Luna’s gold is Sandstorm’s gain

Luna Gold’s (LGC-T) Aurizona gold mine in northeastern Brazil’s Maranhao state looks more robust each day, and that’s good news for two sets of shareholders.

Aurizona is one of Sandstorm Gold’s (SSL-T, SAND-X) most valuable gold streams, according to Canaccord Genuity analyst Nicholas Campbell, who says the stream makes up roughly 37% of the company’s value.

The stream was Sandstorm’s first. Since then, the company has defined a core competency in buying gold streams from emerging producers, with transactions that involve upfront financing in exchange for future gold production at a discounted price. The deal on Aurizona gave Sandstorm the right to buy 17% of the life-of-mine gold produced from Aurizona for US$400 per oz., on an inflation-adjusted basis.

With the latest boost to resources, the investment looks to be a shrewd one that will net more cheap gold than originally imagined.

Luna increased measured-and-indicated resource tonnage by 15% to 3.63 million oz. from 82 million tonnes grading 1.38 grams gold, while gold ounces in the inferred category are up 44% to 1.04 million oz. from 18.5 million tonnes grading 1.74 grams gold.

Piaba is a 3.3 km long deposit that holds one operating open-pit mine. The deposit is Aurizona’s only source of production, and its key contributor to resources. The latest estimate shows the deposit looking richer all the time, with average grades climbing. The deposit’s average grade was up 10% compared with its previous estimate. Now it stands at 1.39 grams gold per tonne for the measured-and-indicated categories, and 1.61 grams gold for the inferred category.

Luna says it expects production from the mine to be 74,000 oz. gold in 2012.

The richer ore caught the attention of Haywood Securities analyst Tara Hassan, who wrote in a recent report that “we note increased grades buck the trend of Luna’s peers and will further contribute to an improved cost profile at the mine.”

But Piaba isn’t the only story at Aurizona: the resource estimate also outlined maiden estimates on a suite of satellite deposits.

Recent drilling cut 6,900 metres into Piaba, and a further 7,500 metres were cut into the Boa Esperanca, Ferradura and Conceicao deposits.

“While additions from these deposits were not as meaningful as Piaba given lower grades and tonnage, they will benefit Aurizona by providing additional oxide feed for blending,” Hassan writes.

He also expects a reserve update, with a release targeted for March 2014.

Aurizona has proven-and-probable reserves of 17 million tonnes grading 1.36 grams gold for 731,000 oz. But reserves haven’t been updated for two years, meaning that the robust resources defined since that time should translate into hefty reserves in the future. And that should make both Luna and Sandstorm shareholders smile.