Jaguar Mining Finds Fair Weather In Brazil

SITE VISIT

Belo Horizonte, Minas Gerais, Brazil–At a time when more than one mining company is struggling to stay afloat, Jaguar Mining (JAG-T) is a bit of fresh air.

With three operating gold mines and a fourth one planned and fully permitted, Jaguar is one of the fastest growing gold producers in Brazil.

The company is confident that depending on gold prices, its mines will be producing about 500,000 oz. gold each year by 2014. In the meantime, it expects to reach an annual run rate of 200,000 oz. gold by the middle of 2009.

Those are heady goals for a company that got its start just six years ago with a staff of nine people.

(Today it has a payroll of 1,375.) But if its third-quarter results are any guide — they are not impossible.

Jaguar churned out 72% more gold (34,935 oz.) in the third quarter of 2008 than it did in the same quarter a year ago.

Revenues reached a record US$25.8 million, while gross profits climbed to US$6.9 million, up from US$2.6 million in the corresponding quarter of 2007.

One of the greatest sensitivities the company has is actually currency risk.

It was largely due to the weakness of the U. S. dollar that Jaguar’s average cash operating costs climbed in the third quarter to US$461 per oz. from US$346 per oz. in the same period a year earlier. According to Jaguar’s financial statements, the Brazilian real averaged 1.67 reais to the U. S. dollar in the third quarter.

Looking ahead, management anticipates cash costs will come in at between US$400-410 per oz. during 2009 at an average exchange rate of 2 reais to the U. S. dollar. But those costs could drop further. In mid-December, the Brazilian real was significantly lower, ranging between 2.3-2.4 to the U. S. dollar, which would drive Jaguar’s costs from the expected US$400-410 per oz. range next year down by 15-20%.

The sharks are moving in

As a small company with producing gold assets in a mining-friendly jurisdiction, Jaguar’s management could be forgiven for feeling a little nervous these days about the possibility of a hostile takeover, especially given the unfavourable pricing environment miners have found themselves in.

“From time to time, we see the sharks out on the horizon, we see their fins in the water, we know they’re always out there,” Bob Zwerneman, Jaguar’s vice-president of corporate development, said in an interview. “But the sharks aren’t on the horizon anymore, they are right near the dock.”

As a defensive move against hostile takeovers, Jaguar has put a number of defensive mechanisms in place, including a shareholders’ rights plan. The company has also signed a number of confidentiality agreements with precious metals producers and mining companies that have asked to evaluate its assets.

“Is Jaguar for sale? No! Can it be acquired? Easily. We feel very vulnerable,” Zwerneman says. “We are not shopping the company — we believe in the long-term opportunity that we offer shareholders. What we would hate to see is somebody steal that upside today.”

Certainly many analysts who cover the company believe Jaguar may be vulnerable.

Jaguar’s assets are all in Brazil’s historic mining state of Minas Gerais, an area roughly the size of France, and in a greenstone belt known as the Iron Quadrangle.

Not only does Jaguar have a good footprint in a strong geological setting, but for companies looking to acquire producing mines in Brazil, there are really only a few companies to choose from and none of the rest — AngloGold Ashanti (AU-N, AGD-L), Yamana Gold (YRI-T, AUY-N) or Kinross Gold (K-T, KGC-N), are pure gold Brazilian plays, Jaguar points out.

Brazil also has a strong mining law under which foreign companies can own 100% of their projects, and mining is embedded in the nation’s culture. Says Daniel Titcomb, Jaguar’s president and chief executive: “You’re not going to see assets being nationalized there.”

Blackmont Capital analysts Richard Gray and Michael Goldberg described Jaguar in a Nov. 7 report as an “ideal takeover candidate for its attractive growth, valuation and exploration upside.” They also have a buy on the stock and a target price of $8.25 per share.

Their views were echoed by Steven Green and Scott Parsons of TD Newcrest in a Nov. 10 research note to clients: “The assets remain valuable as fairly low-risk gold deposits in a stable jurisdiction with excellent infrastructure.” They have a buy on the stock with a 52-week target price of $7.50 per share.

At presstime, Jaguar was trading at about $4.05 per share. The company has a 52-week trading range of $2.39-14.45 per share.

Turmalina

At Jaguar’s underground Turmalina gold mine, about 140 km northwest of Belo Horizonte, the capital of Minas Gerais, a group of about twenty-five miners hold hands in prayer before the start of the afternoon shift.

On their path down the ramp and into the mine, the young men pass a statue of Saint Barbara, the patron saint of mining, enclosed behind glass on a small shelf carved out of the rock.

Saint Barbara was murdered by her father in the third century AD for converting to Christianity. Legend has it that as soon as he cut off her head, he was struck by lightning in a sudden thunderstorm.

Since then, Saint Barbara has been viewed as a protectress against fire, explosions and even tunnel collapses. She’s believed to also control lightning, and is revered by miners around the world.

So far, the miners’ silent prayers to Saint Barbara seem to have paid off. There have been no serious accidents at Turmalina since the mine was commissioned in November 2006.

Jaguar bought Turmalina from AngloGold Ashanti in 2004 for US$1.35 million and moved it into production in 2007.

“It was too small for AngloGold, but after we bought it we found more resources,” Lucio Cardoso, Jaguar’s vice-president operations, explained in an interview at his office in Belo Horizonte, an industrial city of 4 million people.

Today, the underground gold mine produces about 1,300 tonnes of ore per day and the company is embarking on a three-phase expansion program to increase capacity by about 25% to 100,000 oz. gold per year.

The first phase of the expansion is expected to be complete in the third quarter of 2009.

