have an estimate or a target in terms of full potential from a production volume's point of view and from the cash cost, obviously, at current exchange rate and so on and so forth? Or you're still in the process to assess what is the full potential of the producing asset?

David Michael Petroff

Carmine, thank you very much for the compliment and identifying that what we're focusing on are the right things. With regard to the potential, I would say that we are still assessing. Generally speaking, we'd like to be fully utilizing the installed capacity of the mills with subject to appropriate downtime for prudent care maintenance. But other than that, we have no specific numbers in mind in terms of volume or cost. We're just assessing the situation and we have to get more comfortable with the operations.

Carmine Di Palo

And my last question is related to some sort of hedging on the gold price. I noticed that in the fourth quarter, you entered in some forward contracts for a portion of the production. Since it looks like the budget is based on $1,600 per ounce assumption, are you considering that to any extent protecting the downside, entering in some form of forward contracts on a portion of the production, or it's not on the table for consideration at the moment?

Thomas Douglas Willock

The hedges -- it's Doug Willock here. The hedges that we're looking at right now is try to increase production a little bit and reduce the cost a little bit, that's a natural hedge for us. In terms of trying to protect the downside, the numbers that we've looked at suggest it's not really economic for us to do that. So we're just going to ride out right now, we have no forward sales in place for gold. And our view on gold is that we've probably seen the bottom and we're closer to seeing upside, and we just want to be positioned there. Our focus will remain on the operations right now.

Operator

[Operator Instructions] And gentlemen, it appears at this time, I'm showing no additional questions. I'd like to turn the conference call over for any additional remarks.

David Michael Petroff

Okay. Well, thank you very much for joining us and listening to what we had to say and asking some very insightful questions. And we look forward to working hard and having good things to talk about at the end of the first quarter. Thank you very much.

Operator

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.

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