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Executives

Patrick Balit - Manager, Investor Relations

Geoffrey Chater - President, Chief Executive Officer and Director

Duane Lo - Executive Vice President and Chief Financial Officer

Analysts

Tara Hassan - Haywood Securities

Philip Ker - PI Financial

Luna Gold Corp. (OTCQX:LGCUF) Q2 2014 Earnings Conference Call August 15, 2014 11:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the Luna Gold 2014 Q2 earnings conference call. There will be a Q&A session following management's remarks for institutional analysts and investors. Contact information for representatives of the media and retail investors will be given at the end of the call.

I would now like to turn the call over to Mr. Patrick Balit, Manager of Investor Relations. Please go ahead, Mr. Balit.

Patrick Balit

Thank you. Good morning, everyone. And welcome to Luna Gold's conference call to review the company's financial results for the second quarter ending June 30, 2014. We will also take this opportunity to discuss Luna's outlook and strategy for the remainder of the year.

With me on this call this morning are Geoff Chater, the company's President and CEO; and Duane Lo, Executive Vice President and CFO. Following our prepared remarks, we will conduct a question-and-answer session for analysts and institutional investors.

Before we begin, I must caution all participants that this conference call contains forward-looking statements that reflect management's expectations regarding the company's future. Whenever possible, these statements will be identified by words such as anticipate, believe, expect or similar expressions, which are based on information currently available to the company.

Investors should not place undue reliance upon these statements, which involve significant risks, uncertainties and assumptions. These statements are made as of the date of this call, and the company assumes no obligation to update or revise them to reflect new events or circumstances.

I will now pass the call on to Geoff, who will be reviewing the company's results for the second quarter, followed by a recent developments and outlook for 2014. Geoff?

Geoffrey Chater

Thank you, Patrick, and good morning, everyone. During the second quarter the company reported revenue of CAD16.1 million, including sales to Sandstorm. Gold sales and production of 13,882 ounces and 14,262 ounces, respectively. Total cash cost of production of CAD1,140; all-in sustaining cost of production of CAD1,297; and all-in cost of CAD1,484 per ounce of gold produced.

Cash flow from operating activities before changes in non-cash working capital was a loss of CAD200,000 and we had net income of CAD100,000. After closing the recent Sandstorm Gold strategic investment, the company has a cash balance of approximately US$35.5 million and 6,700 ounces of finished gold in inventory.

During the quarter, the company re-tendered the final construction packages for the Phase I expansion, which resulted in capital costs increasing from the original estimate of CAD50 million to an estimate of CAD63 million. This 26% increase is due to increased contractor costs associated with mechanical, piping and electrical installations as well as higher cement costs associated with the completion of the high rate thickener foundations.

Due to a combination of lower operating cash flow than budgeted during the first six months of 2014 and a revised capital estimates to complete the Phase I expansion, the company has decided to delayed a completion of a portion of the Phase I expansion for an indefinite period.

In particular, work package 3, which consists of two high rate thickeners and three Carbon In-Leach tanks and work package 4, which consists of a triple deck wet screen, cyclones, pumps and trash screen will be delayed. The company is determining the optimum production profile for sustained long-life production at the Aurizona mine, and prioritizing allocation of its capital and cash flow in order to right-size production in the current gold price environment.

Based on the first half of 2014 gold production and average unit cash costs of production, the company has revised its 2014 full year operating guidance as follows. 2014, gold production guidance was 85,000 to 90,000 ounces and has been revised between 75,000 ounces and 80,000 ounces.

Cash cost of production which was guided between CAD690 and CAD740 per ounce has now been revised between CAD825 and CAD900 per ounce. Finally, once again on a per ounce basis that we had guided all-in sustaining cost between CAD800 and CAD900, all-in sustaining cost to 2014 have now been revised to between CAD915 and CAD1,010 per ounce.

In July, the company engaged JDS Energy & Mining to provide operation and technical support to address mining and processing efficiencies at the Aurizona mine. JDS will provide site management services and work with Luna employees to stabilize and improve operations, including operator training and the implementation of mining and processing best practices.

The company is targeting to extract 7.5 million tons of material from the Piaba mine pit to produce between 41,000 and 46,000 ounces of gold in the second half of 2014 and stockpile approximately 600,000 tons of ore at an estimated grade of 1.2 grams per ton by December 31, 2014. During the month of July, approximately 1.1 million tons of material was mined both ore and waste in total from the Piaba pit and we produced 6,700 ounces of gold.

The company intends to complete the four main circuits in work packages 1 and 2 of the Phase I expansion as well as honor any outstanding procurement commitments. Work package 1 and work package 2 consist of the carbon regeneration kiln, intense leach reactor, elution circuit and electro-winning cells.

The timeline for mechanical completion of WP1 and WP2 remains before yearend 2014. The estimated cost to complete these work packages is CAD6 million. The company is working with the mining and environmental authorities to modularly commission and permit work package 1 and work package 2.

The company has commenced its brownfields exploration program to expand resources and reserves, specifically targeting new saprolite mineralization and to improve its understanding of the high grade mineralization controls and to sterilize footprints for future plant expansion, tailings and waste storage areas.

The company expects to spend up to CAD4 million in exploration in the second half of 2014. Furthermore, the company has delayed the purchase of three multi-purpose drill rigs and will review its decision in 2015. Expenditures on sustaining capital projects for the second half of 2014 is budgeted CAD7 million.

