Luna Gold Corp.
TSX VENTURE : LGC
BVLAC : LGC

Luna Gold Corp.

August 08, 2011 08:30 ET

Luna Gold Corp. Reports Operational and Financial Results for the Three and Six Months Ended June 30, 2011

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Aug. 8, 2011) - Luna Gold Corp. (TSX VENTURE:LGC)(BVLAC:LGC) ("Luna" or the "Company") today announces its results for the three and six months ended June 30, 2011. The complete financial statements and management discussions and analysis are available for review at www.lunagold.com and should be read in conjunction with this news release.

Overview

Luna Gold Corp. (the "Company") is a publicly listed company on the TSX Venture Exchange trading under the symbol "LGC". The Company is actively engaged in the operation, exploration, acquisition and development of gold properties in Brazil. The Company currently has one gold mining operation, one development project and one large greenfield exploration project located in northeast Brazil.

The Aurizona gold mining operation ("Aurizona") consists of an open pit mine and gold process plant. Aurizona consists of the Piaba and Tatajuba deposits and over 10 near mine exploration targets which are being actively explored by the Company. It covers approximately 15,500 hectares of land and includes a mining license and three exploration permits.

The Cachoeira gold project ("Cachoeira") is a development gold project with a National Instrument 43-101 compliant resource estimate in three gold deposits consisting of quartz vein systems, hydrothermally altered host rocks and stockworks within a north-south trending shear zone.

The Maranhao Greenfields exploration property ("Maranhao Greenfields") is located next to Aurizona and consists of an extensive landholding of exploration licenses totalling 190,000 hectares. This unexplored land holding is highly prospective due to its location in the southern extension of the Guyana Shield and displays strong geologic and structural similarities to major West African gold deposits. The area contains over 100 artisanal gold workings that are being explored by the Company.

The Company's near term focus is to:

  • Significantly increase the size of the Aurizona mineral resource and release an updated NI 43-101 resource estimate for the Piaba gold deposit and advance certain near mine exploration targets to drill stage;
  • Increase Aurizona gold production above current feasibility study levels through plant optimization and plant expansion;
  • Complete a scoping study on the Cachoeira resource and advance the project to a feasibility study; and
  • Continue the exploration programs at Maranhao Greenfields to define drill targets for the 2012 exploration season.

The Company's longer term focus is to:

  • Increase Aurizona gold production to 100,000 ounces per annum;
  • Continue to invest in brownfield exploration activities to attempt to increase the mineral resources and mineral reserves at Aurizona to replace production and provide a longer mine life;
  • Develop Cachoeira as an organic growth pipeline project for the Company; and
  • Identify new gold resources through the exploration of the 190,000 hectare Maranhao Greenfields property and business development programs.

HIGHLIGHTS

  • Net loss was $7.7 million in Q2 and was $7.5 million for the year to date;
  • Operating cash outflow before working capital was $5.5 million in Q2 and was $6.3 million for the year to date;
  • Successfully completed the planned Aurizona plant upgrade in April and recommenced ramp up of gold production;
  • Aurizona gold production was approximately 5,600 ounces in Q2 and was approximately 14,800 ounces for the year to date; Gold production since the plant upgrade in April has steadily increased month on month;
  • The Company began trading on the Lima Stock Exchange under the symbol LGC;
  • The Company closed a $30 million Senior Secured Credit Facility with WestLB AG; and
  • Aurizona resource definition drilling continued with significant gold intercepts reported in Q2 including:
    • 19.00 metres @ 4.67 g/t Au and 53.00 metres @ 2.09 g/t Au;
    • 44.00 metres @ 4.94 g/t Au including 5.00 metres @ 30.51 g/t Au;
    • 48.00 metres @ 3.29 g/t Au including 12.00 metres @ 7.93 g/t Au; and
    • 55.00 metres @ 4.15 g/t Au including 17.00 metres @ 7.80 g/t Au.
  • The Company significantly strengthened its operational management team in Q2 with the additions of a Vice President Operations, General Manager of Aurizona, Mining Manager of Aurizona and Brazil Director of Exploration.

OUTLOOK

  • Aurizona gold production target for the 2011 year revised to approximately 40,000 ounces for the 2011 year at a targeted cash cost of between $900 and $915 per ounce. The second half of the 2011 year targeted cash cost(1) is between $620 and $640 per ounce of production;
  • The Company remains on target to complete 30,000 metres of the ongoing 40,000 meter Aurizona exploration drill program and release an updated NI 43-101 compliant resource in Q4 2011; and
  • Cachoeira and Aurizona Expansion scoping study to be completed and the results released in Q2 2012.

AURIZONA GOLD MINE – MARANHAO STATE, BRAZIL

The Aurizona gold mine is wholly-owned by the Company and is situated in the municipality of Godofredo Viana in Maranhão State, Brazil, near the coast of the Atlantic Ocean. Aurizona contains the Piaba and Tatajuba deposits and over 10 near mine exploration targets. The area is covered by a mining licence and three exploration permits. The Tatajuba deposit is located within an exploration permit which is in the process of being converted to a mine license.

Operating Data

Three months ended June 30 Six months ended June 30
(tabled amounts are expressed in thousands of US dollars) 2011 2010 2011 2010
Mined waste - tonnes 9,873 278,670 357,909 388,939
Mined ore - tonnes 113,377 276,011 224,986 623,958
Ratio of waste to ore 0.1 1.0 1.6 0.6
Ore Grade mined – g/t 1.27 0.97 1.52 1.13
Processed ore – tonnes 210,558 138,960 503,951 138,960
Average grade processed – g/t 1.27 1.58 1.22 1.58
Average recovery rate % 65% 17% 75% 17%
Gold produced (ounces) 5,595 1,217 14,804 1,217
Gold sold (ounces) 6,924 739 15,282 739
Total cash costs (per ounce) (1) $1,790 $2,846 $1,379 $2,846
(1) Cash cost is a non IFRS measure. See "Non IFRS Measures".

