Canaccord: Buy rating and $2.00 target for Luna Gold Corp.According to Canaccord Genuity:
Luna Gold Corp.
Buy | C$2.00 Target
FIRST LOOK: Q1/14 EPS BEAT ON LOWER CASH COSTS, G&A
Investment recommendation
We maintain our BUY rating on Luna Gold following the release of better-than-expected Q1/14 earnings, the beat explained by lower cash costs, lower corporate G&A and lower expensed interest. In our opinion, Q1/14 results were relatively strong (a record Q1 for the company), especially in light of an unscheduled week-long shutdown in January and challenging mining conditions due to the onset of the rainy season in Brazil. The Phase I expansion at Aurizona remains on track for completion in H2/14, and FY2014 guidance has been maintained (guidance is not reliant on the planned Phase I upgrades). We continue to view delivery on guidance and execution on the Phase I expansion/ramp-up as key catalysts for the stock.
Investment highlights
- Q1/14 adjusted EPS of $0.04 (after adjusting for unrealized gains on financial instruments and foreign exchange) was ahead of our estimate of $0.02 and consensus of $0.03. CFPS (before changes in non-cash working capital) was $0.07, which was ahead of our estimate of $0.04 and consensus of $0.06. The variance to our estimate is explained by lower cash costs, lower stock-based compensation and lower expensed interest.
- Production of 19,414 oz and sales of 23,002 oz were pre-released but cash operating costs of $705/oz were 4% lower than our estimate of $733/oz, the variance to our estimate explained mostly by a lower strip ratio partly offset by higher per tonne site costs. All-in-sustaining costs for the quarter were $787/oz.
- The company ended the quarter with $23.5 million in cash vs our estimate of $21 million – the variance explained by lower capital spending (likely timing related) partly offset by working capital changes. The working capital position at the end of Q1 was $28 million including 5,409 oz of finished gold in inventory. As of April 30, 2014, the cash balance had increased to $31 million, with the finished gold inventory at 4,500 oz.
- The Aurizona Phase I expansion continues to progress within budget and on track for completion in H2/14. As of April 30, 2014, engineering and procurement reached 98% completion (97% at Feb 28, 2014) and construction reached 43% completion (48% at Feb 28, 2014). Construction completion is lower than previously reported because one of the CIL tank shells had to be removed and reinstalled (due to defective installation). We do not see this as a material problem, since mechanical completion remains on track for completion in H2/14 and FY2014 guidance does not rely on the completion of any of the Phase I upgrades.
- FY2014 guidance remains unchanged at 85,000 – 95,000 oz at cash costs of US$690 – US$740/oz.
Valuation
Our 12-month target price remains unchanged at C$2.00 based on 0.75x our operating NAVPS estimate plus working capital and other adjustments. LGC currently trades at 0.48x P/NAV and 4.8x P/CF (2015E) vs the mid/small cap average of 0.67x and 7.8x respectively.