Luca Mining: Growing Gold Producer with Two Mines in Mexico and A Clear Path to Free Cash Flow Generation

• Luca Mining operates the Campo Morado mine in Guerrero state and the Tahuehueto mine in Durango state, Mexico. With optimization initiatives underway at both assets, the company expects to produce over 100,000 ounces of gold equivalent in 2025.
• Luca recently closed a C$11.5 million financing, providing the capital to complete critical optimization projects. At Campo Morado, this includes increasing throughput to 2,400 tonnes per day and improving metallurgical recoveries, while at Tahuehueto focus is on reaching the 1,000 tonne per day nameplate capacity and declaring commercial production.
• Luca has hired a world-class exploration team consisting of industry veterans which is tasked with finding higher-grade ore to enhance the mine plans, extending mine life to support a 150,000 oz/year production profile, and making new discoveries on the company's extensive land package.
• Luca expects to generate sufficient operating cash flow to repay its $12.3 million debt over the next 18 months. If the company delivers on its operating and exploration objectives, it could be debt-free and net cash flow positive in 6-12 months.
• As Luca's balance sheet improves and the share price re-rates higher to reflect the company's progress, management will consider accretive M&A opportunities to further bolster its portfolio. Luca's 20-person office in Mexico City provides a strong corporate infrastructure to support additional growth initiatives.

Luca Mining (TSXV:LUCA) is a Mexican-focused gold mining company that is in the midst of optimizing operations at its two producing mines while also launching an ambitious exploration program to drive long-term organic growth. With a refreshed management team, strengthened balance sheet, and clear path to free cash flow generation, Luca presents a compelling investment case for those seeking precious metals exposure.

Two Operating Gold Mines with Optimization Upside

Luca's portfolio consists of the Campo Morado mine in Guerrero state and the Tahuehueto mine in Durango state. Campo Morado was acquired in 2011 but suffered from deferred maintenance under prior ownership. Luca is now in the final stages of a mill optimization program, with the goal of reaching the 2,400 tonne per day nameplate capacity in Q1 2025, up from 1,400-1,600 tonnes per day in H1 2024. Key initiatives include engaging a mining contractor to consistently fill the mill and working with engineering firm Ausenco to boost recoveries.

At Tahuehueto, a brand new mine, Luca has invested $1-2 million to complete construction. The operation is now consistently processing 800 tonnes per day, with a goal of reaching the 1,000 tonne per day nameplate capacity in the coming weeks and declaring commercial production.

According to CEO Dan Barnholden:

"The story over at Tahuehueto, it's a similar story, except this is a brand new mine and really the story is one of capital constraints. We relieve those capital constraints with the capital that we raised in September and really we've been able to make the requisite investments."

Assuming both assets reach their respective nameplate capacity and processing rates, Luca expects to produce over 100,000 ounces of gold equivalent in 2025.

Interview with CEO Dan Barnholden

World-Class Exploration Team to Drive Resource Growth

While the producing assets provide a strong foundation, the real blue sky potential lies in Luca's vast exploration upside. The company recently announced the hiring of a world-class exploration team. This team will be tasked with a three-fold mandate:

• Find near-mine, higher-grade ore to enhance the current mine plan and boost near-term cash flow
• Extend mine life and support organic production growth to 150,000 oz/year
• Test high-risk, high-reward targets for new discoveries.

"I believe however that both of these assets have the potential for extraordinary discovery," explained Barnholden. "We believe that both of these assets have potential to get much greater and then lastly we're going to take some higher risk shots to see if we have some of those real bonanza grades further afield on our concessions."

Path to Re-Rating as Luca Delivers on Turnaround Story

Over the next 6-12 months, Luca will be focused on three key milestones:

• Ramping up production to fill the mills at Campo Morado and Tahuehueto
• Delivering exploration success to showcase the resource growth potential
• Cleaning up the balance sheet by repaying the gold prepay agreement.

On the first point, Q3 2024 represented an important inflection point with mining contractor Minera Castilla at Campo Morado helping to boost throughput to over 2,000 tpd. At Tahuehueto, Luca is now consistently achieving 800 tpd with an expectation of reaching the 1,000 tpd capacity in the coming weeks.

Exploration results from both properties will be an important potential catalyst in H1 2025, with $2.5 million budgeted over the next six months. The company is currently sifting through a wealth of historical data from previous operator Farallon and has already identified several promising drill targets. Initial holes at Tahuehueto are described by Barnholden as looking "extraordinary."

Financial Position

Finally, on the balance sheet, Luca expects to generate sufficient operating cash flow to repay its $12.3 million gold prepay agreement with Trafigura over the next 18 months. The company also has a 13.6 million share purchase warrant exercisable at $0.50 set to expire in September 2025. If exercised in full, the warrant could bring in an additional $6.8 million to further accelerate debt repayment.

