Hubris Is a Painful Lesson Learned for Jaguar Mining

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Considering that hindsight is 20-20, I'm pretty sure Jaguar Mining's (NYS: JAG) directors are kicking themselves daily for not accepting Shandong Gold's offer in November to purchase the gold miner for $1 billion, or $9.30 per share in an all-cash deal. Hubris isn't something you can teach a company, and shareholders are learning the hard way that stubbornness comes with a price.

Earlier this week, amid a 35% one-day shellacking, Jaguar unveiled its comprehensive review and plan to get its operations back on track. Judging by the precipitous drop in its share price since the Shandong deal was first digested, investors seem quite skeptical.

Jaguar's plan entails reducing costs across the board, from operations to administrative expenses -- and it's willing to reduce its output to implement these immediate changes. Here's a short list of some of Jaguar's key cost-saving efforts:

  • At Paciencia, the company is basically stopping production until it can get smaller equipment in place. This is expected to cost $15 million to implement, to reduce costs in the long run, and to increase gold grade per tonne.
  • At Turmalina and Caete, it's the same story as Paciencia, with the only difference being that there will be no interruption in production. No additional funding will be required to bring in smaller equipment.
  • The company plans to reduce its mining pathways from 5 meters by 5 meters to 3 meters by 3.5 meters. Because ore deposits are typically found in 2-meter swaths, the move is expected to improve ore grade and reduce the costs of development, support, and ventilation.
  • Finally, Jaguar is looking to improve operating efficiency by reducing administrative costs by 40%, which will primarily be achieved through layoffs.

The jury is still out on whether or not Jaguar will be able to successfully implement this turnaround in the next 12 to 18 months and reduce its gold mining cost from about $1,200 per ounce to its targeted level of $700 to $800 per ounce.

What's also unanswered -- and to me was the driving force behind my excitement over Jaguar back in December -- is what the company is going to do with its Gurupi project. Based on the company's April reserve figures, the Gurupi project has more than 2.3 million ounces of proven and probable gold reserves. The question is: Does Jaguar have the funding to make the mine a reality?

This is actually becoming a common sort of question in recent months, with Kinross Gold (NYS: KGC) indefinitely shuttering its plans for the Tasiast mine in Mauritania due to excessive build-out costs, while Newmont Mining (NYS: NEM) did something similar with its Hope Bay mine in Canada and its potential 9 million ounces of gold in reserves. Others, like Agnico-Eagle Mines (NYS: AEM) , have had to close mines due to safety issues and incur the expenses of bringing them back to code. In short, the costs to run a mine are skyrocketing, and Jaguar is learning the hard way that it waited too long to adapt.

There's a reason pride is considered one of the seven deadly sins. It's just too bad shareholders had to suffer for the sins of Jaguar's management.

Jaguar may not be digging its way into investors' portfolios anytime soon, but that doesn't mean great deals aren't just a stone's throw away. See which tiny gold miner our analysts think will be the next to strike it rich by clicking here for your free copy of our latest special report.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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