Mining production

The Company mined approximately 123,250 tonnes of material, of which approximately 113,377 tonnes was ore at an average head grade of 1.27 grams per tonne in Q2. This represented a reduction of 78% of total material mined compared to the prior year. The six months mining production in the current year represented a 43% reduction of the total material mined compared to prior year as well. This was mainly driven by the demobilization of the mining contractor on site and drawdown of stockpiled ore.

Early in the quarter, the mining contractor engaged at Aurizona had completed its two year contract with the Company and the contract was not extended further resulting in the demobilization of the contractor from site. In preparation for the wet season, the Company had established a run of mine ("ROM") stockpile with capacity for three months ore supply to the mill. In the absence of a mining contractor and the onset of the wet season these stocks were allocated to feed the mill for April, May and June until the mobilization of a new mining fleet to Aurizona, which was completed at the end June 2011. This fleet is now operational and mining has recommenced.

Mill Processing

Production in Q2 and the current year to date were significantly higher than comparative periods as the plant began commissioning in early 2010 and first gold production was achieved in Q2 2010. Current quarter production was lower than the previous quarter due to the planned shutdown in April to implement plant improvements to deliver consistent and reliable production for the future of the operation.

Commissioning of the Aurizona plant has confirmed the process plant construction did not deliver key process and operational performances as designed. Luna Gold's management and the Company's consulting engineers identified major and minor modifications required to achieve reliable and consistent feasibility design performance. Improvements and upgrades will proceed progressively while production continues.

The upgrade, completed in April, addressed the following plant improvements:

  • Installation of a reduction gearbox to reduce the SAG rotation speed from 94% to 74% critical speed;
  • Installation of an inching gearbox for safe and efficient mill liner changes;
  • Complete mill reline and ball charge;
  • Installation of a trash screen prior to the carbon in leach ("CIL") tanks and a carbon recovery screen after the CIL tanks;
  • Installation of a pinion and commissioning #4 ball mill;
  • Repairs to the apron feeder; and
  • Replacement of thickener pumps.

This necessary upgrade was completed with 19 days of plant downtime for the operation resulting in low production for April.

The speed reduction of the SAG was successfully implemented, however the retro-fit wet seal in the SAG continued intermittent water and dust contamination in the hydraulic oil supply for the SAG bearings. Intermittent SAG mill downtime and phased changes in the mill process circuit were required to re-commission the process plant in order to reach Feasibility Study production levels. Gold recoveries in May were low with improvements in June. Blending on the ROM stockpile area by grade and ore type in last half of June has improved recoveries and throughput tonnes.

Subsequent to quarter end, a further 5 day plant shutdown was completed and the SAG mill chute liners were successfully sealed resolving the contamination in the hydraulic oil supply. In addition, improvements were made to the grizzly to reduce downtime and improve feed size consistency. July gold production continued to improve over the previous month with approximately 3,375 ounces produced.

Recoveries are continuing to improve by minimizing carbon breakdown and loss to tails through optimizing grind and particle size classification fed to the CIL. Metallurgical testing on the ore blending is progressing to maximize thickener performance and enable future ore blending flexibility.

The production results above demonstrate a positive upward trend in all key performance indicators and the continued improvements are expected to result in the achievement of feasibility gold production targets in Q3 and consistent production in Q4 and onwards.

Cash Costs (1)

Cash cost for 2011 remained higher than the targeted rate due to lower ore volumes mined and lower ore throughput resulting in the low gold production rates. This has resulted in the higher cost per unit due to the higher proportion of fixed costs related to this operation. The current quarter is especially high due to the planned shutdown of the plant and slower than anticipated ramp up after the successful plant upgrades.

Cash cost in general were lower than the comparative 2010 periods because the operations were in its preliminary ramp up stage in 2010.

AURIZONA EXPLORATION

The Company's exploration teams continued to advance exploration at Aurizona. The Phase 1, 20,000 metre drill program was completed in July 2011 and was extended by a further 20,000 metres. The Company's exploration strategy of surface exploration techniques combined with magnetic geophysical surveys is proving highly successful in defining the principal mineralized shear zones which host the near mine targets.

Diamond Drilling

The Company currently has eight drill rigs in operation at the Piaba deposit. Assays from 51 holes totalling 14,346 metres were received and samples from 14 additional holes are currently at the assay lab. Drilling is focused on infilling over the 3 kilometre strike length of the Piaba deposit to increase measured and indicated mineral resources. Holes are being drilled on 100 metre spaced sections to a maximum depth of minus 300 metres RL. Certain infill holes are also being completed to convert in pit inferred mineralization to the measured and indicated categories. On completion of the Piaba drill program, the rigs will be moved to the Tatajuba deposit and the Boa Esperança near mine exploration target, which is drill ready following a trenching program which was completed in Q1. Recent significant diamond drill intercepts (not true widths) from the ongoing program are listed below:

  • 19.00 metres @ 4.67 g/t Au including 3.00 metres @ 14.08 g/t Au and 2.00 metres @ 14.32 g/t Au;
  • 44.00 metres @ 4.94 g/t Au including 0.50 metres @ 21.40 g/t Au, 0.50 metres @ 14.35 g/t Au and 5.00 metres @ 30.51 g/t Au;
  • 48.00 metres @ 3.29 g/t Au including 12.00 metres @ 7.93 g/t Au and 1.00 metres @ 9.84 g/t Au ; and
  • 55.00 metres @ 4.15 g/t Au including 17.00 metres @ 7.90 g/t Au.

Soil Surveys

Assays have been received for the majority of samples collected near the mine site and the data is being processed and new targets prioritized. Soil surveying was completed in the unexplored western portion of the Aurizona area (LDW Grid) which is targeting the discovery of new gold mineralization within extensions to the west-southwest trending structures that host the gold mineralization in the main Aurizona area. Assay data is being received.

