For every disappointment in life, and in the stock market, there is a lesson to be learned. In Jaguar Mining’s (JAG:TSX) case, that lesson cost about a billion dollars.
Recently the list of write-downs and losses in the mining industry has been endless, and this article is more about timing and not getting caught up in the ‘mania mindset’ than it is about Jaguar Mining.
In mining there are always some decisions within the control of management and investors that they wish they could take back. Emotions tend to move front-and-center during a mania and decisions that seem like no brainer’s, only a few years removed from the hysteria, often prove to be the most difficult.
In 2011, gold mining producers flourished as takeovers were abundant; gold’s price had risen almost 10 years in a row and its legend as a store of value was becoming infallible. Shawn Ryan was making headlines in the Yukon as the White Gold District excited Canadians and TSX Venture investors from coast to coast. South America had yet to deliver some of its more prolific political meltdowns, such as Kinross’ Fruta del Norte, while China was leading the world in buyouts of energy and gold companies.
BMO estimated at the time that global gold companies would accumulate net cash of $120 billion by 2015 if gold prices remain elevated. To say the future looked bright for advanced gold mining companies would have been an understatement.
In November of 2011, just a few short months after gold hit an all-time high of over $1900 an ounce, Chinese state-owned Shandong Gold Group came knocking on Jaguar’s door. Jaguar Mining (JAG:TSX) received a $1 billion takeover bid from the Chinese entity and although large, it represented just another takeover in a sector commanding huge premiums and respect.
Gold Alert wrote
“Jaguar Mining (JAG) received a $1 billion takeover bid from Chinese state-owned Shandong Gold Group Co. on Wednesday, marking the latest deal in a growing trend of merger and acquisition activity in the gold sector.”
The Wall Street Journal reported that the $9.30 per share offer valued Jaguar at $1 billion. It represented a 72.5% premium to the previous day’s closing price of $5.39. Immediately Jaguar traded up as high as $8 per share, but never anywhere near the $9.30 offered by the state-owned company. Many have argued this was the first sign that something wasn’t right or that Jaguar would have to jump through a few hoops to complete the deal.
Shortly after the offer, Jaguar Mining released a news release stating 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.”
While the proposed takeover may have been a long way from a concrete offer, it serves a purpose in this example of a market in a ‘mania phase’.
Read the entire Press Release HERE
While the offer shocked many, no one was prepared for what would happen over the ensuing 2 years as Jaguar would lose more than 95% of its value. No doubt there were investors that would have gladly taken the $9.30 per share and ran. However, at the time, passing on such an offer was not out of the ordinary as rumours that Kinross or other majors were interested and may join the bidding table at any moment abounded. This is a classic mania effect – the idea that there is always another buyer, always someone willing to pay more.
J.P. Morgan equity research analyst John Bridges wrote in a note to clients just a few days after the offer that “We believe if JAG delivers on its operation and growth promises in the future, there is value in the stock, and the offer price is justified.”
At the time of the offer Bridges had a neutral rating on the stock and a $5 price target. He added that, “Our Dec-12 target price for the company is $5 based on a conservative NPV methodology after operational disappointments. If we apply our standard Black Scholes valuation methodology to JAG, the value is $11 to $12.per share.”
Notice the key words, “if JAG delivers on its operation and growth promises in the future.”
‘If’ and ‘future’ are two of the most speculative words that can be spoken in the mining industry.
Jaguar produced 40,660 ounces in the third quarter of 2011 and according to an October 18th 2011 statement raised its full-year throughput guidance to about 155,000 to 163,000 ounces. Although Jaguar would have to marginally increase its production moving forward, 155,000-163,000 seemed reasonable.
On October 18th 2011, just weeks before the takeover bid was announced, Jaguar’s President and CEO at the time, Daniel Titcomb commented, “We are disappointed to have to make the adjustments to our guidance. We believe our production targets of over 200,000 ounces annually from our three current operations are achievable in the near future, but we are clearly not there yet with the continuing mill issues at Paciência.”
Read that entire Press Release HERE
As the months went by and the share price began to stumble, investors began to realize the chances of a bidding war or a new buyer emerging was unlikely.
Adding to the downward pressure were less than stellar production numbers that continued to miss estimates. Jaguar began running into operational difficulties and by July of 2012, directors were vacating the board as key executives began to step down. By then gold had come way off its highs from September 2011.
On November 18th 2011, Jaguar hit an intra-day high of $8 per share. It has since lost roughly 96.25% of its value.
Jaguar Mining – 3 Year Chart
Turning the Page
On September 12th 2012, Jaguar Mining announced that David M. Petroff has been appointed as the new President and Chief Executive Officer of the Company and has joined the Board of Directors effective immediately.
Dick Falconer, Chairman of the Board of Directors commented that,
“This is an important time in Jaguar’s history as the Company implements its turnaround plan. David’s wealth of mining and finance experience, together with his proven track record of successful mining company turnarounds makes him uniquely qualified to lead Jaguar.”
On September 12th, Jaguar closed at $1.33 per share. Since then the company has lost 77.4% of its value after closing at $0.30 today.
Jaguar Mining – 1 Year Chart
On June 27th 2013, Jaguar announced that it had finalized the drawdown of the remaining $25 million on its previously announced $30 million standby credit facility (the “Facility”) with Renvest Mercantile Bancorp Inc. (“Renvest”) through its Global Resource Fund (the “Lender”).
After hitting a 52 week low of $0.24, Jaguar closed at $0.30 per share on August 20th, giving it a market cap of $25.9 million.
While many metaphors can be applied to Jaguar Mining stock’s ill-fated journey over the past few years, it should serve as a warning to those wishing to capitalize on the next mania. When you find yourself believing someone will always pay more and that gold, or any other asset for that matter, will continue rising indefinitely for the foreseeable future, be sure to remind yourself of Jaguar and the $1 billion dollar deal that wasn’t to be.
As a final reminder: Should gold go on to rebound to new all-time highs, Jaguar’s story and everything it represents should not be lost on the investor and management of companies in the mining sector. While we don’t pretend to know all the details of what happened with Jaguar Mining, the lessons learnt from this particular gold miner are vast.
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