A Small Cap Gold Miner That Could Provide Outsized Returns In 2014

| About: Luna Gold (LGCUF)

If the precious metals market and the miners are set to take off in 2014, as many of the gold bugs and pundits believe, then now is a good time to be looking for well-managed, well-funded, and profitable gold producers. A very appealing company in the junior category of the gold producers sector is Luna Gold (OTCPK:LGCUF).

Luna Gold's main asset is the Aurizona Gold Mine located in north-eastern Brazil. For FY2013 the mine produced a record 79,229 ounces.

Said John Blake, Luna's president and CEO:

"We are encouraged by both another record gold production quarter and a record full year of production, exceeding 2012 annual production by approximately 7%. This strong performance can be attributed to higher gold head grade and improved recovery rates, which were slightly offset by a lower mill throughput,"

Luna will report its FY2013 results no later than March 29th, 2014. On November 12, 2013, the company reported net income of $8.4 million and earnings per share of $0.08 for the nine months ending September 30, 2013.

At the end of the third quarter 2013, Luna had a cash balance of $18.1 million, gold inventory of 3,655 ounces and operating cash inflow before working capital movements of $18.2 million ($0.17 per share).

As of the November 12, 2013 press release, the company expects its full-year cash costs per ounce of gold to be between $725 to $745 per ounce; while the fourth quarter cash cost was expected to range between $665 to $715 per ounce.

Luna's management team has demonstrated their commitment to shareholders and employees by taking steps to cut costs during this period of time when the gold miners have been out of favor with the general market. Fellow SA contributor Steve Nicastro wrote an article regarding this in August of last year, which you can read here.

Additionally, the owners and management of Luna have a record of regularly purchasing the company's stock on the open market. (See here)

The Aurizona mine is currently undergoing its Phase 1 Expansion. When completed the expansion will boost gold production by 70% to 135,000 ounces per year. Completion of the Phase 1 Expansion is targeted for the first half of 2014.

The results of a Phase 2 Expansion pre-feasibility study are expected to be released in the first half of 2014. This expansion is planned to increase Luna's gold production to between 200,000 and 300,000 ounces per year.

In March 2013, Luna released an updated resource estimate for Aurizona of 3.63 million ounces Measured & Indicated Resources and 1.04 million ounces Inferred Resources; representing increases of 15% and 44% respectively from the previous resource update of December 2011.

The company also owns the Luna Greenfields Project, where it controls over 220,000 hectares of contiguous exploration licenses, covering Brazil's newest gold belt with several more licenses under application. The company believes that this area also has the potential for multi-million ounce deposits.

Sandstorm Gold (NYSEMKT:SAND) has a gold stream agreement with Luna Gold to purchase 17% of the life of mine gold production from Aurizona at a price of US$400 per ounce. Sandstorm made an upfront payment of $17.8 million in cash and 1.1 million common shares of Sandstorm to acquire the stream in May 2009. In September 2012, Sandstorm contributed an additional $10 million towards the Phase 1 Expansion Project at Aurizona.

Be sure to do your own due diligence, but overall Luna Gold is a well-managed, well-financed and growing junior gold producer that has a lot of upside potential on both the production and exploration side.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LGCUF, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.