Trenching

Trench samples from the Ferradura and Conceicao near mine targets are in the laboratory and due for delivery in August.

Permitting

The process of converting the Tatajuba exploration licence, which hosts the Tatajuba deposit, to a mining license advanced during the quarter with the preparation of the mine application documentation due for submittal to the National Department of Mineral Production in Brazil in August.

Auger Drilling

Auger drill samples from the Micote near mine target were received defining near surface mineralization extending west from the Micote garimpo pit. Auger and reverse circulation drilling was completed at the Piaba East target area with the objective of defining extensions to the main Piaba ore body beyond the current eastern boundary of the current resource model. Samples are at the assay laboratory. Auger drilling recommenced at the newly defined Agenor near mine exploration target and drilling is ongoing. An auger drill program was completed at the Pirocaua SE target and samples are at the assay laboratory.

CACHOEIRA GOLD PROJECT

The Cachoeira Gold Project is located in northern Brazil in the Gurupi Greenstone Belt, approximately 220 kilometres southeast of the Pará State capital of Belém and about 270 kilometres northwest of the port city of São Luis, Maranhão State. Cachoeira comprises one contiguous block consisting of two mining and two exploration licenses covering approximately 3,826 hectares and an application for an exploration license covering approximately 916 hectares.

In October 2007, the Company announced that it had finalized an option agreement whereby it could earn a 100% interest in the property from a consortium of vendors. According to the terms of the agreement the Company can earn its interest by making a one-time cash payment and by incurring work expenditures of at least BRL 9.5 million over a 50 month period. As at the date of this MD&A, the Company had achieved this commitment. The Company's interest in the property is subject to a 4.0% net profits royalty with a provision for a partial buy-out of this royalty.

The major asset associated with Cachoeira is a series of shear zone hosted gold deposits consisting of quartz veins, stockworks and wall rock alteration. Three deposits, Tucano, Arara and Coruja, have been defined to date within the north-south trending Cachoeira Shear Zone. In December 2010, the Company released a maiden NI 43-101 compliant mineral resource estimate at Cachoeira and filed the technical report on February 7th, 2011 on SEDAR.

Cachoeira Regional

The Company completed an auger drill program at the Arara North target and samples are at the assay laboratory.

MARANHAO GREENFIELDS EXPLORATION PROPERTY – MARANHAO STATE, BRAZIL

The Maranhao Greenfields exploration property is located to the southwest and southeast of Aurizona and contains multiple shear zones and over 100 historic artisanal gold workings (garimpos). It consists of over 190,000 hectares of contiguous exploration licenses and is located within the São Luis Craton, southeast of the Guiana shield, which hosts several major gold deposits including Rosebel and Las Cristinas. Geologic reconstruction of the South American and African continents places the São Luis Craton in close proximity to the Birimian Gold Belt of West Africa. Strong geologic and structural similarities exist between the São Luis Craton, the Guiana shield and the West African Craton. The area is characterized by low relief and an extensive sedimentary cover sequence with deep weathering profiles. Historic exploration in the district was limited to soil and rock sampling, auger drilling, geophysical surveys and some shallow reconnaissance drill holes.

The Company currently has exploration crews working four targets simultaneously in the Maranhao Greenfields project area. The Company continues its exploration programs throughout the wet season although at reduced rates.

Areal Grid

Full soil assay results have been received for the Areal target and a ground magnetic survey. These programs have identified intrusion related gold mineralization associated with several granitoid bodies.

JST Grid

Assay data for soil and channel samples from the JST Grid have been received and will be reported in due course.

PC, CPB, PJP BML Grids

Soil sampling and regolith mapping was completed at the PC, CPB and PJP grids in the quarter which host numerous historic garimpo workings. Soil sampling continued at the BML target area (eastern area) and work is progressing well. This grid will be completed within 1 month. The Company is aggressively exploring its extensive and prospective landholding at Maranhão Greenfields to deliver drill targets on 100% owned mineral rights in 2012.

SUMMARY OF OPERATING RESULTS

Three months ended June 30 Six months ended June 30
(tabled amounts are expressed in thousands of US dollars) 2011 2010 2011 2010
Revenue 9,179.4 829.5 19,536.8 829.5
Operating expense (10,990.7) (2,393.4) (19,719.6) (2,393.4)
Depreciation and amortization (1,203.5) (46.9) (2,105.6) (46.9)
(3,014.8) (1,610.8) (2,288.4) (1,610.8)
General & administration (2) (2,178.1) (1,037.0) (3,240.1) (2,056.1)
Exploration expense (2,236.4) (725.7) (3,635.1) (788.9)
Financing (cost) income, net (624.5) (78.6) (980.1) (47.8)
Unrealized gains (losses) from derivative liability 737.3 (520.9) 2,365.6 (520.9)
Foreign exchange and other (375.1) 349.5 275.3 354.1
Net income (loss) (7,691.6) (3,623.5) (7,502.8) (4,670.4)
Basic/Diluted loss per share (0.02) (0.01) (0.02) (0.01)
(2) General and administration ("G&A") consists of general and administrative expenses, professional fees and stock based compensation charges.

The Company sold 6,924 ounces of gold for the current quarter and 15,282 ounces of gold year to date for 2011. This was significantly higher than the comparative periods as the Company was in the commissioning stage in 2010 and began producing gold in Q2 2010. Likewise, operating expense was higher than the comparative periods due to the increase in current period gold sales. Current quarter operating expense was higher than the previous quarter due to higher mechanical costs to modify and repair the issues related with the original construction and higher reagent costs related to the blending of the ores in the process plant.

