WSW Power Investor: New Small Cap Monster

10/16/06: New Top 10 Stock: Aurizon Mines(AMEX: AZK; Toronto: ARZ)

Aurizon Mines is a Canadian based company developing its 100% owned Casa Berardi Project, situated in the Abitibi region of north-western Quebec, one of the world's most prolific gold and base metal regions. Aurizon is going to start production on this property next month. Production is expected to average 175,000 ounces a year during the initial mine life, with cash costs per ounce estimated to be US$240.

Exploration at Casa Berardi is both active and ongoing. Underground drilling is being conducted along the 550 metre level drift, east of Zone 113. The company is attempting to expand the current resource around the current mine site by drilling a number of deep wide spaced holes from underground. Infill drilling in the area of Zone 118 to 120 will endeavour to upgrade the current resource there. Surface drilling has been targeted both west of the West Mine and near the East Mine.

Aurizon also owns the Joanna property km east of Rouyn-Noranda, Quebec, which it is actively exploring. The property was mined previously from underground to a maximum depth of 200 metres. Historic production grades were estimated at 6.5 grams/tonne gold. Aurizon plans to initiate an aggressive surface drill program to test the dip potential of the property to a depth of at least 500 metres. To earn a 100% interest in the Joanna Property, the Company will be required to incur exploration expenditures of $3.5 million over three years, pay an aggregate of $500,000, in cash and/or shares, and issue 50,000 shares subject to regulatory approval.

Finally Aurizon owns 80 claims in the Kipawa area, 100 kilometres south of Rouyn-Noranda, Quebec. The region has been targeted for its gold-uranium association, based on a regional gold anomaly in stream sediments. A till sampling program, which will test for heavy minerals to locate dispersion trains related to stream sediment anomalies, has recently been completed. Assays are still pending on the 230 samples taken. A contract has been awarded for a combined airborne radiometric and electric geophysical survey. Field prospecting and till sampling using smaller spacing will be completed once the results from the first phase of sampling are received.

The exploration around the Casa Berardi project and on Aurizon's other two properties gives it blue-sky potential. However, for me its main attraction is the Casa Berardi mine and it's stocks current valuation.

AZK has a current market cap of only $368 million. With next year's projected gold production this gives it a forward P/E of only 9.41 when large cap gold stocks such as Newmont are trading with forward P/E's in the high teens and trailing P/E's in the 25-35 range. Based on valuation to its peers AZK should easily double from here over the next year as its mine comes fully operation and cash begins to flow into the company's coffers.

Over the past few years, my best gold stock investments have been in companies positioned exactly where AZK is right now. These have been companies that were about to open new mines which were set to greatly increase the company's cash flow and earnings thereby turning the stocks into true growth stories. Just think of Desert Sun Mining and Yamana Gold. Desert Sun Mining only opened one operating mine producing a little over 100,000 ounces of gold a year. Through great management of the mine and by carrying out more exploration and increasing its reserves it made itself an attractive acquisition target.

Shares of AZK have been outperforming the XAU and HUI all year. The stock has held up well during this recent correction, a reflection that smart money is getting into the stock. Current resistance on the stock is around the 2.70 area and support is around 2.45. I'd expect some more consolidation in these areas over the short-term, which would provide new buyers with a good entry point. But once the stock breaks 2.70 it should make a fast run to the $3.00 area. I think we'll see it above $5 by next summer. I currently own the stock and am adding it to the Top 10 List of Small Cap Stocks with market caps under $500 million.