March/April 2013

From broke to booming

Luna Gold improves its fortunes by reworking how it operates its Aurizona mine

By Virginia Heffernan

The build for the Aurizona mine went very poorly, but the company revamped its financial and operational management and turned the project into a success | Courtesy of Luna Gold

At a time when gold project disappointments frequent the headlines, it is refreshing to encounter an operation that has bucked the trend. Flirting with bankruptcy as recently as 2011, the Aurizona gold mine, owned by Luna Gold, in northeastern Brazil, produced over 74,000 ounces of gold in 2012 and is now generating a net income of about $3.5 million per quarter while in full expansion mode.

“We spent our last few dollars on fuel in June 2011,” says Duane Lo, CFO of Luna Gold. “But within three months we went from barely surviving and not being able to meet our payroll, to meeting our feasibility production target of 5,000 ounces of gold per month.”

The open pit mine is a shear-hosted orogenic gold deposit consisting of saprolitic, lateritic and low-sulphide fresh rock ores. This year, it is expected to produce at least 95,000 ounces at cash costs of about $710 per ounce – a big step up from 42,000 ounces at cash costs of more than $1,000 each two years ago. Once Luna completes its Phase 1 expansion currently underway, annual gold production is expected to reach 125,000 ounces, with new economies of scale keeping costs in check for this year and beyond.

Aurizona has come a long way since its days as a joint venture between Eldorado Gold and Brascan. The partners decided to sell their 660,000-ounce gold resource to Luna in 2007 due to the low gold price and limited accessibility of Aurizona at the time. Luna quickly increased the resource by about 50 per cent, but, just as the company was gathering a construction team, the 2008 financial crisis hit.

Unable to finance development on its own, Luna brought in a trio of angel investors who led an equity financing that injected $25 million into the company for the project. Vancouver-based Sandstorm Gold also contributed $20 million in cash and shares in exchange for the right to buy 17 per cent of the life of mine gold production for US$400 per ounce.

But the influx of cash was not enough. “The build went poorly and there were a number of problems with management and the skills needed to build a proper mine,” says Lo. At the time, the company had not hired an EPCM consultant, and instead relied on a patchwork of management, execution and equipment and services suppliers to build the mine. “In early 2010, we discovered that the build was not on spec or on budget, and the company was on the road to bankruptcy again,” he adds.

180 degrees

So how did Luna turn such a broken endeavour into a gold mining success story when soaring capital and operating costs are crippling so many other projects? Vice-president of operations Peter Mah attributes the turnaround to improved operational management, a motivated workforce, and a striving towards best practices in mill recovery, operating time, throughput and grade control.

In mid-2010, the company brought in an experienced Canadian EPCM company and recruited John Blake as president and CEO. John then hired Mah and general manager Jim Healy in early 2011 to overhaul the mine site management. Most importantly, contract mining was replaced by an owner-operated set-up. That allowed a reduction in cash costs to $651 per ounce by the fourth quarter of 2012. A fully owned and operated fleet consisting of 12 Caterpillar 740B articulated dump trucks and three Cat 374 excavators replaced a mash-up of heavy equipment operated by three separate contractors.

“It was a complex combination of doing it all at once or, as we liked to call it, ‘fixing the car as it was moving down the highway at a hundred kilometres per hour,’” says Mah, who gives credit to the wizardry of Healy and their new deputy general manager, Alberto Reyes. “We became owner-operated and took our workers from the local workforce, trained them, had them fully certified, and shattered the contractors’ production records, while reducing safety incidents by more than half.”

Over 720 of the 900-plus workers live within 40 kilometres of the mine in the state of Maranhão, with the remainder coming from other parts of Brazil. When Luna brought in Caterpillar’s representative in northeastern Brazil to train its staff, he was initially skeptical that the lag in education was too large to be made up. But despite first impressions, some of Luna’s employees were among the top graduates of Cat’s mobile training program. Luna complements the Cat training with on-site education. The company also supports its workers with programs in literacy, furthering their basic education and promoting local culture and dance.

“The average education level is grade four and the state is the second poorest in all of Brazil, so there was big hill to climb,” says Mah. “But the schooling level is not a measure of the intelligence and capability of the people in the area.”

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