Jaguar
Mining Inc.





Consolidated
Financial Statements



December 31,
2011 and 2010



1









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/ Gary E. German    |  | /s/ Gil Clausen        
|--------------------- |  | -----------------------
|                      |  |                        
|Gary E. German        |  | Gil Clausen            
|Chairman of the Board |  | Director               
|                      |  |                        
|                      |  |                        
|/s/ John Andrews      |  | /s/ James M. Roller    
|                      |  |                        
|John Andrews          |  | James M. Roller        
|Director              |  | Chief Financial Officer





March 23, 2012



2















|KPMGllp                    |                         
|-------------------------- | ------------------------
|Chartered Accountants      | Telephone (416) 777-8500
|Bay Adelaide Centre        | Telefax (416) 777-8818  
|333 Bay Street, Suite 4600 | www.kpmg.ca             
|Toronto, ON M5H 2S5        |                         











REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To
the Board of Directors of Jaguar Mining Inc.



We
have audited the accompanying consolidated balance sheets of Jaguar Mining Inc. as of December 31, 2011, December 31, 2010 and
January 1, 2010, the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity
and cash flows for the years ended December 31, 2011 and December 31, 2010. These financial statements are the responsibility
of Jaguar Mining Inc.’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.



We
conducted our audits 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 the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Jaguar Mining Inc. as of December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated
financial performance and its consolidated cash flows for the years ended December 31, 2011 and December 31, 2010 in conformity
with International Financial Reporting Standards as issued by the International Accounting Standards Board.



We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Jaguar Mining
Inc.’s internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 23, 2012 expressed an unqualified opinion on the effectiveness of Jaguar Mining Inc.’s internal control
over financial reporting.















Chartered
Accountants, Licensed Public Accountants



Toronto,
Canada

March
23, 2012



2











|KPMGllp                    |                         
|-------------------------- | ------------------------
|Chartered Accountants      | Telephone (416) 777-8500
|Bay Adelaide Centre        | Telefax (416) 777-8818  
|333 Bay Street, Suite 4600 | www.kpmg.ca             
|Toronto, ON M5H 2S5        |                         











REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To
the Board of Directors of Jaguar Mining Inc.



We
have audited Jaguar Mining Inc.’s internal control over financial reporting as of December 31, 2011, based on the criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). 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, included in Management’s
Annual Report on Internal Control over Financial Reporting in its annual report on Form 40-F for the year ended December 31, 2011.
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.











In
our opinion, Jaguar Mining Inc.maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).



We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Jaguar Mining Inc. of December 31, 2011, December 31, 2010 and January 1, 2010, and the related consolidated
statements of operations and comprehensive income (loss), shareholders’ equity and cash flows for each of the years ended
December 31, 2011 and December 31, 2010, and our report dated March 23, 2012expressed an unqualified opinion on
thoseconsolidated financial statements.







Chartered
Accountants, Licensed Public Accountants



Toronto,
Canada

March
23, 2012



2









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



|                                                                |  |                |  | December 31, 2011 |          |   | December 31, 2010 |   |         | January 1, 2010 | 
|--------------------------------------------------------------- |  | -------------- |  | ----------------- | -------- | - | ----------------- | - | ------- | --------------- | 
|                                                                |  |                |  |                   |          |   | Note 21           |   |         | Note 21         | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|Assets                                                          |  |                |  |                   |          |   |                   |   |         |                 | 
|Current assets:                                                 |  |                |  |                   |          |   |                   |   |         |                 | 
|Cash and cash equivalents                                       |  | Note 18        |  | $                 | 74,475   |   |                   | $ | 39,223  |                 | 
|Inventory                                                       |  | Note 4         |  |                   | 34,060   |   |                   |   | 31,495  |                 | 
|Prepaid expenses and sundry assets                              |  | Note 5         |  |                   | 25,541   |   |                   |   | 24,523  |                 | 
|Derivatives                                                     |  | Note 6(a)      |  |                   | -        |   |                   |   | 168     |                 | 
|                                                                |  |                |  |                   | 134,076  |   |                   |   | 95,409  |                 | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|Prepaid expenses and sundry assets                              |  | Note 5         |  |                   | 48,068   |   |                   |   | 48,582  |                 | 
|Net smelter royalty                                             |  | Note 17(d)(iv) |  |                   | -        |   |                   |   | 1,006   |                 | 
|Restricted cash                                                 |  | Note 7         |  |                   | 909      |   |                   |   | 908     |                 | 
|Property, plant and equipment                                   |  | Note 8         |  |                   | 388,675  |   |                   |   | 348,815 |                 | 
|Mineral exploration projects                                    |  | Note 9         |  |                   | 88,938   |   |                   |   | 74,658  |                 | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|                                                                |  |                |  | $                 | 660,666  |   |                   | $ | 569,378 |                 | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|Liabilities and Shareholders' Equity                            |  |                |  |                   |          |   |                   |   |         |                 | 
|Current liabilities:                                            |  |                |  |                   |          |   |                   |   |         |                 | 
|Accounts payable and accrued liabilities                        |  |                |  | $                 | 34,922   |   |                   | $ | 25,232  |                 | 
|Notes payable                                                   |  | Note 10        |  |                   | 22,517   |   |                   |   | 26,130  |                 | 
|Income taxes payable                                            |  |                |  |                   | 18,953   |   |                   |   | 16,677  |                 | 
|Reclamation provisions                                          |  | Note 11        |  |                   | 2,082    |   |                   |   | 2,167   |                 | 
|Other provisions                                                |  | Note 12        |  |                   | 4,347    |   |                   |   | 2,621   |                 | 
|Deferred compensation liabilities                               |  | Note 15        |  |                   | 2,953    |   |                   |   | 2,436   |                 | 
|Other liabilities                                               |  |                |  |                   | 1,475    |   |                   |   | 704     |                 | 
|                                                                |  |                |  |                   | 87,249   |   |                   |   | 75,967  |                 | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|Notes payable                                                   |  | Note 10        |  |                   | 228,938  |   |                   |   | 140,664 |                 | 
|Option component of convertible notes                           |  | Note 6(b)      |  |                   | 79,931   |   |                   |   | 28,776  |                 | 
|Deferred income taxes                                           |  | Note 13        |  |                   | 8,635    |   |                   |   | 215     |                 | 
|Reclamation provisions                                          |  | Note 11        |  |                   | 15,495   |   |                   |   | 17,960  |                 | 
|Deferred compensation liabilities                               |  | Note 15        |  |                   | 2,270    |   |                   |   | 4,829   |                 | 
|Other liabilities                                               |  |                |  |                   | 339      |   |                   |   | 497     |                 | 
|Total liabilities                                               |  |                |  |                   | 422,857  |   |                   |   | 268,908 |                 | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|Shareholders' equity:                                           |  |                |  |                   |          |   |                   |   |         |                 | 
|Share capital                                                   |  | Note 14(a)     |  |                   | 370,043  |   |                   |   | 369,747 |                 | 
|Stock options                                                   |  | Note 14(b)     |  |                   | 14,207   |   |                   |   | 13,054  |                 | 
|Contributed surplus                                             |  |                |  |                   | 3,414    |   |                   |   | 1,901   |                 | 
|Deficit                                                         |  |                |  |                   | (149,855 | ) |                   |   | (84,232 | )               | 
|Total equity attributable to equity shareholders of the Company |  |                |  |                   | 237,809  |   |                   |   | 300,470 |                 | 
|                                                                |  |                |  |                   |          |   |                   |   |         |                 | 
|Commitments                                                     |  | Notes 6,20     |  |                   |          |   |                   |   |         |                 | 
|Subsequent events                                               |  | Notes 17,22    |  |                   |          |   |                   |   |         |                 | 
|                                                                |  |                |  | $                 | 660,666  |   |                   | $ | 569,378 |                 | 



|On behalf of the Board: |  |         
|----------------------- |  | --------
|                        |  |         
|Gary E. German          |  | Director
|                        |  |         
|Gil Clausen             |  | Director
|                        |  |         
|John Andrews            |  | Director



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



3







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



|                                                               |  |                |  | Year Ended December 31, 2011 |            |   | Year Ended December 31, 2010 |  
|-------------------------------------------------------------- |  | -------------- |  | ---------------------------- | ---------- | - | ---------------------------- | -
|                                                               |  |                |  |                              |            |   | Note 21                      |  
|                                                               |  |                |  |                              |            |   |                              |  
|Gold sales                                                     |  |                |  | $                            | 243,137    |   |                              | $
|Production costs                                               |  |                |  |                              | (153,331   | ) |                              |  
|Stock-based compensation                                       |  | Notes 14(b),15 |  |                              | (347       | ) |                              |  
|Depletion and amortization                                     |  |                |  |                              | (46,107    | ) |                              |  
|Gross profit                                                   |  |                |  |                              | 43,352     |   |                              |  
|                                                               |  |                |  |                              |            |   |                              |  
|Operating expenses:                                            |  |                |  |                              |            |   |                              |  
|Exploration                                                    |  |                |  |                              | 1,953      |   |                              |  
|Stock-based compensation                                       |  | Notes 14(b),15 |  |                              | 2,970      |   |                              |  
|Administration                                                 |  |                |  |                              | 25,506     |   |                              |  
|Management fees                                                |  | Note 17(d)(i)  |  |                              | 3,016      |   |                              |  
|Amortization                                                   |  |                |  |                              | 1,249      |   |                              |  
|Other                                                          |  |                |  |                              | 2,596      |   |                              |  
|Total operating expenses                                       |  |                |  |                              | 37,290     |   |                              |  
|                                                               |  |                |  |                              |            |   |                              |  
|Income (loss) before the following                             |  |                |  |                              | 6,062      |   |                              |  
|                                                               |  |                |  |                              |            |   |                              |  
|Loss (gain) on derivatives                                     |  | Note 6(a)      |  |                              | 420        |   |                              |  
|Loss (gain) on conversion option embedded in convertible debt  |  | Note 6(b)      |  |                              | 32,250     |   |                              |  
|Foreign exchange loss (gain)                                   |  |                |  |                              | 8,480      |   |                              |  
|Accretion expense                                              |  | Note 11        |  |                              | 2,454      |   |                              |  
|Interest expense                                               |  |                |  |                              | 27,001     |   |                              |  
|Interest income                                                |  |                |  |                              | (9,237     | ) |                              |  
|Gain on disposition of property                                |  | Note 10(b)     |  |                              | (2,029     | ) |                              |  
|Other non-operating expense recoveries                         |  |                |  |                              | 453        |   |                              |  
|Total other expenses (income)                                  |  |                |  |                              | 59,792     |   |                              |  
|                                                               |  |                |  |                              |            |   |                              |  
|Income (loss) before income taxes                              |  |                |  |                              | (53,730    | ) |                              |  
|Income taxes                                                   |  | Note 13        |  |                              |            |   |                              |  
|Current income taxes                                           |  |                |  |                              | 3,450      |   |                              |  
|Deferred income taxes (recoveries)                             |  |                |  |                              | 8,443      |   |                              |  
|Total income taxes                                             |  |                |  |                              | 11,893     |   |                              |  
|                                                               |  |                |  |                              |            |   |                              |  
|Net income (loss) and comprehensive income (loss) for the year |  |                |  | $                            | (65,623    | ) |                              | $
|                                                               |  |                |  |                              |            |   |                              |  
|Basic and diluted earnings (loss) per share                    |  | Note 16        |  | $                            | (0.78      | ) |                              | $
|                                                               |  |                |  |                              |            |   |                              |  
|Weighted average number of common shares outstanding - basic   |  | Note 16        |  |                              | 84,386,569 |   |                              |  
|Weighted average number of common shares outstanding - diluted |  | Note 16        |  |                              | 84,386,569 |   |                              |  



