jaguar mining_rbc capital_11 august 2011

8/12/2019 Jaguar Mining_RBC Capital_11 August 2011

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COMPANY UPDATE | COMMENTAUGUST 11, 2011

Jaguar Mining Inc. (TSX: JAG; NYSE: JAG)

Q2 Results - Still Work Left To Do On OperatingTurnaround

Sector PerformAbove Average RiskPrice: 5.39

Shares O/S (MM): 84.4Dividend: 0.00ROE: 5.6%Float (MM): 84.4Debt to Cap: 45%

Price Target: 5.75Implied All-In Return: 7%Market Cap (MM): 455Yield: 0.0%Tr. 12 ROE: NMAvg. Daily Volume (MM): 1.89

Strategic Ownership:Priced as of market close ET, August 11, 2011.

Event

Jaguar reported headline EPS of $0.18 for Q2/11.

Investment Highlights

Financial Results Backing out non-cash and extraordinary items, we calculatoperating EPS was $0.07, a bit better than our $0.05 estimate and consensus of$0.06. CFPS of $0.16 was weaker than our $0.18 estimate and consensus of$0.20.

Operating Results Jaguar pre-released production and cost data for Q2 inmid-July: 40Koz of gold at cash costs of $799/oz (see Exhibit 2 on p. 2).Production was lower than our 46Koz estimate, and cash costs were significantlhigher than our estimate at all three Brazilian underground gold mines.

Financial Position Constrained Jaguar had $112 million of working capital(including $125MM in cash) and $265 million of convertible debt outstanding(2014 and 2016 maturities). Assuming Jaguar is able to secure project debt of$125-$150 million for the Gurupi open pit mine, our modeling suggests thatcurrent cash balances and operating cash flows would be sufficient to fundconstruction of JAG's fourth gold mine in Brazil.

Operating Outlook Management believes it can still meet the lower end ofprevious guidance (195205Koz of gold). We are not as optimistic, and maintaia forecast below company guidance (177Koz, down from 180Koz previously).We have also increased our 2011 total cash cost estimate from $737 to $766/oz.

Investment Thesis UnchangedLooking to forward EPS and CFPS multiples, JAG shares seem to be veryattractive versus other Tier III producers. However, Q2 operating results did nothelp us garner greater confidence that the company will achieve theimprovements we have forecast for both increased gold output and loweroperating costs. As a result, we maintain our view that below average CF-basedtrading multiples are likely to persist until investors (and analysts) have greaterconfidence in future year operating and financial estimates.

Priced as of prior trading day's market close, EST (unless otherwise noted).

125 WEEKS 27MAR09 - 11AUG11

4.00

6.00

8.00

10.00

12.00

14.00

MA M J J A S O N2009

D J F M A M J J A S O N2010

D J F M A M J J A2011

HI-15JAN10 14.18

HI/LO DIFF -71.93%

CLOSE 5.39

LO-13MAY11 3.98

1500

3000

4500

6000

7500

PEAK VOL. 8993.7

VOLUME 1269.9

60.00

90.00

120.00

Rel. S&P/TSX COMPOSITE INDEX HI-08JAN10 139.82HI/LO DIFF -72.96%

C LOSE 5 2. 51

LO-13MAY11 37.81

RBC Dominion Securities Inc.

Michael D. Curran, CFA (Analyst)(416) 842-3770; [email protected]

FY Dec 2010A 2011E 2012E 2013E

CFPS - Basic 0.22 0.69 1.30 1.74

Prev. 0.68

P/CFPS 25.9x 8.2x 4.4x 3.3x

EPS (Op) - Basic (0.19) 0.21 0.63 0.86

P/E NM 27.1x 9.0x 6.6x

Revenue (MM) 170.8 264.2 338.0 423.8

Prev. 252.4

CFPS - Basic Q1 Q2 Q3 Q4

2010 0.08A 0.06A 0.06A 0.05A

2011 0.12A 0.16A 0.19E 0.19E

Prev. 0.18EEPS (Op) - Basic

2010 (0.01)A 0.00A (0.08)A (0.09)A2011 0.01A 0.07A 0.06E 0.07E

Prev. 0.05E 0.07E

All market data in CAD; all financial data in USD.

For Required Conflicts Disclosures, see Page 8.


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Investment Thesis Growth Potential Is Immaterial Until Existing Mines Operate Better

Jaguar Mining is a Tier III gold producer focused on Brazil, one of our favorite jurisdictions globally, for the combination ofabove average geological potential and well established mining-friendly government/infrastructure. In our view, investorinterest in Jaguars growing producer story has lost momentum with the poor operating results reported in 2010.We believe

turnaround prospects remain several quarters out, as all three existing mines continue to perform well below planned

output levels.