G&A expense was significantly higher than comparative periods due to stock based compensation expense related to new management. Excluding stock based compensation, the G&A remained reasonably consistent with the comparative periods. Exploration expense increased over the comparative periods as the Company ramped up its exploration programs at Aurizona, Cachoeira and Maranhao Greenfields during the latter part of 2010. In the current quarter, the Company spent $1.5 million at Aurizona (capitalized in mineral properties for accounting purpose), $1.0 million at Cachoeira and $1.3 million at Maranhao Greenfields. The Company focused most of its cash on mine development and production in the comparative periods resulting in lower amounts spent on exploration activities.

Net financing cost was higher due to the decrease in interest revenue from bank balance as the average cash balance was lower in 2011 than in the previous year.

Due to the transition to IFRS, warrants outstanding were classified as a derivative liability and were re-classified from share capital to liability. This derivative liability is to be mark-to-market every period end and will fluctuate based on factors such as Company's stock price and volatility. The non-cash unrealized gains and losses resulted from the required revaluation and expiry of warrants from the current quarter end. Foreign exchange loss was the result of negative currency movements for the Company on its accounts payable and funds held in foreign currencies.

Operating results – 2 year historic trend

(tabled amounts are expressed in thousands of US dollars) (3) Q2 11 Q1 11 Q4 10 Q3 10 Q2 10 Q1 10 Q4 09 Q3 09
Revenue 9,179.4 10,357.4 13,656.7 1,620.3 829.5 - - -
Operating expense (10,990.7) (8,728.9) (13,922.3) (5,576.2) (2,393.4) - - -
Depreciation and amortization (1,203.5) (902.1) (1,783.0) (303.8) (46.9) - - -
(3,014.8) 726.4 (2,048.6) (4,259.7) (1,610.8) - - -
General & administration(4) (2,178.1) (1,062.0) (1,320.7) (1,367.6) (1,037.0) (1,019.1) (813.4) (704.1)
Exploration expense (2,236.4) (1,398.7) (665.4) (1,334.5) (725.7) (63.2) (576.1) (1,249.5)
Financing (cost) income, net (624.5) (355.6) (491.2) (327.4) (78.6) 30.8 977.4 277.6
Unrealized gains (losses) from derivative liability 737.3 1,628.3 (899.0) 472.7 (520.9) - - -
Foreign exchange and other (375.1) 650.4 519.1 30.4 349.5 4.6 (891.2) 1,593.0
Net income (loss) (7,691.6) 188.8 (4,905.8) (6.786.1) (3,623.5) (1,046.9) (1,303.3) (83.0)
Basic loss income per share (0.02) 0.00 (0.01) (0.02) (0.01) (0.00) (0.00) (0.00)
Diluted loss income per share (0.02) 0.00 (0.01) (0.02) (0.01) (0.00) (0.00) (0.00)
(3) The quarterly comparatives from 2009 are presented under Canadian GAAP. IFRS transition began on January 1, 2010.
(4) General and administration consists of general and administrative expenses, professional fees and stock based compensation charges.

Revenue's began in Q2 2010 with the Company's first gold production and increased up to Q4 2010 due to higher production output and rising gold prices. However, production decreased due to the planned shutdown and plant upgrade and the onset of the rain season resulting in lower revenues. Operating expenses followed the same trend as gold sales with movements in quarterly operating expense directly related to the number of ounces of gold sold within that period. However, Q2 2011 was an exception due to the plant shutdown and upgrade, which incurred additional costs related to restarting up the plant after successfully implementing all the planned upgrades and modifications.

General and administration expense remained consistent quarter on quarter since production began in Q2 2010, except for Q2 2011, where the increase from the previous quarter was primarily due to an increase in stock based compensation expense related to the new management additions.

Exploration expense was related to the Cachoeira and Maranhao Greenfield exploration programs which began in Q2 2010. Variances between quarters were due to the timing of executing the planned exploration programs and the weather.

Net financing costs were directly related to the interest expense on the outstanding loan balance and interest income on the cash balance of the Company.

Unrealized derivative gains and losses quarter on quarter was driven by the volatility in the Company's share price and its relation to the outstanding warrants.

Foreign exchange movements each quarter are related to changes in the USD:BRL exchange rate in relation to the Company's working capital accounts in Brazil.

LIQUIDITY AND CAPITAL RESOURCES

Three months ended June 30 Six months ended June 30
(tabled amounts are expressed in thousands of US dollars) 2011 2010 2011 2010
Cash flows from operating activities
- Before working capital (5,496.9) (2,999.8) (6,298.6) (3,385.2)
- After working capital (3,865.6) (4,707.1) (3,439.9) (6,357.1)
Cash flows from financing activities 3,564.7 30,197.4 2,421.5 44,107.5
Cash flows from investing activities (3,587.6) (8,335.1) (9,543.2) (24,193.8)
Effect of exchange rates on cash 215.3 343.6 273.5 301.7
Net cash flows (3,888.5) (17,155.2) (10,561.6) 13,556.6
Cash balance 415.5 26,423.8 415.5 26,423.8

At June 30, 2011, the Company had cash and cash equivalents of $0.4 million and finished gold bullion inventory of approximately 1,898 ounces.

Q2 and year to date operating cash outflow before working capital was higher than the comparative quarter due to the increase in net loss. Cash outflow after working capital movements was lower than the comparative periods due to increases in accounts payable. The Company's accounts payable balance increased due to efforts to conserve cash while operations ramped up after the plant shutdown and upgrade and the Company closed the WestLB AG refinancing. The increase in accounts receivable included $1.2 million in gold sales, which were received subsequent to quarter end.

Q2 financing activities included a payment of $1.7 million on the Aurizona project debt facility. This was netted out by cash inflow from proceeds of approximately $0.3 million from the exercise of stock options and an upfront payment of $5.5 million from RMB to deliver gold in the following quarter. Cash flow from financing activities was significantly lower than the comparative quarter as the comparative quarter included the drawdown of the RMB debt facility and equity financing. The current year to date financing activities were similar to the quarter except for the additional payment of $1.7 million on the Aurizona project debt facility made in Q1 and additional proceeds from stock option exercised in the previous quarter.

