Jaguar Mining Inc., which is exploring its options after receiving acquisition proposals, is proving that even a record takeover premium for a gold company can be a bargain.
Shandong Gold Group Co., owner of China’s second-largest gold producer, offered to buy Jaguar for $785 million in cash, two people familiar with the deal said Nov. 16. The $9.30-a-share bid is 77 percent more than Jaguar’s prior 20-day average, the highest premium in a cash takeover of a gold miner greater than $500 million, according to data compiled by Bloomberg. Jaguar closed yesterday at a 3.5 percent discount to its net asset value, cheaper than 94 percent of comparable gold miners.
While Jaguar lost money in each of the past seven years, the Concord, New Hampshire-based operator of three gold mines in Brazil’s Iron Quadrangle region is projected to earn its first annual profit in 2012, according to analysts’ estimates compiled by Bloomberg. After gold prices reached a record of $1,921.15 an ounce in London on Sept. 6, potential rival bidders such as Kinross Gold Corp. may be willing to pay more than $9.30 a share to secure Jaguar’s 4.26 million ounces of gold reserves, according to WallachBeth Capital LLC.
“Relative to their peers, Jaguar is trading at a pretty substantial discount,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon Plc, said in a telephone interview. “Even a $9.30 offer may be undervaluing the company. They could actually get a longer-term value asset at a cheap price. It’s the Brazilian assets that make Jaguar so appealing.”
Lu Haitao, a spokesman for Shandong, confirmed the company is in talks with Jaguar and declined to give more details.
Valeria Rezende DioDato, a spokeswoman for Jaguar, which is traded on the Toronto and New York stock exchanges, declined to comment beyond the company’s statement this week.
After reports of the bid from state-owned Shandong, Jaguar’s board said it would review its alternatives to increase returns for shareholders “in light of the publicized unsolicited offer.” None of the proposals received in the last few weeks have “progressed beyond the exploratory stage,” Jaguar said in the Nov. 16 statement that sparked a one-day stock gain of 45 percent.
The 77 percent premium from Shandong would be more than double the average of 29 percent paid in takeovers of gold mining companies greater than $500 million, in which the deal was at least partially funded with cash, data compiled by Bloomberg show. Goldcorp Inc. set the record in September 2010 when it offered a 56 percent premium for Andean Resources Ltd.
Discount to Rivals
After closing at $7.80 in New York on Nov. 16, Jaguar fell 3.5 percent yesterday to $7.53. The company is trading at 0.97 times its net asset value of $7.80 a share, based on the average of analysts’ estimates compiled by Bloomberg. That means it’s still cheaper than 16 of 17 other gold companies with similarly sized mines, the data show. Jaguar’s rivals are worth an average of 1.8 times the value of their underlying assets.
“They should be able to get something higher,” based in part on where gold is trading, Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth, said in a phone interview. “The company has received multiple offers, which tells you that people don’t believe it’s operating at its full potential.”
Jaguar rose 2.3 percent to $7.70 today in New York.
Before Jaguar announced its review, the shares had fallen 24 percent this year while the Russell 2000 Materials & Processing Index of 128 companies retreated only 8.3 percent. Analysts are estimating that the company will report its eighth straight loss this year.
Ripe for Takeover
“The stock has lagged the group and generally underperformed, and as a result the company was ripe for the picking,” Mark Kellstrom, a senior partner at Summit, New Jersey-based Strategic Energy Research and Capital LLC, which focuses on energy and natural resources, said in a phone interview. “For a purchaser like Shandong, there’s a real opportunity here to buy gold reserves at cheaper valuations, improve the operating results and therefore reap a nice return.”
Still, Jaguar may be cheap for a reason, according to John Goldsmith, a Toronto-based fund manager at Montrusco Bolton Investments Inc., which oversees about C$4.9 billion ($4.8 billion).
“They’ve overpromised and under-delivered,” Goldsmith said in a phone interview. “The assets in Brazil are small in nature, were supposed to be scalable but weren’t. What the Chinese see in this asset I have no idea.”
While Jaguar said it received more than one proposal, the stock closed yesterday 19 percent below Shandong’s offer price, indicating traders may not be convinced that another bidder will emerge, Goldsmith said.
Jaguar produces gold from the Turmalina, Paciencia and Caete mines, which are located in the Iron Quadrangle near the city of Belo Horizonte in the state of Minas Gerais, Brazil, and is developing a fourth operation called the Gurupi Project. Last month the company forecast full-year gold production of 155,000 ounces to 163,000 ounces.
While the company failed to turn a profit in past years, Jaguar is projected to earn $45 million in net income in 2012 on record revenue of $324 million, according to analysts’ estimates compiled by Bloomberg.
That may attract another bidder such as Toronto-based Kinross, which has a market value of $14.9 billion, according to Strategic Energy’s Kellstrom and WallachBeth’s Oshodi. Canada’s third-biggest gold miner sold the mineral licenses for the Gurupi Project in Brazil to Jaguar two years ago. Steve Mitchell, a spokesman for Kinross, declined to comment on a potential acquisition of Jaguar.
Barrick Gold Corp., the world’s largest gold miner, and Newmont Mining Corp., the largest U.S. gold producer, may also consider bidding for Jaguar, said Kellstrom and John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto.
Andy Lloyd, a spokesman for Toronto-based Barrick, declined to comment on potential deals. Omar Jabara, a spokesman for Greenwood Village, Colorado-based Newmont, didn’t return a phone call or e-mail requesting comment.
Gold prices have risen as much as 35 percent this year as Europe’s debt crisis spurred investors to buy the metal to protect their wealth. Gold traded at $1,723.28 at 11:02 p.m. in London yesterday. While that’s down 10 percent from its September record, the metal is still on pace for an 11th straight annual increase.
As gold prices have gained, the market values for companies mining the metal have lagged behind, said Richard Hurowitz, who helps oversee about $1 billion as chief executive officer of Octavian Advisors LP, a New York-based firm focusing on special situations and distressed investments.
“It’s creating a huge opportunity right now for the larger guys to grow their reserves at really attractive prices,” Hurowitz said in a phone interview. “These stocks are at such a disconnect to where the gold price is that I think companies can pay very large premiums for businesses or projects and still have the deals be accretive.”