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



4







|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, 2010                |  | Note 21    |  |               | 83,714,648 |  |               |  | 365,667 |                     |  |  | 4,596,500 |   |  |       | 14,762
|Exercise of stock options               |  | Note 14(b) |  |               | 659,000    |  |               |  | 4,080   |                     |  |  | (659,000  | ) |  |       | (1,185
|Vested options expired upon termination |  | Note 14(b) |  |               | -          |  |               |  | -       |                     |  |  | (160,000  | ) |  |       | (734  
|Stock-based compensation                |  | Note 14(b) |  |               | -          |  |               |  | -       |                     |  |  | -         |   |  |       | 211   
|Net income                              |  | Note 21    |  |               | -          |  |               |  | -       |                     |  |  | -         |   |  |       | -     
|Balance, December 31, 2010              |  | Note 21    |  |               | 84,373,648 |  |               |  | 369,747 |                     |  |  | 3,777,500 |   |  |       | 13,054
|                                        |  |            |  |               |            |  |               |  |         |                     |  |  |           |   |  |       |       
|                                        |  |            |  |               |            |  |               |  |         |                     |  |  |           |   |  |       |       
|Balance, January 1, 2011                |  | Note 21    |  |               | 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) |  |               | -          |  |               |  | -       |                     |  |  | (575,000  | ) |  |       | (1,363
|Vested options expired upon termination |  | Note 14(b) |  |               | -          |  |               |  | -       |                     |  |  | (41,500   | ) |  |       | (150  
|Net loss                                |  |            |  |               | -          |  |               |  | -       |                     |  |  | -         |   |  |       | -     
|Balance, December 31, 2011              |  |            |  |               | 84,409,648 |  |               |  | 370,043 |                     |  |  | 4,005,000 |   |  |       | 14,207



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



5







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



|                                                                                                    |  |         |  | Year Ended December 31, 2011 |          |   | Year Ended December 31, 2010 |  
|--------------------------------------------------------------------------------------------------- |  | ------- |  | ---------------------------- | -------- | - | ---------------------------- | -
|                                                                                                    |  |         |  |                              |          |   | Note 21                      |  
|                                                                                                    |  |         |  |                              |          |   |                              |  
|Cash provided by (used in):                                                                         |  |         |  |                              |          |   |                              |  
|Operating activities:                                                                               |  |         |  |                              |          |   |                              |  
|Net income (loss) and comprehensive income (loss) for the year                                      |  |         |  | $                            | (65,623  | ) |                              | $
|Adjustments to reconcile net earnings to net cash provided
    from (used in) operating activities: |  |         |  |                              |          |   |                              |  
|Unrealized foreign exchange loss                                                                    |  |         |  |                              | 11,618   |   |                              |  
|Stock-based compensation expense (recovery)                                                         |  |         |  |                              | 3,317    |   |                              |  
|Interest expense                                                                                    |  |         |  |                              | 27,001   |   |                              |  
|Accretion of interest income                                                                        |  |         |  |                              | (188     | ) |                              |  
|Accretion expense                                                                                   |  |         |  |                              | 2,454    |   |                              |  
|Income taxes (recovered)                                                                            |  |         |  |                              | (140     | ) |                              |  
|Deferred income taxes                                                                               |  |         |  |                              | 8,443    |   |                              |  
|Depletion and amortization                                                                          |  |         |  |                              | 47,356   |   |                              |  
|Write-down on Sabará property                                                                       |  |         |  |                              | -        |   |                              |  
|Unrealized loss on derivatives                                                                      |  |         |  |                              | 168      |   |                              |  
|Unrealized loss (gain) on option component of convertible note                                      |  |         |  |                              | 32,250   |   |                              |  
|Loss on disposition of property, plant and equipment                                                |  |         |  |                              | 1,618    |   |                              |  
|Gain on disposition of mineral property                                                             |  |         |  |                              | -        |   |                              |  
|Inventory write-down                                                                                |  |         |  |                              | 2,242    |   |                              |  
|Impairment mineral exploration projects                                                             |  |         |  |                              | 528      |   |                              |  
|Reclamation expenditure (recovery)                                                                  |  |         |  |                              | (556     | ) |                              |  
|                                                                                                    |  |         |  |                              | 70,488   |   |                              |  
|Change in non-cash operating working capital:                                                       |  |         |  |                              |          |   |                              |  
|Inventory                                                                                           |  |         |  |                              | 286      |   |                              |  
|Prepaid expenses and sundry assets                                                                  |  |         |  |                              | (8,845   | ) |                              |  
|Accounts payable and accrued liabilities                                                            |  |         |  |                              | 8,419    |   |                              |  
|Income taxes payable                                                                                |  |         |  |                              | 2,416    |   |                              |  
|Other provisions                                                                                    |  |         |  |                              | 1,725    |   |                              |  
|Deferred compensation liabilities                                                                   |  |         |  |                              | (2,570   | ) |                              |  
|                                                                                                    |  |         |  |                              | 71,919   |   |                              |  
|Financing activities:                                                                               |  |         |  |                              |          |   |                              |  
|Issuance of common shares                                                                           |  |         |  |                              | 164      |   |                              |  
|Increase in restricted cash                                                                         |  |         |  |                              | -        |   |                              |  
|Repayment of debt                                                                                   |  |         |  |                              | (24,163  | ) |                              |  
|Increase in debt                                                                                    |  |         |  |                              | 115,313  |   |                              |  
|Interest paid                                                                                       |  |         |  |                              | (13,276  | ) |                              |  
|Other liabilities                                                                                   |  |         |  |                              | 613      |   |                              |  
|                                                                                                    |  |         |  |                              | 78,651   |   |                              |  
|Investing activities:                                                                               |  |         |  |                              |          |   |                              |  
|Mineral exploration projects                                                                        |  |         |  |                              | (15,723  | ) |                              |  
|Purchase of property, plant and equipment                                                           |  |         |  |                              | (95,107  | ) |                              |  
|Proceeds from disposition of property, plant and equipment                                          |  |         |  |                              | 365      |   |                              |  
|Proceeds from disposition of mineral property                                                       |  |         |  |                              | -        |   |                              |  
|                                                                                                    |  |         |  |                              | (110,465 | ) |                              |  
|                                                                                                    |  |         |  |                              |          |   |                              |  
|Effect of foreign exchange on non-U.S. dollar denominated
    cash and cash equivalents             |  |         |  |                              | (4,853   | ) |                              |  
|Increase (decrease) in cash and cash equivalents                                                    |  |         |  |                              | 35,252   |   |                              |  
|Cash and cash equivalents, beginning of year                                                        |  |         |  |                              | 39,223   |   |                              |  
|Cash and cash equivalents, end of year                                                              |  |         |  | $                            | 74,475   |   |                              | $
|                                                                                                    |  |         |  |                              |          |   |                              |  
|Supplemental cash flow information                                                                  |  | Note 18 |  |                              |          |   |                              |  



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



6







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



Jaguar
Mining Inc. (the “Company” or “Jaguar”) is a company domiciled in Canada. The address of the Company’s
registered office is100 King Street West, Suite 4400, 1 First Canadian Place, Toronto, Ontario, M5X 1B1.



These
consolidated financial statements of the Company as at and for the years ended December 31, 2011 and December 31, 2010 include
the accounts of the Company and itswholly-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.



The activities
of the Company are directed towards developing and operating mineral projects in Brazil.



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



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



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



These are the
Company’s first consolidated financial statements prepared in accordance with IFRSs and IFRS 1, First Time Adoption of
International Financial Reporting Standards has been applied. An explanation of how the transition to IFRSs has affected the
reported financial position, financial performance and cash flows of the Company is provided in Note 21.



These consolidated
financial statements were authorized for issue by the Board of Directors on March 23, 2012.



| | (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, 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.



7







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (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, 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.



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) | IFRS 1 elections on transition to IFRS:
| | --- | ---------------------------------------



IFRS 1 elections
have been applied by management where applicable to the Company’s consolidated financial statements. These elections impact
the Company’s retrospective application of IFRS. (See Note 21.)



| | (ii) | 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. If these estimates of reserves prove to be inaccurate, or if the Company revises its mine plans
due to reductions in the price of gold or unexpected production costs increases thereby resulting in the amount of reserves expected
to be recovered to be reduced, the Company could be required to write-down the carrying value of its mineral exploration projects
and mining properties and would be required to increase the amount of future depletion and amortization expense, both of which
would reduce the Company’s earnings and net assets.



| | (iii) | 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-progress inventory, which
could reduce the Company’s earnings and working capital.



8







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (iv) | 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, estimates and 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.



| | (v) | 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.



| | (vi) | 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.



| | (vii) | 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 management’s estimates of the fair values of 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.



9







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (viii) | 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.



| | (ix) | 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.



| | (x) | 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.



| | (xi) | 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 mining properties, this assessment is based on the expected future cash
flows to be generated from the asset. For non-producing mining properties, this assessment is based on whether factors that may
indicate the need for a write-down are present. 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, or because the Company has determined that the deferred
costs of non-producing properties may not be recovered based on current economics or permitting considerations, 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.



| | (xii) | 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.



10







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (xiii) | 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.



| | (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.



11







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (v) | Net smelter royalty:
| | --- | --------------------



The Company records
its net smelter royalty at cost. Amortization of the net smelter royalty is calculated on a unit of production basis. Royalty revenue
is recognized when the Company has reasonable assurance with respect to measurement and collectability.



| | (vi) | 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   
|---------------------- |  | -----------------------------------
|Vehicles               |  | - 5 years, straight line           
|Equipment              |  | - 5 -10 years, straight line       
|Leasehold improvements |  | - over term of lease, straight line
|Mining properties      |  | - unit-of-production method1       



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.



1Depletion
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 expected
to be classified as reserves.



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



The carrying
value of all categories of property, plant and equipment, mineral exploration projects and net smelter royalty 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.



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.



12







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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. An impairment
loss is reversed 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
income (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 impairment provisions are written off.



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



Income taxes
expense comprises current and deferred income taxes. Income taxes expense is recognized in the statements of operations and comprehensive
income (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).



13







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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 income (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 income (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
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.



| | (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 earnings.



| | (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.



14







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



The Company has
stock-based compensation plans, which are described in Notes 14 and 15 to the 2011 annual financial statements. 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 income (loss). For any changes in the estimated forfeiture of the awards, the
accrued compensation cost will be adjusted in the period of the change of estimate.



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.



| | (xvi) | Stripping costs:
| | ----- | ----------------



Costs
associated with the removal of overburden and other mine waste materials that are incurred in the production phase of mining operations
are included in the cost of the inventory produced in the period in which they are incurred, except when the charges represent
a future economic benefit to the mineral property. Charges represent a future economic benefit to the mineral property when the
stripping activity provides access to reserves that will be produced in future periods that would not have been accessible without
the stripping activity. The Company capitalizes costs related to future economic benefits to the mineral property. The charges
are amortized over the reserve accessed by the stripping activity using the unit-of-production
method.



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



The Company
classifies all financial instruments as either held-to-maturity, fair value through profit or loss “(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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------



15







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | · | 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 net earnings (loss) 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 net earnings (loss) 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, 2011:
| | - | ----------------------------------------------------------------------------------------------------------------



|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 income (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$).



| | (xviii) | 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 income (loss) in the period in which they are incurred.



16







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



Recently issued
but not adopted accounting guidance includes IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint
Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IFRS 13 Fair Value Measurement, and IFRIC 20 Stripping Costs in
the Production Phase of a Surface Mine.