Jaguar shares are currently trading at a P/NAV multiple of 1.18x, a slight premium to the Tier III producer average of 0.93x.For Jaguar, we employ 1.25x NAV and 7.5x forward P/CF target multiples, which are within the target ranges we employ forthe Tier III gold producers (0.75-1.5x P/NAV and 7.5-15x forward P/CF). These discounted target multiples reflect the recentoperating results of the companys existing mines, our view that execution risk remains for the existing mines to perform betterin the short-term, and market concerns that management can deliver production growth to become a Tier II producer longer-term.

Exhibit 1: Q2/11 Results: Jaguar Mining

Q2/11 Actual Versus

RBCCM Our Est. Last Yr. Last Qtr.

Q2/10A Q1/11A Q2/11E Q2/11A Q2/11E Q2/10A Q1/11A

Revenue 36.9 55.1 60.6 60.6 0% 64% 10%

Direct Mining Expenses 25.7 33.1 32.1 36.8 15% 43% 11%

Gross Operating Income 11.2 22.1 28.5 23.7 -17% 112% 8%

Depreciation 8.9 11.1 10.5 10.8 3% 22% -2%

Exploration 1.2 0.3 1.5 0.7 -52% -40% 115%

G&A 4.8 5.3 5.0 5.4 8% 13% 3%

Interest Expense 3.1 4.2 3.5 4.2 20% 36% 0%

EBT (7.2) 0.8 7.6 2.2 - - -

Total Taxes 0.6 0.3 0.3 0.3 0% -50% 0%

Foreign Exchange Loss (Gain) 1.0 (3.1) 0.0 (6.5) - - -

Stock-based compensation 1.5 (2.7) 1.0 (0.4) - - -

Derivative loss/(gain) (0.1) 1.1 0.0 (9.3) - - -

Other (4.0) 0.8 0.5 0.6 - - -

Net Income - reported (5.9) 3.7 3.1 15.6 399% - 320%

EPS - reported ($0.07) $0.04 $0.04 $0.18 - - -

Net Income - operating (1.1) (0.1) 5.7 5.7 - - -

EPS - operating ($0.01) $0.00 $0.05 $0.07 47% - -

Cash Flow 4.7 9.8 15.1 13.7 - - -

CFPS $0.06 $0.12 $0.18 $0.16 -9% 171% 40%

Shares Outstanding 84.1 84.4 85.0 84.4 -1% 0% 0%

Gold Production (oz) 30,613 41,449 46,000 40,257 -12% 32% -3%

Gold Sales (oz) 30,646 39,794 40,257 40,184 0% 31% 1%

Cash Costs (US$/oz) 746 727 704 799 13% 7% 10%

Source: Company Reports and RBC Capital Markets estimates

Jaguar Mining IncAugust 11, 2011


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Exhibit 2: Mine-by-Mine Operating Results

RBCCM

Q1/11 Q2/11 Q2/11

Actual Estimate Actual Difference

Gold Production (000oz)

Turmalina (Brazil) 16 17 15 -2

Paciencia (Brazil) 12 15 13 -2Caete (Brazil) 13 15 13 -2

Total 41 46 40 -6

Total Cash Costs (US$/oz)

Turmalina (Brazil) 755 755 800 6%

Paciencia (Brazil) 555 580 637 10%

Caete (Brazil) 850 775 961 24%

Total 727 704 799 13%

Source: Company Reports and RBC Capital Markets estimates

Valuation MethodologyOur favored valuation method for precious metals producers is a price-to-net-asset-value (P/NAV) multiple based on adiscounted cash flow (DCF) model constructed using our estimates of the parameters of existing or potential mining operations.Our gold price forecast is $1,400/oz for 2011 and 2012, $1,300/oz for 2013, $1,200/oz for 2014 and $1,000/oz long-term.Future year cash flows are then discounted using a base rate of 5%, to which a risk premiumis added, depending on thecurrency and/or political risk which we consider the companys operating assets to be most exposed to. We do not have separaterisk adjustment for each individual country in the world, instead classifying our risk premiums as 2% (most of the Americas,Australia), 5.0% (South Africa, Eastern Europe, etc.), or 7% (FSU).

