Update: Luna Gold's Q2 Production Falls Due To Heavy Rain, Partner Sandstorm Gold Suffers As Well

Jul.28.14 | About: Luna Gold (LGCUF)

Summary

Luna Gold recently announced that heavy rainfall decreased mining activity at its Aurizona Mine and management was forced to process low grade ore stockpiles dragging production down 24%.

Sandstorm Gold gets a third of its attributable production from Aurizona, which means its total attributable production for the quarter will be about 8% lighter than expected.

This was an unforeseen event in my previous articles on both companies.

This is negative for both companies, although given the weakness in Luna's share price I am open to reconsidering my mildly bearish outlook, pending a positive PEA for Aurizona's expansion.

Sandstorm Gold has done an excellent job diversifying away from Aurizona although it is still heavily dependent, and it is an interesting stock to buy on pullbacks.

Recently Luna Gold (OTCPK:LGCUF) announced that Q2 production at its flagship Aurizona Mine declined by 24% from Q2 of last year as heavy rainfall forced the company to decrease mining in lieu of processing stockpiled ore. This ore was lower grade than the ore processed in Q2 last year (1.14 gpt vs. 1.69 gpt.) and so total production fell from 18,853 oz. to 14,262 ounces. This directly impacts Luna Gold's primary partner Sandstorm Gold (NYSEMKT:SAND), which owns a streaming deal on the Aurizona mine whereby it is entitled to buy 17% of the gold produced at the Aurizona Mine at $400/oz. With the mine's production declining Sandstorm Gold's attributable production declines as well by about 8%. Clearly this is negative for both companies, and it wasn't anticipated in either my previous article on Luna Gold, or my most recent articles (found here and here) on Sandstorm Gold. However neither of my theses is impacted by this unusual occurrence.

A bullish case for Luna Gold largely depends on how expensive the company's Aurizona expansion will be. While Aurizona is a high grade and low cost mine the fact that the company sold a stream to Sandstorm substantially lowers its effective realized gold price, which means that in most circumstances the company needs a higher gold price in order to justify expanding the Aurizona Mine. The lousy weather in Q2 will likely hit near-term earnings but it serves as a reminder that mining is a risky business and that when we analyze these companies we need to factor in black swans such as bad weather. However since the stock has significantly underperformed since my April article it appears to be more compelling now, and those investors who appreciate that Aurizona is a growing and efficient mine can consider taking a position at the current price, although keep in mind that lousy Q2 production will almost certainly hit earnings.

As for Sandstorm Gold, since Aurizona was supposed to produce about 90,000 ounces of gold this year, or 22,500 for the quarter, the company is losing out on about 8,000 ounces of effective production, meaning that operating profits will take a hit of about $7.2 million. As previously mentioned Sandstorm Gold has done a good job of diversifying its risk away from Aurizona by buying Premier Royalties last year and its sister company--Sandstorm Metals and Energy--earlier this year. This serves to dampen the blow of black swan events such as this one.

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