Sandstorm supports Luna Gold after rough quarter

VANCOUVER — Luna Gold (TSX: LGC; US-OTC: LGCUF) had a rocky start to the year at its flagship Aurizona gold mine in Brazil’s Maranhao state, but that didn’t stop streaming outfit Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND) from upping its ownership in the Vancouver-based producer. In early August the companies reached an agreement that could see Sandstorm hold more than 20% of Luna’s outstanding shares.

Luna is processing ore from the greenstone-hosted Piaba deposit, which runs for 3 km and hosts 79 million measured and indicated tonnes grading 1.61 grams gold per tonne for 3.5 million contained oz.

The company is targeting brownfield expansion across its 155 sq. km land package with an exploration program focusing on five deposits: Piaba, Tatajuba, Boa Esperanca, Conceicao and Ferradura. Aurizona’s global measured and indicated resources total 82 million tonnes at 1.38 grams gold for 3.6 million contained oz.

During the second quarter, Luna processed 406,144 tonnes at 1.14 grams gold. Recoveries were 89%, which allowed production of 14,262 oz. gold and sales of 13,882 oz. That compares to first-quarter production of 19,414 oz.. All-in first-quarter sustaining costs were US$787 per oz., for net income of US$7.5 million, or 7¢ per share. (Second-quarter financials are not yet available.)

 In July Luna said its 2014 production guidance — which stood at 85,000 to 95,000 oz. gold — was under review, and the company has initiated a “recovery plan” that included contracting additional mining equipment to increase material movement in an effort to meet guidance expectations.

“Above-average rainfall during the second quarter severely impacted our ability to access ore in the pit, which required processing of lower-grade stockpiled ore,” president and CEO Geoff Chater noted during a second-quarter conference call. “We’ve had a full year drain already this year, which has really restricted mining to the upper levels of the open pit and to Piaba and Tatajuba. So that was a big issue. We also didn’t have much time to prepare for the wet season due to cash constraints at the end of last year.”

In August, Luna  revised its annual guidance for 2014 to 75,000-80,000 oz. gold, and increased its all-in sustaining cost estimates by US$115 per oz. to between US$915 and US$1,010 per oz.

The company has “indefinitely delayed” part of an expansion at Aurizona that would have bumped throughput from 7,500 tonnes per day to 10,000 tonnes per day. That project had been budgeted at US$50 million, but cost overruns increased the capital estimate to US$63 million.

Luna will still complete two elements of the expansion, including a carbon regeneration kiln, intense leach reactor, elution circuit and electrowinning cells.

But third and fourth phases that would have involved two high-rate thickeners and three carbon-in-leach tanks are on hold.

“We need to determine the optimum production profile for sustained long-life production at [Aurizona]. The company is examining the best allocation of its limited capital and cash flow in order to right size production in the current gold-price environment,” Chater said.

Sandstorm’s continued investment  and a potential modification of an existing streaming deal at Aurizona could improve Luna’s finances.

Luna is trying to close a non-brokered private placement wherein it will aim to issue 30 million shares at $1.02 per share for gross proceeds of $30.6 million.

Sandstorm has agreed to buy at least 19.5 million shares for $20 million, which would result in the streaming company owning 19.8% of Luna.

The existing streaming agreement that is up for possible renegotiation  is the one wherein Sandstorm buys 17% of the life-of-mine gold produced from the open-pit operations at Aurizona for US$404 per oz. (increasing 1% annually).

On closing of the initial placement with Sandstorm, Luna will have $36 million in cash, $40 million in working capital, $50 million in debt and 6,800 oz. gold doré .

Assuming the placement is fully subscribed, Luna will have $46 million in cash and $50 million in working capital.

“The interests of Sandstorm and Luna are very much aligned, and we are committed to working together in order to unlock as much value as possible for our respective shareholders,” Sandstorm president and CEO Nolan Watson commented.

In more optimistic times, Luna had been targeting a production boost towards 115,000 oz. gold for 2015 — assuming Aurizona’s phase-one expansion was completed— and had been  undertaking a prefeasibility study on a phase-two development that would consider expanding gold production to between 200,000 and 300,000 oz. gold.

Luna shares have traded in a 52-week range of 92¢ to $1.97, and dropped 3¢ after news of Sandstorm’s investment, to close at 98¢ at press time.

The company has 122 million shares outstanding for a $120-million market capitalization.