Otto over at IKN asks the question “Can Jaguar Mining survive?” and after a helpful little analysis concludes that it might just have a fighting chance with Petroff at the helm:
… working cap is expected to be negative when the September numbers are posted which isn’t very nice, but the interesting bit is that the costs of production are dropping. As belt-tightening has now become the order of the day at JAG, we should see costs drop further in 3q12 and 4q12 as well. So if JAG can produce to the higher end of guidance in the next couple of quarters, I reckon that 4q12 could see the company post a net profit. And that’s the key here folks, because with a profitable mining operation that’s finished with fracturing the cash, JAG could go out and do some sort of corporate financing from a position that garners more confidence from the market. With just 84m shares out, JAG has never diluted too much so there’s room for an equity-based raising …
So, would a JAG with 235m shares out be worth half a billion in market cap under those circumstances (that’s a $2.12 pps to you, madam/sir)? Yup, could be and that would make for a rough double from today’s prices. The key will be to stop making a net quarterly loss and start making a net quarterly profit and from there, nice things might start happening to this utter dog of a company. The bottom line; I’m going to keep a close eye on the 3q12 numbers when they show up, but I’d guess that 4q12 report will be the real do-or-die moment at JAG.
But instead of buying the shares outright (currently US$1.40) we’re considering various January 2014 call option spreads, namely:
- $1 to $2 — target $0.30 or less per spread, with max 233% return if initiated at $0.25
- $1 to $3 — target $0.40 or less per spread, with max 400% return if initiated at $0.40
- $1 to $4 — target $0.50 or less per spread, with max 500% return if initiated at $0.50
Each spread consists of buying the lower strike call ($1 in each case) and selling the higher strike call ($2, $3, $4). This strategy caps the upside, but significantly lowers the cost of entry. Since we don’t think it’s very realistic Jaguar could get much beyond $4 level within the next 16 months the capped upside isn’t much of a concern. Other January 2014 variations could also be interesting depending on the price, such as the $2.00 to $3.00 call spread but the $1 call seems to work particularly well since it’s already almost 40 cents in the money. For example, if you purchase the $1 to $2 spread for $0.30 and Jaguar trades completely flat through expiration, never allowing for an opportunistic exit, you’ll still realize a positive return.
We do not currently own any of these spreads, but we may begin placing orders soon. However, we’re not going to rush into a large position since (1) these options aren’t particularly liquid and (2) there’s a decent chance for a general pullback that gives us a better entry point.
8 months ago 
