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Summary

  • Luna Gold broke even in Q2 as the company's production declined on heavy rainfall.
  • The company was forced to process lower grade stock-piled ore which pushed costs higher.
  • As I suggested in my article last week, this shouldn't be a regular occurrence and the company should benefit from its strengthened partnership with Sandstorm Gold.
  • Shares are in the doldrums at multi-year lows: maybe the bottom hasn't been reached yet but the risk/reward is favorable.

Luna Gold (OTCQX:LGCUF) just reported its second quarter earnings results and relative to the company's past strong performance they weren't pretty. The company broke even on revenues of $16.1 million versus a profit of $7.5 million on revenues of $25.9 million in the first quarter. As I've already discussed elsewhere this weakness was to be expected. Luna Gold reported its production figures a couple of weeks ago and it warned that they would be weak as heavy rainfall slowed down the company's operations and it was forced to process low-grade stock-piled ore that isn't as profitable to produce. The company's ore grade fell from 1.66 gpt. to 1.28 gpt. As a result the company's total production fell to about 14,000 ounces from nearly 20,000 ounces in the first quarter. Furthermore all in sustaining costs rose to $1,297/oz., which is roughly the current gold price.

With production down and costs up so significantly in the quarter the company revised its 2014 guidance as follows.

(click to enlarge)

(Source: Luna Gold's Earnings Press Release)

Given this reduced guidance the company issued 30 million shares--2/3 to Sandstorm Gold (NYSEMKT:SAND), and in that press release there was mention of the possibility that the streaming deal between Sandstorm Gold and Luna Gold will be restructured so that it is not so punitive towards Luna Shareholders. As I mention in my latest article on Luna Gold, the company receives about $1,150/oz. because it has to sell 17% of its gold to Sandstorm at $404/oz. The numbers put forth in this earnings release show that such a restructuring is necessary, especially if the gold price remains weak (remember Sandstorm Gold doesn't want Luna Gold to lose money or else it will have to shut down Aurizona).

Given these recent developments things look bad, but this is priced into the stock. I was actually pleasantly surprised to see that Luna Gold didn't lose money in the second quarter, and this demonstrates the quality of the Aurizona project, which can withstand both low gold prices and shorter term production issues. Luna shares are in a downtrend currently so we may not have seen the bottom, but as I argued last week the possibility of a restructuring deal makes the Aurizona Project far more compelling. The company's increased cash position, which now sits at about $54 million after the secondary offering also limits the downside and it gives the company capital to expand the Aurizona Project as planned. Given these points I like the stock here, and think that the reward outweighs the risk.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Update: Luna Gold's Q2 Earnings Weren't So Bad