Jaguar
Mining Inc.



Consolidated
Financial Statements



December 31,
2012 and 2011











MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL REPORTING



The accompanying consolidated
financial statements of Jaguar Mining Inc. and all the information contained in this annual report are the responsibility of management
and have been approved by the Board of Directors. These financial statements and all other information have been prepared by management
in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Some
amounts included in the financial statements are based on management’s best estimates and have been derived with careful
judgment. In fulfilling its responsibilities, management has developed and maintains a system of internal controls. These controls
ensure that transactions are authorized, assets are safeguarded from loss or unauthorized use, and financial records are reliable
for the purpose of preparing financial statements. The Board of Directors carries out its responsibilities for the financial statements
through the Audit Committee. The Audit Committee periodically reviews and discusses financial reporting matters with the Company’s
auditors, KPMG LLP, as well as with management. These financial statements have been audited by KPMG LLP, Chartered Accountants,
on behalf of the shareholders.



|/s/ David M. Petroff    | 
|----------------------- | 
|David M. Petroff        | 
|President and CEO       | 
|                        | 
|/s/ T. Douglas Willock  | 
|T. Douglas Willock      | 
|Chief Financial Officer | 



March 21,
2013



2









| | KPMG LLP                      | Telephone | (416) 777-8500 | 
| | ----------------------------- | --------- | -------------- | 
| | Chartered Accountants         | Fax       | (416) 777-8818 | 
| | Bay Adelaide Centre           | Internet  | www.kpmg.ca    | 
| | 333 Bay Street Suite
    4600 |           |                | 
| | Toronto ON M5H -2S5           |           |                | 



INDEPENDENT
AUDITORS’ REPORT OF REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders
of Jaguar Mining Inc.,



We have audited
the accompanying consolidated financial statements of Jaguar Mining Inc., which comprise the consolidated balance sheets as at
December 31, 2012 and December 31, 2011, the consolidated statements of operations and comprehensive loss, shareholders’
equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory
information.



Management’s Responsibility for the Consolidated Financial Statements



Management
is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with international
Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.



Auditors’
Responsibility



Our responsibility
is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from material misstatement



An audit
involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to
the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and
the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.



We believe
that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.



Opinion



In our opinion,
the consolidated financial statements present fairly, in all material respects, the consolidated balance sheets of Jaguar Mining
Inc. as at December 31, 2012 and December 31, 2011, and its consolidated financial performance and its consolidated cash flows
for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board.



| | KPMG LLP is
    a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
    KPMG International Cooperative (“KPMG International”), a Swiss entity. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | KPMG Canada provides services
    to KPMG LLP.                                                                                                                                                                        | 



3









| | KPMG LLP                  | Telephone | (416) 777-8500 | 
| | ------------------------- | --------- | -------------- | 
| | Chartered Accountants     | Fax       | (416) 777-8818 | 
| | Bay Adelaide Centre       | Internet  | www.kpmg.ca    | 
| | 333 Bay Street Suite 4600 |           |                | 
| | Toronto ON M5H 2S5        |           |                | 



Other
Matter



We also have
audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s
internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March
21, 2013 expressed an unqualified (unmodified) opinion on the effectiveness of the Company’s internal control over financial
reporting.







Chartered Accountants, Licensed
Public Accountants

Toronto, Canada

March 21, 2013



| | KPMG LLP is
    a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
    KPMG International Cooperative (‘‘KPMG International”), a Swiss entity. | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | KPMG Canada provides services
    to KPMG LLP.                                                                                                                                                                         | 



4









| | KPMG LLP                  | Telephone | (416) 777-8500 | 
| | ------------------------- | --------- | -------------- | 
| | Chartered Accountants     | Fax       | (416) 777-8818 | 
| | Bay Adelaide Centre       | Internet  | www.kpmg.ca    | 
| | 333 Bay Street Suite 4600 |           |                | 
| | Toronto ON M5H 2S5        |           |                | 



REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board
of Directors and Shareholders of Jaguar Mining Inc.,



We have audited
Jaguar Mining Inc.’s internal control over financial reporting as of December 31, 2012, based on the criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Jaguar Mining Inc.’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting under the heading Management’s Report on
Internal Control over Financial Reporting in Management’s Discussion and Analysis for the year ended December 31, 2012. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.



We conducted
our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.



A company’s
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.



Because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



| | KPMG LLP is
    a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
    KPMG International Cooperative (“KPMG International”), a Swiss entity. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | KPMG Canada provides services
    to KPMG LLP.                                                                                                                                                                        | 



5











In our opinion,
Jaguar Mining Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31,
2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.



We also have
audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Jaguar Mining Inc. as of December 31, 2012 and December 31, 2011, and
the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the years
then ended, and our report dated March 21, 2013 expressed an unqualified (unmodified) opinion on those consolidated financial statements.







Chartered Accountants, Licensed
Public Accountants

Toronto, Canada

March 21, 2013





6







|JAGUAR MINING INC.                      
|----------------------------------------
|                                        
|Consolidated Balance Sheets             
|(Expressed in thousands of U.S. dollars)



|                                                                |  |                |  | December 31, 2012 |          |   | December 31, 2011 |  
|--------------------------------------------------------------- |  | -------------- |  | ----------------- | -------- | - | ----------------- | -
|                                                                |  |                |  |                   |          |   |                   |  
|Assets                                                          |  |                |  |                   |          |   |                   |  
|Current assets:                                                 |  |                |  |                   |          |   |                   |  
|Cash and cash equivalents                                       |  | Note 18        |  | $                 | 13,856   |   |                   | $
|Inventory                                                       |  | Note 4         |  |                   | 26,342   |   |                   |  
|Prepaid expenses and sundry assets                              |  | Note 5         |  |                   | 20,069   |   |                   |  
|Derivatives                                                     |  | Note 6(a)      |  |                   | 43       |   |                   |  
|                                                                |  |                |  |                   | 60,310   |   |                   |  
|                                                                |  |                |  |                   |          |   |                   |  
|Prepaid expenses and sundry assets                              |  | Note 5         |  |                   | 56,886   |   |                   |  
|Restricted cash                                                 |  | Note 7         |  |                   | 609      |   |                   |  
|Assets available for sale                                       |  |                |  |                   | 612      |   |                   |  
|Property, plant and equipment                                   |  | Note 8         |  |                   | 301,383  |   |                   |  
|Mineral exploration projects                                    |  | Note 9         |  |                   | 84,075   |   |                   |  
|                                                                |  |                |  | $                 | 503,875  |   |                   | $
|                                                                |  |                |  |                   |          |   |                   |  
|Liabilities and Shareholders' Equity                            |  |                |  |                   |          |   |                   |  
|Current liabilities:                                            |  |                |  |                   |          |   |                   |  
|Accounts payable and accrued liabilities                        |  |                |  | $                 | 29,745   |   |                   | $
|Notes payable                                                   |  | Note 10        |  |                   | 27,388   |   |                   |  
|Income taxes payable                                            |  |                |  |                   | 15,451   |   |                   |  
|Reclamation provisions                                          |  | Note 11        |  |                   | 4,124    |   |                   |  
|Other provisions                                                |  | Note 12        |  |                   | 4,796    |   |                   |  
|Deferred compensation liabilities                               |  | Note 15        |  |                   | 105      |   |                   |  
|Other liabilities                                               |  |                |  |                   | 20       |   |                   |  
|                                                                |  |                |  |                   | 81,629   |   |                   |  
|                                                                |  |                |  |                   |          |   |                   |  
|Notes payable                                                   |  | Note 10        |  |                   | 240,158  |   |                   |  
|Option component of convertible notes                           |  | Note 6(b)      |  |                   | 4,458    |   |                   |  
|Deferred income taxes                                           |  | Note 13        |  |                   | 6,624    |   |                   |  
|Reclamation provisions                                          |  | Note 11        |  |                   | 16,927   |   |                   |  
|Deferred compensation liabilities                               |  | Note 15        |  |                   | 216      |   |                   |  
|Other liabilities                                               |  |                |  |                   | 60       |   |                   |  
|Total liabilities                                               |  |                |  |                   | 350,072  |   |                   |  
|                                                                |  |                |  |                   |          |   |                   |  
|Shareholders' equity:                                           |  |                |  |                   |          |   |                   |  
|Share capital                                                   |  | Note 14(a)     |  |                   | 370,043  |   |                   |  
|Stock options                                                   |  | Note 14(b)     |  |                   | 2,137    |   |                   |  
|Contributed surplus                                             |  |                |  |                   | 16,015   |   |                   |  
|Deficit                                                         |  |                |  |                   | (234,392 | ) |                   |  
|Total equity attributable to equity shareholders of the Company |  |                |  |                   | 153,803  |   |                   |  
|                                                                |  |                |  |                   |          |   |                   |  
|                                                                |  |                |  | $                 | 503,875  |   |                   | $
|                                                                |  |                |  |                   |          |   |                   |  
|Commitments                                                     |  | Notes 6 and 20 |  |                   |          |   |                   |  
|Subsequent events                                               |  | Note 21        |  |                   |          |   |                   |  



On behalf of the Board:



Richard Falconer



David Petroff



The accompanying notes
are an integral part of these consolidated financial statements.



7







|JAGUAR MINING INC.                                                          
|----------------------------------------------------------------------------
|                                                                            
|Consolidated Statements of Operations and Comprehensive Loss                
|(Expressed in thousands of U.S. dollars, except share and per share amounts)



|                                                                         |  |                |  | Year Ended December 31,2012 |            |   | Year Ended December 31,2011 |  
|------------------------------------------------------------------------ |  | -------------- |  | --------------------------- | ---------- | - | --------------------------- | -
|                                                                         |  |                |  |                             |            |   |                             |  
|Gold sales                                                               |  |                |  | $                           | 172,430    |   |                             | $
|Production costs                                                         |  |                |  |                             | (127,851   | ) |                             |  
|Stock-based compensation                                                 |  | Notes 14(b),15 |  |                             | 457        |   |                             |  
|Depletion and amortization                                               |  |                |  |                             | (38,893    | ) |                             |  
|Gross profit                                                             |  |                |  |                             | 6,143      |   |                             |  
|                                                                         |  |                |  |                             |            |   |                             |  
|Operating expenses:                                                      |  |                |  |                             |            |   |                             |  
|Exploration                                                              |  |                |  |                             | 700        |   |                             |  
|Paciência shut down & care and maintenance                               |  | Note 8         |  |                             | 4,350      |   |                             |  
|Stock-based compensation (recovery)                                      |  | Notes 14(b),15 |  |                             | (1,864     | ) |                             |  
|Administration                                                           |  |                |  |                             | 18,886     |   |                             |  
|Management fees                                                          |  | Note 17(c)(i)  |  |                             | 30         |   |                             |  
|Amortization                                                             |  |                |  |                             | 1,168      |   |                             |  
|Other                                                                    |  |                |  |                             | 3,595      |   |                             |  
|Total operating expenses                                                 |  |                |  |                             | 26,865     |   |                             |  
|                                                                         |  |                |  |                             |            |   |                             |  
|Income (loss) before the following                                       |  |                |  |                             | (20,722    | ) |                             |  
|                                                                         |  |                |  |                             |            |   |                             |  
|Loss (gain) on derivatives                                               |  | Note 6(a)      |  |                             | (720       | ) |                             |  
|Loss (gain) on conversion option embedded in convertible debt            |  | Note 6(b)      |  |                             | (75,473    | ) |                             |  
|Foreign exchange loss                                                    |  |                |  |                             | 5,882      |   |                             |  
|Accretion expense                                                        |  | Note 11        |  |                             | 3,585      |   |                             |  
|Interest expense                                                         |  |                |  |                             | 28,511     |   |                             |  
|Interest income                                                          |  |                |  |                             | (3,168     | ) |                             |  
|Loss (gain) on disposition of property                                   |  | Note 10(b)     |  |                             | 2,805      |   |                             |  
|Impairment of properties                                                 |  | Note 8         |  |                             | 102,997    |   |                             |  
|Other non-operating expense                                              |  |                |  |                             | 1,164      |   |                             |  
|Total other expenses                                                     |  |                |  |                             | 65,583     |   |                             |  
|                                                                         |  |                |  |                             |            |   |                             |  
|Loss before income taxes                                                 |  |                |  |                             | (86,305    | ) |                             |  
|Income taxes                                                             |  | Note 13        |  |                             |            |   |                             |  
|Current income taxes (recoveries)                                        |  |                |  |                             | (466       | ) |                             |  
|Deferred income taxes (recoveries)                                       |  |                |  |                             | (1,302     | ) |                             |  
|Total income taxes                                                       |  |                |  |                             | (1,768     | ) |                             |  
|                                                                         |  |                |  |                             |            |   |                             |  
|Net loss and comprehensive loss for the year                             |  |                |  | $                           | (84,537    | ) |                             | $
|                                                                         |  |                |  |                             |            |   |                             |  
|Basic and diluted loss per share                                         |  | Note 16        |  | $                           | (1.00      | ) |                             | $
|                                                                         |  |                |  |                             |            |   |                             |  
|Weighted average number of common shares outstanding - basic and diluted |  | Note 16        |  |                             | 84,409,648 |   |                             |  



The accompanying notes
are an integral part of these consolidated financial statements.



8







|JAGUAR MINING INC.                             
|-----------------------------------------------
|                                               
|Consolidated Statements of Shareholders' Equity
|(Expressed in thousands of U.S. dollars)       



|                               |  |                |  | Common Shares |            |  | Stock Options |  |         | Contributed
    Surplus |  |  | Deficit    |   |  | Total |        
|------------------------------ |  | -------------- |  | ------------- | ---------- |  | ------------- |  | ------- | ----------------------- |  |  | ---------- | - |  | ----- | -------
|                               |  |                |  | #             |            |  | $             |  |         | #                       |  |  | $          |   |  | $     |        
|                               |  |                |  |               |            |  |               |  |         |                         |  |  |            |   |  |       |        
|Balance,
    January 1, 2011   |  |                |  |               | 84,373,648 |  |               |  | 369,747 |                         |  |  | 3,777,500  |   |  |       | 13,054 
|Stock
    options granted      |  | Note
    14(b) |  |               | -          |  |               |  | -       |                         |  |  | 880,000    |   |  |       | 2,798  
|Exercise
    of stock options  |  | Note
    14(b) |  |               | 36,000     |  |               |  | 296     |                         |  |  | (36,000    | ) |  |       | (132   
|Vested
    options expired     |  | Note
    14(b) |  |               | -          |  |               |  | -       |                         |  |  | (616,500   | ) |  |       | (1,513 
|Net
    loss                   |  |                |  |               | -          |  |               |  | -       |                         |  |  | -          |   |  |       | -      
|Balance,
    December 31, 2011 |  |                |  |               | 84,409,648 |  |               |  | 370,043 |                         |  |  | 4,005,000  |   |  |       | 14,207 
|                               |  |                |  |               |            |  |               |  |         |                         |  |  |            |   |  |       |        
|Balance,
    January 1, 2012   |  |                |  |               | 84,409,648 |  |               |  | 370,043 |                         |  |  | 4,005,000  |   |  |       | 14,207 
|Stock
    options granted      |  | Note
    14(b) |  |               | -          |  |               |  | -       |                         |  |  | 1,326,250  |   |  |       | 531    
|Vested
    options expired     |  | Note
    14(b) |  |               | -          |  |               |  | -       |                         |  |  | (3,495,000 | ) |  |       | (12,601
|Net
    loss                   |  |                |  |               | -          |  |               |  | -       |                         |  |  | -          |   |  |       | -      
|Balance,
    December 31, 2012 |  |                |  |               | 84,409,648 |  |               |  | 370,043 |                         |  |  | 1,836,250  |   |  |       | 2,137  



The accompanying notes
are an integral part of these consolidated financial statements.