IFRS 9 Financial
Instruments replaces the guidance in IAS 39: Financial Instruments Recognition and Measurement on the classification and measurement
of financial assets. Financial assets will be classified into one of two categories on initial recognition: financial assets measured
at amortized cost or financial assets measured at fair value. IFRS 9 also adds guidance on the classification and measurement of
financial liabilities. Under IFRS 9, changes in fair value attributable to changes in credit risk for financial liabilities measured
at fair value under the fair value option will be recognized in other comprehensive income (“OCI”), with the remainder
of the change recognized in profit or loss. However, if this requirement creates or enlarges an accounting mismatch in profit or
loss, the entire change in fair value will be recognized in profit or loss. Amounts presented in OCI will not be reclassified to
profit or loss at a later date. IFRS 9 also requires derivative liabilities that are linked to and must be settled by delivery
of an unquoted equity instrument to be measured at fair value. This new standard is applicable, for accounting periods beginning
January 1, 2015. The Company is assessing the impact of IFRS 9 on its results of operations and financial position and will adopt
IFRS 9 in its financial statements effective January 1, 2015.



IFRS 10 Consolidated
Financial Statements builds on existing principles by identifying the concept of control as the determining factor in whether an
entity should be included within the consolidated financial statements of the parent company. The standard provides additional
guidance to assist in the determination of control where this is difficult to assess. IFRS 10 replaces SIC-12 Consolidation - Special
Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements. 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 the financial statements.



IFRS 11 Joint
Arrangements requires that the accounting for joint arrangements be determined by the rights and obligations of the arrangement,
rather than its legal form (as is currently the case). The standard addresses inconsistencies in the reporting of joint arrangements
by requiring a single method to account for interests in jointly controlled entities. Under IFRS 11, entities must now use the
equity method to account for their interest in jointly controlled entities. IFRS 11 supersedes IAS 31 Interests in Joint Ventures
and SIC-13 Jointly Controlled Entities - Non-monetary Contributions by Venturers. This new standard is applicable for accounting
periods beginning January 1, 2013. The Company is assessing the impact of IFRS 11 on its financial statements and will adopt IFRS
11 in its financial statements effective January 1, 2013.



IFRS 12 Disclosure
of Interests in Other Entities 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 January 1, 2013.
The Company currently does not expect that IFRS 12 will have a material impact on the financial statements.



17







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



IFRS 13 Fair
Value Measurement 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 currently does not expect that IFRS 13 will have a material impact on the financial statements.



IFRIC 20 Stripping
Costs in the Production Phase of a Surface Mine 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. The benefits include usable
ore that can be used to produce inventory and improved access to further quantities of material that will be mined in future periods.
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 cost
of stripping activity which provides a benefit in the form of improved access to ore 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 Company currently does not expect that IFRIC 20 will have a material impact on the financial
statements.



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



Inventory is
comprised of the following:



|                                                       |  |      |        |   |      |   |        | January 1, | 
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---------- | 
|                                                       |  | 2011 |        |   | 2010 |   |        | 2010       | 
|Raw materials                                          |  | $    | 3,409  |   |      | $ | 3,267  |            | 
|Mine operating supplies                                |  |      | 11,534 |   |      |   | 8,565  |            | 
|Ore stockpiles                                         |  |      | 2,395  |   |      |   | 1,653  |            | 
|Gold in process                                        |  |      | 16,722 |   |      |   | 18,010 |            | 
|                                                       |  | $    | 34,060 |   |      | $ | 31,495 |            | 
|                                                       |  |      |        |   |      |   |        |            | 
|Depletion and amortization costs included in inventory |  |      |        |   |      |   |        |            | 
|Ore stockpiles                                         |  | $    | 960    |   |      | $ | 443    |            | 
|Gold in process                                        |  |      | 4,808  |   |      |   | 4,726  |            | 
|                                                       |  | $    | 5,768  |   |      | $ | 5,169  |            | 
|                                                       |  |      |        |   |      |   |        |            | 
|Stock-based compensation costs included in inventory   |  |      |        |   |      |   |        |            | 
|Ore stockpiles                                         |  | $    | (12    | ) |      | $ | 1      |            | 
|Gold in process                                        |  |      | (28    | ) |      |   | 54     |            | 
|                                                       |  | $    | (40    | ) |      | $ | 55     |            | 



18







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



During
the fourth quarter of 2011, a write-down of ore stockpiles and gold in process inventory to net realizable value of $2.2 million
was recorded at the Paciência property.



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



|                                                          |  |      |        |  |      |   |        | January 1, | 
|--------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---------- | 
|                                                          |  | 2011 |        |  | 2010 |   |        | 2010       | 
|                                                          |  |      |        |  |      |   |        |            | 
|Advances to suppliers                                     |  | $    | 376    |  |      | $ | 1,098  |            | 
|Recoverable taxes                                         |  |      | 64,731 |  |      |   | 65,583 |            | 
|Sundry receivables from related parties  Note 17(d)       |  |      | 1,266  |  |      |   | 352    |            | 
|Other                                                     |  |      | 7,236  |  |      |   | 6,072  |            | 
|                                                          |  | $    | 73,609 |  |      | $ | 73,105 |            | 
|Less:                                                     |  |      |        |  |      |   |        |            | 
|Long-term recoverable taxes                               |  | $    | 47,718 |  |      | $ | 48,344 |            | 
|Sundry receivables from related parties  Note 17(d)       |  |      | 350    |  |      |   | 227    |            | 
|Other                                                     |  |      | -      |  |      |   | 11     |            | 
|                                                          |  | $    | 48,068 |  |      | $ | 48,582 |            | 
|Current portion of prepaid
    expenses and sundry assets |  | $    | 25,541 |  |      | $ | 24,523 |            | 



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, 2011, total recoverable
taxes denominated in Brazilian reais (R$) amounted to R$121.4 million ($64.7 million), (December 31, 2010 – R$109.3 million
($65.6 million)); (January 1, 2010 – R$89.1 million ($51.2 million)).



Sundry
receivables are due from Prometálica Centro Oeste Mineração Ltda (“PCO”) and Brazilian Resources
Inc. (“BZI”) related parties (Note 17(d)). BZI is a founding shareholder of the Company and PCO is controlled by IMS
Empreendimentos Ltda. (“IMS”), a founding shareholder of the Company.



| | 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. As at December 31, 2011 no put and call
gold option contracts were outstanding (December 31, 2010 - $nil; January 1, 2010 - $nil). Included
in loss on derivatives for the year endedDecember 31, 2011 is $194,000
of realized losses on commodity option derivatives (year endedDecember 31,
2010 - $686,000 of losses).



19







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



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



As at December
31, 2011, derivative assets include $nil of unrealized foreign exchange gains relating to the forward foreign exchange contracts
(December 31, 2010 – gains of $168,000; January 1, 2010 – gains of $1.3 million). Included in loss on derivatives are
the following amounts of unrealized and realized gains or losses on foreign exchange derivatives:



|                     |  | 2011 |     |  | 2010 |  
|-------------------- |  | ---- | --- |  | ---- | -
|Unrealized loss      |  | $    | 168 |  |      | $
|Realized loss (gain) |  | $    | 58  |  |      | $
|                     |  | $    | 226 |  |      | $



The terms of
the bank agreement required funds to be held on deposit as collateral at December 31, 2011. As at December 31, 2011, $800,000 of
cash was restricted for this facility (December 31, 2010 – $800,000; January 1, 2010 – $nil).



| | (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’s cash and cash equivalents are held
through large financial institutions in Brazil, Canada and the U.S. 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.



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 deals with only highly rated counterparties,
normally major financial institutions. The Company is exposed to credit risk when there is a positive fair value of derivative
financial instruments at a reporting date.



The Company’s
exposure for the sale of gold is limited because a sales receipt or payment from a financial institution must be received prior
to or at the time of shipment of the gold.



| | (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 $46.8 million of working
capital as at December 31, 2011 (December 31, 2010 – $19.4 million, January 1, 2010 – $134.2 million). Accounts payable
and accrued liabilities, current portion of notes payable, other provisions and current taxes payable are due within the current
operating period. The Company’s financial liabilities and other commitments are listed in Note 20.



20







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



The Company
is exposed to the financial risk related to the fluctuation of foreign exchange rates. The Company operates in Brazil, Canada and
the United States. 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, 2011 and December 31, 2010 with all other variables held constant. It shows how net income would
have been affected by changes in the relevant risk variable that were reasonably possible at that date.



|Exchange Rates                  | Change for Sensitivity Analysis |  | Impact of Change to 2011 Foreign Exchange Gain (Loss) |  | Impact of Change to 2010 Foreign Exchange Gain (Loss))
|------------------------------- | ------------------------------- |  | ----------------------------------------------------- |  | ------------------------------------------------------
|U.S. dollar per Brazilian reais | 10% change in Brazilian reais   |  | $5,606                                                |  | $5,420                                                
|U.S. dollar per Canadian dollar | 10% change in Canadian dollar   |  | $81                                                   |  | $208                                                  



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



The Company
is exposed to interest rate risk on its outstanding borrowings and short-term investments. Interest on the Company’s short-term
and long-term debt is based on both fixed and variable interest rates. 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 6.35% per annum (2010 – 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’s policy is not to hedge gold sales
and had no gold hedges in place as of December 31, 2011. The current intent is that its forecasted gold sales will remain unhedged
(Note 6 (a)(i)).



| | (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



21







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



December 31,
2011, a strengthening of $1.00 in the price of the Company’s common shares would have had an unfavourable impact of approximately
$1.8 million (2010 - $2.2 million) in income before income taxes. For the year ended December 31, 2011, a weakening of $1.00 in
the price of the Company’s common shares would have had a favourable impact of approximately $1.6 million (2010 - $2.1 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |    |                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------
| | 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, 2011 and December 31, 2010 are as follows:



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



|December 31, 2010                 
|----------------------------------
|Financial assets                  
|Derivatives                       
|Forward foreign exchange contracts



22







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



|December 31, 2010                    
|-------------------------------------
|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, that 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, 2011 and December 31, 2010
with all other variables held constant. It shows how the option component of the convertible notes and net income would have been
affected by changes in these relevant risk variables that were reasonably possible at that date.



Impact to option
component of convertible notes:



|Assumption    |  | Change for Sensitivity Analysis |  |  | Pre-tax Impact of Change as at December 31, 2011 |        |   | Pre-tax Impact of Change as at December 31, 2010 |  
|------------- |  | ------------------------------- |  |  | ------------------------------------------------ | ------ | - | ------------------------------------------------ | -
|              |  |                                 |  |  |                                                  |        |   |                                                  |  
|Volatility    |  | 5% increase                     |  |  | $                                                | 5,138  |   |                                                  | $
|              |  |                                 |  |  |                                                  |        |   |                                                  |  
|              |  | 5% decrease                     |  |  | $                                                | (5,274 | ) |                                                  | $
|              |  |                                 |  |  |                                                  |        |   |                                                  |  
|Credit spread |  | 1% increase                     |  |  | $                                                | 826    |   |                                                  | $
|              |  |                                 |  |  |                                                  |        |   |                                                  |  
|              |  | 1% decrease                     |  |  | $                                                | (861   | ) |                                                  | $



The carrying
amount of the option components of the convertible notes was $79.9 million at December 31, 2011 (December 31, 2010 - $28.8 million;
January 1, 2010 - $75.4 million). The change in fair value of $32.3 million for the year ended December 31, 2011 is shown as a
loss on conversion option embedded in convertible debt in the statements of operations and comprehensive income (loss) (December
31, 2010 - $46.6 million gain.)



