Luna Gold LGCUD

RE:Canaccord: Buy rating and $2.00 target for Luna Gold Corp.

[hockeyguy123]

According to Canaccord Genuity:

https://app.box.com/s/l19ay1b4j8t5s6xowug4

May 19, 2014

Luna Gold Corp.

Rating: BUY

Target: C$2.00

INEXPENSIVE VALUATION WITH RE-RATING CATALYSTS AHEAD

Investment recommendation

We maintain our BUY rating and C$2.00 target on Luna Gold, which trades at 0.38x P/NAV, a 36% discount to the mid/small cap average of 0.59x. Over the next 12 months, we expect the key catalysts for potential re-rating to be: 1) delivery on FY2014 guidance, 2) successful completion of the Phase I expansion (H2/14E), and 3) mill/mine ramp-up to full capacity (2015E). Longer term we see additional re-rating/upside potential based on: 1) further potential expansions at Aurizona, 2) optimization of production levels as mill feed moves to harder fresh ore, 3) exploration upside, particularly if the company is successful at proving up additional saprolite reserves.

Investment highlights

- We expect a soft Q2/14 (continued heavy rains) followed by a material improvement in H2/14 as improved conditions have a positive impact on mining rates and ore availability. We view FY2014 guidance as attainable, but confidence should increase as we get through Q2.

- Mechanical completion of the Phase I expansion remains within budget and on schedule for H2/14. Beyond that, the ramp-up of the mill and particularly the mine to full capacity should provide for the next phase of potential re-rating. With the mine likely to be the bottleneck post plant expansion, mine development is expected to accelerate in H2/14 as conditions improve – progress made in H2/14 will likely be key to meaningfully increasing production in 2015.

- Our current valuation is based solely on reserves, which include only 50% of the 4.7 Moz total resource base, highlighting upside potential from upgrading further resources to the reserve category and more importantly upgrading/expanding saprolite ore reserves which could have a positive impact on medium-term production forecasts.

- The key near-term risk remains the potential impact of unforeseen operational challenges during the Phase I ramp-up and longer-term risks associated with maintaining production levels with harder fresh ore. We believe the risks are largely priced in but prudent management of market expectations will remain important. In that regard, we view the recent appointment of Geoff Chater as the President & CEO very positively, considering his extensive capital markets experience.

Valuation

Our 12-month target price of C$2.00 is based on 0.75x our operating NAVPS estimate plus working capital and other adjustments. Luna currently trades at 0.38x P/NAV vs. the mid/small cap producer average of 0.59x. On a P/CF basis, the stock trades at 6.5x P/CF (2015E) vs. the group at 7.8x, but we note that the stock would look cheaper on the same metric as the ramp-up at Aurizona is further advanced (2.3x P/CF 2018E).

Upcoming potential catalysts

- Quarterly financial and operating results (2014E)

- Mechanical completion of the Phase I expansion (H2/14E)

- Updated Aurizona reserves and resources (H2/14E) – potential for an increase in saprolite reserves.

- Updated Phase I NI-43-101 technical report (H2/14E)

- Phase II expansion pre-feasibility study (H2/14E)

- Results from the Aurizona brownfield exploration program (late 2014E/early 2015E)

- Phase I expansion ramp-up (2015E)