Jaguar Mining grows with Brazil

SITE VISIT

Belo Horozonte, Brazil — It’s a grey day in Minas Gerais — Brazil’s famed mining state — and the row of flags flying over the heads of Jaguar Mining’s (JAG-T, JAGNF-O) board members gathered below don’t offer much protection from the drizzle.

But the glum conditions aren’t washing the contentment off anyone’s face on this occasion, the opening of Jaguar’s latest and largest mine to date — Turmalina.

At full capacity, Turmalina will process 1,200 tonnes of ore a day and pump out 60,000 oz. gold per year. With high-grade reserves coming from 2.9 million tonnes of ore grading 6.3 grams gold for 587,000 oz., the mill is currently slated to run for 8.5 years, but that can only grow once a feasibility study is finished on a parallel orebody, known as Satinoco, which lies roughly 250 metres from the main orebody. The study is expected to be finished in six to eight months.

But Turmalina is only a part of the Jaguar story.

To understand why the company says it will be a mid-tier gold producer of 200,000 oz. by 2008, adding another 100,000 oz. gold by 2009, one has to understand the array of projects the company has stretching across the lush hills of Minas Gerais. Sabara, Paciencia, Santa Barbara and Turmalina are all in or moving towards production, and combined, they give the company a measured and indicated resource of close to 2.7 million oz. gold with another 890,000 oz. in the inferred category.

“We should be there with the execution of our build-out program,” Jaguar’s president and chief executive Dan Titcomb says. “That includes completing feasibility at Paciencia and the Caete expansion shortly and the additional expansion for Turmalina.”

Fortunately, the logistics of getting it all done are not as intimidating as one might suppose.

“All of the projects are within 140 kilometres of our office in Belo Horizonte (the capital of Minas Gerais),” Titcomb says. “We love the neighbourhood. We’re concentrating our efforts there, and with tight infrastructure we should be able to explore efficiently and convert resources into reserves.”

Such proximity in projects is a luxury few companies enjoy, but one that comes with having extensive properties in an area renowned for its robust deposits. Jaguar’s properties all lie within a geological area known as the Iron Quadrangle, with a massive greenstone belt that has yielded 60 million oz. of gold over its history.

While the wealth of minerals in the ground was known first to Portuguese colonists, in recent history the area primarily fell into the hands of two majors — AngloGold Ashanti (AU-N, AGD-L) and for its massive iron ore deposits, Companhia Vale do Rio Doce (RIO-N).

“It’s a traditional, deep-rooted greenstone belt, but it has been kept quiet because only two majors have held it over the past twenty-five years,” Titcomb says. “If you had this region in Canada, you’d likely have thirty to forty juniors with exploration under way.”

The reason for paucity of juniors in the region is tied to both the history of Minas Gerais specifically and the evolution of the Brazilian economy generally.

Minas Gerais

Gold was first discovered in Minas Gerais in 1693, and it soon made Brazil the world’s leading gold producer. But within just a hundred years, the mines had been exhausted with the bulk of the riches shipped to Portugal.

The exodus of the metal instilled within Brazilians a deep mistrust in the extraction of minerals by foreigners. As recently as 1988, the Brazilian constitution forbade foreign majority participation in mining operations.

But when it became clear the policy was choking off mineral development, the doors to the free market began to creak open, and by 1995, constitutional amendments had pushed them open wider by way of privatization, joint ventures, and deregulated investment.

“The entire country has evolved dramatically. It’s embraced the international market,” Titcomb says. “When you look at the time period — the last ten to twelve years — it’s a remarkable change in growth and the country should be proud of it.”

While similar neo-liberal policies spread across the continent in the ’90s, Brazil has been free of the socialist backlash they provoked in countries like Bolivia, Ecuador and Venezuela.

“There’s a more sophisticated political process in Brazil,” explains Albert Berry, a professor of economic development at the University of Toronto. “Unlike a country like Venezuela, which doesn’t have a strongly rooted industrial elite, Brazil does.”