Q2 and year to date investing activities included payments of $1.5 million and $2.9 million respectively of capitalized exploration costs related to the Aurizona resource definition drilling program. The balance of investment activity cash outflow was related to equipment purchases and plant upgrades at the Aurizona plant. Cash outflow from investing activities was significantly lower than the comparative periods as the plant was substantially completed in late 2010.

In July 2011, the Company closed a $30.0 million senior secured credit facility with WestLB AG. The Company will use this financing to repay the remaining $10 million outstanding on the RMB Facility, fund working capital, and provide funding for further capital improvements and sustaining capital requirements.

As at June 30, 2011, the Company had the following contractual obligations outstanding:

(tabled amounts are expressed in thousands of US dollars) Total Less than
1 year
1 – 2 years 2 – 3 years 3 – 4 years 4 – 5 years Thereafter
Long term debt 18,548.7 9,271.4 5,902.7 2,569.4 569.4 235.8 -
Accounts payables 11,076.9 11,076.9 - - - - -
Asset retirement obligation 6,490.1 - - - - - 6,490.1

$30.0 million senior secured credit facility with WestLB AG ("WestLB")

In July 2011, the Company closed a $30.0 million senior secured credit facility with WestLB. This facility is comprised of a $20.0 million senior secured term loan (the "Term Loan") and a $10.0 million (Brazilian Real equivalent) senior secured revolving loan (the "Revolving Facility"). The purpose of the Facility is to refinance the Company's existing debt with RMB Resources and to fund additional capital expenditures and working capital needs at the Aurizona gold mine.

The Term Loan is a 5 year loan with semi-annual instalments commencing on July 1, 2012 and will bear interest at LIBOR plus 3.625%. The Revolving Facility will be denominated in Brazilian Reais, matures on July 1, 2014 and will bear interest at CDI plus 3.25%. Any outstanding commitments under the Revolving Facility shall be repaid in full on the final maturity date.

The Company has provided security on the facility in the form of a first fixed floating charge over the Aurizona operation, a first mortgage over the shares of Mineracao Aurizona S.A. ("MASA") and of the rights, title and licenses associated with the operation and a general security agreement by the Company in favour of WestLB AG.

The Company shall maintain a debt service coverage ratio ("DSCR") to be greater than 1.35, a loan life coverage ratio ("LLCR") to be less than 1.35 and a reserve tail ratio ("RTR") to be greater than 30% over the life of the loan.

Subsequent to quarter end, the Company drew down $20 million on the Term Loan and $10 million on the Revolving Facility.

Aurizona Project Debt Facility

In December 2009, the Company entered into a senior secured, project debt facility (the "RMB Facility") in the amount of up to $15.0 million with RMB Resources Inc. ("RMB") to assist in the completion of the Aurizona processing plant. The RMB Facility was comprised of two tranches in the amount of $7.5 million each that bore interest at LIBOR plus 7.5% and was to be fully repaid by December 31, 2012.

Subsequent to quarter end, this RMB Facility was repaid in full with the proceeds from the Term Loan.

RMB $5.5 million prepaid gold agreement

In May 2011, the Company entered into a $5.5 million prepaid gold agreement with RMB. In exchange for the upfront cash received by the Company, the Company will deliver a total of 3,880 ounces of gold to RMB of which 2,730 ounces and 1,150 ounces will be delivered in the month of July 2011 and August 2011, respectively.

Prior to the release of this MD&A, all of the ounces were delivered to RMB and no further ounces remain owing.

Commitment from Acquisition of Aurizona Goldfields Corporation

In January 2007, the Company acquired the Aurizona property from Brascan Brasil ("Brascan") and Eldorado Gold Corporation ("Eldorado") in exchange for a series of staged payments (the "Purchase Agreement"), some of which were conditional upon the project reaching commercial production, as defined in the Purchase Agreement. The Company has repaid all outstanding amounts in relation to this agreement but remained liable for payments of $1.0 million payable to each party on the first, second and third anniversary of the commencement of commercial production of Aurizona. As defined under the terms of the Purchase Agreement, the Company achieved commercial production on December 2, 2010 resulting in the first payment becoming due and payable on December 2, 2011.

In July 2011, the Company entered into an agreement with Brascan and Eldorado to amend the outstanding debt of $6.0 million of the Company to Brascan and Eldorado. The Company issued promissory notes in the aggregate amount of $3.0 million to each of Eldorado and Brascan in connection with the Purchase Agreement. In satisfaction of the aforementioned promissory notes, Brascan and Eldorado will each receive $1.5 million in cash on or before December 2, 2011, and 2,417,949 common shares of the Company.

FINAME Equipment Purchase Financing ("FINAME")

In February 2011, the Company entered into debt financing in the amount of 4 million Brazilian Reais ("BRL") to purchase mining equipment through the FINAME financing program, which is administered through the Brazilian Development Bank ("BNDES"). Interest is calculated at 5.5% per annum and the FINAME is repayable in equal monthly instalments beginning September 15, 2011 and ending February 15, 2016.

Derivative Contracts

Subsequent to quarter end, the Company entered into the following derivative contracts as required under the terms of the WestLB Facility:

BRL / USD Forward Contracts

The Company sells US dollars and buys Brazilian Real as follows:

Expiry Date Notional Amount (USD) BRL / USD Price
December 16, 2013 $6,000.0 1.86725
June 16, 2014 $6,000.0 1.92986
December 15, 2014 $6,000.0 1.99265
June 15, 2015 $6,000.0 2.04843
December 15, 2015 $6,000.0 2.11206
June 15, 2016 $6,000.0 2.16633

Floating to Fixed Interest Rate Swap Contracts

The Company pays a fixed annual interest rate of 1.495% and receives 6 month US Libor rate as follows:

Start Date End Date Notional Amount (USD)
January 25, 2012 July 25, 2012 $20,000.0
July 25, 2012 January 25, 2013 $12,304.0
January 25, 2013 July 25, 2013 $12,304.0
July 25, 2013 January 27, 2014 $ 4,235.7
January 27, 2014 July 25, 2014 $ 4,235.7

OTHER ITEMS

Strengthening of Management Team

The Company has significantly strengthened its management team in both operations and exploration during the quarter and will continue to increase the skills of the workforce and engage high quality and technically capable management to develop a strong management team to deliver shareholder value.