23







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|                                          |  | December 31, 2011 |         |  | December 31, 2010 |  
|----------------------------------------- |  | ----------------- | ------- |  | ----------------- | -
|                                          |  | Carrying Value    |         |  | Fair Value        |  
|Financial Assets                          |  |                   |         |  |                   |  
|Cash and cash equivalents1                |  | $                 | 74,475  |  |                   | $
|Restricted cash1                          |  |                   | 909     |  |                   |  
|Loan receivable from related party3       |  |                   | 950     |  |                   |  
|Derivatives2                              |  |                   |         |  |                   |  
|Forward foreign exchange contracts        |  |                   | -       |  |                   |  
|                                          |  |                   |         |  |                   |  
|Financial Liabilities                     |  |                   |         |  |                   |  
|Accounts payable and accrued liabilities1 |  |                   | 34,922  |  |                   |  
|Other provisions4                         |  |                   | 4,347   |  |                   |  
|Notes payable3                            |  |                   | 251,455 |  |                   |  
|Option component of convertible notes5    |  |                   | 79,931  |  |                   |  
|Deferred compensation liabilities6        |  |                   | 5,223   |  |                   |  



| | 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 assets or liabilities at the
current market rate of interest available to the Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



As at December
31, 2011, $109,000 was held in a Certificate of Deposit as security for corporate credit cards (2010 - $108,000; January 1, 2010
- $108,000). In addition, as at December 31, 2011, $800,000 was restricted as collateral for the foreign exchange contracts (2010
- $800,000; January 1, 2010 - $nil) (Note 6(a)(ii)).



24







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | 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, 2010              |  | $                | 13,500 |   |          | $ | 6,225  |           |  | $ | 120,756                |   |  | $                         | 426   |   |                   | $ | 17,055  |       | 
|Additions                               |  |                  | 80     |   |          |   | 5,096  |           |  |   | 24,658                 |   |  |                           | 4     |   |                   |   | 40,728  |       | 
|Disposals                               |  |                  | (12    | ) |          |   | (67    | )         |  |   | (2,426                 | ) |  |                           | (40   | ) |                   |   | -       |       | 
|Constructed assets completed            |  |                  | 165    |   |          |   | 1,430  |           |  |   | 45,979                 |   |  |                           | 1,818 |   |                   |   | (49,392 | )     | 
|Balance at December 31, 2010            |  | $                | 13,733 |   |          | $ | 12,684 |           |  | $ | 188,967                |   |  | $                         | 2,208 |   |                   | $ | 8,391   |       | 
|                                        |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|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  |       | 
|                                        |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|Accumulated amortization and impairment |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|Balance at January 1, 2010              |  | $                | 5,866  |   |          | $ | 3,056  |           |  | $ | 22,025                 |   |  | $                         | 203   |   |                   | $ | -       |       | 
|Amortization for the year               |  |                  | 920    |   |          |   | 1,785  |           |  |   | 15,297                 |   |  |                           | 215   |   |                   |   | -       |       | 
|Eliminated on disposal                  |  |                  | -      |   |          |   | (49    | )         |  |   | (540                   | ) |  |                           | (40   | ) |                   |   | -       |       | 
|Balance at December 31, 2010            |  | $                | 6,786  |   |          | $ | 4,792  |           |  | $ | 36,782                 |   |  | $                         | 378   |   |                   | $ | -       |       | 
|                                        |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|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   |   |                   | $ | -       |       | 
|                                        |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|Carrying amounts                        |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|At January 1, 2010                      |  | $                | 7,634  |   |          | $ | 3,169  |           |  | $ | 98,731                 |   |  | $                         | 223   |   |                   | $ | 17,055  |       | 
|At December 31, 2010                    |  | $                | 6,947  |   |          | $ | 7,892  |           |  | $ | 152,185                |   |  | $                         | 1,830 |   |                   | $ | 8,391   |       | 
|                                        |  |                  |        |   |          |   |        |           |  |   |                        |   |  |                           |       |   |                   |   |         |       | 
|At January 1, 2011                      |  | $                | 6,947  |   |          | $ | 7,892  |           |  | $ | 152,185                |   |  | $                         | 1,830 |   |                   | $ | 8,391   |       | 
|At December 31, 2011                    |  | $                | 6,076  |   |          | $ | 7,401  |           |  | $ | 163,136                |   |  | $                         | 1,781 |   |                   | $ | 11,772  |       | 



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



As at December
31, 2011, mining properties include the following properties which are in production, or are under development:



| | (i) | Turmalina Project – Turmalina and Satinoco mines:
| | --- | -------------------------------------------------



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, Ouro Fino, Chame and Bahu mines:
| | ---- | --------------------------------------------------------------------------------------



The
Company has an agreement with AngloGold to pay a sliding scale Net Smelter Royalty (“NSR”), from 1.5% to 4.5% of gross
revenue, on gold and other precious metals produced from the Santa Isabel property, based on precious metal prices at the time
of production (Note 9(a)).



| | (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.



25







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



|Mineral Exploration Projects         |  | Paciência |       |  | Turmalina |   |       | Caeté |  |   | Gurupi |   |  | Total |       
|------------------------------------ |  | --------- | ----- |  | --------- | - | ----- | ----- |  | - | ------ | - |  | ----- | ------
|Carrying amount at January 1, 2010   |  | $         | 2,276 |  |           | $ | 2,855 |       |  | $ | 14,248 |   |  | $     | 42,857
|Additions                            |  |           | 368   |  |           |   | 4,519 |       |  |   | 3,106  |   |  |       | 4,429 
|Carrying amount at December 31, 2010 |  | $         | 2,644 |  |           | $ | 7,374 |       |  | $ | 17,354 |   |  | $     | 47,286
|                                     |  |           |       |  |           |   |       |       |  |   |        |   |  |       |       
|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 PP&E                   |  |           | -     |  |           |   | -     |       |  |   | (1,098 | ) |  |       | -     
|Carrying amount at December 31, 2011 |  | $         | 3,616 |  |           | $ | 8,865 |       |  | $ | 16,381 |   |  | $     | 60,076



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



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



The Santa Isabel,
Palmital, Marzagão, Ouro Fino and Chame and Bahu properties are included in property, plant and equipment. 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 royalty obligation is reduced. During 2011 additional gains of $1.9 million (2010 - $1.8 million)
were recognized relating to this property (Notes 8(a)(ii), 18).



26







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



The costs relate
to the Satinoco property (Ore Body D) 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:
| | --- | -------



On December 2,
2009, the Company completed its acquisition of MCT from Companhia Nacional de Mineração, (“CNM”), a subsidiary
of Kinross Gold Corporation (“Kinross”). 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, Kinross has granted
a right of first refusal to Jaguar on an adjacent exploration property.



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



|                                               |  |      |         |  |      |   |         | January 1, | 
|---------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | ---------- | 
|                                               |  | 2011 |         |  | 2010 |   |         | 2010       | 
|Bank indebtedness (a)                          |  | $    | 23,173  |  |      | $ | 31,373  |            | 
|CVRD note (b)                                  |  |      | 7,968   |  |      |   | 7,968   |            | 
|4.5% convertible notes (c)                     |  |      | 136,327 |  |      |   | 127,453 |            | 
|5.5% convertible notes (d)                     |  |      | 83,987  |  |      |   | -       |            | 
|Total notes payable                            |  | $    | 251,455 |  |      | $ | 166,794 |            | 
|Less:  current portion                         |  |      | 22,517  |  |      |   | 26,130  |            | 
|Long-term portion                              |  | $    | 228,938 |  |      | $ | 140,664 |            | 
|                                               |  |      |         |  |      |   |         |            | 
|Fair value of notes payable                    |  | $    | 223,750 |  |      | $ | 150,162 |            | 
|                                               |  |      |         |  |      |   |         |            | 
|Principal repayments over the next five years: |  |      |         |  |      |   |         |            | 
|2012                                           |  | $    | 22,779  |  |      |   |         |            | 
|2013                                           |  |      | 9,045   |  |      |   |         |            | 
|2014                                           |  |      | 165,188 |  |      |   |         |            | 
|2015                                           |  |      | 187     |  |      |   |         |            | 
|2016                                           |  |      | 103,500 |  |      |   |         |            | 
|Total                                          |  | $    | 300,699 |  |      |   |         |            | 
|Less: unamortized discounts                    |  |      | 49,244  |  |      |   |         |            | 
|                                               |  | $    | 251,455 |  |      |   |         |            | 



27







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



Bank indebtedness
includes $7.1 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 August 2012 to August 2015. At December 31,
2010, bank indebtedness include $11.4 million of notes payable and a credit facility of R$273,000 ($164,000) secured by equipment,
and bearing interest at 4.5% to TJLP (Brazilian government rate) plus 3.0% or 9.0%, repayable monthly or semi-annually over the
life of the note or 36 months. The credit facility matured June 2011 and the notes mature August 2012 to August 2015. (January
1, 2010 credit facilities of R$987,000 ($567,000) secured by equipment, bearing interest at TJLP plus 1.9% to 3.0% (7.9% to 9%)
payable monthly over the terms to maturity in December 2010 to June 2011.)



Bank indebtedness
also includes $16 million of promissory notes secured by future gold sales payable at maturities from August 2012 to December 2012.
The notes bear interest at 3.8% to 5.1%. (December 31, 2010 - $20 million maturing February 2011 to December 2011 at interest of
2.96% to 3.55%; January 1, 2010 - $nil.



| | (b) | CVRD note:
| | --- | ----------



Relates to purchase
of mineral rights for the Roça Grande property for $13.3 million.



The timing of
these payments is dependent upon CVRD’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 2012 and the remaining balance
of $6.7 million in 2013.



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



The contract
grants corresponding rights for CVRD to explore a property owned by the Company for iron and to acquire iron mineral rights on
the property. CVRD acquired iron mineral rights subject to approval from the DNPM, from the Company valued at $5 million during
2009. DNPM approval was obtained in June 2010 at which time the sale was recorded. In July 2010 the Company received $1.25 million
and the balance of $3.75 million in July 2011. For the year ended December 31, 2010 the statement of operations includes a gain
on disposition of property of $4.6 million (2011 - $nil) relating to the sale of iron ore rights.



28







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (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 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
income (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 U.S.$1,000 principal amount of notes, representing an initial
conversion price of approximately U.S.$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
income (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.



29







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | 11. | Reclamation Provisions:
| | --- | -----------------------



|                                               |  |   |        |   | 2011 |   |        |   |  |   | 2010  | 
|---------------------------------------------- |  | - | ------ | - | ---- | - | ------ | - |  | - | ----- | 
|Balance, beginning of year                     |  |   |        |   |      | $ | 20,127 |   |  |   |       | 
|Increase (decrease) in reclamation obligations |  |   |        |   |      |   |        |   |  |   |       | 
|Sabará (a)                                     |  | $ | 194    |   |      |   |        |   |  | $ | 410   | 
|Turmalina (b)                                  |  |   | (1,476 | ) |      |   |        |   |  |   | 1,274 | 
|Paciência (c)                                  |  |   | 49     |   |      |   |        |   |  |   | 534   | 
|Caeté (d)                                      |  |   | (628   | ) |      |   | (1,861 | ) |  |   | 6,535 | 
|Reclamation expenditures                       |  |   |        |   |      |   | (556   | ) |  |   |       | 
|Accretion expense                              |  |   |        |   |      |   | 2,454  |   |  |   |       | 
|Foreign exchange                               |  |   |        |   |      |   | (2,587 | ) |  |   |       | 
|Balance, end of year                           |  |   |        |   |      |   | 17,577 |   |  |   |       | 
|Less:  current portion                         |  |   |        |   |      |   | 2,082  |   |  |   |       | 
|Long-term portion                              |  |   |        |   |      | $ | 15,495 |   |  |   |       | 



The
estimated future cash flows have been discounted using a rate of 11% to 12% and the inflation rate used to determine future expected
cost ranges is 4.0% to 5.5% per annum.