Assuming Luca delivers on these three initiatives, Barnholden sees potential for a meaningful re-rating of the stock.

"I'm in the market after the financial statements were filed yesterday because I see what we're doing," he explained. "So out of an abundance of caution, wanted to make sure that we could execute on all of the initiatives we got a lot going on at this company and obviously we need money to execute on those plans. We raised money, we've invested at both mines, we've invested in exploration and I believe that we've turned a corner here now and this company is going to actually start to generate cash to its balance sheet and we will expect to exit 2024 with a pretty healthy cash balance."

Attractive Entry Point with Upcoming Catalysts

With approximately 200 million shares outstanding, Luca currently has a market capitalization of roughly CAD$101 million at its recent $0.55 share price. This appears to be an attractive valuation for a company with two producing mines, a world-class exploration team, and a clear path to generating positive free cash flow.

Near-term catalysts for the stock include:

• Declaration of commercial production at Tahuehueto (Q4 2024)
• Initial exploration results from $2.5 million drill program (H1 2025)
• Continued quarterly improvements in operating metrics (ongoing)
• Repayment of gold prepay agreement (H2 2025 / H1 2026)

Looking further ahead, Barnholden believes that Luca could become an attractive acquisition target for mid-tier and senior gold producers once the turnaround is complete. The company's 20-person office in Mexico City and growing corporate infrastructure could also support accretive M&A of complementary assets in due course.

Conclusion

For investors comfortable with the jurisdictional risk of operating in Mexico, Luca Mining offers a compelling mix of near-term cash flow growth and long-term exploration upside. With an experienced management team at the helm and multiple near-term catalysts on the horizon, the stock appears well-positioned for a re-rating as the turnaround story continues to gain traction.

The Investment Thesis for Luca Mining

• Optimization initiatives at Campo Morado and Tahuehueto will allow operations to reach nameplate capacity and fill the mills, driving production over 100,000 oz gold equiv. in 2025
• Newly hired world-class exploration team will aggressively explore both sites in the next six months, with the potential to significantly grow resources
• Generating free cash flow will allow Luca to repay $12.3M debt and have a healthy cash balance by the end of 2025
• If Luca executes as planned over the next 12 months, it has potential to re-rate significantly higher as the market recognizes progress and long-term potential
• Luca could become an attractive acquisition target for mid-tier and senior producers once the turnaround is complete and may undertake its own accretive M&A
• With a market cap of under $110M, Luca is an undervalued emerging gold producer with strong upcoming catalysts - investors may want to establish a position ahead of exploration results and ramp-up milestones

Macro Thematic Analysis

The investment case for Luca Mining is supported by constructive precious metals fundamentals. Gold has been one of the best performing asset classes in 2023, rallying over 15% from its November 2022 low to trade above $2,700/oz in October. A combination of persistently high inflation, mounting recession risks, and the recent banking sector turmoil has reignited interest in gold as a safe haven and portfolio diversifier. Central banks also remain strong buyers of bullion, with China and Turkey accelerating their purchases in early 2023.

Gold equities have lagged the move in the underlying metal year-to-date, creating an attractive entry point for investors. The NYSE Arca Gold Miners Index (GDM) currently trades at a price-to-NAV multiple of just 1.1x versus a five-year average of 1.3x, while the average balance sheet is under-levered at 0.2x ND/EBITDA. Despite the industry's improved cost discipline and capital allocation practices, sentiment remains subdued, allowing contrarians to acquire gold miners at a discount to intrinsic value.

Mexico is a particularly attractive jurisdiction for precious metals mining, ranking as the world's largest silver producer and 9th largest gold producer in 2022. The country offers a competitive tax regime, established permitting process, and skilled labor force. However, the mining industry has faced some challenges under the Andres Manuel Lopez Obrador (AMLO) administration, with permitting delays and increased scrutiny of environmental practices. Companies that can successfully navigate the political landscape and maintain strong community relations thus have a competitive advantage.

As summarized by Luca CEO Dan Barnholden:

"You correctly point out that there is a gulf in valuation between operators and cash flow generating companies and developing companies today."

This valuation gap creates opportunities for astute investors to identify emerging producers that are well-positioned to re-rate as they transition from explorer to producer status.

Key takeaways

Luca Mining is at an exciting inflection point as it optimizes its two Mexican gold mines and embarks on an aggressive exploration program. The company expects to produce over 100,000 oz gold equivalent in 2025, generating robust margins at current gold prices. A newly hired world-class exploration team will work to organically grow resources and make new discoveries. With a strengthened balance sheet and clear path to positive free cash flow, Luca is well-positioned to re-rate higher as it delivers on its business plan. The stock is an attractive way to gain exposure to a turnaround story with meaningful exploration upside.