Jaguar Mining: Q2 2012 Buyout Decision Could Offer 80% Upside

Mar.26.12 | About: Jaguar Mining (JAGGF)

Jaguar Mining (JAG) reported full year and fourth quarter 2011 earnings on March 22, 2012 which included the latest news concerning the possible sale of the business in 2Q 2012. For those unfamiliar, Jaguar Mining is a junior gold producer located in Brazil. Their stock price has historically lagged the Junior Gold Miners ETF (NYSEARCA:GDXJ) due to a long history of problems ranging from increasing cash costs to overall unprofitably.

JAG has attractive assets but has only provided frustrating performance. The stock price reflects the overall disappointing production results but the market ignores the reported unsolicited bid of $9.30 by Shandong Gold Group. This represents a 82% upside from March 22, 2012 closing price of $5.11. The bid occurs while JAG continues an aggressive drilling program to further expand the resources at their Gurupi project with an estimated 2.5 million ounces. The Gurupi project provides additional growth and significant exploration upside to JAG's future reserves. As the Gurupi project grows so will capital costs which JAG doesn't appear capable of funding without additional capital. 2011 was another lackluster year for JAG shareholders but ended on a positive note due to the possibility of a buyout coming in 2012.

Looking at the timeline, the process has gone well with a decision expected in the 2nd quarter of 2012.

Timeline of Events

Nov 16, 2011 - It was reported that two people familiar with the situation stated Shandong Gold Group Co., owner of China's second-largest gold producer, offered to buy JAG for $785 million.

Nov 16, 2011 - JAG confirmed that, in light of the publicized unsolicited offer, the Board of Directors has determined to initiate a strategic process to explore alternatives to maximize shareholder value. At this time, none of these proposals has progressed beyond the exploratory stage. The Board has retained financial and legal advisors to assist in this regard. There is no assurance that the process will culminate in a change of control transaction.

Dec 06, 2011 - JAG states CEO Daniel Titcomb will be leaving his role as President and Chief Executive Officer of the Company effective Dec 06, 2011. On an interim basis, the Chairman of the Board of Directors, Gary E. German, together with two other JAG directors, Gil Clausen and John Andrews, will form a newly-created Office of the Chairman to fulfill the duties of the Chief Executive Officer. These directors also constitute a Special Committee of the Board charged with oversight of the Company's strategic process announced in November.

Dec 07, 2011 - John Bridges, JP Morgan analyst, states "We know the two directors, Messrs, Clausen and Andrews, who have been co-opted into this process and feel that they have the experience and the knowledge to make the right decisions for stakeholders in the company."

Dec 15, 2011 - JAG retains JP Morgan Securities LLC as its financial advisor and Davies Ward Phillips & Vineberg LLP as legal counsel to assist the Board and the Special Committee. Over the past several weeks, through JP Morgan, the Company has solicited interest regarding a potential change of control or merger transaction with the Company.

Jan 11, 2012 - JAG provides an update concerning the direction of the Special Committee. JP Morgan Securities LLC has held various discussions with potentially interested parties to solicit their interest regarding a potential change of control or merger transaction with the Company. As a result of such discussions, several parties have been identified and have executed confidentiality agreements. These parties have access to due diligence materials and are continuing to conduct their evaluations of the Company.

Jan 31, 2012 - In early January, JAG received the installation license which authorizes the construction of the processing plant for the Gurupi open pit mine project in the Northern Brazilian state of Maranhão. Approximately 80 percent of the assays from phase one have been received with the remaining 20 percent expected to be completed in February 2012. The results to date confirm the potential to significantly increase gold indicated mineral resources at the project's Cipoeiro and Chega Tudo deposits, currently estimated at 69,887,500 tonnes at 1.12 grams per tonne totaling 2.5 million ounces.

Feb 16, 2012 - JAG updates Gurupi drill results including 53 meters of 4.22 g/t gold. While the company has focused recent drilling and exploration on the Chega Tudo and Cipoeiro ore bodies, the 100 percent JAG owned extensive Gurupi concession includes 12 additional, identified targets within the region (map below). These additional targets have not been included in any of the Company's resource estimates or feasibility studies related to the Gurupi project. They have been identified by favorable geology, structures, old artisan mine works, soil and channel sampling anomalies and exploration drilling as high potential. They include additional areas they will target to further increase indicated resources.

Mar 21, 2012 - JAG reported an adjusted net loss of $8.8 million or $0.10 per fully diluted share for the quarter ended December 31, 2011. Jaguar's fourth quarter result was a net loss of $33.7 million or $0.40 per fully diluted share.

A full re-evaluation of the Gurupi resource at the Cipoeiro and Chega Tudo ore bodies is expected to be completed in April 2012.

The strategic review process initiated by the Board of Directors and led by the Special Committee is active and continuing. Diligence investigations are ongoing and the Special Committee expects to complete the Strategic Review Process in the second quarter. "The Special Committee continues to advance the process and work with its advisors, interested parties and their representatives to maximize value for JAG shareholders. The Special Committee believes that important progress has been achieved in advancing this process," Mr. German said.


JAG continues to be unable to control costs and management understands the company must be sold. JAG verified that an unsolicited offer took place. Then the long time CEO departs after many years of being unable to make Jaguar into a mid-tier gold producer. On December 7, 2011, JP Morgan analyst praises new management stating, "They feel that they have the experience and the knowledge to make the right decisions for stakeholders in the company." Eight days later, JAG hires JP Morgan Securities LLC to be their financial advisor for the potential sale. In January, management states there are several parties that have been identified and have executed confidentiality agreements and inspecting the company. By the end of January, they announce they have obtained the installation license which authorizes the construction of the processing plant for the Gurupi open pit mine.

The 2011 results disappoint and management identifies more potential resources at the Gurupi mine with a re-evaluation of resources due out in April and a completion of the Strategic Review to follow within the quarter.

Management knows that they must accept an offer. The long time CEO was replaced suddenly when an offer was on the table. The strategic review process seems to be developing as management has planned. This is a very attractive short term investment which should return +80% in the coming months.

Disclosure: I am long JAG.