Exhibit 3: Net Asset Value (NAV) Breakdown: Jaguar Mining

Discount Rate Ownership Value Per Share (C$/sh)

C$MM 2011E 2012E 2013E

Turmalina (Brazil) 7.0% 100% $53 $0.52 $0.38 $0.23

Caete (Brazil) 7.0% 100% $173 $1.71 $1.82 $1.52

Paciencia (Brazil) 7.0% 100% $99 $0.97 $0.79 $0.60

Gurupi (Brazil) 7.0% 100% $291 $2.88 $2.84 $3.61

Exploration potential $15 $0.15 $0.15 $0.15

OPERATING ASSETS $631 $6.23 $5.99 $6.12

Working Capital $112 $1.11 $0.98 $1.32

Corporate G&A (after tax) ($92) ($105) ($1.04) ($0.89)

Reclamation $0 $0.00 $0.00 $0.00

Hedge book $0 $0.00 $0.00 $0.00

LT Debt ($165) ($1.71) ($1.71) ($1.71)

CORPORATE ASSETS ($158) ($1.65) ($1.62) ($1.21)

NET ASSET VALUE $472 $4.58 $4.37 $4.91

Source: RBC Capital Markets Inc. estimates

In Exhibit 3, we provide forward-looking NAV/sh estimates to show whether the companys NAV is expected to decline orgrow over the next few years. Employing our 1.25x target P/NAV multiple on our NAV estimate for Jaguar suggests a fairvalue of $6/sh. We arrive at a lower value for Jaguar using a forward-looking P/CF multiple analysis. Employing a 7.5x P/CFmultiple on our 2011 CF estimate, generates a fair value of $5.50/sh. The 7.5x forward P/CF multiple used for Jaguar is at thelower end of our target range for the Tier III golds (7.5-15x), reflecting the continuing execution risk for the mines to perform

better and achieve our cash flow estimates.



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Using the valuation methods described above, we maintain our 12-month target price of $5.75 per Jaguar share, suggesting to usthat JAG shares are sli ghtly undervaluedat the current time, but we maintain our Sector Perform ratinguntil we see bettervisibility of a successful operating turnaround.

Exhibit 4: P/NAV and P/CF Multiples: Tier III Golds

0.0x

0.5x

1.0x

1.5x

2.0x

Claude

R

esources

Lake

Shore

MineraIRL

DundeePrecious

M

etals

TierIII

Avg

Alamos

AlliedNevada

Jaguar

G

reatBasin

TierII

Avg

P/NAV(x

0.0x

5.0x

10.0x

15.0x

20.0x

Jaguar

Claude

Resources

G

reatBasin

DundeePrecious

M

etals

TierIII

Avg

TierII

Avg

Alamos

AlliedNevada

Lake

Shore

P/2012ECF(x)

Source: RBC Capital Markets

Exhibit 5: Actual/forecast Operations: Jaguar Mining

0

100,000

200,000

300,000

400,000

500,000

2007

2008

2009

2010

2011E

2012E

2013E

2014E

GoldProductio

n(oz)

$300

$400

$500

$600

$700

$800

CashCosts(

$/oz)

Sabara Turmalina

Paciencia CaeteGurupi Total Cash Costs (RHS)

Source: Company reports and RBC Capital Markets estimates



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Companies Mentioned

Alamos Gold (TSX: AGI - C$18.50; Outperform, Above Average Risk) *

Allied Nevada (TSX: ANV - C$38.73; Sector Perform, Above Average Risk) **

Claude Resources (TSX: CRJ - C$1.52; Outperform, Above Average Risk) **

Great Basin Gold (TSX: GBG - C$1.96; Outperform, Average Risk) ***

Lake Shore Gold (TSX: LSG - C$2.05; Sector Perform, Above Average Risk) **

Minera IRL (TSX: IRL - C$1.15; Outperform, Speculative Risk) **

Dundee Precious Metals (TSX: DPM - C$8.26; Outperform, Above Average Risk) **

*Covered by RBC Dominion Securities Inc. Analyst Haytham Hodaly (604) 257-7508; [email protected]

**Covered by RBC Dominion Securities Inc. Analyst Stephen Walker (416) 842-4120; [email protected]

***Covered by Royal Bank of Canada Europe Limited Analyst Leon Esterhuizen (44) 207 653-4154; [email protected]



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ValuationOur NAV for Jaguar is $4.58/sh using our gold price forecasts and discount rate assumptions. We are maintaining our 12-month targetprice of $5.75/sh to reflect average of fair values generated using P/NAV and forward-looking P/CF multiples. For Jaguar, we employ1.25x NAV and 7.5x forward P/CF target multiples, which remain near the lower end of our target ranges for Tier III golds (0.75-1.5xP/NAV and 7.5-15x P/CF). These target multiples reflect the weak recent operating results from the company's mines, and theexecution risk to achieve Tier II producer status in 2013.

