Will Pilot Error Fly Jaguar Mining Into The Ground?
Full Disclosure: Author is Long Jaguar Mining
Pilot error, left undetected or uncorrected, overrides all precautions and systems, and drives even an otherwise functioning plane straight into the ground. In the corporate world, an inept CEO and Board of Directors can do the same.
Have Chairman Gary German’s hands on the controls killed Jaguar Mining(NYSE: JAG) Company shareholder value?
If not his hands and actions, then how to explain the following sequence of events?
Over the last six months, these events transpired:
1. November 16, 2011: JAG Investor Relations released this information: "Jaguar Mining Inc., in response to news articles today regarding an unsolicited offer to buy the company, acknowledges that is has received proposals over the past few weeks."
On that day sources close to Reuters reported that China Shandong Gold Corp had offered $9.30 to acquire the company. That price was a 72% premium from the close of the day previous to this announcement. The stock rose over $8.00 a share on the news. JAG's response to this news continued to say, "The Company 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 culiminate in a change of control transaction."
(At this point, there was no poison pill in place. In October, following the report of dismal 3rd quarter earnings, the stock price had dropped to the low $4.00 range, and it appears that not long after Shandong Gold’s interest was piqued. )
2. December 6, 2011: CEO Daniel Titcomb resigns. Following this event the stock dropped from 7.24 to the 6.55 level.
3. December 15, 2011: Jaguar provides an update on the strategic review process, stating that, "The Board has appointed a Special Committee comprised solely of independent directors to review and evaluate any proposals received as part of the strategic review process and to assess whether any such proposal may be more desirable than the continued operation of the Company on a stand-alone basis, and to make re commendations to the Board thereon. The Special Committee is chaired by Gil Clausen and is comprised of Mr. Clausen, Gary German and John Andrews. The Company has retained JP Morgan Securities LLC as its financial advisor and Davies Ward Philips & Vineberg LLP as legal counsel to assist the Board and the Special Committee."
4. January 11, 2012: Jaguar releases this statement, "At 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."
5. February 13, 2012: Chairman German states with regard to the strategic review process that it is, “Going along very smoothly. We are not disappointed with the way it has been proceeding.” At that time, the stock was trading in the range of $6.50, well below the $9.30 offer price. Following this update, the stock began to tumble.
6. March 21, 2012: Jaguar reports dramatic and unexpected 4th quarter earnings loss of 10 cents a share, and, even more alarming, a cash operating cost of $1,114.00 per ounce of gold. Also Jaguar took a hit on its balance sheet as their cash on hand was reduced to 74.5 million, down from 101.7 million in the 3rd quarter.
The Company currently has roughly 300 million of debt and will have to add to that debt in order to finance its Gurupi Project. However, the real surprise in this report was that the Board of Directors announced a Rights Plan, which is "intended to protect Shareholders and Shareholder value."
Mr. German also said, "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 Jaguar shareholders. The Special Committee believes that important progress has been achieved in advancing this process."
(Note that for the second time in a row Jaguar reported disappointing earnings, but this time, unlike following the 3rd quarter, Chairman German and the Board enacted a Poison Pill to protect themselves. I believe the reason for this was they were concerned that they were vulnerable to a hostile takeover. The previous poor earnings report had brought Shandong Gold’s $9.30 offer; this time the Board didn't want to be unprotected from an aggressive buyer, hence the Poison Pill.)
What conclusions should be drawn, then, aboutGary German the pilot and Jaguar’s BOD as co- pilots? Will their flying skills deliver strong shareholder value to Jaguar investors?
As of today’s close, it appears that shareholder value rapidly approaches a defining moment. Is there recovery and ultimate success ahead, or are we witnessing the beginnings of a bone crushing death spiral?
The truth is Jaguar stock traded well over $8 a share with the news of a proposed 9.30 offer last November, and today, April 19, 2012, the stock closed at $3.07.
To be sure, even the best pilot encounters headwinds and turbulence. Crucial, then, are his support staff's "skills" at managing fears and expectations. Do they know how to calm nerves and reassure nervous investors? Has this Strategic Review process gone smoothly or are shareholders unhappy with how things are proceeding Passenger revolt can be as dangerous as the original turbulence.
And what is the real story about the poison pill?
We acknowledge that Jaguar Mining continues their relative sequestration in their Strategic Review, with the stated ultimate goal of maximizing shareholder value. So, to be fair, we must wait to see what the final review says. However, if Jaguar believes going it alone with their balance sheet is the best way to enhance shareholder value, rather than selling the Company, then I believe it’s time for Mr. German and the entire BOD to step down.
Once a company goes public, then management's fiduciary duty is to the shareholders. Mr. German and the BOD would have a tough time arguing they are promoting that agenda with the stock trading at 3.07 when a 9.30 offer was discussed.
Until further and final word from Jaguar’s team of pilots, then, shareholders should return to their seats and hang on for a bumpy ride. The Pilot clearly has trouble flying the plane even in perfect weather.
Full Disclosure: Long Jag
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