JDL, Luna to merge, become Trek Mining

VANCOUVER — Newly formed JDL Mining (TSXV: JDL; US-OTC: LWLCF) and debt-heavy Luna Gold (TSX: LGC; US-OTC: LGCVF) hope that a proposed merger of the two companies will pave the way to sustainable near-term gold production in Brazil.

On Feb. 1, the companies came to terms to create Trek Mining, which would have a $300-million market capitalization and 149 million shares outstanding. The move would help Luna clean up its debt-heavy balance sheet, while JDL is eyeing  near-term production Luna’s  suspended Aurizona gold mine in Brazil’s Maranhao state.

Luna shareholders would receive 1.105 JDL shares for each share held. The exchange ratio represents $2.20 per Luna share based on valuations at the time of the deal. That equates to a 16% premium to Luna’s 20-day, volume-weighted average price, and values Luna at $86 million.

Heavy equipment in the pit at Luna Gold’s suspended Aurizona gold mine in Brazil’s Maranhao state. Credit: Luna Gold.

For its part Luna has $61 million in cash debt, as well as $43 million in convertible debt due to streaming company Sandstorm Gold (TSX: SSL; NYSE-MKT: SAND). Luna also has $12 million in cash.

Luna shut down operations at Aurizona in mid-2015 amid falling gold prices and a stream-finance deal with Sandstorm that hindered its cash flows.

Workers at Luna Gold’s Aurizona gold mine in Brazil. Credit: Luna Gold.

Luna also had operational issues, which resulted in cost overruns and production shortfalls.

The Aurizona mine is permitted up to 5,500 tonnes per day, but produced just 14,260 oz. gold in the second quarter of 2015 at all-in sustaining cash costs (AISCs) of US$1,119 per oz. gold.

In a pre-feasibility study (PFS)  released in late 2016, Luna updated Aurizona’s mine plan and proposed expanding the mill to an 8,000-tonne-per-day capacity that would produce 150,000 oz. gold per year at AISCs of US$708 per oz., based on a 6.5-year mine life.

Mining at Luna Gold’s Aurizona gold mine in Brazil’s Maranhao state. Credit: Luna Gold.

The upgrades would cost US$146 million in capital expenses. Assuming a US$1,250 per oz. gold price, the Aurizona study features a 34% after-tax internal rate of return and US$201-million net present value at a 5% discount rate.

Prior to the merger news, Luna had hoped to have the mine back in production by the end of 2018.

Aurizona hosts proven and probable reserves of 18.6 million tonnes grading 1.62 grams gold per tonne for 969,000 contained oz. gold. The project’s pit-constrained, measured and indicated resources total 29.9 million tonnes of 1.67 grams gold for 1.6 million contained oz. gold.

Luna also has a regional joint-venture in Brazil with AngloGold Ashanti (NYSE: AU; LON: AGD) that encompasses 2,000 sq. km of greenfield property across what Luna describes as underexplored greenstone belts hosting orogenic gold systems.

AngloGold can earn a 70% interest in the broad land package — not including Aurizona — by spending  $14 million on exploration over the next four years.

Meanwhile, JDL emerged as a beefed up gold play in October 2016 via the three-way combination of Lowell Copper, Gold Mountain Mining and Anthem United.

The past-producing Elk gold project in southern B.C. Credit: JDL Gold.

JDL’s assets include: a 75% interest in the 350-tonne-per-day Koricancha mill in Arequipa, Peru; the wholly owned, past-producing Elk Gold project in southern B.C.; and the wholly owned, Warintza copper-molybdenum project in southeastern Ecuador.

JDL toll mills at Koricancha, which involves buying mill feed at a discount from legally operating small-scale and artisanal miners in Peru.

“The strategic focus for [JDL] has been to acquire high-value, flagship gold projects where we can invest our cash and management resources,” JDL CEO Greg Smith said during a conference call announcing the merger. “Aurizona is a perfect fit for us. It’s been heavily de-risked and has meaningful near-term gold production with attractive economics, and we see considerable opportunity to significantly increase the mine life. The asset has been undervalued in the market, but it is a rare opportunity, and I expect our combination to unlock that value.”

The processing plant at Luna Gold’s suspended Aurizona gold mine in Brazil’s Maranhao state. Credit: Luna Gold.

JDL also brings $56 million in cash and no debt to the table. The company’s largest shareholder is the Lundin family.

The new Trek Mining intends to close a $27-million, non-brokered private placement priced at $2 per subscription receipt. Each receipt holder would get one Trek share and one warrant with a $3 strike price through 2021.

“Our shareholders communicated to us that one of our focuses should be cleaning up the balance sheet, and we’ve achieved that here,” Luna CEO Christian Milau said. “We felt it was a question of putting two pieces of a puzzle together. This is a fresh start for us and we’re on the path to creating a mid-tier gold producer, but a lot of this story is going to be about exploration. It’s a lot easier to execute our growth plans together … the portfolio is worth more as a combined company.”

The Koricancha mill is a fully-operational industrial gold milling facility located in Southern Peru. Credit: JDL Gold.

Luna debt held by Australian private-equity firm Pacific Road Capital will be repaid after the new financing is closed, while the Sandstorm debt will be settled in exchange for equity, or a combination of equity and cash.

Pacific Road could hold a 16% equity interest in Trek when the deal closes, and Sandstorm, a 19% interest. The merger is scheduled  to close before April.

A drill site at Luna Gold’s Aurizona gold mine in Brazil. Credit: Luna Gold.

The companies intend to complete a feasibility study for Aurizona’s reactivation by year-end, which would be followed by 18 months of construction.

Luna shares have traded in a 52-week range of 60¢ to $3.50, and closed at $1.99 per share at press time. The company has 39 million shares outstanding for a $76-million market capitalization.

JDL shares have moved in a 52-week range of $1.49 to $2.19, and closed at $1.84 per share. The company has 67.5 million shares outstanding for a $127-million market capitalization.