The reclamation
provisions relate to the following:



| | (a) | Sabará:
| | --- | -------



The Company expects
to spend approximately $1.61 million between 2012 and 2018 to reclaim land that has been disturbed as a result of mining
activity.



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



The Company expects
to spend approximately $8.31 million between 2012 and 2026 to reclaim land that has been disturbed as a result of the
mining activity.



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



The Company expects
to spend approximately $7.21million between 2012 and 2026 to reclaim land that has been disturbed as a result of the
mining activity.



| | (d) | Caeté:
| | --- | ------



The Company expects
to spend approximately $9.81 million between 2012 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.



30







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | 12. | Other Provisions:
| | --- | -----------------



|                           |  | 2011 |       |   | 2010 |  
|-------------------------- |  | ---- | ----- | - | ---- | -
|Balance, beginning of year |  | $    | 2,621 |   |      | $
|Additions                  |  |      | 2,811 |   |      |  
|Reductions                 |  |      | (722  | ) |      |  
|Foreign exchange           |  |      | (363  | ) |      |  
|Balance, end of year       |  | $    | 4,347 |   |      | $



In the ordinary
course of operations, lawsuits have been filed against the Company. In the opinion of management, the outcome of the lawsuits now
pending will involve amounts that would not have a material adverse effect on the Company. However, should any loss result from
the resolution of these claims, such loss 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:



|                                                             |  | 2011 |        |   | 2010 |  
|------------------------------------------------------------ |  | ---- | ------ | - | ---- | -
|                                                             |  |      |        |   |      |  
|Current tax expense                                          |  |      |        |   |      |  
|Current                                                      |  | $    | 3,450  |   |      | $
|                                                             |  |      |        |   |      |  
|Deferred tax expense                                         |  |      |        |   |      |  
|Origination and reversal of temporary differences            |  |      | 7,850  |   |      |  
|Recognition of previously unrecognized temporary differences |  |      | (506   | ) |      |  
|Change in unrecognized deductible timing differences         |  |      | 1,099  |   |      |  
|                                                             |  |      | 8,443  |   |      |  
|Total income tax expense                                     |  | $    | 11,893 |   |      | $



31







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (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:



|                                                                |  | 2011 |         |   | 2010 |  
|--------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|                                                                |  |      |         |   |      |  
|Income (loss) before income taxes                               |  | $    | (53,730 | ) |      | $
|Combined federal and provincial income tax rate                 |  |      | 28.25   | % |      |  
|Expected income tax expense                                     |  |      | (15,179 | ) |      |  
|                                                                |  |      |         |   |      |  
|Increase (decrease) in tax expense resulting from:              |  |      |         |   |      |  
|Foreign exchange                                                |  |      | 13,065  |   |      |  
|Change in benefit of non-capital losses not recognized          |  |      | (2,575  | ) |      |  
|Change in benefit of other temporary differences not recognized |  |      | 2,305   |   |      |  
|Difference in foreign tax rates and future enacted  tax rates   |  |      | 1,898   |   |      |  
|Adjustment to prior year non-capital losses                     |  |      | (1,226  | ) |      |  
|Other non-deductible(taxable) expense                           |  |      | 11,772  |   |      |  
|Withholding tax on inter-company interest                       |  |      | 1,833   |   |      |  
|Income tax expense                                              |  | $    | 11,893  |   |      | $



| | (c) | Deferred tax assets:
| | --- | --------------------



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



|                                 |  | 2011 |        |  | 2010 |  
|-------------------------------- |  | ---- | ------ |  | ---- | -
|                                 |  |      |        |  |      |  
|Deductible temporary differences |  | $    | 53,831 |  |      | $
|Tax losses                       |  | $    | 94,044 |  |      | $



| | (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.



32







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



| | (i) | Canada:
| | --- | -------



|Canada |  | Expiry |      |  | Amount |  
|------ |  | ------ | ---- |  | ------ | -
|       |  | Date   |      |  |        |  
|       |  |        | 2014 |  |        | $
|       |  |        | 2015 |  |        |  
|       |  |        | 2026 |  |        |  
|       |  |        | 2027 |  |        |  
|       |  |        | 2028 |  |        |  
|       |  |        | 2029 |  |        |  
|       |  |        | 2030 |  |        |  
|       |  |        | 2031 |  |        |  
|       |  |        |      |  |        | $



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



The Company
has non-capital losses of $63.7 million (R$119.5 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:
| | --- | -----------------------------------------



|                              |  | 2011 |        |   | 2010 |  
|----------------------------- |  | ---- | ------ | - | ---- | -
|                              |  |      |        |   |      |  
|Balance, beginning of year    |  | $    | (215   | ) |      | $
|Recognized in profit and loss |  |      | (8,443 | ) |      |  
|Other                         |  |      | 23     |   |      |  
|Balance, end of year          |  | $    | (8,635 | ) |      | $



33







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



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



|                                  |  | December 31, |         |   | December 31, |   |         | January 1, | 
|--------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | ---------- | 
|                                  |  | 2011         |         |   | 2010         |   |         | 2010       | 
|                                  |  |              |         |   |              |   |         |            | 
|Deferred tax assets               |  |              |         |   |              |   |         |            | 
|                                  |  |              |         |   |              |   |         |            | 
|Non-capital losses                |  | $            | 12,329  |   |              | $ | 2,114   |            | 
|Property, plant and equipment     |  |              | -       |   |              |   | 6,682   |            | 
|Amounts not deductible until paid |  |              | 5,040   |   |              |   | 3,889   |            | 
|Inventory                         |  |              | 1,656   |   |              |   | -       |            | 
|Unrealized foreign exchange loss  |  |              | 1,669   |   |              |   | -       |            | 
|                                  |  | $            | 20,694  |   |              | $ | 12,685  |            | 
|Deferred tax liabilities          |  |              |         |   |              |   |         |            | 
|                                  |  |              |         |   |              |   |         |            | 
|Inventory                         |  |              | -       |   |              |   | (131    | )          | 
|Unrealized foreign exchange gain  |  |              | (875    | ) |              |   | (12,511 | )          | 
|Property, plant and Equipment     |  |              | (27,333 | ) |              |   | (258    | )          | 
|Deferred revenue                  |  |              | (1,121  | ) |              |   | -       |            | 
|                                  |  |              |         |   |              |   |         |            | 
|Deferred tax liabilities - net    |  | $            | (8,635  | ) |              | $ | (215    | )          | 



| | 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.



| | (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.



34







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|Common Share Options             |  | Number |           |   | Weighted Average Exercise Price Cdn. |  
|-------------------------------- |  | ------ | --------- | - | ------------------------------------ | -
|Balance, January 1, 2010         |  |        | 4,596,500 |   |                                      | $
|Options exercised                |  |        | (659,000  | ) |                                      |  
|Options expired upon termination |  |        | (160,000  | ) |                                      |  
|Balance, December 31, 2010       |  |        | 3,777,500 |   |                                      | $
|Issued during the year           |  |        | 880,000   |   |                                      |  
|Options exercised                |  |        | (36,000   | ) |                                      |  
|Options expired upon termination |  |        | (41,500   | ) |                                      |  
|Options expired                  |  |        | (575,000  | ) |                                      |  
|Balance, December 31, 2011       |  |        | 4,005,000 |   |                                      | $



The weighted
average share price for the options exercised during the year was $6.18 (2010 – $9.81)



|Exercise Price |      | Outstanding December 31, 2011 |  |           | Weighted Average Remaining Life in Years |  |  | Number 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 |                                          |  |  |                    |     



|Exercise Price |      | Outstanding December 31, 2010 |  |           | Weighted Average Remaining Life in Years |  |  | Number Exercisable |     
|-------------- | ---- | ----------------------------- |  | --------- | ---------------------------------------- |  |  | ------------------ | ----
|$              | 4.41 | Cdn.                          |  |           | 25,000                                   |  |  |                    | 0.50
|$              | 4.62 | Cdn.                          |  |           | 36,000                                   |  |  |                    | 0.67
|$              | 5.47 | Cdn.                          |  |           | 550,000                                  |  |  |                    | 0.36
|$              | 5.94 | Cdn.                          |  |           | 940,000                                  |  |  |                    | 1.22
|$              | 6.40 | Cdn.                          |  |           | 810,000                                  |  |  |                    | 0.92
|$              | 6.48 | Cdn.                          |  |           | 326,500                                  |  |  |                    | 1.69
|$              | 9.54 | Cdn.                          |  |           | 1,090,000                                |  |  |                    | 1.93
|               |      |                               |  | 3,777,500 |                                          |  |  |                    |     



Stock compensation
expense of $211,000 is included in stock-based compensation for the year ended December 31, 2010.



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.



35







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



|                                                 |  | 2011    |       |       | 2010 | 
|------------------------------------------------ |  | ------- | ----- | ----- | ---- | 
|Risk-free interest rate                          |  | 1.19% - | 1.42% |       |      | 
|Expected dividend yield                          |  |         | 0%    |       |      | 
|Expected share price volatility                  |  | 67% -   | 70%   |       |      | 
|Expected life of the option in years             |  | 3.75 -  | 4.6   |       |      | 
|Weighted average grant date fair value of shares |  | Cdn.    |       | $6.28 |      | 



| | 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
January 1, 2010 liability included in deferred compensation liabilities for the DSU Plan is $2.0 million. The intrinsic value of
the DSU liability is equal to its fair value and carrying value for the years ended presented below:



|Deferred Stock Units                                                                          |  | 2011 |         |   | 2010 |  
|--------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | -
|Units outstanding, beginning of period                                                        |  |      | 221,228 |   |      |  
|Units granted                                                                                 |  |      | 14,600  |   |      |  
|Balance outstanding, end of period                                                            |  |      | 235,828 |   |      |  
|                                                                                              |  |      |         |   |      |  
|Liability included in deferred compensation liabilities in the consolidated balance sheets    |  | $    | 1,460   |   |      | $
|                                                                                              |  |      |         |   |      |  
|Expense recorded in the consolidated statements of operations and comprehensive income (loss) |  |      |         |   |      |  
|Stock-based compensation recovery                                                             |  | $    | (38     | ) |      | $
|Foreign exchange loss (gain)                                                                  |  |      | (20     | ) |      |  
|                                                                                              |  | $    | (58     | ) |      | $



| | (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 January 1, 2010 liability included in deferred
compensation liabilities for the RSU Plan is $2.2 million. The intrinsic value of the RSU liability is equal to its carrying value
and fair value for the years ended presented below:



36







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|Restricted Stock Units                                                                           |  | 2011 |          |   | 2010 |  
|------------------------------------------------------------------------------------------------ |  | ---- | -------- | - | ---- | -
|Units outstanding, beginning of period                                                           |  |      | 804,125  |   |      |  
|Units granted                                                                                    |  |      | 194,300  |   |      |  
|Units vested upon termination                                                                    |  |      | (46,550  | ) |      |  
|Units vested upon time vesting                                                                   |  |      | (263,600 | ) |      |  
|Units cancelled                                                                                  |  |      | (33,700  | ) |      |  
|Balance outstanding, end of period                                                               |  |      | 654,575  |   |      |  
|                                                                                                 |  |      |          |   |      |  
|Liability included in deferred compensation liabilities in the consolidated balance sheets       |  |      |          |   |      |  
|Current portion                                                                                  |  | $    | 1,539    |   |      | $
|Long-term portion                                                                                |  |      | 629      |   |      |  
|                                                                                                 |  | $    | 2,168    |   |      | $
|                                                                                                 |  |      |          |   |      |  
|Expense recorded in the consolidated statements of operations and comprehensive income (loss)    |  |      |          |   |      |  
|Production costs                                                                                 |  | $    | 347      |   |      | $
|Stock-based compensation expense - cash                                                          |  |      | 1,911    |   |      |  
|Stock-based compensation expense (recovery)                                                      |  |      | (950     | ) |      |  
|Foreign exchange loss (gain)                                                                     |  |      | (64      | ) |      |  
|                                                                                                 |  | $    | 1,244    |   |      | $
|                                                                                                 |  |      |          |   |      |  
|Expense deferred and included in mineral exploration projects in the consolidated balance sheets |  | $    | 179      |   |      | $



| | (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
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 January 1, 2010 liability included in deferred compensation liabilities for the SAR
plan is $4.7 million. The intrinsic value of the SAR liability as at January 1, 2010 is $4.3 million.