Price Target ImpedimentImpediments to our target price include fluctuations in commodity prices, greater than expected mine operating and new projectconstruction costs and increasing energy, material and manpower costs. In a very competitive environment, Jaguar Mining, as with allmining companies, faces challenges finding and replacing mined reserves. Our Above Average Risk (AAR) qualifier reflects theremainingexecution riskas the company ramps up production at its existing mines, and completes construction on a third mine overthe next few quarters.

Company DescriptionJaguar Mining Inc. is a Canadian-listed, New Hampshire-head officed exploration and development company with a large landposition in southeastern Brazil. The company is focused on gold deposits located in the Iron Quadrangle area in the State of MinasGerais. Jaguar's operating team has extensive experience, both in Brazil and the Iron Quadrangle, which has a history of goldproduction. The company has two operating gold mines (Turmalina and Paciencia), a third operation set to begin shortly (Caete), and afourth project (Gurupi) with a completed pre-feasibility study. Jaguar is a Tier III gold producer poised to graduate to Tier II status in2011.



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Jaguar Mining Inc. Symbol JAG TSX; NYSE 11-Aug-11Share Price C$ 5.39 Stock Rating: Sector Perform Risk Qualifier Above Average

RBC Capital Markets Price Target: C$ 5.75 NAV C$ 4.58

Michael Curran, (416) 842 3770 Mark. Cap (US$MM) 475 Discount Rate 7.0%

All US$ unless noted For Fiscal Year Ended Dec 31 All US$ unless noted For Fiscal Year Ended Dec 3

RATIO ANALYSIS 2010 2011E 2012E 2013E PRICES/EXCHANGE RATES 2010 2011E 2012E 2013E

Net Income $MM (23.8) 29.8 51.4 73.0 Gold Price $/oz $1,225 $1,400 $1,400 $1,300

EPS (reported) $/sh ($0.28) $0.35 $0.60 $0.84 Realized Gold Price $/oz $1,215 $1,400 $1,400 $1,300

P/E Multiple x n.m. 15.4 9.0 6.4 Exchange Rate C$/US$ $0.95 $1.01 $1.00 $0.99

Operating Cash Flow $MM 18.4 58.6 111.8 151.2 Exchange Rate Real/US$ 1.75 1.75 1.75 1.75

CFPS before working cap. $/sh $0.22 $0.69 $1.30 $1.74

Price/CF x 24.7 7.8 4.1 3.1 MINE/EQUITY PRODUCTION 2010 2011E 2012E 2013E

Dividends Per Share $/sh $0.00 $0.00 $0.00 $1.00 Production 000 oz 138 177 241 326

Dividend Yield % 0.0% 0.0% 0.0% 18.6% Total Cash Costs $/oz $732 $766 $665 $618

LTD/(Total Cap) % 0.0% 0.0% 23.5% 20.7% Attributable Reserves and Resources

INCOME STATEMENT 2010 2011E 2012E 2013E Reserves MM oz 4.3Sales Rev. incl. Royalties $MM 170.8 264.2 338.0 423.8 Adj. Market Cap/oz** US$/oz 91

Operating Costs $MM 119.1 157.2 160.5 201.6 Resources (incl. Reserves) MM oz 0.0

EBITDA $MM 27.6 82.0 152.5 197.2 Adj. Market Cap/oz** US$/oz 61,649DD&A $MM 38.8 45.7 57.4 76.1 ** Market Cap + LTD - Net Current Assets - Non Gold Assets

EBIT $MM (11.3) 36.3 95.1 121.1 ***Resources include measured and indicated resources only

Interest Expense $MM 12.8 16.8 12.4 12.4 OTHER DATA

EBT $MM (24.0) 19.5 82.7 108.7 Issued Shares MM 84.4 12-month High $7.88

Non-Recurring Items/Other $MM (3.0) (13.1) 3.0 2.0 Issued Shares (fully diluted) MM 101.3 12-month Low $3.98

Taxes/Recovery $MM 1.8 7.3 26.8 32.2 Hedged Prod'n 2011E (000oz) nil Total Hedged Prod'n (000oz) nil

Net Income (operating) $MM (23.8) 29.8 51.4 73.0Shares o/s (avg.) MM 84.2 85.0 86.0 87.0