9







|JAGUAR MINING INC.                      
|----------------------------------------
|                                        
|Consolidated Statements of Cash Flows   
|(Expressed in thousands of U.S. dollars)



|                                                                                                    |  |             |  | Year Ended
    December 31, 2012 |         |   | Year Ended
    December 31, 2011 |  
|--------------------------------------------------------------------------------------------------- |  | ----------- |  | -------------------------------- | ------- | - | -------------------------------- | -
|                                                                                                    |  |             |  |                                  |         |   |                                  |  
|Cash
    provided by (used in):                                                                     |  |             |  |                                  |         |   |                                  |  
|Operating
    activities:                                                                           |  |             |  |                                  |         |   |                                  |  
|Net
    loss and comprehensive income (loss) for the year                                           |  |             |  | $                                | (84,537 | ) |                                  | $
|Adjustments
    to reconcile net earnings to net cash provided from (used in) operating activities: |  |             |  |                                  |         |   |                                  |  
|Unrealized
    foreign exchange (gain) loss                                                         |  |             |  |                                  | (4,184  | ) |                                  |  
|Stock-based
    compensation expense (recovery)                                                     |  |             |  |                                  | (2,321  | ) |                                  |  
|Interest
    expense                                                                                |  |             |  |                                  | 28,511  |   |                                  |  
|Accretion
    of interest income                                                                    |  |             |  |                                  | -       |   |                                  |  
|Accretion
    expense                                                                               |  |             |  |                                  | 3,585   |   |                                  |  
|Deferred
    income taxes (recovery)                                                                |  |             |  |                                  | (1,302  | ) |                                  |  
|Depletion
    and amortization                                                                      |  |             |  |                                  | 40,061  |   |                                  |  
|Impairment
    of properties                                                                        |  |             |  |                                  | 102,997 |   |                                  |  
|Write-down
    of Paciência inventory                                                               |  |             |  |                                  | 1,825   |   |                                  |  
|Unrealized
    (gain) loss on derivatives                                                           |  |             |  |                                  | (43     | ) |                                  |  
|Unrealized
    loss (gain) on option component of convertible note                                  |  |             |  |                                  | (75,473 | ) |                                  |  
|Provision
    and loss on disposition of PPE                                                        |  |             |  |                                  | 4,460   |   |                                  |  
|Impairment
    mineral exploration projects                                                         |  |             |  |                                  | -       |   |                                  |  
|Reclamation
    expenditures                                                                        |  |             |  |                                  | (298    | ) |                                  |  
|Current
    income tax paid                                                                         |  |             |  |                                  | -       |   |                                  |  
|                                                                                                    |  |             |  |                                  | 13,281  |   |                                  |  
|Change
    in non-cash operating working capital:                                                   |  |             |  |                                  |         |   |                                  |  
|Inventory                                                                                           |  |             |  |                                  | 7,146   |   |                                  |  
|Prepaid
    expenses and sundry assets                                                              |  |             |  |                                  | (12,183 | ) |                                  |  
|Accounts
    payable and accrued liabilities                                                        |  |             |  |                                  | (5,597  | ) |                                  |  
|Income
    taxes payable                                                                            |  |             |  |                                  | (3,502  | ) |                                  |  
|Other
    provisions                                                                                |  |             |  |                                  | 449     |   |                                  |  
|Deferred
    compensation liabilities                                                               |  |             |  |                                  | (2,383  | ) |                                  |  
|                                                                                                    |  |             |  |                                  | (2,789  | ) |                                  |  
|Financing
    activities:                                                                           |  |             |  |                                  |         |   |                                  |  
|Issuance
    of common shares                                                                       |  |             |  |                                  | -       |   |                                  |  
|Decrease
    in restricted cash                                                                     |  |             |  |                                  | 300     |   |                                  |  
|Repayment
    of debt                                                                               |  |             |  |                                  | (20,703 | ) |                                  |  
|Increase
    in debt                                                                                |  |             |  |                                  | 23,200  |   |                                  |  
|Interest
    paid                                                                                   |  |             |  |                                  | (14,370 | ) |                                  |  
|Other
    liabilities                                                                               |  |             |  |                                  | (1,733  | ) |                                  |  
|                                                                                                    |  |             |  |                                  | (13,306 | ) |                                  |  
|Investing
    activities:                                                                           |  |             |  |                                  |         |   |                                  |  
|Mineral
    exploration projects                                                                    |  |             |  |                                  | (8,554  | ) |                                  |  
|Purchase
    of property, plant and equipment                                                       |  |             |  |                                  | (44,263 | ) |                                  |  
|Proceeds
    from disposition of property, plant and equipment                                      |  |             |  |                                  | 1,556   |   |                                  |  
|                                                                                                    |  |             |  |                                  | (51,261 | ) |                                  |  
|                                                                                                    |  |             |  |                                  |         |   |                                  |  
|Effect
    of foreign exchange on non-U.S. dollar denominated cash and cash equivalents             |  |             |  |                                  | 6,737   |   |                                  |  
|Increase
    (decrease) in cash and cash equivalents                                                |  |             |  |                                  | (60,619 | ) |                                  |  
|Cash
    and cash equivalents, beginning of year                                                    |  |             |  |                                  | 74,475  |   |                                  |  
|Cash
    and cash equivalents, end of year                                                          |  |             |  | $                                | 13,856  |   |                                  | $
|                                                                                                    |  |             |  |                                  |         |   |                                  |  
|Supplemental
    cash flow information                                                              |  | Note
    18 |  |                                  |         |   |                                  |  



The accompanying notes
are an integral part of these consolidated financial statements.



10







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | 1. | Nature of Business:
| | -- | -------------------



Jaguar
Mining Inc. (the “Company” or “Jaguar”) is a corporation continued under the Business Corporations
Act (Ontario) engaged in the acquisition, exploration, development and operation of gold producing properties in Brazil. 
The address of the Company’s registered office is 155 Wellington Street West, Toronto, ON
M5V 3J7 Canada.



These consolidated
financial statements of the Company as at and for the years ended December 31, 2012 and December 31, 2011 include the accounts
of the Company and its wholly-owned subsidiaries: Mineração Serras do Oeste Ltda. (“MSOL”), Mineração
Turmalina Ltda. (“MTL”) and Mineração Chega Tudo Ltda. (“MCT”).  All significant intercompany
accounts and transactions have been eliminated on consolidation.



| | 2. | Basis of Preparation:
| | -- | ---------------------



| | (a) | Statement of compliance:
| | --- | ------------------------



These consolidated
financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as
issued by the International Accounting Standards Board.



These consolidated
financial statements were authorized for issue by the Board of Directors on March 20, 2013.



| | (b) | Basis of measurement:
| | --- | ---------------------



These consolidated
financial statements have been prepared on the historical cost basis except for certain financial instruments and liabilities associated
with certain long-term incentive plans and reclamation provisions, which are stated at fair value.



| | (c) | Functional and presentation currency:
| | --- | -------------------------------------



These consolidated
financial statements are presented in U.S. dollars, which is the Company’s functional currency. All financial information
presented in U.S. dollars has been rounded to the nearest thousand.



| | (d) | Use of estimates and judgments:
| | --- | -------------------------------



The preparation
of consolidated financial statements in conformity with IFRS requires management to make estimates, judgments and assumptions that
affect the application of accounting policies and the reported amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the period. Actual results could differ from these estimates.



Estimates and
underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which
the estimates are revised and in any future periods affected.



Certain estimates,
such as those related to the valuation of mineral exploration projects, recoverability of property plant and equipment, recoverable
taxes, deferred tax assets and liabilities, reclamation provision, derivatives, option component of convertible notes, liabilities
associated with certain long-term incentive plans, measurement of inventory and disclosure of contingent assets and liabilities
depend on subjective or complex judgments about matters that may be uncertain. Changes in those estimates could materially impact
these consolidated financial statements.



11







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



The judgments
that management has applied in the application of accounting policies and related estimates that have the most significant effect
on the amounts recognized in these consolidated financial statements are discussed below:



| | (i) | Unit of production depletion and amortization:
| | --- | ----------------------------------------------



The Company’s
mineral exploration projects and mining properties are depleted and amortized on a unit-of-production basis, using the expected
amount of recoverable reserves. Changes to these estimates, which can be significant, could be caused by a variety of factor, including
future production differing from current forecasts, expansion of mineral reserves through exploration activities, differences between
estimated and actual costs of mining and other factors impacting mineral reserves or the expected life of the mining operation.



| | (ii) | Inventory:
| | ---- | ----------



Gold in process
and ore in stockpiles are stated at the lower of average production cost and net realizable value. Production costs charged to
earnings include labour, benefits, material and other product costs. The assumptions used in the impairment assessment of gold
in process inventory include estimates of gold contained in the ore stacked, assumptions of the amount of gold stacked that is
expected to be recovered and an assumed gold price expected to be realized when the gold is recovered. If these estimates or assumptions
prove to be inaccurate, the Company could be required to write-down the recorded value of its work-in-process inventory, which
could reduce the Company’s earnings and working capital.



| | (iii) | Mine reserve estimates:
| | ----- | -----------------------



A mine reserve
estimate is an estimate of the amount of product that can be economically and legally extracted from the Company’s mining
properties. In order to calculate reserve estimates, assumptions are required about a range of geological, technical and economic
factors, including: quantities, grades, production techniques, recovery rates, production costs, transportation costs, commodity
demand, commodity prices and exchange rates. The Company is required to determine and report mine reserves in accordance with the
Canadian Institute of Mining, Metallurgy and Petroleum standards.



Estimates of
mine reserves may change as estimates and assumptions change and as additional geological data is generated during the course of
operations. Changes in mine reserve estimates may affect carrying values of the Company’s inventory, property, plant and
equipment, mineral exploration projects, reclamation provisions and deferred income taxes.



| | (iv) | Capitalization of mineral exploration projects:
| | ---- | -----------------------------------------------



The Company’s
accounting policy for exploration costs results in certain items being capitalized according to the expected recoverability of
the projects. This policy requires management to make certain estimates and assumptions as to future events and circumstances,
in particular whether an economically viable extraction operation can be established. Any such estimates and assumptions may change
as new information becomes available. If, after having capitalized the costs, a judgment is made that recovery of the costs is
unlikely, the relevant capitalized amount will be written off to earnings.



12







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | (v) | Production start date:
| | --- | ----------------------



The Company
assesses the stage of each mineral exploration project to determine when a mine is substantially complete and ready for its intended
use. Once this stage is obtained, amortization of the mine will commence. The Company considers various criteria to assess when
the mine has reached the production stage, including completion of a reasonable amount of testing of the mine plant and equipment,
and the ability to sustain ongoing production of gold in a saleable form. The judgment used to apply these criteria could impact
the amortization commencement date.



| | (vi) | Reclamation provision:
| | ---- | ----------------------



The Company’s
mining and exploration activities are subject to various laws and regulations governing the protection of the environment. In general,
these laws and regulations are continually changing and, over time, becoming more restrictive which impacts the cost of retiring
assets at the end of their useful lives. The Company recognizes liabilities for reclamation provisions in the period in which they
are incurred. A corresponding increase to the carrying amount of the related asset, where one is identifiable, is recorded and
amortized over the life of the asset. Where a related asset is not easily identifiable with a liability, the change in fair value
over the course of the period is expensed. Over time, the reclamation provision will be increased each period to reflect the interest
element (accretion) reflected in its initial measurement at fair value, and will also be adjusted for changes in the estimate of
the amount, timing and cost of the work to be carried out. Additionally, future changes to environmental laws and regulations could
increase the extent of reclamation and remediation work required to be performed by the Company.



| | (vii) | Stock-based compensation:
| | ----- | -------------------------



The Company
includes an estimate of forfeitures, share price volatility, expected life and risk-free interest rates in the calculation of the
liability for certain long-term incentive plans. These estimates are based on previous experience and may change throughout the
life of an incentive plan. Such changes could impact the carrying value of the deferred compensation liability, mineral exploration
projects, inventory and earnings.



| | (viii) | Determination of functional currency:
| | ------ | -------------------------------------



The functional
currency of the Company has been assessed by management based on consideration of the currency and economic factors that mainly
influence the Company’s gold sales, production and operating costs, financing and related transactions. Changes to these
factors may have an impact on the judgment applied in the determination of the Company’s functional currency.



| | (ix) | Capitalization of borrowing costs:
| | ---- | ----------------------------------



Borrowing costs
are identified for capitalization to property, plant and equipment construction projects until such time that the constructed asset
is substantially complete and ready for its intended use. Borrowing costs related to specific borrowings are identified for capitalization
to mineral exploration projects until such time that the mine is substantially complete and ready for its intended use. Amounts
to be capitalized are estimated based on costs incurred to date and the interest rate of specific borrowings or the weighted average
borrowing costs of general borrowings. The judgment used to identify mines or assets that require capitalization of borrowing costs
could impact the carrying value of those assets, depletion and amortization and interest expense.



13







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | (x) | Identification of impairment:
| | --- | -----------------------------



The Company
considers, at the end of each accounting period, whether or not there has been an impairment of the capitalized mineral exploration
projects, or property, plant and equipment. For producing and non-producing mining properties, this assessment is based on the
expected future cash flows to be generated from the asset. If the Company determines there has been an impairment because its prior
estimates of future cash flows have proven to be inaccurate, due to reductions in the price of gold, increases in the costs of
production, reductions in the amount of reserves expected to be recovered or otherwise, the Company would be required to write-down
the recorded value of its mineral explorations projects, or property, plant and equipment, which would reduce the Company’s
earnings and net assets.



| | (xi) | Recoverable taxes:
| | ---- | ------------------



In Brazil,
the Company is due refunds of certain taxes based on consumption, of which the timing of realization is uncertain. If these recoverable
taxes are not collected, it could reduce the carrying value of these assets.



| | (xii) | Deferred taxes:
| | ----- | ---------------



The Company
recognizes the deferred tax benefit related to tax assets and tax losses to the extent recovery is probable. Assessing the recoverability
of deferred income tax assets requires management to make significant estimates of future taxable profit and expected timing of
reversals of existing temporary differences. To the extent that future cash flows and taxable profit differ significantly from
estimates, the ability of the Company to realize the deferred tax assets recorded at the balance sheet date could be impacted.
In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods from
tax assets and tax losses.



| | 3. | Significant Accounting Policies:
| | -- | --------------------------------



| | (a) | Existing accounting policies:
| | --- | -----------------------------



| | (i) | Basis of consolidation:
| | --- | -----------------------



Subsidiaries
are entities controlled by the Company. The financial statements of the subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases. The accounting policies of the subsidiaries
have been changed when necessary to align them with the policies adopted by the Company.



| | (ii) | Cash and cash equivalents:
| | ---- | --------------------------



The Company considers
deposits in banks, certificates of deposit and short-term investments with remaining maturities of three months or less at the
time of acquisition to be cash and cash equivalents. Cash held on deposit as security is classified as restricted cash.



| | (iii) | Short-term investments:
| | ----- | -----------------------



Short-term investments
include short-term money market instruments with terms to maturity at the date of the acquisition of between three and twelve months.
Short-term investments are classified as fair value through profit or loss (“FVTPL”) and recorded at fair value.