The following management additions include:

Vice President Operations – Peter Mah

Peter will lead the operational team through re-commissioning and achieving feasibility level production. Peter is a mining and processing engineer with a Master's degree in Rock Mechanics from UBC. His experience base is from progressive management positions with Goldcorp, Newcrest and Newmont throughout Canada, USA, South East Asia and Africa. Peter will be based in Vancouver BC Canada. Peter has spent significant time at Aurizona with the Operations team.

General Manager Aurizona Gold Mine – Jim Healy

Jim is a well experienced Mining Engineer (New Mexico Institute of Mining & Technology). Jim has worked extensively in engineering and project management with BHP Billiton, INCO, Aura Minerals and JDS Engineering and Mining in the USA, Canada, Australia, Indonesia, Brazil, South America and New Caledonia. Jim is fluent in Portuguese and has direct experience in General Management in Brazil. Jim brings a talent of practical and professional management to our operations and will be based in Brazil.

Mining Manager Aurizona Gold Mine – Alberto Reyes

Alberto is a mining engineer from Ontario with broad experience in mine operations and mine planning. He brings to the Company extensive experience gained with an International Mining Consultancy, Newcrest Mining Ltd and Gold Fields in Canada, USA, South America, Australia and Africa. Alberto will implement systems and processes into the operations to deliver discipline in grade control and mining efficiencies over the life of the mine. Alberto is fluent in Portuguese, English and Spanish.

Brazil Exploration Director – Carlos Paranaos

Carlos has spent over 15 years working and managing both greenfields and brownfields gold exploration programs in South America and Africa with AngloGold Ashanti. During his time in Africa, Mr. Paranhos made significant contributions to determining structural controls on several major gold deposits resulting in increased life of mine. Recently Mr. Paranhos acted as Exploration Coordinator for AngloGold Ashanti Brazil in the prolific Iron Quadrangle Region of Minas Gerais State where he was responsible for setting-up and running regional exploration programs targeting an additional 6 million ounces of gold of new inferred resources to the existing AngloGold Ashanti Brazil mineral statement.

SHAREHOLDERS' EQUITY

Shareholders' equity increased over the prior year due to the Company's equity financing activities during the period, which was partially offset by an increase in the deficit.

As at the date of this report the Company had 441,850,328 shares outstanding, 23,950,000 share purchase options and 6,859,221 common share warrants outstanding.

The following is a summary of stock options outstanding as at the date of this report:

Number of shares ('000s) Vested ('000s) Price per share CA$ Expiry Date
100 100 0.50 14-Mar-12
340 340 0.85 8-Aug-12
210 210 1.23 16-Jan-13
165 165 1.05 2-May-13
250 250 0.90 20-Jun-13
5,800 5,800 0.42 24-Jul-14
750 750 0.37 29-Jul-14
100 100 0.55 4-Jan-15
1,310 873 0.63 5-Jul-15
5,000 1,000 0.58 24-Sep-15
7,075 25 0.65 12-Apr-16
2,850 - 0.55 18-May-16
23,950 9,613

The following is a summary of warrants outstanding as at the date of this report:

Number of warrants ('000s) Price per share CA$ Expiry Date
6,859 1.00 20-Jun-12
6,859

OUTLOOK AND STRATEGY

Aurizona Gold Mine

The Company has revised its 2011 production target downward to approximately 40,000 ounces of gold at an estimated cash cost between $900 and $915 per ounce of production. The downward revision is due to the slower than anticipated ramp up of production since successfully implementing the planned process plant upgrades.

The Company plans on spending approximately $5.0 million on further capital improvements at the Aurizona mine during the remainder of 2011. The Aurizona brownfield exploration and drill program remains on target to produce an updated NI 43-101 resource estimate for release in Q4.

Cachoeira Gold Property

The Company has extended its target to complete the Cachoeira scoping study (the "Scoping Study") to Q2 2012 that will deliver the path forward to developing Cachoeira into a mining project feasibility study. This has been delayed to allow management to focus on the Aurizona resource upgrade and production planning.

Maranhao Greenfields Property

The Company continues to aggressively explore the extensive Maranhao Greenfields property to discover new gold deposits and will maintain exploration crews working four targets simultaneously throughout 2011. Regional scale exploration is underway designed to generate large gold-in-soil anomalies consistent with the Aurizona mineralization style. Through these programs the Company intends to define between six and eight new target areas, several of which will be brought to drill stage in 2012.