The Aurizona Phase II expansion prefeasibility study, and the Aurizona 43-101 resource and reserve update remain on target for completion and release in the second half of 2014. The prefeasibility study will identify the company's options on a number of different throughput capacities to address the additional crushing and grinding circuit that will be needed to process the harder primary ore body in the future.

In August, the company entered into a strategic investment agreement with Sandstorm Gold, which had made Sandstorm the company's largest shareholder with a 19.8% ownership. Pursuant to the agreement, Sandstorm invested approximately CAD19.9 million and the company's proceeds of the transaction will be used for expenditures related to the Aurizona mine, ongoing brownfields exploration at and around the Aurizona mine, and exploration at Luna greenfields. After closing the transaction, as previously mentioned, the company has a cash balance of US$35.5 million as well 6,700 ounces of finished gold in inventory.

As required by investment for Sandstorm, Mr. David Awram, Senior Executive Vice President of Sandstorm has been appointed to the company's Board of Directors; and furthermore Mr. Luis Baertl has stepped down as Chairman of the Board and has been succeeded as Chairman by the company's current lead Independent Director, Mr. Steven Krause. Mr. Baertl will remain a Director in the company.

Sandstorm and Luna has commenced discussions related to potential modification of the Aurizona gold stream. The focus of the discussion is to explore opportunities that will increase value for both Sandstorm and Luna's shareholders, with a goal of improving Luna's excess capital, accelerating production and cash flow to both Sandstorm and Luna, and leveraging the highly perspective brownfields and greenfields exploration targets. Unrelated to the Sandstorm investment, Mr. Peter Mah, our Chief Operating Officer, has left the company.

Before I hand the conference call back to Patrick, I would like to reiterate, Luna is focused sustainable gold production and cash generation, with reinvestment to maximize the company's future growth. Patrick?

Patrick Balit

Thank you, Geoff. Before we begin today's Q&A session, I would like to remind everyone that questions will be reserved for institutional investors and analysts. For retail investors and members of media, who wish to ask questions, please call Patrick Balit directly at 604-568-7993.

Operator, we can now proceed to the Q&A. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Tara Hassan from Haywood Securities.

Tara Hassan - Haywood Securities

Just quickly on the Phase I expansion, the increased CapEx and the reference to labor rates going up. I know earlier in the year, there was actually some thought that there was some easing of cost with the World Cup ending. Can you give us some color on what's happened in between then to cause the increased capital on the last two packages?

Duane Lo

Eventually I think the biggest challenge that we faced is that we went and bid on these packages late in the season. And it didn't give us a lot of opportunity to negotiate better rates. And typically when you get to the dry season in Brazil, the rates go up. So at this point in time, that's really the best explanation we got from the contractors that were bidding on the project.

Tara Hassan - Haywood Securities

And so is it possible, if you sort of change the timing of the bidding next year that you can recoup some of those inflated costs then?

Geoffrey Chater

I certainly think that's possible. I'd also like to add to Duane's comment. It was a real tender process. We had a number of tenders for each package, and by no means for the ones that we had picked in the CAD63 million, they were the highest ones. So it is always the hope that we can get better numbers in the future. So yes, I guess that is possible.

Operator

The following question is from Philip Ker from PI Financial.

Philip Ker - PI Financial

Just two questions here today. First, with Peter resigning and the ongoing changes likely occurring at site, I am just curious as to sort of what the sentiment is amongst the site employees? And sort of how they're coping with any of the transition that maybe happening over the next little while here?

Geoffrey Chater

It's actually really good. We brought JDS in early in July. We have a mixture of senior managers that are employees of the company and we've plugged in some important positions from JDS. I think that the reality is, is that leadership was something that we really needed down on site. And they are getting that now. Our efficiencies are good. We are moving all the dirt. People are engaged. They are happy. We have a plan. And it's the dry season, so it's always easier in the dry season, but quite frankly, I would say things are morale-wise are very, very good.

Philip Ker - PI Financial

And just as you commented there, just with all the dirt moving on, ongoing, are we anticipating an increased strip ratio for the rest of the year?

Duane Lo

Strip ratio should be modeled between 3 and 4.5. If there is an opportunity to push and to get some more strip out of the way, in anticipation of the wet season coming up, we will. But right now, it's targeting about 3 to 3.5. It could increase to 4, 4.5.

Geoffrey Chater

And part of the waste that will be moved will be utilized on the tailings dam raise that we need to do here as well.

Philip Ker - PI Financial

And just with respect to the upcoming debt payments, is there any kind of movement to trying to renegotiate those or is there full intention still to start servicing those here at end of the September.

Duane Lo

The goal is that we will actually start servicing it in September. Once we actually release our prefease and our updated 43-101, we'll sit down with the banks and discuss any opportunities that may exist.

Operator

We have no further question registered. I'd like to turn the meeting back over to Mr. Balit. Please go ahead, sir.

Patrick Balit

In conclusion, we would like to thank everyone for joining our second quarter results call this morning. And we are available to answer further question on 604-568-7993. Before we finish, I would like to remind all listeners of Luna's we are looking forward to updating you on the company's third quarter conference call in October. Thank you very much and have a nice day.

Operator

Thank you. The conference call has now ended. Please disconnect your lines at this time. We thank you for your participation.

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Source: Luna Gold's (LGCUF) CEO Geoffrey Chater on Q2 2014 Results - Earnings Call Transcript
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