14







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | (iv) | Inventory:
| | ---- | ----------



Gold in process
and ore in stockpiles are stated at the lower of the average total production cost or net realizable value. Production costs include
direct labour, employee benefits, direct material and other direct product costs including depletion and amortization. Net realizable
value represents estimated selling price in the ordinary course of business, less any further costs expected to be incurred to
completion.



Raw materials
and mine operating supplies are stated at the lower of weighted average cost, and net realizable value.



The nature of
the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing
process is monitored and the engineering estimates are refined based on actual results over time. The ultimate recovery of gold
from a leach pad will not be known until the leaching process is concluded.



| | (v) | Property, plant and equipment:
| | --- | ------------------------------



The Company’s
property, plant and equipment are recorded at cost less accumulated amortization and accumulated impairment losses. Amortization
is recorded over the estimated useful lives of the assets, after taking into account residual values as follows:



|Processing plants      | - over plant life, straight-line basis   
|---------------------- | -----------------------------------------
|Vehicles               | - 5 years, straight line                 
|Equipment              | - 5 -10 years, straight line             
|Leasehold improvements | - over term of lease, straight-line basis
|Mining properties      | - unit-of-production method(1)           



When parts
of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components)
of property, plant and equipment. Amortization is adjusted prospectively if there is a change in useful lives, reserve base or
residual values.



(1)Depletion
of mining properties and amortization of preproduction and development costs are calculated and recorded on the unit-of-production
basis over the mine’s estimated and economically proven and probable reserves and the portion of mineralization resources
expected to be classified as reserves.



| | (vi) | Stripping costs:
| | ---- | ----------------



Stripping
costs incurred in the production phase of a mining operation are accounted for as production costs and are included in the costs
of inventory produced, unless the stripping activity can be shown to be a betterment of the mineral property, in which case the
stripping costs are capitalized. Betterment occurs when the stripping activity increases future output of the mine by providing
access to additional reserves. Capitalized stripping costs are amortized on a unit-of-production basis over the economically recoverable
proven and probable reserve ounces of gold to which they relate.



| | (vii) | Impairment:
| | ----- | -----------



The carrying
value of all categories of property, plant and equipment and mineral exploration projects are reviewed at each reporting date for
impairment whenever events or circumstances indicate the recoverable amount may be less than the carrying amount. The recoverable
amount is the greater of its value-in-use and its fair value less cost to sell.





15









Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years
ended December 31, 2012 and 2011



Value-in-use
is based on estimates of discounted future cash flows expected to be recovered from an asset or the smallest group of assets that
largely generates independent cash inflows (cash generating units or “CGUs”) through their use. Estimated future cash
flows are calculated using estimates of future recoverable reserves and resources, future commodity prices and expected future
operating and capital costs. Once calculated, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.



Fair value less
cost to sell is the amount obtainable from the sale of an asset or CGU in an arm’s length transaction between knowledgeable,
willing parties, less the costs of disposal. Costs of disposal are incremental costs directly attributable to the disposal of
an asset or CGU, excluding finance costs and income tax expense.



An impairment
loss is recognized when the carrying value of an asset held for use exceeds its estimated recoverable amount. Impairment losses
recognized in respect of CGUs are allocated to reduce the carrying amounts of the other assets in the unit (group of units) on
a pro-rata basis. Impairment losses are recognized in other expenses. Assumptions, such as gold price, discount rate, foreign
exchange rate and expenditures underlying the fair value estimates are subject to risks and uncertainties. Impairment charges
are recorded in the reporting period in which determination of impairment is made by management.



Impairment
losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount and
only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined,
net of depletion or amortization, if no impairment loss had been recognized.



| | (viii) | Mineral exploration projects:
| | ------ | -----------------------------



The Company
classifies exploration costs as green field or brown field according to the expected recoverability of the projects. Green field
exploration costs are exploration costs from the first evaluation of the target area through to the completion of a scoping study.
All costs related to green field are expensed and included in exploration costs in the consolidated statements of operations and
comprehensive loss.



Exploration
costs incurred subsequent to confirmation of an area’s potential, are classified as brown field exploration costs. The Company
considers its brown field exploration costs to have the characteristics of property, plant and equipment. As such, the Company
defers brown field exploration costs, including acquisition costs, field exploration and field supervisory costs relating to specific
properties until those properties are brought into production.



After a mine
property has been brought into development the related costs will be transferred to property, plant and equipment. When specific
properties have been brought into production the deferred costs will be amortized on a unit of production basis based on their
estimated economic lives or until the properties are abandoned, sold, or considered to be impaired in value, at which time an
appropriate charge will be made.



The recoverability
of the amounts shown for mineral exploration projects is dependent on the existence of economically recoverable reserves, the
ability to obtain financing to complete the development of such reserves and meet obligations under various agreements, and the
success of future operations or dispositions. If a project does not prove viable, all unrecoverable costs associated with the
project net of any related existing impairment provisions are written off.



16







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years
ended December 31, 2012 and 2011



| | (ix) | Income taxes:
| | ---- | -------------



Income tax expense
comprises current and deferred income taxes. Income tax expense is recognized in the statements of operations and comprehensive
loss except to the extent that it relates to items recognized directly in equity.



Current income
taxes



Current income
taxes are the expected taxes payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to taxes payable in respect of previous years.



Deferred
income taxes



The Company
accounts for deferred income taxes under the asset and liability method. Under this method of tax allocation, deferred income
and mining tax assets and liabilities are determined based on differences between the financial statement carrying values and
their respective income tax bases (temporary differences).



Deferred income
taxes are measured using the tax rates that are expected to be in effect when the temporary differences are likely to reverse,
based on the laws that have been enacted or substantively enacted by the reporting date. The effect on deferred income tax assets
and liabilities of a change in tax rates is included in earnings in the period in which the change is substantively enacted. The
amount of deferred income tax assets recognized is limited to the amount that is probable to be realized.



| | (x) | Reclamation provisions:
| | --- | -----------------------



The Company
recognizes a provision arising from legal and constructive obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or normal operation of a long-lived asset. A reclamation provision
is a monetary item that is recorded in the period in which it is incurred and is estimated based on the present value of the expenditures
expected to settle the obligation, using estimated cash flows based on current prices adjusted for inflation. These estimates
are discounted at a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the
liability. When the reclamation provision is initially recorded, the cost is capitalized by increasing the carrying amount of
the related long-lived asset. The Company amortizes the amount added to the asset using the amortization method established for
the related asset. The amortization expense is included in the statements of operations and comprehensive loss and accounted for
in depletion and amortization. An accretion expense in relation to the discounted provision over the remaining life of the mining
properties is accounted for in the statements of operations and comprehensive loss and added to the reclamation provision. The
provision is adjusted at the end of each reporting period to reflect the passage of time, changes in foreign exchange rates, specific
risks, changes in discount rates and changes in the estimated future cash flows underlying the obligation. Upon settlement of
the liability, a gain or loss is recorded.



| | (xi) | Other provisions:
| | ---- | -----------------



Provisions are
recorded when a legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation
can be made. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation
estimated at the end of each reporting period, taking into account the risks and uncertainties surrounding the obligation and
is measured using the present value of cash flows estimated to settle the present obligation.

17







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | (xii) | Foreign currency translation:
| | ----- | -----------------------------



The U.S. dollar
is considered to be the functional currency of the Company and of its subsidiaries. Monetary assets and liabilities of the Company's
Brazilian operations are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date, and non-monetary
assets and liabilities are translated at the historical rate of exchange. Transactions in foreign currencies are translated at
the actual rates of exchange. Foreign currency gains and losses are recognized in the statements of operations and comprehensive
loss.



| | (xiii) | Revenue recognition:
| | ------ | --------------------



The Company
produces gold doré which is further refined by a third party. Revenue from gold doré is recognized when title is
transferred, delivery is completed, and when the Company has reasonable assurance with respect to measurement and collectability.



| | (xiv) | Stock-based compensation:
| | ----- | -------------------------



The Company
has stock-based compensation plans, which are described in Notes 14 and 15. The Company accounts for all equity-settled stock-based
payments using a fair value based method incorporating the Black-Scholes model.



Under the fair
value based method, compensation cost attributable to options granted is measured at fair value at the grant date and amortized
on a straight-line basis over the vesting period. The amount recognized as an expense is adjusted to reflect any changes in the
Company’s estimate of the shares that will eventually vest and the effect of any non-market vesting conditions.



The Company
treats awards that call for settlement in cash, including share appreciation rights and performance awards, as liabilities. The
value of these liabilities is re-measured at each reporting period at fair value. Any gains or losses on re-measurement are recorded
in the statements of operations and comprehensive loss. For any changes in the estimated forfeiture of the awards, the accrued
compensation cost will be adjusted in the period in which the change of estimate is determined.



Share-based
payment arrangements in which the Company receives goods or services as consideration are measured at the fair value of the good
or service received, unless that fair value cannot be estimated reliably.



| | (xv) | Earnings (loss) per share:
| | ---- | --------------------------



Basic
earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders by the weighted average
number of common shares outstanding during the period. The dilutive effect of outstanding options and warrants and their equivalents
are reflected in diluted earnings (loss) per share by the application of the treasury method. The computation of diluted earnings
(loss) per share assumes conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance
would have a dilutive effect on earnings per share.



18







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | (xvi) | Financial instruments - recognition
                                                               and measurement:
| | ----- | -------------------------------------------------------------------------------------------------------------------



The Company
classifies all financial instruments as either held-to-maturity, FVTPL, loans and receivables, available-for-sale, or other financial
liabilities.



| | · | Held-to-maturity
                                                                                                             financial assets
                                                                                                             are initially recognized
                                                                                                             at their fair values
                                                                                                             and subsequently
                                                                                                             measured at amortized
                                                                                                             cost using the effective
                                                                                                             interest method.
                                                                                                             Impairment losses
                                                                                                             are charged to earnings
                                                                                                             in the period in
                                                                                                             which they arise.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | FVTPL
                                                                                                             financial instruments
                                                                                                             are carried at fair
                                                                                                             value with changes
                                                                                                             in fair value charged
                                                                                                             or credited to earnings
                                                                                                             in the period in
                                                                                                             which they arise.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Loans
                                                                                                             and receivables are
                                                                                                             initially recognized
                                                                                                             at their fair values,
                                                                                                             with any resulting
                                                                                                             premium or discount
                                                                                                             from the face value
                                                                                                             being amortized to
                                                                                                             earnings using the
                                                                                                             effective interest
                                                                                                             method. Impairment
                                                                                                             losses are charged
                                                                                                             to earnings in the
                                                                                                             period in which they
                                                                                                             arise.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Available-for-sale
                                                                                                             financial instruments
                                                                                                             are carried at fair
                                                                                                             value with changes
                                                                                                             in the fair value
                                                                                                             charged or credited
                                                                                                             to other comprehensive
                                                                                                             income. Impairment
                                                                                                             losses are charged
                                                                                                             to earnings in the
                                                                                                             period in which they
                                                                                                             arise.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Other
                                                                                                             financial liabilities
                                                                                                             are initially measured
                                                                                                             at cost or amortized
                                                                                                             cost, net of transaction
                                                                                                             costs and any embedded
                                                                                                             derivatives that
                                                                                                             are not closely related
                                                                                                             to the financial
                                                                                                             liability, depending
                                                                                                             upon the nature of
                                                                                                             the instrument with
                                                                                                             any resulting premium
                                                                                                             or discount from
                                                                                                             the face value being
                                                                                                             amortized to earnings
                                                                                                             using the effective
                                                                                                             interest method.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                             following is a summary
                                                                                                             of the financial
                                                                                                             instruments outstanding
                                                                                                             and classifications
                                                                                                             as at December 31,
                                                                                                             2012:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Cash
    and cash equivalents                |  | Loans
    and receivables      
|-------------------------------------------- |  | -------------------------------
|Restricted cash                              |  | Loans and receivables          
|Loan receivable                              |  | Loans and receivables          
|Derivative assets
    and liabilities        |  | FVTPL                          
|Accounts payable
    and accrued liabilities |  | Other financial
    liabilities
|Other provisions                             |  | Other financial
    liabilities
|Notes payable                                |  | Other financial
    liabilities
|Option component
    of convertible notes    |  | FVTPL                          



The
Company has used certain derivative financial instruments, principally forward sales contracts and commodity option contracts
to manage commodity price exposure on gold sales and forward foreign exchange contracts to manage exposure to changes in foreign
exchange rates. Derivative financial instruments are used for risk management purposes and not for generating trading profits.
Derivative financial instruments are not accounted for as hedges. Unrealized gains and losses on the derivative financial instruments
are recognized in the statements of operations and comprehensive loss. Unrealized gains and losses on forward sales contracts
are a result of the difference between the forward spot price of the gold and the forward sales contract price. Unrealized gains
and losses on forward foreign exchange contracts are primarily a result of the difference between the forward currency contract
price and the spot price of the Brazilian reais (R$).



19







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | (xvii) | Borrowing costs:
| | ------ | ----------------



Borrowing
costs directly related to the financing of qualifying capital projects under construction are added to the capitalized cost of
those projects during the construction phase, until such time that the assets are substantially ready for their intended use or
sale which in the case of mining properties is when they are capable of commercial production. Specific borrowings to finance
a project are capitalized as the actual borrowing costs are incurred. Interest expense on general borrowings is capitalized to
qualifying capital projects using a weighted average of the borrowing costs applicable to the Company during the period.



All other
borrowing costs, including the foreign currency translation on the principal borrowed, are recognized in the statements of operations
and comprehensive loss in the period in which they are incurred.



| | (b) | Accounting standards and
                                                                    interpretations issued but not yet implemented:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------



Accounting standards
and interpretations issued but not yet implemented are as follows:



IFRS 7 Financial
Instruments – Disclosures (“IFRS 7”) was amended by the IASB in October 2011 and provides guidance on identifying
transfers of financial assets and continuing involvement in transferred assets for disclosure purposes. The amendments introduce
new disclosure requirements for transfers of financial assets including disclosures for financial assets that are not derecognized
in their entirety, and for financial assets that are derecognized in their entirety but for which continuing involvement is retained.
The Company intends to adopt IFRS 7 in its financial statements for the annual period beginning on January 1, 2013. The Company
does not expect IFRS 7 to have a material impact on its financial statements.



The IASB has
issued IFRS 9 Financial Instruments (“IFRS 9”) which proposes to replace IAS 39 Financial Instruments Recognition
and Measurement. The replacement standard has the following significant components: establishes two primary measurement categories
for financial assets — amortized cost and fair value; establishes criteria for classification of financial assets within
the measurement category based on business model and cash flow characteristics; and eliminates existing held to maturity, available-for-sale
and loans and receivable categories. This standard is effective for the Company’s annual period beginning January 1, 2015.
The Company will evaluate the impact of the change to its consolidated financial statements based on the characteristics of its
financial instruments at the time of adoption.



IFRS 10 Consolidated
Financial Statements (“IFRS 10”), which replaces parts of IAS 27, Consolidated and Separate Financial Statements (“IAS
27”) and all of SIC-12 Consolidation – Special Purpose Entities, changes the definition of control which is the determining
factor in whether an entity should be consolidated. Under IFRS 10, an investor controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power
over the investee. The Company intends to adopt IFRS 10 in its financial statements for the annual period beginning on January
1, 2013. The Company does not expect IFRS 10 to have a material impact on its financial statements.



