Lumina Gold: A Look At The Updated Preliminary Economic Assessment

Summary

• Lumina Gold released its Preliminary Economic Assessment this week for its Cangrejos Project, and the project envisions a large open-pit mine with 360,000 ounces of gold production per year.
• While the updated PEA has added to the mine life substantially from the 2018 PEA, the initial capex has also increased significantly.
• Clearly, Lumina's Cangrejos Project is one of the largest undeveloped gold projects in the world following the recent PEA, but projects of this size often struggle to find financing.
• Based on the recent study, I see much better opportunities elsewhere in the sector, as I have more faith in projects that require less than $500 million to move into production.

It's been a busy start to the year for the development-stage gold miners as several names rush to get out economic studies to showcase their projects at the best possible metals prices. Lumina Gold (OTCQX:LMGDF) is the most recent name to release an economic study, and the updated Preliminary Economic Assessment has added to the mine life at Cangrejos and envisions an annual gold production profile of over 350,000 ounces. However, while the higher After-Tax NPV (5%) and increased mine life are impressive, this is offset by significantly higher upfront costs to put Cangrejos into production. Based on the higher initial capital expenditures that will make it more challenging to get Cangrejos into production, I don't see this Preliminary Economic Assessment as a considerable improvement. Therefore, while I see the stock as a speculative buy below C$0.63, I believe there are better opportunities out there in the gold-developer space.

(Source: Company Website)

Lumina Gold released an updated Preliminary Economic Assessment [PEA] this week for its Cangrejos Project in Ecuador, with significant improvements in key areas of the project. These enhancements were thanks to a higher gold (GLD) price, and a much larger resource, with 11.4 million ounces of gold expected to be mined vs. the 7.5 million ounce estimate in the June 2018 PEA. The updated PEA envisions a large-scale open-pit operation with a 25-year mine life, average annual gold-equivalent production of 366,000 ounces, and all-in sustaining costs [AISC] of $772/oz. While these are impressive figures, the elephant in the room is the upfront cost to get Cangrejos into production, with this figure jumping by 20% to US$1.0 billion, making it one of the most expensive projects to build in the world. Let's take a closer look at the updated PEA below:

(Source: Company News Release)

As we can see in the above table, the After-Tax NPV (5%) for the Cangrejos Project has vaulted up to $1.57 billion, an increase of 70%, and this is using a very conservative gold price of just $1,400/oz. However, the upfront costs to build the mine have jumped to $1.0 billion, up from $831 million previously. This is a hefty capital expenditure bill for a company with a market cap of barely US$200 million. Therefore, while the After-Tax NPV (5%) is up significantly, and this is a world-class project, it doesn't mean much if the project will struggle to be financed. Currently, there are a plethora of massive world-class projects waiting to go into production, and the one thing holding them back is capital. A few examples are IAMGOLD's (IAG) Cote Lake Project, Seabridge's (SA) Courageous Lake Project, Vista Gold's (VGZ) Mt. Todd Project, and International Tower Hill's (THM) Livengood Project. The one difference, of course, with Lumina's Cangrejos Project and the ones just listed, is that all of the other projects are sitting in Tier-1 jurisdictions. Based on the fact that no partners or senior producers are in a rush to help develop these projects, I would argue Cangrejos might have an even tougher time finding the financing to build out this mine.

(Source: Company News Release)

Some investors will argue that the gold price at $1,400/oz is far too conservative, and one should look at the upside case economics, which uses a gold price of $1,680/oz. As we can see above, the After NPV (5%) for Cangrejos soars by over 60% to $2.51 billion at $1,680/oz gold and $3.30/lb copper, showing massive optionality for the project. However, this does not fix the problem, which is finding a financier or partner willing to help push this project into production. While the last bull market cycle for gold saw several mining companies swoop in to pick up capital-intensive projects, the current C-suite at the helm of senior gold producers seems to be much more conservative. This is likely because they recall the massive destruction of value by overpaying for capital-intensive projects in 2000 through 2012 and then writing them down in the ensuing bear market. Therefore, I would have preferred a PEA for Cangrejos with a smaller production profile with an expansion case to be funded from the first few years of production vs. a longer mine life with a colossal capex bill. Let's take a look at how the deal PEA stacks up against other project's economic studies below:

(Source: Real Vision, YouTube)

(Source: Company News Release)

In the chart below, we can see four separate projects compared alongside Lumina's Cangrejos Project, with all of these projects having an annual output of over 300,000 ounces of gold per year. As we can see, Cangrejos carries the highest initial capex of the five projects at $1.0 billion, with the initial capex of the other five projects being $799 million. Meanwhile, from an After-Tax NPV (5%) standpoint, Cangrejos has the second-highest value, with Taung Gold's Jeanette Project coming in first at $1.76 billion. It's important to note that a $1,400/oz gold price is used for all of these projects to ensure that they are comparable. Finally, one way to assess the attractiveness of a project is by its After-Tax NPV (5%) to Initial Capex Ratio. When it comes to Lumina's Cangrejos Project, the project has an After-Tax NPV (5%) to Initial Capex Ratio of 1.57 vs. its peer average for 300,000-ounce per annum projects of 1.43. Based on this, and if we exclude the high capex issue, the project is quite attractive, as it's rare that any gold projects of this size exceed a ratio of 2.0, given the high upfront capital.

(Source: Author's Chart, Company Data)

In the chart below, we can take another look at Lumina's Cangrejos Project, and compare it to the same projects based on their average annual production and all-in sustaining costs. As we can see, Cangrejos has the second-largest production profile at 366,000 ounces per year, but it has the highest projected costs of $772/oz. While these are still exceptional costs as they are 20% below the industry average, they aren't nearly as attractive as the costs at other projects like the Salares Norte Project and Jeanette Project, which have all-in sustaining costs below $550/oz. Therefore, if we are strictly comparing by margins, Lumina's Cangrejos Project is the lowest-margin project among its peer group, whether it is a world-class project or not.

(Source: Author's Chart, Company Data)

In summary, while Lumina's updated PEA has some positives, and while this is a world-class project, it is clear that this project is inferior to some of its peers' projects from both a margin and upfront capital standpoint. While some investors will point out that it has one of the highest net present values among its peers and many 300,000-ounce projects worldwide, the NPV (5%) is irrelevant if the capital isn't available to build the mine. Therefore, without a partner that's willing to step up to the plate, it will be challenging for Lumina to build this mine. This is especially true when there are better mines out there with lower costs in Tier-1 jurisdictions like Vista Gold's Mt. Todd Project in Australia. I believe this because it's more likely that a major would partner with Vista Gold on Mt. Todd with a 15% lower capex bill ($826 million) in a more attractive jurisdiction like Australia than to elect to put up more capital in a less established mining jurisdiction like Ecuador.

(Source: Lumina Gold Corporate Presentation)

Lumina Gold released an impressive PEA this week, but the mine life increase has been offset by a higher capex bill that raises questions around how the mine will head into production. While the management team has a solid track record with several companies sold over the past several years, this project requires the most capital of any other project. Meanwhile, there are several other similar projects out there in better jurisdictions that are yet to be developed. Therefore, while Lumina Gold may be able to put Cangrejos into production after the receipt of a Positive Feasibility Study, I do not believe it will be easy. This is because it doesn't look possible without a partner or diluting the stock massively, given the low market currently. Based on this, I believe there are better opportunities out there for investors looking for optionality plays, with Vista Gold being a more attractive option.

Analyst’s Disclosure: I am/we are long GLD. 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.

Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.