Berry credits the influence of the industrial elite, coupled with the greater complexity of the Brazilian economy — which isn’t based on a relatively simple commodity such as oil — as being keys to understanding the country’s openness to free markets and foreign investment.

And that should be a winning situation in the long run for Brazil. Analysts like Michael Curran of RBC Capital Markets, say higher political risk in neighbouring countries should mean more money vested in Brazil.

Still, investment in Brazil is not completely without risk. Berry lists an alarming degree of income inequality, a convoluted and over-burdensome tax system, and difficulty regaining economic growth momentum after the debt crisis of the ’80s due to increased competition from Asia, as the three biggest risks facing the country’s economic health in the future.

And while Berry doesn’t believe those risks pose a serious impediment to investment, he does say the government’s target of 5% growth for this year will be hard to meet.

In many ways, Jaguar’s continued growth serves as a model in miniature of what the Brazilian government would like to see on a larger scale: growth fuelled by more foreign investment.

It is a point touched on at the opening of Turmalina by the Canadian ambassador to Brazil, Guillermo Rishchynski.

“The investment of our mining industry is a symbol of the faith we have in the future of Brazil, and specifically, the faith we have in the mining sector,” Rishchynski says.

That faith has been especially welcome given the lack of a strong junior mining sector within Brazil itself. High interest rates in the 1990s — as high as 15% — meant there was little capital to fuel the growth of juniors.

But Titcomb saw the lack of juniors as an opportunity, especially given his belief in the long-term direction of the country.

“In the early ’90s, we started building relationships in Brazil. What struck me was the evolution of Chile, where they staved off a financial disaster by privatizing mining,” Titcomb says. “You could see Brazil had the opportunity to do it too; it just came down to having the confidence that the country would go through that process.”

While he admits it was difficult in the early years, the experience gave Titcomb, and by extension Jaguar shareholders, what he calls “country knowledge equity.” And that equity was enriched the moment he teamed up with a group of Brazilians — all former top AngloGold executives.

It was 2002 when Titcomb’s former company Brazilian Resources (bzi.h-v) brought its Sabara property to the table, and IMS Empreendimentos (headed by former AngloGold executives Juvenil Felix, Lucio Cardoso and Adriano Nascimento) added its Caete plant and Rio De Peixe property. A year later, Jaguar Mining was born.

“One thing they brought in was lowering the cost of bringing resource into reserves,” Titcomb says.

Jaguar’s conversion costs are between US$5 and US$8 per oz. and its finding costs have been between US$5 and US$17 an oz., depending on the Brazilian real.

The group’s deep, hands-on knowledge of the region’s geology — Felix, for instance, has 40 years experience in the area and was president of AngloGold’s Brazilian division — led it to target only the most prospective areas and devise more efficient drill programs.

Their knowledge also played a significant role in mine construction.

“Their history in the area allowed them to expedite the
building of Turmalina,” Titcomb explains. “One of the key things to reducing capital expenditure at Turmalina was their ability to find and buy the right used equipment in advance of feasibility.”

Turmalina

Turmalina had its first gold pour in early January, which yielded 91% gold dor bars.

Jaguar plans to churn out 20,000 oz. gold in the first half of 2007 and 33,000 oz. gold in the second half of the year from the US$31.5-million plant, which was built in 11 months.

In order to meet loan requirements for the project, Jaguar had to hedge roughly 77,000 oz. of that production at US$527.10 an oz., but remains largely unhedged on its overall production program.

Titcomb says cash costs for the mine are estimated at between US$214 and US$230 an oz., the key determinant to the variance being the value of the real, which has gathered more strength recently than anticipated.

The company is buffered somewhat by a currency hedge on US$8 million for capital and operating expenditures at an average forward rate of 2.4 Brazilian reals for one US$1.