IFRS 11 Joint
Arrangements (“IFRS 11”), which replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities
– Non-monetary Contributions by Venturers, requires a venturer to classify its interest in a joint arrangement as either
a joint operation or a joint venture. For a joint operation, the joint operator will recognize its assets, liabilities, revenue
and expenses, and/or its relative share thereof. For a joint venture, the joint venturer will account for its interest in the
venture’s net assets using the equity method of accounting. This is a change from the existing standards, under which the
Company chose to proportionally consolidate joint ventures. The Company intends to adopt this standard effective January 1, 2013.
The Company does not expect IFRS 11 to have a material impact on its financial statements.



20







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



IFRS 12 Disclosure
of Interests in Other Entities (“IFRS 12”) is a new and comprehensive standard on disclosure requirements for all
forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off-balance
sheet vehicles. The required disclosures aim to provide information in order to enable users to evaluate the nature of, and the
risks associated with, an entity’s interest in other entities, and the effects of those interests on the entity’s
financial position, financial performance and cash flows. The Company intends to adopt IFRS 12 in its financial statements for
the annual period beginning on January 1, 2013. The Company does not expect IFRS 12 to have a material impact on its financial
statements.



IFRS 13 Fair
Value Measurement (“IFRS 13”) replaces the fair value measurement guidance contained in individual IFRSs with a single
source of fair value measurement guidance. It defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date, i.e. an exit price. The
standard also establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements
to provide information that enables financial statement users to assess the methods and inputs used to develop fair value measurements
and, for recurring fair value measurements that use significant unobservable inputs (Level 3), the effect of the measurements
on profit or loss or other comprehensive income. The Company intends to adopt IFRS 13 in its financial statements for the annual
period beginning on January 1, 2013. The Company does not expect IFRS 13 to have a material impact on its financial statements.



IFRIC 20 Stripping
Costs in the Production Phase of a Surface Mine (“IFRIC 20”) sets out the accounting for overburden waste removal
(stripping) costs in the production phase of a mine. The new interpretation clarifies when production stripping should lead to
the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. It considers when
and how to account separately for benefits arising from the stripping activity and how to measure these benefits both initially
and subsequently. It prescribes that the costs of stripping activity be accounted for in accordance with the principles of IAS
2 Inventories to the extent that the benefit from the stripping activity is realized in the form of inventory produced. On the
other hand, the costs of stripping activity which provides a benefit in the form of improved access to ore in future periods is
recognized as a non-current 'stripping activity asset' when specified criteria are met. The Company intends to adopt IFRIC 20
in its financial statements for the annual period beginning on January 1, 2013. The impact of these changes on the Company ́s
financial statements is currently under review in preparation for first quarter 2013 financial reporting and have not yet been
determined.



21







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | 4. | Inventory:
| | -- | ----------



Inventory is
comprised of the following:



|                                                           |  | 2012 |        |   | 2011 |  
|---------------------------------------------------------- |  | ---- | ------ | - | ---- | -
|Raw materials                                              |  | $    | 3,483  |   |      | $
|Mine operating supplies                                    |  |      | 9,221  |   |      |  
|Ore stockpiles                                             |  |      | 1,308  |   |      |  
|Gold in process                                            |  |      | 12,330 |   |      |  
|                                                           |  | $    | 26,342 |   |      | $
|                                                           |  |      |        |   |      |  
|Depletion and amortization
    costs included in inventory |  |      |        |   |      |  
|Ore stockpiles                                             |  | $    | 262    |   |      | $
|Gold in process                                            |  |      | 3,185  |   |      |  
|                                                           |  | $    | 3,447  |   |      | $
|                                                           |  |      |        |   |      |  
|Stock-based compensation costs
    included in inventory   |  |      |        |   |      |  
|Ore stockpiles                                             |  | $    | -      |   |      | $
|Gold in process                                            |  |      | (5     | ) |      |  
|                                                           |  | $    | (5     | ) |      | $



During
2012, the Company incurred an inventory write-down of $1.8 million (2011 - $2.2 million), included within production costs.



| | 5. | Prepaid Expenses and Sundry Assets:
| | -- | -----------------------------------



|                                                          |  | 2012 |        |  | 2011 |  
|--------------------------------------------------------- |  | ---- | ------ |  | ---- | -
|Recoverable taxes                                         |  | $    | 65,918 |  |      | $
|Advances to suppliers                                     |  |      | 961    |  |      |  
|Sundry receivables from related parties Note 17(c)        |  |      | 1,124  |  |      |  
|Receivables from sales of tax credits                     |  |      | 7,983  |  |      |  
|Prepaid financing fees Note 10(e)                         |  |      | 691    |  |      |  
|Other                                                     |  |      | 278    |  |      |  
|                                                          |  | $    | 76,955 |  |      | $
|Less:                                                     |  |      |        |  |      |  
|Long-term recoverable taxes                               |  | $    | 56,886 |  |      | $
|Sundry receivables from related
    parties Note 17(c)    |  |      | -      |  |      |  
|                                                          |  | $    | 56,886 |  |      | $
|Current portion of prepaid expenses
    and sundry assets |  | $    | 20,069 |  |      | $



The
Company is required to pay certain taxes in Brazil that are based on purchases of consumables and property, plant and equipment.
These taxes are recoverable from the Brazilian tax authorities through various methods. As at December 31, 2012, total recoverable
taxes denominated in Brazilian reais (R$) amounted to R$134.7 million ($65.9 million), (December 31, 2011 – R$121.4 million
($64.7 million)).



22







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



The
Company has the possibility to sell part of its tax credits and use the credits to purchase certain machinery and equipment (see
Note 8). The receivable from sales of tax credits relates to the sales of ICMS (VAT) to other companies.



Sundry
receivables are due from Brazilian Resources Inc. (“BZI”) and IMS Engenharia Mineral Ltda. (“IMS”).
See note 17(c).



| | 6. | Risk Management Policies:
| | -- | -------------------------



| | (a) | Derivative financial instruments:
| | --- | ---------------------------------



| | (i) | Commodity option contracts:
| | --- | ---------------------------



During the
year ended December 31, 2011, the Company sold European style commodity gold call options. None were sold during 2012. Included
in loss on derivatives for the year ended December 31, 2011 is $194,000 of realized losses on commodity option derivatives (year
ended December 31, 2012 - $nil).



| | (ii) | Forward
                                                                                                            sales contracts:
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------



During October
2012, the Company entered into gold forward contracts to sell 7,900 ounces at $1,775. These contracts settled during the fourth
quarter of 2012 at a gain of $600,000. As at December 31, 2012, no gold forward contracts were outstanding (December 31, 2011
- $nil).



| | (iii) | Forward
                                                                                                             foreign exchange
                                                                                                             contracts:
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As at December
31, 2012, the Company has forward foreign exchange contracts to purchase Brazilian reais (R$) as follows:



|Settlement Date |  | Amount in US$ |        |  | Settlement amount in
    R$ |   
|--------------- |  | ------------- | ------ |  | --------------------------- | --
|31-Jan-13       |  | $             | 1,000  |  |                             | R$
|31-Jan-13       |  |               | 1,000  |  |                             |   
|31-Jan-13       |  |               | 1,000  |  |                             |   
|31-Jan-13       |  |               | 1,000  |  |                             |   
|28-Feb-13       |  |               | 1,000  |  |                             |   
|28-Feb-13       |  |               | 1,000  |  |                             |   
|28-Feb-13       |  |               | 1,000  |  |                             |   
|28-Feb-13       |  |               | 1,000  |  |                             |   
|28-Mar-13       |  |               | 1,500  |  |                             |   
|28-Mar-13       |  |               | 1,500  |  |                             |   
|30-Apr-13       |  |               | 1,000  |  |                             |   
|30-Apr-13       |  |               | 1,000  |  |                             |   
|31-May-13       |  |               | 1,000  |  |                             |   
|31-May-13       |  |               | 1,000  |  |                             |   
|                |  | US$           | 15,000 |  |                             | R$



As at December
31, 2011, the Company had no forward foreign exchange contracts outstanding.



As at December
31, 2012, derivative assets include $43,000 of unrealized foreign exchange gain relating to the forward foreign exchange contracts
(December 31, 2011 – $nil). Included in the statement of operations and comprehensive loss are the following amounts related
to foreign exchange derivatives:



23







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



|                       |  | 2012 |      |   | 2011 |  
|---------------------- |  | ---- | ---- | - | ---- | -
|Unrealized (gain) loss |  | $    | (43  | ) |      | $
|Realized (gain) loss   |  |      | (77  | ) |      |  
|                       |  | $    | (120 | ) |      | $



The terms
of the Company ́s bank agreement required funds to be held on deposit as collateral at December 31, 2012, for the above derivative
financial instruments. As at December 31, 2012, $300,000 of cash was restricted for this facility (December 31, 2011 – $800,000).



| | (b) | Financial instruments:
| | --- | ----------------------



| | (i) | Credit risk:
| | --- | ------------



Credit risk
arises from cash held with banks, derivative financial instruments with positive fair values and credit exposure to customers.
The credit risk is limited to the carrying amount on the balance sheet.



The Company
is exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but
does not expect any counterparties to fail to meet their obligations. The Company ́s cash and cash equivalents are held through
large financial institutions in Brazil, Canada and the United States. The Company manages its credit risk by entering into transactions
with high-credit quality counterparties, limiting the amount of exposure to each counterparty where possible and monitoring the
financial condition of the counterparties.



| | (ii) | Liquidity risk:
| | ---- | ---------------



Liquidity
risk is the risk that the Company will not be able to meet the obligations associated with its financial liabilities. The Company
manages liquidity risk through the management of its capital structure as outlined in Note 19. The Company has a $21.3 million
working capital deficit as at December 31, 2012 (December 31, 2011 – $46.8 million of working capital). Accounts payable
and accrued liabilities, current portion of notes payable, reclamation provisions, deferred compensation liabilities, income taxes
payable, other provisions and other liabilities are due within the current operating period. The Company’s financial liabilities
and other commitments are listed in Note 20.



The Company
has arranged a new credit facility to improve its liquidity, as described in Note 10(e) as it completes its restructuring activities.



| | (iii) | Currency risk:
| | ----- | --------------



The Company
is exposed to the financial risk related to the fluctuation of foreign exchange rates. Financial instruments that impact the Company’s
net earnings due to currency fluctuations include: Brazilian reais and Canadian dollar denominated cash and cash equivalents,
recoverable taxes, accounts payable and accrued liabilities, notes payable, taxes payable, reclamation and other provisions, and
deferred compensation liabilities.



The table
below summarizes a sensitivity analysis for significant unsettled currency risk exposure with respect to the Company’s financial
instruments as at December 31, 2012 and December 31, 2011 with all other variables held constant. It shows how income before taxes
would have been affected by changes in the relevant risk variable that were reasonably possible at that date.



24







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



|Exchange Rates                  |  | Change for Sensitivity Analysis |  | Impact of Change to
    2012 Foreign Exchange Gain/Loss |       |  | Impact of Change to
    2011 Foreign Exchange Gain/Loss |  
|------------------------------- |  | ------------------------------- |  | ------------------------------------------------------- | ----- |  | ------------------------------------------------------- | -
|U.S. dollar per Brazilian reais |  | 10% change in Brazilian reais   |  | $                                                       | 1,971 |  |                                                         | $
|U.S. dollar per Canadian dollar |  | 10% change in Canadian dollar   |  |                                                         | 56    |  |                                                         |  



| | (iv) | Interest rate risk:
| | ---- | -------------------



The Company
is exposed to interest rate risk on its outstanding borrowings and short-term investments. The Company managed its risk by entering
into long-term agreements with fixed interest rates on 100% of its debt with interest rates ranging from 0% to 8.9% per annum
(2011 – 0% to 6.35% per annum).



| | (v) | Price
                                                                                                           risk:
| | --- | ----------------------------------------------------------------------------------------------------------------------



The Company
is exposed to price risk with respect to gold prices on gold production. The Company placed hedge contracts for 7,900 ounces of
gold during 2012 and had no gold hedges in place as of December 31, 2012 (December 31, 2011 – nil) (Note 6 (a)).



| | (vi) | Stock-based
                                                                                                            compensation risk:
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------



The Company
is exposed to the risk of increased compensation expense due to the increase in the Company’s share price.



The Company’s
compensation expense is subject to volatility due to the movement of share price and its impact on the value of certain stock-based
compensation programs. These programs, as described in Note 15 include Deferred Stock Units (“DSUs”), Restricted Stock
Units (“RSUs”) and Share Appreciation Rights (“SARs”). Under the program, the DSUs and RSUs represent
rights to receive cash settlement from the Company equivalent to the market price of the common shares on the date of exercise.
The SARs represent rights to receive cash settlement from the Company equivalent to the amount by which the market price of the
Company’s common shares at the time of exercise exceeds the market price of such shares at the time of grant. For the year
ended December 31, 2012, a strengthening of $1.00 in the price of the Company’s common shares would have had an unfavourable
impact of approximately $549,000 (2011 - $1.8 million) in income before income taxes. For the year ended December 31, 2012, a
weakening of $1.00 in the price of the Company’s common shares would have had a favourable impact of approximately $321,000
(2011 - $1.6 million).



| | (vii) | Fair value estimation:
| | ----- | ----------------------



IFRS 7 Financial
Instruments - Disclosures prescribes the following three-level fair value hierarchy for disclosure purposes based on the transparency
of the inputs used to measure the fair values of the assets and liabilities:



| | a. | Level 1 –
                                                                                  quoted prices (unadjusted) of identical instruments
                                                                                  in active markets that the reporting entity
                                                                                  has the ability to access at the measurement
                                                                                  date.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Level 2 – inputs
                                                                are quoted prices of similar instruments in active markets; quoted
                                                                prices for identical or similar instruments in markets that are
                                                                not active; inputs other than quoted prices used in a valuation
                                                                model that are observable for that instrument; and inputs that
                                                                are derived principally from or corroborated by observable market
                                                                data by correlation or other means.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | c. | Level 3 – one or more significant
                                                                inputs used in a valuation technique are unobservable for the
                                                                instruments.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Determination
of fair value and the resulting hierarchy requires the use of observable market data whenever available. The classification of
a financial instrument in the hierarchy is based upon the lowest level of input that is significant to the measurement of fair
value.



The fair
values of the Company’s financial assets and financial liabilities that are measured at fair value on a recurring basis
as at December 31, 2012 and December 31, 2011 are as follows:



|December 31, 2012                 
|----------------------------------
|                                  
|                                  
|                                  
|Financial assets                  
|Derivatives                       
|Forward foreign exchange contracts



|December 31, 2011   
|--------------------
|                    
|                    
|                    
|Financial
    assets
|None                



|December 31, 2012                    
|-------------------------------------
|                                     
|                                     
|                                     
|Financial liabilities                
|Option component of convertible notes



|December 31, 2011                    
|-------------------------------------
|                                     
|                                     
|                                     
|Financial liabilities                
|Option component of convertible notes



The option
components of the convertible notes (Note 10) are fair valued using the Crank-Nicolson valuation model which requires inputs,
such as volatility and credit spread, which are both unobservable and significant, and therefore are categorized as Level 3 in
the fair value hierarchy.



The table
below summarizes a sensitivity analysis for the inputs of volatility and credit spread as at December 31, 2012 and December 31,
2011 with all other variables held constant. It shows how the option component of the convertible notes and income before taxes
would have been affected by changes in these relevant risk variables that were reasonably possible at that date.



