New execs hope to 
turn around Luna Gold

The team that put the Karma gold mine into production in Burkina Faso for True Gold before the junior was acquired by Endeavour Mining (TSX: EDV; US-OTC: EDVVF) for $240 million in April, hopes to duplicate its success at Luna Gold (TSX: LGC) in Brazil.

Luna Gold owns 100% of the Aurizona gold mine, which has been on care and maintenance since the third quarter of 2015. During its last reported year of production in 2013, the mine turned out 79,229 oz. gold at total cash costs of US$723 per oz. gold.

“We were quite excited when we looked at it because we were really looking for something that was undervalued in the current market,” Christian Milau, Luna Gold’s new president and CEO, said during a corporate presentation in September at the Precious Metals Summit in Beaver Creek, Colorado. “A lot of share prices have run up, as we all know this year, and we were looking for the next opportunity.”

“This one really had what I called its hair and warts on it, and really needed to be fixed,” Milau continued. “But underlying that we felt it was a really good asset and that was the crux of our interest. We felt very similar when we looked at True Gold a couple of years ago.”

The former CEO of True Gold joined Luna Gold in August, along with other members of the True Gold team, including David Laing, chief operating officer; Peter Hardie, chief financial officer; Scott Heffernan, vice-president of exploration; and Sebastian D’Amici, vice-president of finance.

Luna Gold’s new leadership team says it can turn Aurizona around, too, much as it did Karma, a stalled construction project that it took through to production in just 14 months. (Milau and Laing were also among the original executives at Endeavour Mining, where they both spent five and a half years, during which the company ascended from an 80,000 oz. gold a year producer in Burkina Faso to one churning out over 500,000 oz. gold per year from a portfolio of mines across West Africa.)

Milau says he’s excited about his new assignment.

“We finished at True Gold in May and this one found us,” Milau says of Luna Gold and its Aurizona mine in Brazil’s northeastern state of Maranhao. “We were looking to invest some of our own money and this opportunity came up.”

One of the key things for Milau and the rest of the team is that they put in about $2.3 million of their own funds in August.

“We wanted to find an opportunity where we could be aligned with shareholders,” he said. “That shows real commitment — not everyone puts direct money in.”

Since then, Luna Gold has released a prefeasibility study (PFS) on restarting the Aurizona gold mine, which Milau and his colleagues hope to accomplish during the first half of 2018. The next step is to complete a feasibility study before the end of the first quarter of 2017.

According to the PFS released on Sept. 12, Aurizona could be in production for US$146 million, which includes a new mine fleet. Life-of-mine sustaining capital is an estimated US$47 million.

The study envisions the mine could produce 150,000 oz. gold a year during the first five years at all-in sustaining costs of US$708 per oz., and cash costs of US$606 per oz. gold. Payback would come in 2.6 years. Construction would take 18 months.

Aurizona has proven and probable reserves of 969,000 contained oz. gold in 18.6 million tonnes grading 1.62 grams gold per tonne, enough to sustain a 6.5-year mine life (at US$1,250 per oz. gold). Inclusive of reserves, Aurizona’s measured and indicated resource stands at 1.6 million contained oz. gold in 29.9 million tonnes at a grade of 1.67 grams gold.

And while the mine life is quite short, Milau conceded, this “didn’t concern us, because we thought the underlying area and project could have district-scale potential.”

The PFS outlines an after-tax net present value at a 5% discount rate of US$201 million and a 34% after-tax internal rate of return at a US$1,250 per oz. gold price. Those figures rise to US$256 million and 41%, at US$1,350 per oz. gold.

“The reason the IRRs are quite high and quite attractive is that the initial capex is quite low at US$150 million, and that includes the full refurbishment of the mining fleet,” Milau says. “We don’t need to build everything. We have got a brownfield site with a lot of infrastructure there we can capitalize on.”

The new mine plan continues primary mining in the Piaba open pit, deepening the pit and mining harder rock types, which will be amenable to treatment in an upgraded processing plant. The plan also envisions early mining of Boa Esperanca, a smaller pit 1 km southeast of Piaba, which when mined out will be used for water storage.

Milau is the first to admit that many people questioned his decision to join the company, and not all shared his optimistic view of its prospects.

“The project has had its history,” he said, explaining that the processing plant had not been built to handle hard rock — it had been built to handle the soft saprolite.

“There was a bit of a misunderstanding of how much soft rock was there, and the plant sort of ground to a halt with the gold price falling,” he says. “Cash funds being quite short, ultimately, it was not prepared to handle that hard rock, which came up sooner than planned.”

He also pointed out that a previous management team that led the company from early 2015 had done a lot of work to put the open-pit operation back into production, including undertaking 15,000 metres of oriented core drilling, 3,000 metres of RC drilling and re-logging of historic core, with the plan to get a feasibility study done based on a better understanding of the rock.

Drilling and metallurgical testwork programs last year helped develop a stronger technical foundation and advanced the team’s understanding of the geology, alteration, weathering, structure and metallurgy, and their controls on gold mineralization, processing and recoveries, Milau noted.