37







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|Stock Appreciation Rights                                                                     |  | 2011 |           |   | 2010 |  
|--------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|Units outstanding, beginning of period                                                        |  |      | 1,806,769 |   |      |  
|Units granted                                                                                 |  |      | 145,000   |   |      |  
|Units exercised                                                                               |  |      | (308,335  | ) |      |  
|Balance outstanding, end of period                                                            |  |      | 1,643,434 |   |      |  
|                                                                                              |  |      |           |   |      |  
|Liability included in deferred compensation liabilities in the consolidated balance sheets    |  |      |           |   |      |  
|Current portion                                                                               |  | $    | 1,414     |   |      | $
|Long-term portion                                                                             |  |      | 181       |   |      |  
|                                                                                              |  | $    | 1,595     |   |      | $
|                                                                                              |  |      |           |   |      |  
|Total fair value of liability                                                                 |  | $    | 406       |   |      | $
|                                                                                              |  |      |           |   |      |  
|Expense recorded in the consolidated statements of operations and comprehensive income (loss) |  |      |           |   |      |  
|Stock-based compensation expense  - cash                                                      |  | $    | 655       |   |      | $
|Stock-based compensation expense (recovery) - non-cash                                        |  |      | (1,406    | ) |      |  
|                                                                                              |  | $    | (751      | ) |      | $



On
November 11, 2011, the board authorized the grant of 250,000 SARs with a reference price of Cdn. $5.78 to the Chief Operating Officer
upon the commencement of employment in January 2012. The SARs were issued upon his employment.



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



|                                                 |  | 2011    |       |         | 2010 | 
|------------------------------------------------ |  | ------- | ----- | ------- | ---- | 
|Risk-free interest rate                          |  | 1.19% - | 1.42% |         |      | 
|Expected dividend yield                          |  |         | 0%    |         |      | 
|Expected share price volatility                  |  | 67% -   | 70%   |         |      | 
|Expected life of the option in years             |  | 3.75 -  | 4.6   |         |      | 
|Weighted average grant date fair value of shares |  | Cdn.    |       | $  6.28 |      | 



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.



38







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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



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



|                                                             |  | 2011 |         |   | 2010 |  
|------------------------------------------------------------ |  | ---- | ------- | - | ---- | -
|Numerator                                                    |  |      |         |   |      |  
|Net income (loss) for the period                             |  | $    | (65,623 | ) |      | $
|                                                             |  |      |         |   |      |  
|Denominator                                                  |  |      |         |   |      |  
|Weighted average number of common shares outstanding-basic   |  |      | 84,387  |   |      |  
|Dilutive effect of options                                   |  |      | -       |   |      |  
|Weighted average number of common shares outstanding-diluted |  |      | 84,387  |   |      |  
|                                                             |  |      |         |   |      |  
|Basic earnings (loss) per share                              |  | $    | (0.78   | ) |      | $
|Diluted earnings (loss) per share                            |  | $    | (0.78   | ) |      | $



The determination
of the weighted average number of common shares outstanding for the calculation of diluted earnings 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 |  | 2011 |        |  | 2010 | 
|------------------------------------------------------ |  | ---- | ------ |  | ---- | 
|(in thousands)                                         |  |      |        |  |      | 
|Options                                                |  |      | -      |  |      | 
|Convertible notes (Note 10)                            |  |      | 25,147 |  |      | 
|                                                       |  |      | 25,147 |  |      | 



| | 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
the year the Company received dividends and a repayment of capital from its subsidiary MTL. During 2010 and 2011 the Company received
interest and loan repayments from its subsidiary MSOL. These transactions were eliminated upon consolidation.



39







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (b) | Transactions with joint venture:
| | --- | --------------------------------



The Company
is engaged in gold exploration at a Greenfield site (Pedra Branca Project) in the State of Ceará in northeastern Brazil
covering 87,000 acres through 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 Pedra Branca Project.  The Project, which was previously owned jointly by Jaguar and Xstrata on a 60/40 basis, is now
100% controlled by Jaguar.  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.



| | (c) | 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).



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 2011
and 2010, remuneration to directors and key management personnel were as follows:



| | (i) | Compensation of Directors
| | --- | -------------------------



Compensation
of the directors comprised:



|                                   |  | 2011 |       |  | 2010 |  
|---------------------------------- |  | ---- | ----- |  | ---- | -
|Fees earned and other compensation |  | $    | 480   |  |      | $
|Share-based compensation           |  |      | 1,134 |  |      |  
|                                   |  | $    | 1,614 |  |      | $



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).



40







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (ii) | Compensation of Key Management Personnel
| | ---- | ----------------------------------------



Compensation
of key management personnel comprised:



|                                   |  | 2011 |       |  | 2010 |  
|---------------------------------- |  | ---- | ----- |  | ---- | -
|Fees earned and other compensation |  | $    | 2,748 |  |      | $
|Termination benefits               |  |      | 3,715 |  |      |  
|Post-employment benefits           |  |      | 19    |  |      |  
|Share-based compensation           |  |      | 933   |  |      |  
|                                   |  | $    | 7,415 |  |      | $



Share-based
compensation includes the recognized cost 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).



| | (d) | Other Related Party Transactions:
| | --- | ---------------------------------



| | (i) | The Company incurred management fees from IMS Engenharia Mineral Ltda. ("IMSE"), a company
owned by two former officers of the Company, under a service agreement with IMSE to render senior management services. The fees
are included in management fees in the Statements of Operations and Comprehensive Income (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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  | Years Ended December 31, |      
|--------------- |  | ------------------------ | -----
|                |  | 2011                     |      
|Management fees |  | $                        | 3,016



| | (ii) | The Company incurred and recovered the following expenditures under cost-sharing arrangements with
Brazilian Resources Inc. (“BZI”), a corporate shareholder:
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                           |  | Years Ended December 31, |     
|------------------------------------------ |  | ------------------------ | ----
|                                           |  | 2011                     |     
|Occupancy costs                            |  | $                        | 180 
|Rental income                              |  | $                        | (123
|Consulting fees and administrative charges |  | $                        | 377 
|Consulting revenue                         |  | $                        | (39 



As at December
31, 2011, prepaid expenses and sundry assets included $40,000 recoverable from BZI relating to consulting fees (December 31, 2010
- $70,000 relating to leasehold improvements of administrative offices paid by the Company), and $55,000 due from BZI relating
to rental income for administrative offices in Belo Horizente (December 31, 2010 - $29,000).



41







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | (iii) | The occupancy costs, consulting fees and administrative service fees are included in the statements
of operations and comprehensive income (loss). As at December 31, 2011, prepaid expenses and sundry assets include $14,000 from
Prometálica Centro Oeste Mineração Ltda (“PCO”) (December 31, 2010 - $16,000) relating to rental
of temporarily idle equipment and the use of administrative offices in 2008. PCO is controlled by IMS Empreendimentos Ltda. (“IMS”),
a founding shareholder of the Company.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) | 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, 2011, BZI had not paid the first installment of $204,000
due on December 31, 2011. Subsequent to the year end, the payment was received from BZI. As at December 31, 2011, prepaid and sundry
assets included $600,000 current and $350,000 long term receivables relating to this agreement (December 31, 2010 net smelter royalty
- $1.0 million).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) | 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 ($206,000). As at December 31, 2011, prepaid expenses and sundry assets included $206,000 receivable from BW Mineração,
a wholly-owned subsidiary of BZI (December 31, 2010 - $227,000.)
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above related
party transactions are 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                         |  | 2011 |       |  | 2010 |  
|------------------------------------------------------------------- |  | ---- | ----- |  | ---- | -
|Transfer of Zone C in exchange for forgiveness of royalties payable |  | $    | 1,898 |  |      | $
|                                                                    |  |      |       |  |      |  
|Equipment purchased on issuing note payable (Note 10)               |  | $    | -     |  |      | $



Cash
and cash equivalents:



Cash
and cash equivalents include R$98.2 million ($52.3 million) in bank certificates of deposit (December 31, 2010 - R$18.8 million
($11.3 million)) and $1.0 million in term deposits (December 31, 2010 – $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



42







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



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.



|Commitments as at December 31, 2011      |  | Less than 1 year |         |  | 1 - 3 years |   |         | 3 - 5 years |  |   | More than 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



43







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|Commitments as at December 31, 2010      |  | Less than 1 year |        |  | 1 - 3 years |   |        | 3 - 5 years |  |   | More than 5 years |  |  | Total |       
|---------------------------------------- |  | ---------------- | ------ |  | ----------- | - | ------ | ----------- |  | - | ----------------- |  |  | ----- | ------
|Financial Liabilities                    |  |                  |        |  |             |   |        |             |  |   |                   |  |  |       |       
|Accounts payable and accrued liabilities |  | $                | 25,232 |  |             | $ | -      |             |  | $ | -                 |  |  | $     | -     
|Notes payable                            |  |                  |        |  |             |   |        |             |  |   |                   |  |  |       |       
|Principal                                |  |                  | 26,391 |  |             |   | 13,622 |             |  |   | 165,375           |  |  |       | -     
|Interest                                 |  |                  | 9,355  |  |             |   | 15,499 |             |  |   | 7,462             |  |  |       | -     
|                                         |  | $                | 60,978 |  |             | $ | 29,121 |             |  | $ | 172,837           |  |  | $     | -     
|Other Commitments                        |  |                  |        |  |             |   |        |             |  |   |                   |  |  |       |       
|Income taxes payable                     |  | $                | 16,677 |  |             | $ | -      |             |  | $ | -                 |  |  | $     | -     
|Other provisions                         |  |                  | 2,621  |  |             |   | -      |             |  |   | -                 |  |  |       | -     
|Other liabilities                        |  |                  | 704    |  |             |   | 497    |             |  |   | -                 |  |  |       | -     
|Operating lease agreements               |  |                  | 201    |  |             |   | -      |             |  |   | -                 |  |  |       | -     
|Management agreement                     |  |                  |        |  |             |   |        |             |  |   |                   |  |  |       |       
|Operations (a)                           |  |                  | 595    |  |             |   | -      |             |  |   | -                 |  |  |       | -     
|Suppliers' agreements                    |  |                  |        |  |             |   |        |             |  |   |                   |  |  |       |       
|Mine operations (b)                      |  |                  | 541    |  |             |   | -      |             |  |   | -                 |  |  |       | -     
|Drilling  (c)                            |  |                  | 450    |  |             |   | -      |             |  |   | -                 |  |  |       | -     
|Reclamation provisions (d)               |  |                  | 2,335  |  |             |   | 1,506  |             |  |   | 1,649             |  |  |       | 30,970
|                                         |  | $                | 24,124 |  |             | $ | 2,003  |             |  | $ | 1,649             |  |  | $     | 30,970
|Total                                    |  | $                | 85,102 |  |             | $ | 31,124 |             |  | $ | 174,486           |  |  | $     | 30,970



| | (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 subsequent to the
year end and termination benefits of $2.2 million which are included in accounts payable and accrued liabilities as at December
31, 2011. Subsequent to December 31, 2011, 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(d)(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. | Explanation of the Transition to IFRS:
| | --- | --------------------------------------



The
Company adopted IFRS effective January 1, 2011. Prior to the adoption of IFRS, the Company prepared its financial statements in
accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). The Company’s consolidated
financial statements for the year ended December 31, 2011 are the first annual consolidated financial statements prepared in accordance
with IFRS. Accordingly, the Company has made an unreserved statement of compliance with IFRS (Note 2).