26







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



Impact to
option component of convertible notes:



|              |  | Change for Sensitivity |  | Impact of Changes as at |      |   | Impact of Changes as at |  
|------------- |  | ---------------------- |  | ----------------------- | ---- | - | ----------------------- | -
|Assumption    |  | Analysis               |  | December 31, 2012       |      |   | December 31, 2011       |  
|              |  |                        |  |                         |      |   |                         |  
|Volatility    |  | 5% increase            |  | $                       | 457  |   |                         | $
|              |  | 5% decrease            |  |                         | (456 | ) |                         |  
|              |  |                        |  |                         |      |   |                         |  
|Credit spread |  | 1% increase            |  |                         | 40   |   |                         |  
|              |  | 1% decrease            |  |                         | (42  | ) |                         |  



The carrying
amount of the option components of the convertible notes was $4.5 million at December 31, 2012 (December 31, 2011 - $79.9 million).
The change in fair value of $75.5 million for the year ended December 31, 2012 is shown as a gain on conversion option embedded
in convertible debt in the statements of operations and comprehensive loss (December 31, 2011 - $32.3 million loss).



|                                                |  | 2012     |         |  | 2011  | 
|----------------------------------------------- |  | -------- | ------- |  | ----- | 
|                                                |  | Carrying |         |  | Fair  | 
|                                                |  | Value    |         |  | Value | 
|Financial Assets                                |  |          |         |  |       | 
|Cash
    and cash equivalents(1)                |  | $        | 13,856  |  |       | 
|Restricted
    cash(1)                          |  |          | 609     |  |       | 
|Loan
    receivable from related party(3)       |  |          | 811     |  |       | 
|Derivatives(2)                                  |  |          |         |  |       | 
|Forward foreign exchange contracts              |  |          | 43      |  |       | 
|                                                |  |          |         |  |       | 
|Financial Liabilities                           |  |          |         |  |       | 
|Accounts
    payable and accrued liabilities(1) |  | $        | 29,745  |  |       | 
|Other
    provisions(4)                         |  |          | 4,796   |  |       | 
|Notes
    payable(3)                            |  |          | 267,546 |  |       | 
|Option
    component of convertible notes(5)    |  |          | 4,458   |  |       | 
|Deferred
    compensation liabilities(6)        |  |          | 321     |  |       | 



| | (1) | Cash and cash equivalents and
                                                                restricted cash are recorded at their carrying values. The carrying
                                                                value of accounts payable and accrued liabilities approximate
                                                                their fair values due to their immediate or short term to maturity.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The fair value of derivative
                                                                  contracts is based on their listed market price, if available.
                                                                  If a listed market price is not available, then fair value is
                                                                  estimated as follows:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | For forward foreign exchange contracts
                                                               by discounting the difference between the contractual forward price
                                                               and the current forward price for the residual maturity of the
                                                               contract using a risk-free interest rate (based on government bonds).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | For options using a modified Black-Scholes
                                                               model.
| | - | ----------------------------------------------------------------------------------------------------------------

| | (3) | The fair value of the loan receivable
                                                                  and notes payable is based on their market price, if available.
                                                                  If a market price is not available then the fair value is determined
                                                                  by discounting the future cash flows at the current market rate
                                                                  of interest available to the Company. The related parties involved
                                                                  with the loan receivable ceased to be related parties in January
                                                                  and May of 2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The carrying value of other
                                                                  provisions approximates fair value and is determined by discounting
                                                                  the future expected cash outflows where losses are probable.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | The option component of the
                                                                  convertible notes (Note 10) is recorded at fair value. Fair
                                                                  value of the conversion option feature is measured using the
                                                                  Crank-Nicolson model.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | The fair value of Stock Appreciation
                                                                  Rights (“SAR”) liabilities is measured using the
                                                                  Black-Scholes model and is recognized over the service or vesting
                                                                  period. The carrying values, measured using intrinsic value,
                                                                  of the Deferred Stock Unit (“DSU”) and Restricted
                                                                  Stock Unit (“RSU”) liabilities approximates their
                                                                  fair values.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | 7. | Restricted Cash:
| | -- | ----------------



As at December
31, 2012, $109,000 was held in a Certificate of Deposit as security for corporate credit cards (December 31, 2011 - $109,000).
In addition, as at December 31, 2012, $300,000 was restricted as collateral for the foreign exchange contracts (December 31, 2011
- $800,000 (Note 6(a)(iii))). Also as at December 31, 2012, $200,000 was restricted as collateral for the Renvest Credit Facility
(Note 10(e)) (December 31, 2011 - $nil).



| | 8. | Property, Plant and Equipment:
| | -- | ------------------------------



|Property, Plant and Equipment           |  | Processing plant |        |  | Vehicles |   |        | Equipment |  |   | Leasehold improvements |   |  | Assets under
    construction |       |   | Mining properties |   |         | Total | 
|--------------------------------------- |  | ---------------- | ------ |  | -------- | - | ------ | --------- |  | - | ---------------------- | - |  | ----------------------------- | ----- | - | ----------------- | - | ------- | ----- | 
|Cost                                    |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|Balance at January 1, 2011              |  | $                | 13,733 |  |          | $ | 12,684 |           |  | $ | 188,967                |   |  | $                             | 2,208 |   |                   | $ | 8,391   |       | 
|Additions                               |  |                  | 112    |  |          |   | 1,794  |           |  |   | 15,217                 |   |  |                               | 536   |   |                   |   | 16,015  |       | 
|Disposals                               |  |                  | -      |  |          |   | (114   | )         |  |   | (1,538                 | ) |  |                               | -     |   |                   |   | (961    | )     | 
|Reclassify within PPE                   |  |                  | 20     |  |          |   | 78     |           |  |   | 17,785                 |   |  |                               | -     |   |                   |   | (11,673 | )     | 
|Reclassify from MEP                     |  |                  | -      |  |          |   | -      |           |  |   | -                      |   |  |                               | -     |   |                   |   | -       |       | 
|Balance at December 31, 2011            |  | $                | 13,865 |  |          | $ | 14,442 |           |  | $ | 220,431                |   |  | $                             | 2,744 |   |                   | $ | 11,772  |       | 
|                                        |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|Balance at January 1, 2012              |  | $                | 13,865 |  |          | $ | 14,442 |           |  | $ | 220,431                |   |  | $                             | 2,744 |   |                   | $ | 11,772  |       | 
|Additions                               |  |                  | 25     |  |          |   | 3,164  |           |  |   | 3,855                  |   |  |                               | 6     |   |                   |   | 10,379  |       | 
|Interest capitalized                    |  |                  | -      |  |          |   | -      |           |  |   | -                      |   |  |                               | -     |   |                   |   | -       |       | 
|Disposals                               |  |                  | -      |  |          |   | (3,820 | )         |  |   | (7,020                 | ) |  |                               | (430  | ) |                   |   | -       |       | 
|Transfer to assets held for sale        |  |                  | -      |  |          |   | (154   | )         |  |   | (1,748                 | ) |  |                               | -     |   |                   |   | (998    | )     | 
|Reclassify within PPE                   |  |                  | 1,790  |  |          |   | 2      |           |  |   | 16,924                 |   |  |                               | 44    |   |                   |   | (18,760 | )     | 
|Reclassify from MEP                     |  |                  | -      |  |          |   | -      |           |  |   | -                      |   |  |                               | -     |   |                   |   | -       |       | 
|Balance at December 31, 2012            |  | $                | 15,680 |  |          | $ | 13,634 |           |  | $ | 232,442                |   |  | $                             | 2,364 |   |                   | $ | 2,393   |       | 
|                                        |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|Accumulated amortization and impairment |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|Balance at January 1, 2011              |  | $                | 6,786  |  |          | $ | 4,792  |           |  | $ | 36,782                 |   |  | $                             | 378   |   |                   | $ | -       |       | 
|Amortization for the year               |  |                  | 1,003  |  |          |   | 2,344  |           |  |   | 21,022                 |   |  |                               | 585   |   |                   |   | -       |       | 
|Eliminated on disposal                  |  |                  | -      |  |          |   | (95    | )         |  |   | (509                   | ) |  |                               | -     |   |                   |   | -       |       | 
|Balance at December 31, 2011            |  | $                | 7,789  |  |          | $ | 7,041  |           |  | $ | 57,295                 |   |  | $                             | 963   |   |                   | $ | -       |       | 
|                                        |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|Balance at January 1, 2012              |  | $                | 7,789  |  |          | $ | 7,041  |           |  | $ | 57,295                 |   |  | $                             | 963   |   |                   | $ | -       |       | 
|Amortization for the year               |  |                  | 868    |  |          |   | 2,226  |           |  |   | 18,563                 |   |  |                               | 461   |   |                   |   | -       |       | 
|Impairment loss (Note 8)                |  |                  | 1,115  |  |          |   | 1,238  |           |  |   | 18,384                 |   |  |                               | 189   |   |                   |   | 922     |       | 
|Transfer to assets held for sale        |  |                  | -      |  |          |   | (96    | )         |  |   | (982                   | ) |  |                               | -     |   |                   |   | -       |       | 
|Eliminated on disposal                  |  |                  | -      |  |          |   | (2,622 | )         |  |   | (3,430                 | ) |  |                               | (430  | ) |                   |   | -       |       | 
|Balance at December 31, 2012            |  | $                | 9,772  |  |          | $ | 7,787  |           |  | $ | 89,830                 |   |  | $                             | 1,183 |   |                   | $ | 922     |       | 
|                                        |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|Carrying amounts                        |  |                  |        |  |          |   |        |           |  |   |                        |   |  |                               |       |   |                   |   |         |       | 
|At December 31, 2011                    |  | $                | 6,076  |  |          | $ | 7,401  |           |  | $ | 163,136                |   |  | $                             | 1,781 |   |                   | $ | 11,772  |       | 
|At December 31, 2012                    |  | $                | 5,908  |  |          | $ | 5,847  |           |  | $ | 142,612                |   |  | $                             | 1,181 |   |                   | $ | 1,471   |       | 



| | (a) | Mining properties:
| | --- | ------------------



As at December
31, 2012, mining properties include the following properties which are in production, or are under development:



| | (i) | Turmalina Project
                                                                                  – Turmalina mine:
| | --- | ---------------------------------------------------------------------------------------------------------------------



The
terms of the acquisition of MTL include a royalty payable by the Company to an unrelated third party. The royalty is a net revenue
interest of 5% of annual net revenue up to $10 million and 3% thereafter.



| | (ii) | Paciência
                                                                                                          Project - Santa
                                                                                                          Isabel, Palmital, Marzagão,
                                                                                                          Rio de Peixe Oxide,
                                                                                                          Ouro Fino, Chame and
                                                                                                          Bahu mines:
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



In November
2003, the Company closed on a property acquisition agreement dated April 17, 2003 whereby the Company acquired certain mineral
rights from AngloGold for $818,000. The mineral rights acquired relate to the following properties in the Paciência Project,
Santa Isabel, Morro do Adão, Bahu and Marzagão and the following properties in the Caeté Expansion Project,
Catita and Camará. The Company will also pay a sliding scale NSR, from 1.5% to 4.5% of gross revenue, on gold and other
precious metals produced from the properties, based on precious metal prices at the time of production.



If the Company
discovers, on a concession basis, in excess of 750,000 ounces of gold over the measured and indicated resources used in the agreement,
AngloGold has the right to buy-in up to 70% of that concession for a predetermined price. If this were to occur, the Company would
retain a 30% interest and would receive the same sliding scale NSR payment from AngloGold as the one mentioned above.



On November
21, 2007, the Company reached an agreement with AngloGold whereby it transferred Zone C to AngloGold for an agreed upon value
of $8.1 million. Part of the purchase price was satisfied by the settlement of $350,000 in existing liabilities payable by MSOL
to AngloGold. The remaining balance will be paid through a reduction of future royalty payments on the sliding scale NSR for the
properties purchased from AngloGold in 2003. MSOL will not be required to make royalty payments on the equivalent of approximately
280,000 ounces of gold. As at December 31, 2007, the Company recorded a gain of $381,000 based on the difference between the carrying
value of Zone C and the amount of the liabilities settled in the transaction. Since the future royalty payments are contingent
on the production and sale of gold at the related properties, the Company is recognizing additional gains over the life of the
mine as the royalty obligation is reduced. During 2012, additional gains of $400,000 (2011 - $1.9 million) were recognized relating
to this property (Notes 8(a)(ii) and 18).



| | (iii) | Caeté
                                                                                                                               Project
                                                                                                                               -
                                                                                                                               Roça
                                                                                                                               Grande
                                                                                                                               and
                                                                                                                               Pilar
                                                                                                                               mines:
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
Company is required to pay royalties of 0.5% of revenue to the land owners of the Pilar mine site.



| | (iv) | Impairment:
| | ---- | -----------



Over the
past year, the Paciência operations have faced significant and increasing challenges. A detailed review determined that
a complete remediation plan would best be accomplished by placing the operations on a temporary care and maintenance program until
the necessary design and structural changes have been implemented in the mines. As a result of the temporary shutdown, the Company
considered this an indicator of impairment and prepared an impairment test on the Paciência operation during the second
quarter of 2012. The impairment test resulted in an impairment charge of $47.7 million and is recorded as impairment of property
in the statements of operations and comprehensive loss, (December 31, 2011 - $nil). During the fourth quarter of 2012 the impairment
test was updated resulting in an increase of $42.4 million also recorded as impairment of property in the statement of operations
and comprehensive loss.



The Turmalina
operation also recorded an impairment charge of $12.9 million in the quarter ended December 31, 2012, due to high historical operating
costs.



The total
impairment charge for the year ended December 31, 2012 is $103.0 million (December 31, 2011 - $nil), $91.6 million allocated to
property, plant and equipment and $11.4 million allocated to mineral properties.



29







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



The Paciência
and Turmalina properties are cash generating units (“CGUs”) which includes property, plant and equipment, mineral
rights, deferred exploration costs, and asset retirement obligations net of amortization. The CGU also includes mineral exploration
project assets relating to properties not in production such as mineral rights and deferred exploration costs.



