Better Know Tomorrow's Outperformers in Gold

As this multi-year secular bull market for commodities and precious metals continues to gather steam, the attention of investors has finally landed squarely upon junior miners and explorers as a legitimate investment class.

The financial crisis carved a deep and memorable "V" into the charts of commodities and the equities that mine them, but relentless, decoupled demand from China, India, and emerging economies has resuscitated the markets for industrial commodities in a very big way. Meanwhile, persistent fiscal imbalances and economic headwinds in the developed western economies have spawned policies and interventions that are resolutely bullish for further strength in precious metals like gold and silver.

As a result of these historic and transformative conditions, I maintain that the finders and producers of hard assets will emerge as the strongest-performing sectors of this fresh new decade. Until fairly recently, investor interest was more keenly focused upon quintessential diversified miners like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP). Even investors seeking targeted exposure to a particular asset gravitated toward large operators with established names like Southern Copper (NYSE:PCU) and Barrick Gold (NYSE:ABX). Increasingly, however, bargain-hunting Fools are delving deeper into this resurgent space to identify smaller companies that may be poised to deliver superior returns.

The basic idea is that a rising tide in a secular bull market ultimately carries all boats, but only comes inshore to the smaller vessels as the tide progresses. The principal caveat is that some of those smaller vessels may not be seaworthy at all, requiring diligent research to separate likely surgers from potential sinkers. This article offers a jumping point for further research into one promising junior miner, but careful scrutiny is required in this more speculative space to avoid unnecessary risk.

On the flip side, that risk accompanies the potential for greater reward as leverage to price gains in the underlying commodities will tend to be greater among juniors over the long haul. This is precisely the idea behind the new Market Vectors Junior Gold Miners (NYSE:GDXJ) ETF, and since I own shares of 16 of the 55 equities held by the ETF (as well as the ETF itself), Fools may appreciate my perspective on its constituent stocks.

What's on the horizon for Aurizon?
Aurizon Mines (AMEX:AZK) has been producing gold from its flagship Casa Berardi mine in Quebec, Canada, since 2006, and it recently reported 2009 production ahead of guidance at 159,261 ounces. Thanks to a very high-grade ore body with gold concentrations averaging nearly 8 grams per ton for the year, operating costs remain very competitive (about $414 per ounce) despite the small scale of production. This has yielded a debt-free producer with $108 million in cash on hand and positive cash flow to keep the treasury stocked.

Casa Berardi will see some contraction in production volume and ore grades in 2010 as the company sets up for higher-grade ores in subsequent years, and this could send costs spiking temporarily to about $490 per ounce, but at present gold prices, this still leaves plenty of room for profit. Meanwhile, 10 drilling rigs are actively seeking to expand reserves at Casa Berardi, and another three drills are focused upon a nearby property with strong development potential called Joanna.

Joanna adds another 1 million gold ounces to Aurizon's proven and probable reserves, but that only tells part of the story. The pre-feasibility study of the project, completed in 2009, focused exclusively upon one ore deposit (Hosco), although additional resources at the Heva deposit and new discoveries in 2009 suggest a more significant project in the making. The Hosco deposit alone could support an 8.3-year mine life and yield a 31.8% internal rate of return at present metal prices.

Aurizon at a glance

Aurizon shares have seen a meteoric rise over the past 15 months, surging some 350% from trough to peak, only to land right back where they started before the acute gold and silver correction that commenced in 2008.

Bargains still abound in the junior mining space despite the recent strength, and Aurizon itself has indicated an interest in accretive acquisitions in North America to add another 100,000 ounces of annual gold production. With consolidation activity in the mining sector gaining momentum, it remains to be seen whether a company like Aurizon can avoid being gobbled up by a reserve-hungry intermediate producer like Agnico-Eagle Mines (NYSE:AEM), but the best defense is a good offense.

As Casa Berardi continues to generate positive cash flow with competitive operating costs, the nearby Joanna project moves closer to a construction decision, and the company seeks to expand its pipeline with accretive acquisitions, I view shares of Aurizon Mines as a potentially rewarding investment.

If you have a favorite junior miner or explorer that you would like to see featured in a future article, please indicate your preference in the comments section below.