In late February, US$1 bought 2.08 reals.

And while a stronger real will ultimately mean higher costs for Jaguar, Titcomb says the company enjoys a “grade” equalizer.

“We’re in a better position to withstand variations in exchange rates,” he says. “While some of our peers are dealing with two to three grams per tonne, we have four to seven grams per tonne. That helps with currency issues.”

Appetite for production

While it was Sabara that brought Jaguar its first taste of gold production — it made its first pour here in December 2003, just three months after listing on the TSX Venture Exchange — it by no means satiated the company’s appetite.

The Sabara region hosts both the Sabara plant — which processes ore from the Sabara deposit — and the Caete plant. Combined, the two plants currently have the capacity to handle 3,000 tonnes of oxide ore per day.

The Sabara deposit has proven and probable reserves of 2 million tonnes grading 2.8 grams gold for 184,000 oz. gold.

And while the Sabara plant has always outperformed Caete — for the first three quarters of 2006, Sabara turned out close to 17,000 oz. gold at a cash cost of US$305 an oz. compared with Caete’s 4,700 oz. gold for the same period — it won’t for much longer.

A planned overhaul of Caete will turn it to a carbon-in-pulp (CIP) plant capable of processing sulphides and will allow it to handle ore from both the Pilar deposit in the Santa Barbara region, some 30 km east, and the Roca Grande deposit.

Titcomb says a feasibility study on the plan is due in the third quarter of this year, with the plant likely going into production by the second half of 2008. Jaguar is targeting production of 80,000 oz. gold in 2008 at Caete, increasing to 160,000 oz. per year by 2011.

At Pilar, an underground mine will extract brecciated sulphide ore formed by hydrothermal activity. The deposit has a historical measured and indicated resource of 2.5 million tonnes grading 5.95 grams gold for 483,000 oz. and an inferred resource of 1.4 million tonnes grading 5.79 grams gold for 263,900 oz.

During 2006, Jaguar produced small amounts of oxide ore from Pilar, which were hauled to Caete for processing. The deposit is open at depth with current drilling going down roughly 500 metres.

As for Roca Grande, Jaguar began its exploration program during the third quarter of 2006. By the end of 2006, the company had finished 6,830 metres of a planned 18,000 metres of drilling.

CVRD built three open pits at the site to mine the oxide ore but did not mine the sulphide which has a historical non-National Instrument 43-101 compliant resource of 2.29 million tonnes grading 7.48 grams gold for 550,000 oz.

The Paciencia region is made up of 10 concessions totally 70 sq. km. A prefeasibility study on the site was recently completed, estimating reserves of 2.7 million tonnes grading 4.52 grams gold for 395,000 oz.

Production is targeted for the second quarter of 2008, with cash costs estimated at US$221 per oz. and the life of mine currently at 5.1 years.

The region, composed of the Paciencia and Rio de Peixe properties, is located in a 17-km linear shear zone known as the Sao Vicente trend; the property consists of 12 km of contiguous concessions along the trend.

Much of the gold production in the Iron Quadrangle took place here during the 17th and 18th centuries and the site still bears the marks. A deep groove on the surface, long overgrown with bush, now looks like a natural valley, but was in fact the work of slave miners.

The plan at Paciencia is to go underground for the non-refractory sulphide ore, which will be processed in a 1,500-tonne-per-day CIP sulphide processing plant to be built on-site.

The prefeasibility study anticipates an initial production rate of 75,000 oz. per year.

On the bus ride from the capital of Minas Gerais, Belo Horizonte Titcomb unfolds a geological map that shows the terrain from a cross section.

As with all of Jaguar’s key deposits, Paciencia is still open at depth.

And given what is known about the geology in the region, it’s a key element to understanding the growth potential of Jaguar, Titcomb says.

“Historically there are 2,400-metre deep mines and that gives us an upside as we’re only at a depth of 300 to 500 metres,” he says.