The loss
of $91.6 million was taken against assets in property, plant and equipment and $11.4 million of the loss was recognized relating
to assets included in mineral exploration projects. The recoverable amount of the properties were determined using a fair value
less cost to sell approach (“FVLCS”). FVLCS for the property was determined by considering the net present value of
future cash flows generated by the property. Net future cash flows were derived from life of mine plans for the properties. The
following significant assumptions were used to value the properties:



Discount
rate: 9%

|Gold price: | first eight
    years: | $1,458 - $1,600 | 
|----------- | ---------------------- | --------------- | 
|            | after eight years:     | $1,396          | 



Expected
future cash flows used to determine the FVLCS used in the impairment testing of the Paciência and Turmalina properties are
inherently uncertain and could materially change over time. The cash flows are significantly affected by a number of factors including
estimates of production levels; operating costs and capital expenditures reflected in the life of mine plans; as well as economic
factors beyond management’s control, such as gold prices and discount rates. Should management’s estimate of the future
not reflect actual events, further impairments may be identified or reversal of the existing impairment may occur.



| | 9. | Mineral Properties:
| | -- | -------------------



|Mineral Exploration Projects         |  | Paciência |        |   | Turmalina |   |        | Caeté |  |   | Gurupi |   |  | Pedra Branca |        |  | Total |  
|------------------------------------ |  | --------- | ------ | - | --------- | - | ------ | ----- |  | - | ------ | - |  | ------------ | ------ |  | ----- | -
|Carrying amount at January 1, 2011   |  | $         | 2,644  |   |           | $ | 7,374  |       |  | $ | 17,354 |   |  | $            | 47,286 |  |       | $
|Additions                            |  |           | 972    |   |           |   | 1,491  |       |  |   | 654    |   |  |              | 12,790 |  |       |  
|Impairment loss                      |  |           | -      |   |           |   | -      |       |  |   | (529   | ) |  |              | -      |  |       |  
|Reclassify to PPE                    |  |           | -      |   |           |   | -      |       |  |   | (1,098 | ) |  |              | -      |  |       |  
|Carrying amount at December 31, 2011 |  | $         | 3,616  |   |           | $ | 8,865  |       |  | $ | 16,381 |   |  | $            | 60,076 |  |       | $
|                                     |  |           |        |   |           |   |        |       |  |   |        |   |  |              |        |  |       |  
|Carrying amount at January 1, 2012   |  | $         | 3,616  |   |           | $ | 8,865  |       |  | $ | 16,381 |   |  | $            | 60,076 |  |       | $
|Additions                            |  |           | 439    |   |           |   | 711    |       |  |   | 529    |   |  |              | 7,050  |  |       |  
|Impairment loss (Note 8)             |  |           | (3,302 | ) |           |   | (8,099 | )     |  |   | -      |   |  |              | -      |  |       |  
|Reclassify to PPE                    |  |           | (753   | ) |           |   | (1,477 | )     |  |   | -      |   |  |              | -      |  |       |  
|Carrying amount at December 31, 2012 |  | $         | -      |   |           | $ | -      |       |  | $ | 16,910 |   |  | $            | 67,126 |  |       | $



| | (a) | Paciência Project:
| | --- | ------------------



The Paciência
Project includes the following properties: Santa Isabel, Morro do Adao, Rio de Peixe Oxide and Sulphide, Palmital, Ouro Fino,
Marzagão, Bahu, and Chame.



Morro de
Adao and Rio de Peixe Sulphide are recorded as Mineral properties, as they are not in production. All the other properties currently
are in care and maintenance and included in property, plant and equipment.



30







Jaguar
Mining Inc.



Notes to the
Consolidated Financial Statements

(tabular dollar
amounts in thousands of U.S. dollars, except per share amounts)



Years ended December
31, 2012 and 2011



| | (b) | Turmalina:
| | --- | ----------



The costs
relate to the Satinoco property (Ore Body D) and Faina and Pontal, adjacent to the Turmalina plant and mine, not currently in
commercial production. The property is subject to a royalty payable to a third party (Note 8 (a)(i)).



| | (c) | Caeté:
| | --- | ------



The project
includes the following properties: Pilar-sulphide, Catita-sulphide, Camará, Roça Grande and Serra Paraiso–sulphide,
Juca Vieira and Trindade. The Roça Grande and Pilar mines are included in property, plant and equipment.



| | (d) | Gurupi:
| | --- | -------



Jaguar has
a 100% equity ownership of MCT, which holds all of the mineral licenses for the Gurupi Project, a gold project located in the
state of Maranhão, Brazil. In addition, the Company has a right of first refusal on an adjacent exploration property.



| | (e) | Pedra
                                                                                                           Branca:
| | --- | ------------------------------------------------------------------------------------------------------------------------



The Company
is engaged in gold exploration at a greenfield site, Pedra Branca Project (the “Project”), in the State of Ceará
in Northeastern Brazil, covering 87,000 acres. The Project used to be a joint venture with Xstrata.



On March
7, 2012, Jaguar executed a binding Memorandum of Understanding (“MOU”) with Xstrata to acquire the remaining 40% interest
in the Project. In accordance with the terms of the MOU, Jaguar committed to (a) a staged cash consideration in the amount of
$400,000; (b) a NSR of 1.00% (one percent) payable to Xstrata on future gold production; and (c) rights of first refusal on any
Base Metal Dominant Deposit (as defined in the MOU) discovered. Upon such discovery, Xstrata may elect to form a new company owned
30% by MSOL and 70% by Xstrata, by paying 300% of MSOL’s exploration expenditures incurred exclusively on the relevant Base
Metal Dominant Area of the property.



As at December
31, 2012, the Company has paid $39,000, relating to mineral rights (December 31, 2011 - $nil), capitalized to Mineral Properties.





31







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         







| | 10. | Notes Payable:
| | --- | --------------



|                                            |  | 2012 |         |  | 2011 |  
|------------------------------------------- |  | ---- | ------- |  | ---- | -
|Bank indebtedness                           |  | $    | 25,839  |  |      | $
|CVRD note                                   |  |      | 7,671   |  |      |  
|4.5% convertible                            |  |      | 145,818 |  |      |  
|5.5% convertible                            |  |      | 88,218  |  |      |  
|Total notes payable                         |  | $    | 267,546 |  |      | $
|Less: current portion                       |  |      | 27,388  |  |      |  
|Long-term portion                           |  | $    | 240,158 |  |      | $
|                                            |  |      |         |  |      |  
|Fair value of notes                         |  | $    | 128,625 |  |      | $
|                                            |  |      |         |  |      |  
|Principal repayments over the next 5 years: |  |      |         |  |      |  
|2013                                        |  | $    | 27,736  |  |      |  
|2014                                        |  |      | 171,949 |  |      |  
|2015                                        |  |      | 189     |  |      |  
|2016                                        |  |      | 103,500 |  |      |  
|Total                                       |  | $    | 303,374 |  |      |  
|Less: unamortized discounts                 |  |      | 35,828  |  |      |  
|                                            |  | $    | 267,546 |  |      |  



| | (a) | Bank indebtedness:
| | --- | ------------------



As at December
31, 2012, bank indebtedness includes $2.6 million of notes payable secured by equipment. The notes bear interest at 4.5% to 6.4%
and are repayable monthly or semi-annually over the life of the note. The notes have maturities ranging from February 2013 to August
2015 (December 31, 2011 - $7.1 million maturing from August 2012 to August 2015 at interest of 4.5% to 6.4%).



Bank indebtedness
also includes $23.2 million of promissory notes secured by future gold sales payable at maturities from March 2013 to December
2013. The notes bear interest at 4.4% to 8.9% (December 31, 2011 - $16.0 million maturing from August 2012 to December 2012 at
interest of 3.8% to 5.1%).



| | (b) | Vale note:
| | --- | ----------



The Vale note
relates to the purchase of mineral rights for the Roça Grande property for $13.3 million.



The timing of
these payments is dependent upon Vale ́s registration of the mineral rights transfer with the Departamento Nacional de Produção
Mineral (“DNPM”). During 2010, the Company paid $3.2 million (2009 - $1.1 million) relating to these mineral rights.
The Company expects to execute the final transfer agreement and pay $2.3 million of the purchase price in 2013 and the remaining
balance of $6.7 million in 2014.



The note payable
was recognized at its fair value and the discount is being amortized using the effective interest method.



32









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | (c) | 4.5% convertible notes:
| | --- | -----------------------



During September
2009, the Company issued $165 million of 4.5% senior unsecured convertible notes.



Jaguar received
net proceeds of approximately $159.1 million. The notes bear interest at a rate of 4.5% per annum, payable semi-annually in arrears
on May 1 and November 1 of each year, beginning on May 1, 2010, and mature on November 1, 2014. The notes have an initial conversion
rate of 78.4314 Jaguar common shares per U.S.$1,000 principal amount of notes, representing an initial conversion price of approximately
US$12.75 per common share. The conversion rate is subject to certain anti-dilution adjustments and adjustments in connection with
specified corporate events. The notes are convertible at any time prior to maturity. Upon conversion, Jaguar may, in lieu of delivering
its common shares, elect to pay or deliver, as the case may be, cash or a combination of cash and common shares, in respect of
the converted notes. Jaguar will be required to make an offer to repurchase the notes for cash upon the occurrence of certain fundamental
changes as defined within the terms of the notes.



The Company
initially allocated $42.2 million of the net proceeds to the conversion option component of the convertible notes since it is treated
as a derivative liability and carried at fair value with changes in fair value recorded in the statements of operations and comprehensive
loss (see Note 6(b)(vii)). The remaining portion of the net proceeds of $116.9 million was allocated to the note component of the
convertible notes issuance and the note component is measured at amortized cost using the effective interest method subsequent
to the date of issuance.



| | (d) | 5.5% convertible notes:
| | --- | -----------------------



During February
2011, the Company issued $103.5 million of 5.5% senior unsecured convertible notes.



The Company
received net proceeds of approximately $99.3 million. The notes bear interest at 5.5% per annum, payable semi-annually in arrears
on March 31 and September 30 of each year, beginning on September 30, 2011, and mature on March 31, 2016. The notes have an initial
conversion rate of 132.4723 Jaguar Mining Inc. common shares per US$1,000 principal amount of notes, representing an initial conversion
price of approximately US$7.55 per common share. The conversion rate is subject to certain anti-dilution adjustments and adjustments
in connection with specified corporate events. The notes are convertible at any time prior to maturity. Upon conversion, the Company
may, in lieu of delivering its common shares, elect to pay or deliver, as the case may be, cash or a combination of cash and common
shares, in respect of the converted notes. The Company will be required to make an offer to repurchase the notes for cash upon
the occurrence of certain fundamental changes as defined within the terms of the notes.



The Company
initially allocated $18.9 million of the net proceeds to the conversion option component of the convertible notes since it is treated
as a derivative liability and carried at fair value with changes in fair value recorded in the statements of operations and comprehensive
loss (see Note 6(b)(vii)). The remaining portion of the net proceeds of $80.4 million was allocated to the note component of the
convertible notes issuance and the note component is measured at amortized cost using the effective interest method subsequent
to the date of issuance.



| | (e) | Renvest Credit Facility:
| | --- | ------------------------



On October
29, 2012, the Company announced that it had arranged a $30.0 million standby credit facility (the “Facility”) with
Renvest Mercantile Bancorp Inc. through its Global Resource Fund (the “Lender”).



33









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



Interest
will be applied to the outstanding balance of all amounts drawn down from the Facility at a fixed rate of eleven percent (11%)
per annum, payable monthly in arrears. Additional draw down and standby fees are payable in cash and in common shares of the Company.
The proceeds from any drawdown will be used for working capital related to its Turmalina, Paciência or Caeté mining
projects in Brazil. The Facility includes a general security agreement over all of the Company’s and its subsidiaries’
present and future assets, delivery of the shares of the Company’s subsidiaries and loan guarantees by the Company’s
subsidiaries. Loan covenants include restrictions on additional borrowing and granting of security and a requirement that the Company
use commercially reasonable efforts to maintain the listing of its common shares on the TSX during the term of the loan.



Included
in Prepaid Expenses and Sundry Assets are $691,000 of financing fees related to the Facility (December 31, 2011 - $nil) (see Note
5). Also, the Company has $200,000 restricted cash as collateral for the Facility (see Note 7).



On January
25, 2013, the Company made an initial drawdown of $5.0 million on the Facility and concurrently issued 570,919 common shares of
the Company to the Lender pursuant to the terms of the Facility. The initial drawdown and any subsequent drawdowns under the Facility
mature in July 2014.



The remaining
$25.0 million will be available to be drawn down by the Company once certain of the remaining security has been registered.



11.
Reclamation Provisions:



|                                               |  |   |       |   | 2012 |   |        |   |  |   | 2011   |  
|---------------------------------------------- |  | - | ----- | - | ---- | - | ------ | - |  | - | ------ | -
|Balance, beginning of year                     |  |   |       |   |      | $ | 17,577 |   |  |   |        |  
|Increase (decrease) in reclamation obligations |  |   |       |   |      |   |        |   |  |   |        |  
|Sabará (a)                                     |  | $ | -     |   |      |   |        |   |  | $ | 194    |  
|Turmalina (b)                                  |  |   | 705   |   |      |   |        |   |  |   | (1,476 | )
|Paciência (c)                                  |  |   | 1,155 |   |      |   |        |   |  |   | 49     |  
|Caeté (d)                                      |  |   | (97   | ) |      |   | 1,763  |   |  |   | (628   | )
|Reclamation expenditures                       |  |   |       |   |      |   | (298   | ) |  |   |        |  
|Accretion expense                              |  |   |       |   |      |   | 3,585  |   |  |   |        |  
|Foreign exchange                               |  |   |       |   |      |   | (1,576 | ) |  |   |        |  
|Balance, end of year                           |  |   |       |   |      |   | 21,051 |   |  |   |        |  
|Less: current portion                          |  |   |       |   |      |   | 4,124  |   |  |   |        |  
|Long-term portion                              |  |   |       |   |      | $ | 16,927 |   |  |   |        |  



The
estimated future cash flows have been discounted using a rate of 7.25% to 8.75% and the inflation rate used to determine future
expected cost ranges from 4.0% to 5.3% per annum.



The reclamation
provisions relate to the following:



| | (a) | Sabará:
| | --- | -------



The Company
expects to spend approximately $2.61 million between 2013 and 2018 to reclaim land that has been disturbed as a result
of mining activity.



34









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | (b) | Turmalina:
| | --- | ----------



The Company
expects to spend approximately $7.81 million between 2013 and 2026 to reclaim land that has been disturbed as a result
of the mining activity.



| | (c) | Paciência:
| | --- | ----------



The Company
expects to spend approximately $7.71million between 2013 and 2026 to reclaim land that has been disturbed as a result
of the mining activity.



| | (d) | Caeté:
| | --- | ------



The Company
expects to spend approximately $8.71 million between 2013 and 2026 to reclaim land that has been disturbed as a result
of mining activity.



1These figures have not been discounted or adjusted for inflation.



12.
Other Provisions:



|                           |  | 2012 |        |   | 2011 |  
|-------------------------- |  | ---- | ------ | - | ---- | -
|Balance, beginning of year |  | $    | 4,347  |   |      | $
|Additions                  |  |      | 3,629  |   |      |  
|Payments                   |  |      | (363   | ) |      |  
|Reductions                 |  |      | (2,496 | ) |      |  
|Foreign exchange           |  |      | (321   | ) |      |  
|Balance, end of year       |  | $    | 4,796  |   |      | $



In the ordinary
course of operations, lawsuits have been filed against the Company. In the opinion of management, in consultation with legal counsel,
the outcome of the lawsuits now pending will involve amounts that would not have a material adverse effect on the Company. Any
losses that might result from the resolution of these claims would be charged against income in the year the claim is resolved.