The goal for 2008 is to produce between 68,000 and 72,000 oz. gold, an amount Jaguar hopes will rise to 135,000 oz. gold annually in 2013.

Currently, Turmalina hosts a measured and indicated resource of 6 million tonnes with an average grade of 5.67 grams gold per tonne for contained gold of 1.1 million oz. In addition, the inferred resource totals 1.62 million tonnes grading 5.55 grams gold for 290,100 contained ounces.

But Jaguar thinks there’s much more gold to be found. All of the existing structures are open at depth. So far, four known orebodies or shoots of mineralization have been identified at Turmalina.

“These are all multiple fingers of mineralization that took different paths to the surface,” Zwerneman explains. “They may all connect at some level deeper down. . . In the Quadrangle, you have to go underground and chase the face to better understand the geometry. This stuff keeps going deeper and deeper.”

There are several instances in the district where mineralization has been identified down to beyond 2,400 metres.

Just take AngloGold as an example.

The South African mining giant started developing its deposit at Cuiaba, in the municipality of Sabara, 25 years ago. Initially, it identified mineralization down to 250- 300 metres — levels where Jaguar is mining today.

But as it chased the mineralization deeper, AngloGold discovered that it increased significantly in volume and in terms of tonnes per vertical metre. The grades also went up sharply to 13 grams per tonne from 3-4 grams, Zwerneman says. He notes that Cuiaba has been mined down to 1,000 metres and AngloGold has proven mineralization extends to 2,300 metres depth.

“It’s been going for 25 years and they’re not even halfway down to where they know the gold is and it will probably go for at least another twenty-five, if not thirty-five years,” says Adriano Nascimento, Jaguar’s vice-president of exploration and engineering. “It is also one of the lowest-cost gold mines in Brazil — by a long shot.”

A Hop, Skip And A Jump

If you drive 32 km southwest of Cuiaba, you will find Jaguar’s second gold mine, Sabara.

The open-pit mine has been producing gold since 2004 and is expected to turn out about 20,000 oz. gold this year. Its carbon-in-column plant processes 1,200 tonnes of ore per day.

Sabara’s oxide ore zone is nearing depletion and Jaguar has started mining at a higher-grade zone (Serra Paraiso), about 20 km east of the Sabara processing plant. With the addition of the Serra Paraiso zone, Sabara should produce about 22,000 oz. gold annually by 2014.

Sabara has measured and indicated resources of 1.96 million tonnes averaging 4.16 grams gold per tonne for total contained gold of about 262,580 oz. In the inferred category, Sabara contains 1.159 million tonnes grading 3.37 grams gold for 125,390 oz.

Once the oxide resources at Serra Paraiso are depleted, Jaguar will likely dismantle the Sabara processing plant and relocate it to a site near its third and newest mine, Paciencia, to process known oxide zones in the area.

Paciencia — also called Saint Isabel– is 132 km southwest of Sabara and about 50 km from Belo Horizonte. The underground mine is expected to produce between 25,000 and 30,000 oz. gold this year. When it reaches full production by the end of next year, it will be turning out 65,000-75,000 tonnes each year.

Jaguar intends to develop the mine’s gold-bearing structures and expand the existing processing plant to reach annual production of over 150,000-175,000 oz. gold by 2014.

Like Turmalina, the existing structures are open at depth, and Jaguar believes additional resources will support operations for many years beyond the current measured resource base.

Paciencia’s measured and indicated resource stands at 5.78 million tonnes grading 4.43 grams gold per tonne for 824,300 oz. gold. Inferred resources total 920,700 tonnes at 5.2 grams gold for 153,960 oz.

Caete delay ‘wise’

The financial crisis has delayed construction of Jaguar’s fourth mine, Caete, which was scheduled to begin in the third quarter of 2009. Now it is unlikely the project will get under way for another year and personnel at Caete have been temporarily reassigned to help with the expansion at Turmalina.

The fully permitted and licensed project holds measured and indicated resources of 9.34 million tonnes averaging 4.44 grams gold per tonne for a total of 1.33 million oz. In the inferred category, Caete hosts 2.99 million tonnes grading 5.6 grams gold for contained gold of 539,580 oz.

Depending on gold prices over the next few years, Jaguar expects Caete will produce about 100,000- 110,000 oz. gold in 2012.

The delay will cut Jaguar’s capex costs by 40% in the fourth quarter of this year and by 70% in 2009. Many analysts who cover the company believe it was a prudent move.

In a Nov. 11 research note to clients, Tara Hassan of MPartners in Toronto described the delay as “wise” and said it will allow Jaguar to take advantage of lower prices for equipment and building materials over the next year.

“Analysts expect a downturn of anywhere from 30-50 per cent in mining equipment prices over the next year and this, coupled with likely lower input costs for building materials in Brazil as a number of large infrastructure projects have been shelved, changes the competitive landscape dramatically,” she wrote.

The delay also means that Jaguar probably will be able to finance Caete with cash flow and a smaller debt facility, she argued, and the company will avoid shareholder dilution because it won’t likely need to return to equity markets.

“With the three operations we have today and the expansion at Turmalina, we will be at about a 200,000-ounce run rate by the middle of next year,” Zwerneman says. “There is quite sufficient cash flow in our model that lets us continue to have our debt serviced, keep all the lights on and keep saving money and put money in the bank. . . We will not issue any more equity to further that project.”

At the end of the third quarter, Jaguar had working capital of US$45 million, including US$41 million in cash, and long-term debt of $80 million, due in 2012.

“We have a bunch of cash in Brazilian banks earning 14%,” Jaguar’s Titcomb said in a conference call in November announcing the company’s third-quarter results.

“We’ve got potential under our feet and on strike,” he added. “We have history and experience to weather the storm.”