Stockhouse Short Report: Jaguar investors told to be wary

After missing production targets in Brazil and seeing its stock price collapse, Jaguar Mining has upset key shareholders who are demanding change at the board level.

As it works to try and restore shareholder confidence, Jaguar Mining Inc. (TSX: T.JAG, Stock Forum) (NYSE: JAG, Stock Forum) was hit with yet another setback late last week when a Texas investment firm told the Seeking Alpha financial website that it may initiate a short position in the Brazilian gold producer.

Harrison Jaynes Capital Inc. said the move is based on its view that Jaguar’s stock price will continue to trend downwards after collapsing to 61 cents last month from over $7 at the beginning of 2012.

Trading at 98 cents this week, Jaguar is left with a market cap of $82.7 million, based on 84.4 million shares outstanding. The 52-week range is $8.36 and 61 cents.

Based in Concord, New Hampshire and holding three gold mines in the state of Minas Gerais in southeastern Brazil, Jaguar is in a state of limbo right now.

Having made a habit of missing production targets in recent years, Jaguar recently upset one of its key U.S. shareholders – Bristol Investment Partners LLC -- by failing to disclose that it had received a change of control proposal worth US$9.30 a share from Shandong Gold Group, a Chinese gold mining company.

“When the press reports disclosed the bid on the morning of November 16, 2011, the bid price represented a 73% premium to the US$5.39 closing price of Jaguar common shares on November 15, 2011,’’ Bristol said in a June 13, 2012 letter to the Jaguar board.

In that letter, Bristol said it was upset that Jaguar had not formed a special committee to conduct a strategic review until after news of the bid was leaked in the press.

Jaguar fired back on June 15, 2012, calling Bristol Investment Partners’ statements “erroneous and misleading,” and saying it wanted to set the record straight.

“Jaguar remains convinced that the proposed transaction with Shandong would never have been consummated,’’ the company said.

Still, Bristol went on to say in its letter that it would not support the re-election of the Jaguar’s three lead directors, including interim chief executive officer John Andrews, at the company’s June 29, 2012 annual meeting. The three have responded by offering to resign.

However, as Jaguar Chairman Richard Falconer has 90 days (from the date of the annual meeting) to announce whether or not those resignations will be accepted, the company remains in a state of flux.

“It is difficult to predict what the future holds,” said Anna Povinelli, the chief compliance officer at Bristol Investment Partners, which holds a 7% stake in Jaguar.

“Not much has changed and change is required,’’ Povinelli said during a telephone interview with Stockhouse.

But even after such a steep decline in the value of the shares, Harrison Jaynes told Seeking Alpha that investors should continue to be wary.

On August 14, Jaguar posted a net loss of $16.4 million or 19 cents per fully diluted for the second quarter ended June 30, 2012. That compares to a net profit of $15.6 million or 18 cents in the second quarter of 2011.

Gold sales in the quarter plunged to $46.5 million from $60.5 million a year earlier.

In a conference call with investors to discuss the company’s second quarter results, interim CEO John Andrews said a poor safety record and hazardous working conditions had negatively impacted productivity and profitability at the Brazilian operations. Those operations include the Turmalina, Caete and Paciencia mines.

“The close relative of a safe working environment is good housekeeping,’’ said Andrews, who pledged to improve mine safety and working conditions. He said the company is beginning to see some positive results from its cost reduction program.

After placing the Paciencia mine on care and maintenance and chopping 543 jobs, the company expects to achieve cost savings of $6.4 million as a result of a lower head count.

Gold production this year is expected to be in the range of 110,000 to 120,000 ounces

For its part, Harrison Jaynes said it remains unconvinced that Jaguar is a turnaround story in the making.

“Many companies looked into the possibility of acquiring Jaguar before they all walked away after doing their due diligence,’’ the investment firm told Seeking Alpha. “Investors should consider doing the same.’’