Jaguar Mining (JAG), a junior gold producer located in Brazil, has a long history of disappointing investors as management has continued to over promise and under deliver. Loyal shareholders hope that profitability is just around the corner citing undervalued assets providing a large upside. Investors were once again disappointed with 2nd quarter earnings which were released on Aug. 14, 2012. Earnings excluding special items were a net loss of $18.4 million or $0.22 per fully diluted share. Analysts on average were expecting a net loss of $0.03 resulting in the two analysts covering the stock to quickly slash their price targets from $0.70 -0.75 to $0.50. Jaguar's stock price will most likely continue to trend downward as investors fall for this value trap.
There is no question that Jaguar's assets are currently undervalued with a current market cap under $100 million. But, the same argument could have been made when the stock was trading at $7 a share with buyout interest earlier in the year. Assets have never been the problem with Jaguar; it is management who has been completely unable to create shareholder value. The new management team is attempting to turn around the company with the announcement of the first phase of the completed cost reduction plan on Aug. 9, 2012 with management announcing:
"This initial phase was comprised of the transition of the Paciência mine to care and maintenance, a targeted reduction of 40 percent in G&A expenses, significant reductions in non-direct operating expenses and a reduction in on-going capital exploration expense. Across Jaguar's operations, non-direct operating personnel have been reduced from 231 to 110. The lower headcount is expected to result in a cost savings of approximately $6.4 million annually."
These cost cuts demonstrate how management has poorly operated their company up until this point. However, analysts are not encouraged by the announcement of the cost cutting focusing more on forward production guidance.
Management now expects 2012 gold production in the range of 110,000 to 120,000 ounces. On this new volume, cash operating costs are expected to be in the range of $900 to $1,000 per ounce (based on an assumed exchange rate of R$2.0 per US$) as the planned benefits of the Restructuring and Turnaround Plan will not be fully realized until 2013. The downward revision surprised no one as these disappointments have become a trend. Looking back through the past few years, forward guidance of 2012 production clarifies why their stock has plummeted over 80% YTD.
At the end of 2010 management stated:
"The company intended to become a mid-size gold producer with sustainable production of approximately 400,000 ounces of gold per year by 2013."
Obviously, Jaguar has fallen far short of their production goals for the last few years. Growth has already peaked for this junior gold miner and will continue to decline as management cuts costs and suspends production as they did at the Paciência mine. Management summed up their poor production growth during the 2nd quarter 2012 conference call stating:
"Productivity at the Jaguar mines has declined at a compound rate of 14% per year for the past 3 years. All other things being equal, we would normally expect productivity's gains of 2% to 3% per year. So we are falling behind our competitors at the rate of nearly 20% per year."
Investors should be very cautious with Jaguar as they will continue to miss production guidance. Don't be fooled by reasoning that Jaguar could be a buyout target which burned investors earlier in the year. The amount of gold resources does not matter when management can't seem to get it out of the ground. Many companies looked into possibly acquiring Jaguar before and they all walked away after doing their due diligence. Investors should consider doing the same.