EPS (operating) $/sh ($0.19) $0.21 $0.63 $0.86CASH FLOW 2010 2011E 2012E 2013E

Cash Flow from Operations

Net Income $MM (23.8) 29.8 51.4 73.0

DD&A $MM 39.3 45.7 57.4 76.1

Deferred Taxes $MM 0.2 2.3 - -

Non Recurring/Other $MM 3.0 (3.1) 3.0 2.0

Working Cap. Changes $MM 0.9 - - -19.6 74.7 111.8 151.2

Cash Flow From Investing

Capital Expenditure (net) $MM - - - -

Acquis./Investments $MM (130.1) (106.0) (225.0) (117.2)

Other $MM - - - -(130.1) (106.0) (225.0) (117.2)

Cash Flow From Financing

Equity Issues (net of costs) $MM 2.9 - - -

Net Borrowings $MM 26.9 99.3 125.0 -

Dividends Paid & Other $MM (0.3) - - -29.5 99.3 125.0 - ESTIMATED NET ASSET VALUE (NAV)/SHARE - 2011

Net Inc.(Dec.) incl For. Ex $MM (82.0) 68.0 11.8 34.0 Status Own'ship $MM $/Sh %NAV

Cash at End of Year $MM 39.2 107.2 119.0 153.0 Turmalina (Brazil) mine 100% $53 0.52 8%BALANCE SHEET 2010 2011E 2012E 2013E Caete (Brazil) constr. 100% $173 1.71 27%

Cash & Equivalents $MM 39.2 107.2 119.0 153.0 Paciencia (Brazil) mine 100% $99 0.97 16%

Total Current Assets $MM 95.4 163.4 175.2 209.2 Gurupi (Brazil) mine 100% $291 2.88 46%

PP&E & Mining Interests $MM 433.4 496.8 661.4 700.5 Other explor. var. $15 0.15 2%Other $MM - - - - Total Operating $631 6.23 100%Total Assets $MM 579.3 710.7 887.1 960.1 Working capital $112 1.11

Current Liabilities $MM 46.7 46.7 46.7 46.7 Corporate G&A (after-tax) ($105) (1.04)

Long Term Debt $MM - - 125.0 125.0 Hedge & Reclamation liability $0 0.00

Other Long Term Liabilities $MM 32.0 34.3 34.3 34.3 LT Debt ($165) (1.71)

Total Liabilities $MM 254.1 355.7 480.7 480.7 NET ASSET VALUE $472 $4.58

S/Holder Equity $MM 325.2 355.0 406.4 479.5 Current P/NAV 1.18Total Liab . & S/Holder Equ ity $MM 579.3 710.7 887.1 960.1

Working Capital $MM 19.4 87.4 99.2 133.2 Source: Company Reports, RBC Capital Markets

0

100

200

300

400

500

2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E

$300

$425

$550

$675

$800

$925

Prod'n -000s oz (LHS) Cash Costs -US$/oz (RHS)



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Required Disclosures

Conflicts Disclosures

This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses toprovide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clientsshould refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1or send a request to RBC CMResearch Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

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Distribution of Ratings

RBC Capital Markets, Equity Research

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 749 52.30 216 28.84

HOLD[SP] 626 43.70 134 21.41

SELL[U] 59 4.10 10 16.95

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for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealercapacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders withRBC Capital Markets, LLC.To Canadian Residents:This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution inOntario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and thawishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC DominionSecurities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.To U.K. Residents:This publication has been approved by Royal Bank of Canada Europe Limited ('RBCEL') which is authorized and regulated by Financial ServicesAuthority ('FSA'), inconnection with its distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules othe FSA. However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and itdissemination in the United Kingdom.To Persons Receiving This Advice in Australia:This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been preparedfor general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting onthis material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition opossible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product andconsider that document before making any decision about whether to acquire the product.To Hong Kong Residents:This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited and RBC Investment Management (Asia) Limited, licensed corporationsunder the Securities and Futures Ordinance or, by Royal Bank of Canada, Hong Kong Branch, a registered institution under the Securities and Futures Ordinance. Thismaterial has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong personswishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC InvestmentManagement (Asia) Limited or Royal Bank of Canada, Hong Kong Branch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone numberis 2848-1388).To Singapore Residents:This publication is distributed in Singapore by RBC (Singapore Branch) and RBC (Asia) Limited, registered entities granted offshore bank status by the MonetaryAuthority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of anyrecipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you shouldconsider whether the product is suitable for you. Past performance is not indicative of future performance.

. Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license.Copyright RBC Capital Markets, LLC 2011 - Member SIPC

Copyright RBC Dominion Securities Inc. 2011 - Member CIPF

Copyright Royal Bank of Canada Europe Limited 2011Copyright Royal Bank of Canada 2011All rights reserved


jaguar mining_rbc capital_11 august 2011

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