Interim Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(expressed in thousands of U.S. dollars, except where indicated)
Note Three months ended Six months ended
June 30,
2011
June 30,
2010
June 30,
2011
June 30,
2010
Revenue
Gold Sales 9 $ 9,179.4 $ 829.5 $ 19,536.8 $ 829.5
9,179.4 829.5 19,536.8 829.5
Operating expenses
Cost of goods sold (10,990.7) (2,393.4) (19,719.6) (2,393.4)
Depletion and amortization (1,203.5) (46.9) (2,105.6) (46.9)
(3,014.8) (1,610.8) (2,288.4) (1,610.8)
Other (expenses) income, net
Exploration (2,236.4) (725.7) (3,635.1) (788.9)
General and administrative 10 (1,052.0) (645.3) (1,769.6) (1,055.5)
Gain (loss) on derivative liability 11 737.3 (520.9) 2,365.6 (520.9)
Foreign exchange gain (loss) (351.0) 377.0 268.1 354.1
Stock-based compensation 7 (1,126.1) (391.7) (1,470.5) (1,000.6)
Finance income 7.1 68.3 124.3 145.0
Finance cost (631.6) (146.9) (1,104.4) (192.8)
Other (expense) income (24.1) (27.5) 7.2 -
Net loss and comprehensive loss for the period $ (7,691.6) $ (3,623.5) $ (7,502.8) $ (4,670.4)
Loss per common share
Basic & Diluted (0.02) (0.01) (0.02) (0.01)
Weighted average shares outstanding (000's)
Basic & Diluted 436,521 359,088 436,082 358,964
Total shares issued and outstanding (000's) 436,889 359,312 436,889 359,312
Interim Consolidated Statements of Financial Position
(expressed in thousands of U.S. dollars, except where indicated)
Note June 30,
2011
December 31,
2010
January 1,
2010
Assets
Current assets
Cash and cash equivalents $ 415.5 $ 10,703.6 $ 12,565.5
Accounts receivable and prepaid expenses 5,715.3 3,647.9 743.7
Inventory 3 7,909.8 6,325.5 393.6
Investments - - 2,942.9
14,040.6 20,677.0 16,645.7
Property, plant and equipment 4 98,886.0 88,166.0 54,867.6
Other assets 1,767.6 1,089.5 408.1
Total assets $ 114,694.2 $ 109,932.5 $ 71,921.4
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 11,076.9 $ 3,524.2 $ 5,364.6
Current portion of derivative liability 204.9 1,605.8 -
Current portion of debt instruments 5 8,528.3 8,118.3 301.6
Current portion of unearned revenue 6 7,132.0 1,748.2 1,787.2
26,942.1 14,996.5 7,453.4
Debt instruments 5 8,547.6 9,383.2 4,989.2
Derivative liability - 1,019.2 -
Unearned revenue 19,571.1 19,917.9 20,308.8
Asset retirement obligation 2,487.9 2,370.9 2,108.5
Total liabilities 57,548.7 47,687.7 34,859.9
Shareholders' equity
Share capital 109,636.8 107,233.3 65,687.7
Deficit (52,491.3) (44,988.5) (28,626.2)
Total shareholders' equity 57,145.5 62,244.8 37,061.5
Total liabilities and shareholders' equity $ 114,694.2 $ 109,932.5 $ 71,921.4
Interim Consolidated Statements of Changes in Shareholders' Equity and Deficit
(expressed in thousands of U.S. dollars, except where indicated)
Attributable to equity holders of the Company
Notes Shares
('000)
Share
capital
Contributed surplus Deficit Total
Balance at January 1, 2010 358,837 $ 60,063.2 $ 5,624.5 $ (28,626.2) $ 37,061.5
Net loss for the period - - - (4,670.4) (4,670.4)
Special warrants issuance - 27,958.5 - - 27,958.5
Stock options exercised 475 295.6 (112.3) - 183.3
Stock-based compensation charges - - 1,140.5 - 1,140.5
Balance at June 30, 2010 359,312 $ 88,317.3 $ 6,652.7 $ (33,296.6) $ 61,673.4
Balance at January 1, 2010 358,837 $ 60,063.2 $ 5,624.5 $ (28,626.2) $ 37,061.5
Net loss for the year - - - (16,362.3) (16,362.3)
Escrow shares returned to treasury and cancelled (214) (35.7) 35.7 - -
Stock options exercised 3,267 1,183.2 (405.6) - 777.6
Stock-based compensation charges - - 1,952.9 - 1,952.9
Issue of share capital, net 72,649 38,701.6 113.6 - 38,815.2
Balance at December 31, 2010 434,539 $ 99,912.3 $ 7,321.1 $ (44,988.5) $ 62,244.9
Net loss for the period - - - (7,502.8) (7,502.8)
Stock options exercised 7 2,350 1,497.7 (564.8) - 932.9
Stock-based compensation charges 7 - - 1,470.5 - 1,470.5
Balance at June 30, 2011 436,889 $ 101,410.0 $ 8,226.8 $ (52,491.3) $ 57,145.5
Interim Consolidated Statements of Changes in Shareholders' Equity and Deficit
(expressed in thousands of U.S. dollars, except where indicated)
Note Three months ended Six months ended
June 30,
2011
June 30,
2010
June 30,
2011
June 30,
2010
Cash flows from operating activities
Net loss for the period (7,691.6) (3,623.5) (7,502.8) (4,670.4)
Items not affecting cash
Depletion and amortization 1,215.0 46.9 2,134.3 55.4
Recognition of unearned revenue (209.8) (36.1) (463.0) (36.1)
Unrealized foreign exchange (gains) losses 396.5 (348.3) (188.4) (331.6)
Unrealized gains from warrant liability (737.3) 520.9 (2,365.6) 520.9
Stock-based compensation charges 1,126.1 391.7 1,470.5 1,000.6
Accretion of asset retirement obligation 69.2 46.0 135.0 91.9
Accretion of interest 335.0 - 481.4 -
Other - 2.6 - (15.9)
(5,496.9) (2,999.8) (6,298.6) (3,385.2)
Change in non-cash operating working capital
Increase in accounts receivable and prepaid expense (2,999.6) (139.4) (2,067.4) (68.3)
Increase in inventory 678.5 (2,314.1) (1,216.5) (3,573.8)
Increase in accounts payable and accruals 3,983.5 758.4 6,271.3 758.4
Payments to the Departamento Nacional de Producao Mineral ("DNPM") (31.1) (12.2) (128.7) (88.2)
(3,865.6) (4,707.1) (3,439.9) (6,357.1)
Cash flows from financing activities
Proceeds from prepaid gold agreement 6(a) 5,500.0 - 5,500.0 13,868.8
Payment of debt financing fees (528.1) - (678.1) -
Repayment to principal of debt financing (1,666.6) - (3,333.3) -
Proceeds from issuance of special warrants, net - 30,055.2 - 30,055.2
Proceeds on issuance of common shares 259.4 142.2 932.9 183.5
3,564.7 30,197.4 2,421.5 44,107.5
Cash flows from investing activities
Proceeds from disposal of investments - - - 2,964.2
Payments for property, plant and equipment (3,587.6) (8,335.1) (9,543.2) (27,158.0)
(3,587.6) (8,335.1) (9,543.2) (24,193.8)
Effect of exchange rate changes on cash 215.3 343.6 273.5 301.7
Increase (decrease) in cash and cash equivalents (3,888.5) 17,155.2 (10,561.6) 13,556.6
Cash and cash equivalents - beginning of period 4,088.7 8,925.0 10,703.6 12,565.5
Cash and cash equivalents - end of period 415.5 26,423.8 415.5 26,423.8

