Would You Take Advantage of This 30% Arbitrage Opportunity?
It's not often that an opportunity to collect a 30% arbitrage gain comes along -- especially when the name "China" is not in front of the company being bought. But that's just what you'd get ... theoretically ... if you purchased shares of Jaguar Mining (NYS: JAG) at their closing price of $6.55 on Wednesday.
Jaguar received an unsolicited buyout offer for $1 billion, or $9.30 in cash, from Shandong Gold last month, initially propelling the stock higher and giving hope to other junior miners in the sector that a consolidation wave could be around the corner. Recently, however, things haven't been nearly as peachy for Jaguar bulls.
Yesterday, the company announced that its CEO, Daniel Titcomb, was resigning as head of the company. Also, in mid-October, Jaguar reduced its full-year output forecast to 160,000 ounces with gold mining costs rocketing higher to $835-$845 per ounce. Even though Jaguar is expected to remain profitable on a yearly basis, this marks yet another instance where Jaguar has failed to deliver on its expectations.
As Foolish metals connoisseur Christopher Barker has stated before, it was not one event, but a series of events that led to Jaguar's multiple shortcomings. In 2009, the company shut down its Sabara Mine without much of an explanation. Then, in 2010, management changes and operational overhauls caused significant production shortfalls at its Paciencia and Turmalina mines.
On the flip side, while not producing nearly as much as it's capable of, Jaguar has made one very smart move. In 2009, Jaguar acquired the Gurupi project from Kinross Gold (NYS: KGC) for a meager $39 million. The deposits in this region are estimated at close to $4 billion, so I'd call that a fantastic purchase. The only dilemma is in obtaining the funding to get mining in the region off the ground -- a struggle that cash-strapped Jaguar has been unable to undertake as of yet.
So what an investment in Jaguar Mining really comes down to is whether you'd be willing to bet that Shandong is successful in courting Jaguar into accepting its buyout offer. If it is, then shareholders are lined up for a 30% gain from yesterday's close. On the other hand, if Jaguar chooses to remain independent, then shareholders run the risk of the company pulling what I refer to as the "Golden Star Resources (ASE: GSS) standard" -- setting the bar high and constantly missing it. I should know. I've been a Golden Star shareholder for the past few months.
But what's your take? Are you a buyer of Jaguar here or do you think it falls further? Share your thoughts in the comments section below and consider adding Jaguar Mining to your free and personalized watchlist to keep up on the latest news from the company.
At the time this article was published Fool contributorSean Williamsowns shares of Golden Star Resources, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat's as good as gold.