13.
Income Taxes:



(a)	Income
tax expense:



The following
table shows the components of current and deferred tax expense:



|                                                             |  | 2012 |        |   | 2011 |  
|------------------------------------------------------------ |  | ---- | ------ | - | ---- | -
|Current tax expense (recovery)                               |  |      |        |   |      |  
|Current                                                      |  | $    | (466   | ) |      | $
|                                                             |  |      |        |   |      |  
|Deferred tax expense (recovery)                              |  |      |        |   |      |  
|Origination and reversal of temporary differences            |  |      | (1,611 | ) |      |  
|Recognition of previously unrecognized temporary differences |  |      | -      |   |      |  
|Change in unrecognized deductible timing differences         |  |      | 309    |   |      |  
|                                                             |  |      | (1,302 | ) |      |  
|Total income tax expense (recovery)                          |  | $    | (1,768 | ) |      | $



35









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



(b)	Tax
rate reconciliation:



The provision
for income taxes differs from that which would be expected by applying the combined Canadian federal and provincial statutory income
tax rate to income before income taxes. A reconciliation of the difference is as follows:



|                                                                |  | 2012 |         |   | 2011 |  
|--------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|Loss before income taxes                                        |  | $    | (86,305 | ) |      | $
|Combined federal and provincial income tax rate                 |  |      | 26.50   | % |      |  
|Expected income tax expense                                     |  |      | (22,871 | ) |      |  
|                                                                |  |      |         |   |      |  
|Increase (decrease) in tax expense resulting from:              |  |      |         |   |      |  
|Foreign exchange                                                |  |      | 8,762   |   |      |  
|Change in benefit of non-capital losses not recognized          |  |      | 28,364  |   |      |  
|Change in benefit of other temporary differences not recognized |  |      | 11,980  |   |      |  
|Difference in foreign tax rates and future enacted tax rates    |  |      | (11,766 | ) |      |  
|Adjustment to prior year non-capital losses                     |  |      | -       |   |      |  
|Other non-deductible (taxable) expense                          |  |      | (17,453 | ) |      |  
|Withholding tax on inter-company interest                       |  |      | 1,216   |   |      |  
|Income tax expense (recovery)                                   |  | $    | (1,768  | ) |      | $



(c)	Deferred
tax assets:



Deferred tax
assets have not been recognized in respect of the following temporary differences:



|                                 |  | 2012 |         |  | 2011 |  
|-------------------------------- |  | ---- | ------- |  | ---- | -
|Deductible temporary differences |  | $    | 225,350 |  |      | $
|Tax losses                       |  |      | 178,166 |  |      |  



(d)	Tax
losses:



The tax losses
not recognized expire as per the amounts and years noted below. Deferred tax assets have not been recognized in respect of these
items because it is not probable that future taxable profit will be available against which the Company can utilize the benefits
there from.



The following
table summarizes the Company's non-capital losses that can be applied against future taxable profit:



36









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



(i)	Canada:



|Canada |  | Expiry Date |  | Amount |       
|------ |  | ----------- |  | ------ | ------
|       |  | 2014        |  | $      | 3,815 
|       |  | 2015        |  |        | 5,769 
|       |  | 2026        |  |        | 1,632 
|       |  | 2027        |  |        | 6,111 
|       |  | 2028        |  |        | 1,988 
|       |  | 2029        |  |        | 20,001
|       |  | 2030        |  |        | 8,482 
|       |  | 2031        |  |        | 20,278
|       |  | 2032        |  |        | 15,003
|       |  |             |  | $      | 83,079



| | (ii) | Brazil:
| | ---- | -------

The Company
has non-capital losses of $105.5 million (R$215.6 million) which can be carried forward indefinitely, however only 30% of the taxable
income in one year can be applied against the loss carry-forward balance.



(e)	Movement
in net deferred tax liabilities:



|                              |  | 2012 |        |   | 2011 |  
|----------------------------- |  | ---- | ------ | - | ---- | -
|Balance, beginning of year    |  | $    | 8,635  |   |      | $
|Recognized in profit and loss |  |      | (1,302 | ) |      |  
|Other                         |  |      | (709   | ) |      |  
|Balance, end of year          |  | $    | 6,624  |   |      | $



| | (f) | Recognized deferred tax assets and liabilities:
| | --- | -----------------------------------------------



The following
table summarizes the types of recognized deferred tax assets and liabilities:



|                                  |  | 2012 |        |  | 2011 |  
|--------------------------------- |  | ---- | ------ |  | ---- | -
|Deferred tax assets               |  |      |        |  |      |  
|Non-capital losses                |  | $    | 3,547  |  |      | $
|Amounts not deductible until paid |  |      | 1,540  |  |      |  
|Inventory                         |  |      | 456    |  |      |  
|Unrealized foreign exchange loss  |  |      | 358    |  |      |  
|Other                             |  |      | 432    |  |      |  
|                                  |  | $    | 6,333  |  |      | $
|Deferred tax liabilities          |  |      |        |  |      |  
|Unrealized foreign exchange gain  |  |      | -      |  |      |  
|Property, plant and equipment     |  |      | 10,423 |  |      |  
|Deferred revenue                  |  |      | 2,063  |  |      |  
|Other                             |  |      | 471    |  |      |  
|                                  |  | $    | 12,957 |  |      | $
|                                  |  |      |        |  |      |  
|Deferred tax liabilities - net    |  | $    | 6,624  |  |      | $



37









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



14.
Capital Stock:



| | (a) | Common shares:
| | --- | --------------



The Company
is authorized to issue an unlimited number of common shares. All issued shares are fully paid and have no par value.



No shares
were issued during 2012.



(b) Stock
options:



Under the
Jaguar Stock Option Plan (the “Plan”), the Company may grant options to directors, officers, employees and consultants
of the Company and its subsidiaries. The maximum number of Company shares that have been reserved under this plan is 10,500,000.



|                           |  |        |            |   | Weighted         |  
|-------------------------- |  | ------ | ---------- | - | ---------------- | -
|                           |  |        |            |   | Average Exercise |  
|Common Share Options       |  | Number |            |   | Price Cdn        |  
|Balance, January 1, 2011   |  |        | 3,777,500  |   |                  | $
|Issued during the year     |  |        | 880,000    |   |                  |  
|Options exercised          |  |        | (36,000    | ) |                  |  
|Options expired            |  |        | (616,500   | ) |                  |  
|Balance, December 31, 2011 |  |        | 4,005,000  |   |                  | $
|Issued during the year     |  |        | 1,326,250  |   |                  |  
|Options expired            |  |        | (3,495,000 | ) |                  |  
|Balance, December 31, 2012 |  |        | 1,836,250  |   |                  | $



No options
were exercised during 2012.The weighted average share price for the options exercised during the 2011 was Cdn$6.18.



|               |      |  |  |      | Outstanding       |  |           | Weighted Average        |  |  | Number      | 
|-------------- | ---- |  |  | ---- | ----------------- |  | --------- | ----------------------- |  |  | ----------- | 
|Exercise Price |      |  |  |      | December 31, 2012 |  |           | Remaining Life in Years |  |  | Exercisable | 
|$              | 6.28 |  |  | Cdn. |                   |  | 510,000   |                         |  |  | 3.71        | 
|$              | 1.05 |  |  | Cdn. |                   |  | 1,200,000 |                         |  |  | 4.70        | 
|$              | 1.26 |  |  | Cdn. |                   |  | 126,250   |                         |  |  | 4.74        | 
|               |      |  |  |      |                   |  | 1,836,250 |                         |  |  | 4.43        | 



|               |      |  |  |      | Outstanding       |  |           | Weighted Average        |  |  | Number      | 
|-------------- | ---- |  |  | ---- | ----------------- |  | --------- | ----------------------- |  |  | ----------- | 
|Exercise Price |      |  |  |      | December 31, 2011 |  |           | Remaining Life in Years |  |  | Exercisable | 
|$              | 6.40 |  |  | Cdn. |                   |  | 810,000   |                         |  |  | 0.37        | 
|$              | 5.94 |  |  | Cdn. |                   |  | 940,000   |                         |  |  | 0.22        | 
|$              | 6.48 |  |  | Cdn. |                   |  | 285,000   |                         |  |  | 0.69        | 
|$              | 9.54 |  |  | Cdn. |                   |  | 1,090,000 |                         |  |  | 0.93        | 
|$              | 6.28 |  |  | Cdn. |                   |  | 880,000   |                         |  |  | 4.71        | 
|               |      |  |  |      |                   |  | 4,005,000 |                         |  |  | 1.46        | 



Stock compensation
expense of $531,000 is included in stock-based compensation for the year ended December 31, 2012 (2011 - $2.8 million).



38









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



During September
2012, 1,200,000 inducement options were granted to the new CEO of the Company at a strike price of Cdn$1.05. These options are
not subject to the plan maximum limitation. One third of the options vested immediately. One third will vest after one year and
one third after two years. The options expire September 10, 2017.



During September
2012, 126,250 options were granted to consultants at an exercise price of Cdn$1.26. The options vested during the fourth quarter
of 2012 and expire September 27, 2017. The direct method was used to value the consultant’s options (using the value of the
services to be rendered). The weighted average grant date fair value of these options was Cdn$0.80.



During September
2011, the Company issued 880,000 options to directors and officers at a strike price of Cdn$6.28. The options vest immediately
and expire September 15, 2016. Included in stock compensation expense for the year ended December 31, 2011 is $2.8 million related
to these options.



The fair value
of the remaining options granted was estimated at the date of the grant using the Black-Scholes option-pricing model with the following
assumptions:



|                                                 |  | 2012 |               |   | 2011 | 
|------------------------------------------------ |  | ---- | ------------- | - | ---- | 
|Risk-free interest rate                          |  |      | 1.21% - 1.29% |   |      | 
|Expected dividend yield                          |  |      | 0             | % |      | 
|Expected share price volatility                  |  |      | 75% - 81%     |   |      | 
|Expected life of the option in years             |  |      | 2.5 - 3.5     |   |      | 
|Weighted average grant date fair value of shares |  |      | Cdn. $ 0.71   |   |      | 
|Expected forfeiture rate                         |  |      | nil           |   |      | 



15.
Long-Term Incentive Plans:



The
Company has three long-term incentive plans for directors, senior officers, employees and consultants of the Company.



| | (a) | Deferred Share Units:
| | --- | ---------------------



A
Deferred Share Unit (“DSU”) Plan was established which allows the Company to grant its directors performance awards.
DSUs are fully vested on issuance with eventual settlement in cash on resignation.



The
intrinsic value of the DSU liability is equal to its fair value and carrying value for the years ended presented below:



39









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         





|Deferred Stock Units                                                                          |  | 2012 |         |   | 2011 |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|Units outstanding, beginning of period                                                        |  |      | 235,828 |   |      |  
|Units granted                                                                                 |  |      | 90,000  |   |      |  
|Units vested upon retirement                                                                  |  |      | (52,349 | ) |      |  
|Balance outstanding, end of period                                                            |  |      | 273,479 |   |      |  
|                                                                                              |  |      |         |   |      |  
|Liability included in deferred compensation liabilities in the consolidated balance sheets    |  |      |         |   |      |  
|Current portion                                                                               |  |      | 19      |   |      |  
|Long-term portion                                                                             |  |      | 184     |   |      |  
|                                                                                              |  | $    | 203     |   |      | $
|                                                                                              |  |      |         |   |      |  
|Expense recorded in the consolidated statements of operations and comprehensive income (loss) |  |      |         |   |      |  
|Stock-based compensation expense - Cash                                                       |  | $    | 56      |   |      | $
|Stock-based compensation expense (recovery)                                                   |  |      | (1,291  | ) |      |  
|Foreign exchange loss (gain)                                                                  |  |      | 34      |   |      |  
|                                                                                              |  | $    | (1,201  | ) |      | $



40









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | (b) | Restricted Stock Units:
| | --- | -----------------------



A
Restricted Stock Unit (“RSU”) Plan was established which allows the Company to grant performance awards to senior officers,
employees and consultants of the Company. RSUs call for eventual settlement in cash based upon the price of the Company’s
common stock at a future vesting date established generally at the time of grant. The intrinsic value of the RSU liability is equal
to its carrying value and fair value for the years ended presented below:



|Restricted Stock Units                                                                           |  | 2012 |          |   | 2011 |  
|------------------------------------------------------------------------------------------------ |  | ---- | -------- | - | ---- | -
|Units outstanding, beginning of period                                                           |  |      | 654,575  |   |      |  
|Units granted                                                                                    |  |      | -        |   |      |  
|Units vested upon termination                                                                    |  |      | (138,000 | ) |      |  
|Units vested upon time vesting                                                                   |  |      | (265,400 | ) |      |  
|Units cancelled                                                                                  |  |      | (33,800  | ) |      |  
|Balance outstanding, end of period                                                               |  |      | 217,375  |   |      |  
|                                                                                                 |  |      |          |   |      |  
|Liability included in deferred compensation liabilities in the consolidated balance sheets       |  |      |          |   |      |  
|Current portion                                                                                  |  | $    | 84       |   |      | $
|Long-term portion                                                                                |  |      | 23       |   |      |  
|                                                                                                 |  | $    | 107      |   |      | $
|                                                                                                 |  |      |          |   |      |  
|Expense recorded in the consolidated statements of operations and comprehensive income (loss)    |  |      |          |   |      |  
|Production costs (recovery)                                                                      |  | $    | (457     | ) |      | $
|Stock-based compensation expense - cash                                                          |  |      | 1,554    |   |      |  
|Stock-based compensation expense (recovery)                                                      |  |      | (1,904   | ) |      |  
|Foreign exchange loss (gain)                                                                     |  |      | 52       |   |      |  
|                                                                                                 |  | $    | (755     | ) |      | $
|Expense deferred and included in mineral exploration projects in the consolidated balance sheets |  | $    | 213      |   |      | $



| | (c) | Stock Appreciation Rights:
| | --- | --------------------------



A
Stock Appreciation Rights Plan (“SAR”) was established which allows the Company to grant performance awards to senior
officers, employees or consultants of the Company. SARs call for eventual settlement in cash based upon the increase in price of
the Company’s common stock from the grant date to a future vesting date.



SARs
typically vest such that one-third will vest upon issuance, one third will vest one year after grant, and one-third will vest two
years after grant. SAR participants are permitted to select a pre-determined price at which the SARs would be paid an amount equal
to the difference between the market price at the date of grant and the pre-determined price upon both the pre-determined price
being attained and the vesting of the SAR. If no pre-determined price is selected by the participant or if the pre-determined price
is not attained before the three year period, the payout amount will be the increase in price of the Company’s common stock
from the grant date to the expiry date. The intrinsic value of the SAR liability as at December 31, 2012 is $nil ( December 31,
2011 – $406).



41









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



|Stock Appreciation Rights                                                                     |  | 2012 |            |   | 2011 |  
|--------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Units outstanding, beginning of period                                                        |  |      | 1,643,434  |   |      |  
|Units granted                                                                                 |  |      | 325,000    |   |      |  
|Units redeemed                                                                                |  |      | (1,123,383 | ) |      |  
|Units cancelled                                                                               |  |      | (425,001   | ) |      |  
|Balance outstanding, end of period                                                            |  |      | 420,050    |   |      |  
|                                                                                              |  |      |            |   |      |  
|Liability included in deferred compensation liabilities in the consolidated balance sheets    |  |      |            |   |      |  
|Current portion                                                                               |  | $    | 2          |   |      | $
|Long-term portion                                                                             |  |      | 9          |   |      |  
|                                                                                              |  | $    | 11         |   |      | $
|                                                                                              |  |      |            |   |      |  
|Total intrinsic value of liability                                                            |  | $    | -          |   |      | $
|                                                                                              |  |      |            |   |      |  
|Expense recorded in the consolidated statements of operations and comprehensive income (loss) |  |      |            |   |      |  
|Stock-based compensation expense - cash                                                       |  | $    | 773        |   |      | $
|Stock-based compensation expense (recovery) - non-cash                                        |  |      | (1,583     | ) |      |  
|                                                                                              |  | $    | (810       | ) |      | $



The fair value
of the SAR liability is estimated at the reporting date using the Black-Scholes option-pricing model with the following assumptions:



|                                    |  | 2012 |               |   | 2011 |  
|----------------------------------- |  | ---- | ------------- | - | ---- | -
|Risk-free interest rate             |  |      | 0.18% - 1.10% |   |      |  
|Expected dividend yield             |  |      | 0             | % |      |  
|Expected share price volatility     |  |      | 98% - 103%    |   |      |  
|Expected life of the right in days  |  |      | 76 - 516      |   |      |  
|Expected forfeiture rate            |  |      | nil           |   |      |  
|Weighted average reference price    |  | $    | 6.79          |   |      | $
|Weighted average fair value of SARs |  |      | 0.03          |   |      |  



The
expected life of the SAR is estimated as the mid-point between the expiry and vesting dates of each SAR granted. In cases where
the right is outstanding past the mid-point between the expiry and vesting dates, the mid-point between the measurement date and
the expiry date is used unless circumstances at the measurement date indicate an alternate date is more appropriate.