On behalf of the Board of Directors

LUNA GOLD CORP.

John Blake – President and CEO

Forward Looking Statements

This MD&A includes certain statements that constitute "forward-looking statements", and "forward-looking information" within the meaning of applicable securities laws ("forward-looking statements" and "forward-looking information" are collectively referred to as "forward-looking statements", unless otherwise stated). These statements appear in a number of places in this MD&A and include statements regarding our intent, or the beliefs or current expectations of our officers and directors. Such forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, words such as "believe", "anticipate", "estimate", "project", "intend", "expect", "may", "will", "plan", "should", "would", "contemplate", "possible", "attempts", "seeks" and similar expressions are intended to identify these forward-looking statements. Forward-looking statements may relate to the Company's future outlook and anticipated events or results and may include statements regarding the Aurizona property and other development projects of the Company's future financial position, business strategy, budgets, litigation, projected costs, financial results, taxes, plans and objectives. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. These forward-looking statements were derived utilizing numerous assumptions regarding expected growth, results of operations, performance and business prospects and opportunities that could cause our actual results to differ materially from those in the forward-looking statements. While the Company considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. Accordingly, you are cautioned not to put undue reliance on these forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results. To the extent any forward-looking statements constitute future-oriented financial information or financial outlooks, as those terms are defined under applicable Canadian securities laws, such statements are being provided to describe the current anticipated potential of the Company and readers are cautioned that these statements may not be appropriate for any other purpose, including investment decisions.

Forward-looking statements are based on information available at the time those statements are made and/or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. These statements are based on a number of assumptions, including, but not limited to, assumptions regarding general business and economic conditions, interest rates, the supply and demand for, deliveries of, and the level and volatility of prices of gold and other primary metals and minerals as well as oil, and related products, the timing of the receipt of regulatory and governmental approvals of our producing and development projects and other operations, our costs of production and production and productivity levels, as well as those of our competitors, power prices, continuing availability of water and power resources for our operations, market competition, the accuracy of our reserve estimates (including with respect to size, grade and recoverability) and the geological, operational and price assumptions on which these are based, conditions in financial markets, the future financial performance of the company, our ability to attract and retain skilled staff, our ability to procure equipment and operating supplies, positive results from the studies on our producing and development projects, our gold and other product inventories, our ability to secure adequate transportation for our products, our ability to obtain permits for our operations and expansions, and our ongoing relations with our employees and business partners. The foregoing list of assumptions is not exhaustive. Events or circumstances could cause actual results to vary materially.

Factors that may cause actual results to vary materially include, but are not limited to, changes in commodity and power prices, changes in interest and currency exchange rates, acts of foreign governments, inaccurate geological and metallurgical assumptions (including with respect to the size, grade and recoverability of mineral reserves and resources), unanticipated operational difficulties (including failure of plant, equipment or processes to operate in accordance with specifications or expectations, cost escalation, unavailability of materials and equipment, government action or delays in the receipt of government approvals, industrial disturbances or other job action, adverse weather conditions and unanticipated events related to health, safety and environmental matters), union labour disputes, political risk, social unrest, failure of customers or counterparties to perform their contractual obligations, changes in our credit ratings and changes or further deterioration in general economic conditions.

Forward-looking statements speak only as of the date those statements are made. Except as required by applicable law, we assume no obligation to update or to publicly announce the results of any change to any forward-looking statement contained or incorporated by reference herein to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements. If we update any one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. You should not place undue importance on forward-looking statements and should not rely upon these statements as of any other date. All forward-looking statements contained in this MD&A are expressly qualified in their entirety by this cautionary statement.

Other Technical Information

Titus Haggan Ph.D., EurGeol Certified Professional Geologist #746, Luna's VP of Exploration, is the Qualified Person as defined under National Instrument 43-101 responsible for the scientific and technical work on the exploration programs and has reviewed and approved the corresponding technical disclosure throughout this MD&A. John Blake Ph.D., Certified Mining Engineer, Luna's President and CEO is the Qualified Person as defined under National Instrument 43-101 responsible for the scientific and technical work on the development programs and has reviewed and approved the corresponding technical disclosure throughout this MD&A.

For further information on the Company, reference should be made to its public filings (including its most recently filed annual information form ("AIF")) which are available on SEDAR at www.sedar.com. Information is also available on the Company's website at www.lunagold.com. Information on risks associated with investing in the Company's securities and technical and scientific information under National Instrument 43-101 concerning the Company's material property, including information about mineral resources and reserves, are contained in the Company's most recently filed AIF. This Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim consolidated financial statements for the three months ended March 31, 2011 and six months ended June 30, 2011 and related notes thereto which have been prepared in accordance with International Financial Reporting Standards.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information

  • Luna Gold Corp.
    Investor Relations
    (604) 689-7317 or Toll Free: 1-866-689-7317
    www.lunagold.com