44







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



The accounting
policies set out in Note 3 have been applied in preparing these consolidated financial statements for the year ended December 31,
2011, the comparative information presented in these financial statements for the year ended December 31, 2010, and in the preparation
of the opening IFRS consolidated balance sheet as at January 1, 2010 (“Transition Date”).



The Company
has applied IFRS 1 First-time Adoption of International Financial Reporting Standards(“IFRS 1”) in preparing
these consolidated financial statements. IFRS 1 requires the retrospective application of all effective IFRS as of the Reporting
Date (December 31, 2011). Accordingly, the final reported opening balance sheet and consolidated financial statements for 2010
and 2011 may differ from these financial statements. IFRS 1 also provides for certain optional exemptions and mandatory exceptions
from the full retrospective application of IFRS for first time IFRS adopters. The optional exemptions and relevant mandatory exceptions
applied by the Company are described below.



| | (a) | IFRS exemptions elected by the Company:
| | --- | ---------------------------------------



| | (i) | Leases:
| | --- | -------



The
Company has elected under IFRS 1 not to reassess whether an arrangement contains a lease under IFRIC 4 Determining Whether an
Arrangement Contains a Leasefor contracts that were assessed under previous Canadian GAAP. Arrangements entered into by the
Company before the January 1, 2005 application date of EIC 150, Determining whether an Arrangement contains a Lease,that
have not subsequently been assessed under EIC 150, were assessed under IFRIC 4, and no additional leases were identified.



| | (ii) | Borrowing costs:
| | ---- | ----------------



The Company
may apply the transitional provisions of IAS 23 Borrowing Costs from the later of January 1, 2009 or Transition Date. This
optional exemption applies to all qualifying assets measured at cost. Alternatively, the Company may elect IAS 23 from an earlier
date and capitalize borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after
that date. The Company has chosen January 1, 2010 as the commencement date for capitalization.



| | (iii) | Business combinations:
| | ----- | ----------------------



The Company
may elect under IFRS 1 to retrospectively apply IFRS 3 Business Combinationsor to not restate business combinations prior
to a selected date chosen by the Company. The Company has applied the business combination exemption in IFRS 1. Hence, it has not
restated any business combinations that took place prior to January 1, 2010.



| | (iv) | Compound financial instruments:
| | ---- | -------------------------------



IFRS 1 provides
relief from full retrospective application of IAS 32 on compound financial instruments. Hence, the Company may elect to retrospectively
restate only those compound financial instruments whereby the liability component is outstanding at the date of transition. The
Company has elected to apply this IFRS 1 exemption.



| | (v) | Decommissioning liabilities included in the cost of property, plant and equipment:
| | --- | ----------------------------------------------------------------------------------



The Company
recognizes a decommissioning liability to reclaim land that has been disturbed as a result of mining activities. IFRS 1 provides
the Company with an option to apply the guidance in IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilitiesprospectively to



45







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



changes in
such liabilities occurring after the transition date to IFRS. The Company has elected to apply this IFRS 1 exemption.



| | (vi) | Designation of previously recognized financial instruments:
| | ---- | -----------------------------------------------------------



The Company
is permitted to designate certain financial assets or financial instruments as FVTPL at the transition date. The Company has elected
not to reclassify any financial assets or financial liabilities on transition to IFRS.



| | (vii) | Fair value or revaluation as deemed cost:
| | ----- | -----------------------------------------



The deemed
cost optional exemption provides the Company with the option to measure property, plant and equipment at the transition date based
on fair value or a revalued amount. This election is available on an asset-by-asset basis. The Company has not elected to apply
this exemption.



| | (viii) | Share-based payments:
| | ------ | ---------------------



IFRS 1 provides
an option to apply IFRS 2 Share-based Payment retrospectively to awards that are otherwise exempt from the retrospective
application of IFRS 2 for first-time adopters of IFRS. These exempt awards are equity instruments granted on or before November
7, 2002 and equity instruments granted after November 7, 2002 that have not vested by the transition date. The Company has not
taken this optional election and will apply IFRS 2 only to all equity instruments that were granted after November 7, 2002, but
were not vested as of January 1, 2010.



The remaining
optional exemptions are not applicable to the Company.



| | (b) | IFRS exceptions followed by the Company:
| | --- | ----------------------------------------



The Company
applied the following mandatory exceptions from retrospective application.



| | (i) | Estimates:
| | --- | ----------



Estimates under
IFRS at January 1, 2010 must reflect the conditions at that date and be consistent with estimates made for the same date under
Canadian GAAP. They cannot reflect conditions that arose after the transition date.



| | (ii) | Hedge accounting:
| | ---- | -----------------



Hedge accounting
may be applied from the transition under IFRS only to hedging relationships that meet the requirements for hedge accounting at
that date. The Company has not applied hedge accounting to its foreign exchange hedging relationships.



The other mandatory
exceptions in IFRS 1 are not applicable to the Company.



| | (c) | Reconciliations between IFRS and Canadian GAAP:
| | --- | -----------------------------------------------



In preparing
the Company’s opening IFRS balance sheet, the Company has adjusted amounts reported previously in financial statements prepared
in accordance with previous Canadian GAAP. An explanation of how the transition from previous Canadian GAAP to IFRS has affected
the Company’s financial statements, financial performance and cash flows is set out in the following tables and the notes
that accompany the tables.



46







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



Reconciliation
of Equity



|                                   |  |      |  | January 1, 2010        |         |  | December 31, 2010            |  
|---------------------------------- |  | ---- |  | ---------------------- | ------- |  | ---------------------------- | -
|                                   |  | Note |  | Previous Canadian GAAP |         |  | Effect of transition to IFRS |  
|                                   |  |      |  |                        |         |  |                              |  
|Assets                             |  |      |  |                        |         |  |                              |  
|Current assets:                    |  |      |  |                        |         |  |                              |  
|Cash and cash equivalents          |  |      |  | $                      | 121,256 |  |                              | $
|Inventory                          |  |      |  |                        | 36,986  |  |                              |  
|Prepaid expenses and sundry assets |  |      |  |                        | 19,050  |  |                              |  
|Derivatives                        |  |      |  |                        | 1,280   |  |                              |  
|                                   |  |      |  |                        | 178,572 |  |                              |  
|Non-current assets:                |  |      |  |                        |         |  |                              |  
|Prepaid expenses and sundry assets |  |      |  |                        | 35,837  |  |                              |  
|Net smelter royalty                |  |      |  |                        | 1,006   |  |                              |  
|Restricted cash                    |  |      |  |                        | 108     |  |                              |  
|Property, plant and equipment      |  | b,d  |  |                        | 205,329 |  |                              |  
|Mineral exploration projects       |  | d,e  |  |                        | 129,743 |  |                              |  
|                                   |  |      |  |                        |         |  |                              |  
|                                   |  |      |  | $                      | 550,595 |  |                              | $



47







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



Reconciliation of Equity
(continued)



|                                         |  |      |  | January 1, 2010        |         |   | December 31, 2010            |  
|---------------------------------------- |  | ---- |  | ---------------------- | ------- | - | ---------------------------- | -
|                                         |  | Note |  | Previous Canadian GAAP |         |   | Effect of transition to IFRS |  
|                                         |  |      |  |                        |         |   |                              |  
|Liabilities and Shareholders' Equity     |  |      |  |                        |         |   |                              |  
|Current liabilities:                     |  |      |  |                        |         |   |                              |  
|Accounts payable and accrued liabilities |  |      |  | $                      | 21,346  |   |                              | $
|Notes payable                            |  | a    |  |                        | 5,366   |   |                              |  
|Income taxes payable                     |  |      |  |                        | 15,641  |   |                              |  
|Reclamation provisions                   |  | b    |  |                        | 510     |   |                              |  
|Other provisions                         |  |      |  |                        | 1,546   |   |                              |  
|Deferred compensation liability          |  |      |  |                        | -       |   |                              |  
|Other liabilities                        |  |      |  |                        | -       |   |                              |  
|Derivatives                              |  |      |  |                        | -       |   |                              |  
|                                         |  |      |  |                        | 44,409  |   |                              |  
|Non-current liabilities:                 |  |      |  |                        |         |   |                              |  
|Notes payable                            |  | a    |  |                        | 126,784 |   |                              |  
|Option component of convertible notes    |  | a    |  |                        | -       |   |                              |  
|Deferred income taxes                    |  | e    |  |                        | 11,821  |   |                              |  
|Reclamation provisions                   |  | b    |  |                        | 12,331  |   |                              |  
|Deferred compensation liability          |  | c    |  |                        | 8,616   |   |                              |  
|Other liabilities                        |  |      |  |                        | 738     |   |                              |  
|Total liabilities                        |  |      |  |                        | 204,699 |   |                              |  
|                                         |  |      |  |                        |         |   |                              |  
|Shareholders' equity                     |  |      |  |                        |         |   |                              |  
|Common shares                            |  |      |  |                        | 365,667 |   |                              |  
|Stock options                            |  | c    |  |                        | 14,762  |   |                              |  
|Contributed surplus                      |  | a    |  |                        | 42,028  |   |                              |  
|Deficit                                  |  | f    |  |                        | (76,561 | ) |                              |  
|                                         |  |      |  |                        | 345,896 |   |                              |  
|                                         |  |      |  |                        |         |   |                              |  
|                                         |  |      |  | $                      | 550,595 |   |                              | $



48







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



Reconciliation of Comprehensive
Income (Loss)



|                                                              |  |      |  | Year ended December 31, 2010 |         
|------------------------------------------------------------- |  | ---- |  | ---------------------------- | --------
|                                                              |  | Note |  | Previous Canadian GAAP       |         
|                                                              |  |      |  |                              |         
|Gold sales                                                    |  |      |  | $                            | 170,788 
|Production costs                                              |  |      |  |                              | (119,124
|Stock-based compensation                                      |  |      |  |                              | (482    
|Depletion and amortization                                    |  | b    |  |                              | (38,762 
|Gross profit                                                  |  |      |  |                              | 12,420  
|                                                              |  |      |  |                              |         
|Operating expenses:                                           |  |      |  |                              |         
|Exploration                                                   |  |      |  |                              | 3,553   
|Stock-based compensation                                      |  | c    |  |                              | (2,053  
|Administration                                                |  |      |  |                              | 20,600  
|Management fees                                               |  |      |  |                              | 1,131   
|Amortization                                                  |  |      |  |                              | 560     
|Accretion                                                     |  | b    |  |                              | 1,697   
|Other                                                         |  |      |  |                              | 5,051   
|Total operating expenses                                      |  |      |  |                              | 30,539  
|                                                              |  |      |  |                              |         
|Income (loss) before the following                            |  |      |  |                              | (18,119 
|                                                              |  |      |  |                              |         
|Loss (gain) on derivatives                                    |  |      |  |                              | (705    
|Loss (gain) on conversion option embedded in convertible debt |  | a    |  |                              | -       
|Foreign exchange loss (gain)                                  |  | b,e  |  |                              | (1,697  
|Accretion expense                                             |  | b    |  |                              | -       
|Interest expense                                              |  | a    |  |                              | 16,638  
|Interest income                                               |  |      |  |                              | (3,870  
|Gain on disposition of property                               |  |      |  |                              | (6,794  
|Write-down on Sabara property                                 |  |      |  |                              | 313     
|Total other expenses (income)                                 |  |      |  |                              | 3,885   
|                                                              |  |      |  |                              |         
|Income (loss) before income taxes                             |  |      |  |                              | (22,004 
|Income taxes                                                  |  |      |  |                              |         
|Current income taxes                                          |  |      |  |                              | 1,616   
|Deferred income taxes (recovered)                             |  | e    |  |                              | 172     
|Total income taxes                                            |  |      |  |                              | 1,788   
|                                                              |  |      |  |                              |         
|Net income (loss) and comprehensive income (loss)             |  |      |  | $                            | (23,792 