42









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



| | 16. | Basic and Diluted Earnings per Share:
| | --- | -------------------------------------



Dollar
amounts and share amounts in thousands, except per share amounts.



|                                                             |  | 2012 |         |   | 2011 |  
|------------------------------------------------------------ |  | ---- | ------- | - | ---- | -
|Numerator                                                    |  |      |         |   |      |  
|Net income (loss) for the period                             |  | $    | (84,537 | ) |      | $
|                                                             |  |      |         |   |      |  
|Denominator                                                  |  |      |         |   |      |  
|Weighted average number of common shares outstanding-basic   |  |      | 84,410  |   |      |  
|Dilutive effect of options                                   |  |      | -       |   |      |  
|Weighted average number of common shares outstanding-diluted |  |      | 84,410  |   |      |  
|                                                             |  |      |         |   |      |  
|Basic earnings (loss) per share                              |  | $    | (1.00   | ) |      | $
|Diluted earnings (loss) per share                            |  | $    | (1.00   | ) |      | $



The determination
of the weighted average number of common shares outstanding for the calculation of diluted loss per share does not include the
following effect of options and convertible notes since they are anti-dilutive.



|Options and convertible notes |  |      |        |  |      | 
|----------------------------- |  | ---- | ------ |  | ---- | 
|considered anti-dilutive      |  |      |        |  |      | 
|(in thousands)                |  | 2012 |        |  | 2011 | 
|Options                       |  |      | 2,921  |  |      | 
|Convertible notes (Note 10)   |  |      | 26,650 |  |      | 
|                              |  |      | 29,571 |  |      | 



17.	Related Party
Transactions:



(a)Transactions
with subsidiaries:



The
Company has transferred funds to its subsidiaries MSOL, MTL and MCT in the form of loans at a rate of three-month LIBOR plus 4%
and export loans at a rate of six-month LIBOR plus 4%. Loans and interest have been eliminated upon consolidation.



During
2012 and 2011 the Company received interest and loan repayments from its subsidiary MSOL. These transactions were eliminated upon
consolidation.



(b)Transactions
with directors and key management:



The
Company transacts with key individuals from management and with its directors who have authority and responsibility to plan, direct
and control the activities of the 	Company. The nature of these dealings were in the form of payments for services rendered
in their capacity as director (director fees, including share-based payments) and as employees of the Company (salaries, benefits
and share-based payments).



43









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



Key
management personnel are defined as the executive officers of the Company including the President and Chief Executive Officer,
Chief Operating Officer, Chief Financial Officer, Secretary, Vice President of Exploration and Engineering, and Vice President
of Corporate Management.

During 2012
and 2011, remuneration to directors and key management personnel were as follows:



| | (i) | Compensation of directors
| | --- | -------------------------



Compensation
of the directors comprised:



|                                      |  | 2012 |        |   | 2011 |  
|------------------------------------- |  | ---- | ------ | - | ---- | -
|Fees earned and other compensation(1) |  | $    | 638    |   |      | $
|Share-based compensation (recovery)   |  |      | (1,385 | ) |      |  
|                                      |  | $    | (747   | ) |      | $



(1)Fees
earned and other compensation paid represents fees paid to the non-executive chairman and the non-executive directors during the
financial year.



A portion of
the directors' compensation is settled with the Company's share-based plans (the Jaguar Stock Option Plan, Deferred Stock Unit
Plan and Stock Appreciation Right Plan) according to the election of the directors (Notes 14(b) and 15).



During the
third quarter of 2012, 100,000 options were granted to Fred Hermann Consulting at an exercise price of Cdn$1.26. Fred Hermann is
a director of Jaguar Mining Inc. The options vested during the fourth quarter of 2012 and expire September 27, 2017. The direct
method was used to value the consultant’s options (using the value of the services to be rendered). The weighted average
grant date fair value of these options was Cdn$0.80. Excluded from directors share-based compensation is $21,000 relating to these
options.



| | (ii) | Compensation of key management personnel
| | ---- | ----------------------------------------



Compensation
of key management personnel comprised:



|                                    |  | 2012 |       |   | 2011 |  
|----------------------------------- |  | ---- | ----- | - | ---- | -
|Fees earned and other compensation  |  | $    | 1,395 |   |      | $
|Termination benefits                |  |      | -     |   |      |  
|Post-employment benefits            |  |      | 7     |   |      |  
|Share-based compensation (recovery) |  |      | (324  | ) |      |  
|                                    |  | $    | 1,078 |   |      | $



Share-based
compensation includes the recognized cost (recovery) to the Company of senior management's participation in share-based payments
plans, as measured by the fair value of options, RSUs and SARs granted, accounted for in accordance with IFRS 2 "Share-based
Payments" (Notes 14(b), 15).



| | (c) | Other related party transactions:
| | --- | ---------------------------------



| | (i) | The Company incurred management fees from IMS Engenharia Mineral Ltda. ("IMS"), a company
owned by two former officers of the Company, under a service agreement with IMS to render senior management services. The fees
are included in management fees in the statements of operations and comprehensive loss. The agreement was terminated on December
31, 2011. On January 1, 2012 and February 1, 2012, the Company entered into new consulting agreements with the former officers
with respective terms of twelve months.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



44









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



|                |  | 2012 |    |  | 2011 |  
|--------------- |  | ---- | -- |  | ---- | -
|Management fees |  | $    | 30 |  |      | $



| | (ii) | Brazilian Resources Inc. (“BZI”)
is a founding shareholder of the Company. BZI ceased to be a related party in May 2012 when the Corporate secretary, who also also
the President and CEO of BZI resigned from the Company. The Company incurred and recovered the following expenditures under cost-sharing
arrangements:
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                           |  | 2012 (1) |     |   | 2011 |  
|------------------------------------------ |  | -------- | --- | - | ---- | -
|Occupancy costs                            |  | $        | 15  |   |      | $
|Rental income                              |  |          | (50 | ) |      |  
|Consulting fees and administrative charges |  |          | -   |   |      |  
|Consulting revenue                         |  |          | (15 | ) |      |  



(1)Includes
the period from January to May of 2012 when BZI ceased to be a related party.



As at December
31, 2012, prepaid expenses and sundry assets included $89,000 recoverable from BZI relating to consulting fees (December 31, 2011
- $40,000 relating to leasehold improvements of administrative offices paid by the Company), and $34,000 due from BZI relating
to rental income for administrative offices in Belo Horizonte (December 31, 2011 - $55,000).



| | (iii) | On September 26, 2011, BZI and IMS agreed to convert obligations under the net smelter royalty
agreement with Prometálica Mineração Ltda. (“PML”) into an obligation to pay a principal payment
amount of $1.2 million payable in three annual installments commencing December 2011. The primary shareholders of PML are BZI and
IMS. BZI and IMS are each committed to pay 50% of the obligations under this settlement agreement. Interest at a rate of 4% per
annum will also be paid with each principal installment. As at December 31, 2012, BZI and IMS had not paid the second installment
of $420,000 due on December 31, 2012. Subsequent to the year end, the payment was received from IMS, but not from BZI. As at December
31, 2012, prepaid and sundry assets included an $811,000 receivable relating to this agreement (December 31, 2011 net smelter royalty
receivable - $950.000).
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | The Company’s subsidiaries MSOL and MTL were required to pay an employment claim of a former
employee who performed work for MSOL, then owned by BZI, and other BZI companies. BZI has guaranteed the amount owed to the Company
of R$386,000 ($190,000). As at December 31, 2012, prepaid expenses and sundry assets included a $190,000 receivable from BW Mineração,
a wholly-owned subsidiary of BZI (December 31, 2011 - $206,000.)
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above related
party transactions were considered to be in the normal course of operations and have been measured at the exchange amount agreed
upon between the related parties.



18.	Supplemental
Cash Flow Information:



|Non-cash financing and investing activities                                         |  | 2012 |       |  | 2011 |  
|----------------------------------------------------------------------------------- |  | ---- | ----- |  | ---- | -
|Transfer of Zone C in exchange for forgiveness of royalties payable (Note 8(a)(ii)) |  | $    | 400   |  |      | $
|Equipment purchased using tax credits                                               |  |      | 4,182 |  |      |  



45









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



Cash
and cash equivalents:



Cash
and cash equivalents include R$22.7 million ($11.1 million) in bank certificates of deposit (December 31, 2011 - R$98.2 million
($52.3 million)) and $nil in term deposits (December 31, 2011 – $1.0 million).



19.
Capital Disclosures:



The Company
manages its capital structure in order to support the acquisition, exploration and development of mineral properties, and to maximize
return to stakeholders through a flexible capital structure which optimizes the costs of capital and the debt and equity balance.
The Company sets the amount of capital in proportion to risk by managing the capital structure and making adjustments in light
of changes in economic conditions and the risk characteristics of the underlying assets. To adjust or maintain our capital structure,
the Company may adjust the amount of long-term debt, enter into new credit facilities or issue new equity.



The capital
structure of the Company consists of notes payable (Note 10) and all of the components of shareholders’ equity.



The Company
is not subject to externally imposed capital requirements.



| | 20. | Commitments:
| | --- | ------------



In
the normal course of business, the Company enters into contracts that give rise to commitments for future minimum payments. The
following table summarizes the remaining undiscounted contractual maturities of the Company’s financial liabilities and other
commitments.



|                                         |  | Less than |        |  |             |   |         |             |  |   | More than |  |  |       |       
|---------------------------------------- |  | --------- | ------ |  | ----------- | - | ------- | ----------- |  | - | --------- |  |  | ----- | ------
|Commitments as at December 31, 2012      |  | 1 year    |        |  | 1 - 3 years |   |         | 3 - 5 years |  |   | 5 years   |  |  | Total |       
|Financial Liabilities                    |  |           |        |  |             |   |         |             |  |   |           |  |  |       |       
|Accounts payable and accrued liabilities |  | $         | 29,745 |  |             | $ | -       |             |  | $ | -         |  |  | $     | -     
|Notes payable                            |  |           |        |  |             |   |         |             |  |   |           |  |  |       |       
|Principal                                |  |           | 27,736 |  |             |   | 172,138 |             |  |   | 103,500   |  |  |       | -     
|Interest                                 |  |           | 14,008 |  |             |   | 18,836  |             |  |   | 2,862     |  |  |       |       
|                                         |  | $         | 71,489 |  |             | $ | 190,974 |             |  | $ | 106,362   |  |  | $     | -     
|Other Commitments                        |  |           |        |  |             |   |         |             |  |   |           |  |  |       |       
|Income taxes payable                     |  | $         | 15,451 |  |             | $ | -       |             |  | $ | -         |  |  | $     | -     
|Other provisions                         |  |           | 4,796  |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Other liabilities                        |  |           | 20     |  |             |   | 60      |             |  |   | -         |  |  |       | -     
|Operating lease agreements               |  |           | 271    |  |             |   | 185     |             |  |   | 92        |  |  |       | -     
|Suppliers' agreements                    |  |           |        |  |             |   |         |             |  |   |           |  |  |       |       
|Mine operations (b)                      |  |           | 2,672  |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Reclamation provisions (d)               |  |           | 4,219  |  |             |   | 3,093   |             |  |   | 5,337     |  |  |       | 14,293
|                                         |  | $         | 27,429 |  |             | $ | 3,338   |             |  | $ | 5,429     |  |  | $     | 14,293
|Total                                    |  | $         | 98,918 |  |             | $ | 194,312 |             |  | $ | 111,791   |  |  | $     | 14,293



46









|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to the Consolidated Financial Statements                                 
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2012 and 2011                                         



|Commitments as at December 31, 2011      |  | Less than |         |  |             |   |         |             |  |   | More than |  |  |       |       
|---------------------------------------- |  | --------- | ------- |  | ----------- | - | ------- | ----------- |  | - | --------- |  |  | ----- | ------
|                                         |  | 1 year    |         |  | 1 - 3 years |   |         | 3 - 5 years |  |   | 5 years   |  |  | Total |       
|Financial Liabilities                    |  |           |         |  |             |   |         |             |  |   |           |  |  |       |       
|Accounts payable and accrued liabilities |  | $         | 34,922  |  |             | $ | -       |             |  | $ | -         |  |  | $     | -     
|Notes payable                            |  |           |         |  |             |   |         |             |  |   |           |  |  |       |       
|Principal                                |  |           | 22,779  |  |             |   | 174,233 |             |  |   | 103,687   |  |  |       | -     
|Interest                                 |  |           | 13,732  |  |             |   | 30,033  |             |  |   | 8,559     |  |  |       | -     
|                                         |  | $         | 71,433  |  |             | $ | 204,266 |             |  | $ | 112,246   |  |  | $     | -     
|Other Commitments                        |  |           |         |  |             |   |         |             |  |   |           |  |  |       |       
|Income taxes payable                     |  | $         | 18,953  |  |             | $ | -       |             |  | $ | -         |  |  | $     | -     
|Other provisions                         |  |           | 4,347   |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Other liabilities                        |  |           | 1,475   |  |             |   | 339     |             |  |   | -         |  |  |       | -     
|Operating lease agreements               |  |           | 192     |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Management agreements                    |  |           |         |  |             |   |         |             |  |   |           |  |  |       |       
|Operations (a)                           |  |           | 30      |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Suppliers' agreements                    |  |           |         |  |             |   |         |             |  |   |           |  |  |       |       
|Mine operations (b)                      |  |           | 2,474   |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Drilling (c)                             |  |           | 1,161   |  |             |   | -       |             |  |   | -         |  |  |       | -     
|Reclamation provisions (d)               |  |           | 2,197   |  |             |   | 4,481   |             |  |   | 5,344     |  |  |       | 14,899
|                                         |  | $         | 30,829  |  |             | $ | 4,820   |             |  | $ | 5,344     |  |  | $     | 14,899
|Total                                    |  | $         | 102,262 |  |             | $ | 209,086 |             |  | $ | 117,590   |  |  | $     | 14,899



| | (a) | The IMS management agreement was terminated on December 31, 2011.
The terms of the termination agreement provided for a payment of $30,000 in January 2012 for services performed in 2012 and termination
benefits of $2.2 million which were included in accounts payable and accrued liabilities as at December 31, 2011. In January 2012
the Company entered into separate consulting agreements with the principals of IMS committing the Company to payments of an additional
$230,000 due in 2012 and $10,000 due in 2013. (See Note 17(c)(i))
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The Company has the right to cancel the mine operations contracts with 30 days advance notice.
The amount included in the commitments table represents the amount due within 30 days.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The Company has the right to cancel the drilling contracts with 30 to 60 days advance notice. The
amount included in the contractual obligations table represents the amount due within 30 to 60 days.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | The reclamation provisions are not adjusted for inflation and are not discounted.
| | --- | ---------------------------------------------------------------------------------



| | 21. | Subsequent events:
| | --- | ------------------



On January
14, 2013, 100,000 inducement shares were granted to the new Chief Operating Officer of the Company.



On January
25, 2013, 570,919 shares were granted to Global Resource Fund upon the initial draw down of $5.0 million of the Renvest credit
facility (see Note 10(e)).



On
March 20, 2013 the Company changed its registered office to 67 Yonge Street, Suite 1203, Toronto, Ontario M5E 1J8, Canada.



47