The mining executive said the company that consolidated the PFS, Lycopodium Minerals Canada, was the same group that Luna Gold’s current management team had worked with during its last two to three mine builds in Africa.

“They really understand this type of region and the type of material we are dealing with,” Milau said, adding that “when you’re standing in Ivory Coast you feel like you’re in Brazil, except it’s probably 10 to 20 years earlier in terms of exploration.

“You just look at all this open area — it’s really underexplored versus West Africa at this stage,” he continued. “Brazil is a big place … it has a lot of opportunities.”

Luna Gold plans to upgrade the processing plant to 8,000 tonnes per day.

“We have permits to operate at 6,000 tonnes per day, so this is not a brand-new permit,” Milau noted, adding that the existing Vene tailings storage facility on the property is also permitted. Luna Gold plans to expand the capacity at Vene in three lifts (the first before the restart of the process plant, the second two years later and a third two years after that.) Tailings facility construction will start in year four.

The upgraded processing plant will use conventional gravity concentration and leach/CIP cyanidation. The design includes a new comminution circuit that will treat all ore types and consist of a primary jaw crusher, SAG mill, ball mill and pebble crusher. Installations will also include an intensive leach reactor, a hybrid leach/carbon-in-pulp circuit, pressurized elution, carbon regeneration kiln, upgraded hydro-cyclones, three more leach tanks and partly installed, high-rate thickeners.

Milau estimated the company will have to undertake $2.5-million worth of more work to complete the feasibility study, including a bit of infill drilling, some geo-tech work and an assessment of the water management plan.

“There are three metres of water there a year, so it’s really important we understand that,” Milau said. “David and I had a good experience recently in West Africa, with big rainfalls and building a mine site and, really, you have got to get that water management plan in place early.”

To handle rock material, the company needs to build the front end of the plant. It needs a primary crusher, a SAG mill, a ball mill and a pebble crusher. The project will need a few more leach pads, as well, to improve gold recoveries.

The fleet will be replaced, and Milau expects that the company will lease some of that. There is already power to site, but the substations need to be upgraded.

“There’s reliable and good power there,” he said. “It’s been fantastic compared with what I’ve experienced in certain other countries, certainly in West Africa.”

The project, 320 km from Sao Luis, the capital of Maranhao state, and 400 km from Belem, the capital of Para state, is road accessible, and can be reached by a one-hour air charter from either city.

The area also has skilled workers. Maranhao is one of the country’s poorest states, and people are keen to find jobs, Milau said. “There are a lot of skilled workers in the area that really want to get back to work once we get this thing back into production.”

Over the last year, Luna Gold has traded from 3¢ to 35¢, and at press time traded at 29.5¢ per share.

The company has about 388.8 million shares outstanding of which Pacific Road owns 45%, Sandstorm Gold (TSX: SSL; NYSE: SAND) owns 17% and Management holds 3%. Luna has a market cap of around $112 million.Milau sees opportunity in Luna Gold’s share price, too.

“The stock has had a really tough time since it had its difficulties a couple of years ago,” he said. “For us, that was part of the opportunity here. It still has room to move to catch up. When you look at valuations of actual producers that are producing 150,000 oz. gold a year at these costs, you’re looking quite often at half-a-billion-dollar market cap these days. Our market cap is sub-$100 million.”

“We’re not here to build one mine that’s six and a half years,” he added. “We believe we can become a multi-asset producer … that was our experience in building up Endeavour.”

The goal, he says, is to double reserves through exploration.

In addition to the Piaba and Boa Esperanca deposits, the property contains a number of exploration targets, including to the west of the Piaba pit (and underneath the existing pit), as well as the Tatajuba target, 2.4 km southwest of Piaba within the Aurizona Shear Zone (ASZ). Tatajuba extends over an 800-metre strike length, and like Piaba, it contains gold mineralization associated with a sub-vertical to moderately north-dipping structure within the ASZ.

Other targets on the property are Conceicao a deposit 1.6 km southeast of Piaba, and Ferradura, a deposit 1.7 km southeast of Piaba. (Luna Gold reported small resource estimates for both deposits in March 2013.)

Near-mine targets include the Tatajuba Extensions (surface geochemical gold anomalies extending to the east and west of the Tatajuba zone); Micote, 3 km east of Piaba on a parallel northeast-trending mineralized structure; and São Lourenco, 3.5 km east of Piaba and 500 metres south of Micote.

In May, Luna Gold’s previous management team signed an exploration agreement with AngloGold Ashanti (NYSE: AU) to spend US$14 million on exploration over four years to earn a 70% interest in mineral claims over 1,702 sq. km (which can be increased to 2,387 sq. km, subject to government approvals).

The joint-venture will not include mineral claims corresponding to the Aurizona gold mine, the nearby Tatajuba extension and other brownfield properties, or the Touro greenfields property.

Luna Gold says the deal shows the Greenfield claims’ potential.

“It’s an area of focus for them in South America,” Milau said. “Over the next four years they plan to spend a reasonable amount of money looking for more Anglo-sized projects on the greenfield areas of our tenements.”