49







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



Notes to reconciliations:



| | a. | The convertible portion of the 4.5% convertible notes payable previously reported as equity for
Canadian GAAP is required to be presented as a liability under IAS 39 Financial Instruments: Recognition and Measurementbecause
it is a derivative on the Company’s common shares that may be settled net in cash or another financial instrument, or in
a variable number of the Company’s own shares equal to the net cash value. Subsequent to the initial measurement, this derivative
is measured at fair value with all gains and losses from changes in fair value recognized immediately in earnings.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The impact
arising from the changes are summarized as follows:



|Consolidated Balance Sheet                        |  | January 1, 2010 |         |   | December 31, 2010 |  
|------------------------------------------------- |  | --------------- | ------- | - | ----------------- | -
|Decrease in notes payable                         |  | $               | (1,301  | ) |                   | $
|Increase in option component of convertible notes |  |                 | 75,356  |   |                   |  
|Decrease in contributed surplus                   |  |                 | (40,861 | ) |                   |  
|Increase (decrease) in deficit                    |  | $               | 33,194  |   |                   | $



|                                                                           |  | Year ended        |        
|-------------------------------------------------------------------------- |  | ----------------- | -------
|Consolidated Comprehensive Income (Loss)                                   |  | December 31, 2010 |        
|Decrease in fair value adjustment on option component of convertible notes |  | $                 | (46,580
|Increase in interest expense                                               |  |                   | 198    
|Decrease in comprehensive income (loss)                                    |  | $                 | (46,382



| | b. | Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an obligation to
restore certain land and sites for the effect of the Company’s mining operations is measured using the cost of internal resources
and a discount rate that reflects the liability’s specific risks, which can be achieved by adjusting either the cash flows
or the discount rate. Under previous Canadian GAAP, this amount is determined by the cost of third party resources and requires
the use of a credit-adjusted risk-free rate. The effect of this change in accounting policy and the application of the IFRS 1 optional
exemption was as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The impact
arising from the changes are summarized as follows:



|Consolidated Balance Sheet                |  | January 1, 2010 |        |   | December 31, 2010 |  
|----------------------------------------- |  | --------------- | ------ | - | ----------------- | -
|Decrease in reclamation provisions        |  | $               | (2,323 | ) |                   | $
|Decrease in property, plant and equipment |  |                 | 1,758  |   |                   |  
|Decrease in deferred income taxes         |  |                 | (79    | ) |                   |  
|Decrease in deficit                       |  | $               | (644   | ) |                   | $



50







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|                                         |  | Year ended         |     
|---------------------------------------- |  | ------------------ | ----
|Consolidated Comprehensive Income (Loss) |  | December 31,
 2010 |     
|Decrease in depletion and amortization   |  | $                  | (185
|Decrease in accretion expense            |  |                    | (180
|Decrease in foreign exchange gain        |  |                    | 997 
|Related tax effect                       |  |                    | (100
|Increase in comprehensive income (loss)  |  | $                  | 532 



| | c. | An estimate of forfeitures is required under IFRS 2 Share-based Payment to be considered
in the measurement of the grant date fair value. Under previous Canadian GAAP, forfeitures were not considered. The impact of this
difference on the Company’s RSU plan is a $124 reduction in deferred compensation liability as at January 1, 2010 $168 as
at December 31, 2010).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company
has a SAR plan that was amended to vest in different tranches. IFRS 2 requires these tranches to be valued separately at fair value,
whereas under previous Canadian GAAP, they were valued in aggregate at intrinsic value. The impact of this difference is a $384
increase in deferred compensation liability at January 1, 2010 (increase of $1,181 as at December 31, 2010).



No transition
differences were identified for the Company’s DSU plan or Stock Option Plan.



The aggregate
impact arising from the changes are summarized as follows:



|Consolidated Balance Sheet                    |  | January 1, 2010 |     |  | December 31, 2010 |  
|--------------------------------------------- |  | --------------- | --- |  | ----------------- | -
|Increase in deferred compensation liabilities |  | $               | 260 |  |                   | $
|Increase in deficit                           |  | $               | 260 |  |                   | $





|                                         |  | Year ended        |    
|---------------------------------------- |  | ----------------- | ---
|Consolidated Comprehensive Income (Loss) |  | December 31,
2010 |    
|Increase in stock-based compensation     |  | $                 | 753
|Increase in comprehensive income (loss)  |  | $                 | 753



| | d. | Under Canadian GAAP, the Company classified all brown field costs and development costs prior to
commercial production as a separate line on the balance sheets called mineral exploration projects.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under IFRS,
a mining property will be transferred to mining properties in property, plant and equipment when feasibility studies are completed
and there has been a decision to develop the property, which is at an earlier stage than under Canadian GAAP.



51







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



The impact
arising from the changes are summarized as follows:



|Consolidated Balance Sheet                |  | January 1, 2010 |         |   | December 31, 2010 |  
|----------------------------------------- |  | --------------- | ------- | - | ----------------- | -
|Increase in property, plant and equipment |  | $               | 59,177  |   |                   | $
|Decrease in mineral exploration projects  |  |                 | (59,177 | ) |                   |  
|Increase in deficit                       |  | $               | -       |   |                   | $



| | e. | Under Canadian GAAP, the Company recognized a deferred income tax liability on temporary differences
arising on the initial recognition of an asset (where the fair value of the asset acquired exceeded its tax basis) in a transaction
which was not a business combination and affected neither accounting profit or loss nor taxable profit or loss. Under IFRS, deferred
income taxes on such transactions are not recognized. As of January 1, 2010, the Company has derecognized the impacts of the deferred
income tax liabilities which had previously been recognized on the initial acquisition of the Gurupi project and the Rio De Peixe
property. The effect of this change, as a result of the transition to IFRS, is a decrease in mineral exploration projects of $8,330,
and adjustments to deficit as described below for foreign exchange.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under IFRS,
a deferred income tax liability (asset) is recognized for exchange gains and losses related to foreign non-monetary assets and
liabilities that are remeasured into the functional currency using historical exchange rates for tax purposes. Under Canadian GAAP,
the above temporary difference is not recognized.



Under IFRS,
all deferred income taxes are classified as non-current, irrespective of the classification of the underlying assets or liabilities
to which they relate, or the expected reversal of the temporary difference.



The aggregate
impact arising from the changes are summarized as follows:



|Deferred income taxes                                       |  | Note |  | January 1, 2010 |         |   | December 31,
2010 |  
|----------------------------------------------------------- |  | ---- |  | --------------- | ------- | - | ----------------- | -
|Reclamation provision                                       |  | b    |  | $               | (79     | ) |                   | $
|Derecognition of deferred income taxes on asset acquisition |  | e    |  |                 | (7,971  | ) |                   |  
|Functional currency adjustment                              |  | e    |  |                 | (3,321  | ) |                   |  
|Decrease in deferred income taxes                           |  |      |  | $               | (11,371 | ) |                   | $
|                                                            |  |      |  |                 |         |   |                   |  



|Consolidated Balance Sheet       |  | January 1, 2010 |        |   | December 31, 2010 |  
|-------------------------------- |  | --------------- | ------ | - | ----------------- | -
|Foreign exchange adjustments     |  | $               | (12    | ) |                   | $
|Rio De Peixe property adjustment |  |                 | 371    |   |                   |  
|Functional currency adjustment   |  |                 | (3,321 | ) |                   |  
|Decrease in deficit              |  | $               | (2,962 | ) |                   | $



52







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



|                                                   |  | Year ended         |     
|-------------------------------------------------- |  | ------------------ | ----
|Consolidated Comprehensive Income (Loss)           |  | December 31,
 2010 |     
|Decrease (increase) in foreign exchange gain       |  | $                  | (544
|Increase (decrease) in deferred income tax         |  |                    | (428
|Increase (decrease) in comprehensive income (loss) |  | $                  | (972



| | f. | The above changes increased (decreased) deficit (each net of related taxes) as follows:
| | -- | ---------------------------------------------------------------------------------------



|Consolidated Balance Sheet     |  | Note |  | January 1, 2010 |        |   | December 31, 2010 |  
|------------------------------ |  | ---- |  | --------------- | ------ | - | ----------------- | -
|Financial instruments          |  | a    |  | $               | 33,194 |   |                   | $
|Reclamation provision          |  | b    |  |                 | (644   | ) |                   |  
|Stock-based compensation       |  | c    |  |                 | 260    |   |                   |  
|Deferred income tax liability  |  | e    |  |                 | (2,962 | ) |                   |  
|Increase (decrease) in deficit |  |      |  | $               | 29,848 |   |                   | $



| | (d) | Statements of cash flows:
| | --- | -------------------------



The IFRS transition
adjustments noted above did not have a material impact on the presentation of the Company’s statements of cash flows.



Finance expense
paid has been classified as a financing activity; these were classified as operating activities under Canadian GAAP.



There were no
other material differences between the cash flow statements presented under IFRS and the cash flow statements presented under Canadian
GAAP for the year ended December 31, 2010.



| | 22. | Subsequent Events:
| | --- | ------------------



Rights
Plan:



On March 21, 2012, the
Board adopted a shareholder rights plan (“Shareholder Rights Plan”). The Shareholder Rights Plan is intended to: (a)
ensure, to the extent possible, that all holders of common shares and the Board have adequate time to consider and evaluate any
unsolicited take-over bid for the common shares; (b) provide the Board with adequate time to identify, solicit, develop and negotiate
value-enhancing alternatives, as considered appropriate, to any such unsolicited take-over bid; (c) provide the Board with adequate
time to continue to identify, solicit, develop and negotiate value-enhancing transactions, as considered appropriate, as part of
the Strategic Review Process; (d) encourage the fair treatment of Jaguar's security-holders in connection with any unsolicited
take-over bid made for its common shares; and (e) generally assist the Board in enhancing shareholder value. The rights issued
under the Shareholder Rights Plan will become exercisable if a person, together with its affiliates, associates and joint actors
(all as defined in the Shareholder Rights Plan), acquires or announces an intention to acquire beneficial ownership of Common Shares
which, when aggregated with its current holdings, total 20% or more of the Company's outstanding common shares (determined in the
manner set out in the Shareholder Rights Plan) without complying with the “Permitted Bid” provisions of the Shareholder
Rights Plan or without approval of the Board. In the event that the rights become exercisable, the rights will entitle shareholders,
other than the acquiring person and its affiliates and associates and persons acting jointly or in concert with it, to purchase
additional common shares at a substantial discount to the market price of the Company's common shares at that time.



53







|Jaguar Mining Inc.                                                             
|-------------------------------------------------------------------------------
|                                                                               
|Notes to Consolidated Financial Statements                                     
|(tabular dollar amounts in thousands of U.S. dollars, except per share amounts)
|                                                                               
|Years ended December 31, 2011 and 2010                                         



| | 23. | Comparative Figures:
| | --- | --------------------



Certain comparative
figures have been reclassified to conform to the current year’s presentation.





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