Lots Of Gas Left In The Tank At Aurizon’s Casa Berardi

SITE VISIT

LA SARRE, QUE. — In the last two years, Aurizon Mines (ARZ-T, AZK-X) has trimmed debt from $73 million to $21 million.

The junior gold producer can now gloat about the $100 million in cash it has in its treasury, the $20 million cash flow it posted in the first quarter of this year from its underground Casa Berardi mine in Quebec, and the fact that it has only tapped equity markets once since early 2006.

First-quarter revenues reached $41.6 million and earnings $5 million, compared with revenues of $35.1 million and a net loss of $3.8 million in the first quarter of 2008.

On an analyst tour of the Casa Berardi mine in early June, David Hall, Aurizon’s Vancouver-based chief executive, said the company was in good shape financially.

“There’s no doubt we’ve built investor goodwill and credibility among our lenders and now we’ve got a significant revenue stream,” he said.

“Now it’s time to turn on the exploration taps” at Aurizon’s projects in Quebec, he said, while building an intermediate-sized mining company with acquisitions in prominent, politically stable jurisdictions.

John McClintock, a mining analyst at Research Capital in Toronto says the company has built an excellent platform from which to go on a shopping spree for advanced-stage projects.

“They have a loaded gun to do anything they want for the most part,” McClintock says. “They have done the best so far in the Quebec mining camp for a junior upstart coming from nothing.”

McClintock has a buy on the stock with a target price of $5.80 per share. At presstime, Aurizon was trading at $4.40 per share.

“If you believe in gold, you have to believe in companies like Aurizon because they can take historically challenged assets, recapitalize them and then leverage them into another platform,” he explains. “There’s a lot of growth in this.”

Hall admits the company has signed some confidentiality agreements and that management is looking broadly at properties in Canada, Mexico and a couple of states in the U. S. — “projects that need some help in moving forward and getting to the finish line.”

In the meantime, however, there is still a lot of work to be done at Casa Berardi and at Aurizon’s two exploration projects in northwestern Quebec, Joanna and Kipiwa.

“It’s still early days at Casa Berardi,” Hall says. “We’ve only been at it for two years and we’ve only really explored 1.5 km out of a total lateral strike length of 37 kilometres down to a vertical depth of 1,000 metres and discovered 2 million ounces. There’s a lot of gas left in the tank.”

Since its first gold pour in December 2006, the gold mine north of Rouyn-Noranda in Quebec’s Abitibi region has produced a total of 374,996 oz. of gold.

Last year, Casa Berardi produced 158,830 oz. of gold (654,397 tonnes at an average grade of 8.2 grams gold per tonne).

This year, Aurizon forecasts production of between 150,000 and 155,000 oz. gold at an average grade of 7.9 grams. The decrease in gold production from 2008 is attributable to lower average gold grades, the company says.

Casa Berardi is classified as an Archean sedimentary-hosted lode gold deposit. Mineralization is closely associated along a 30-to 50-metre-wide gold trend, hosting multiple quartz veins and disseminated gold-rich sulphide orebodies.

The mineralization is superimposed on continuous graphitic mudrock corresponding to the Casa Berardi Fault plane. (The deposit straddles a 37-km section of the Casa Berardi Fault.) The gold occurs predominantly south of the fault and sometimes on both sides of it.

The deposit stretches along an east-west mineralized corridor and includes an East and West mine (5 km apart in the central part of the property) and the Principal zone.

Between 1988 and 1997, the two underground mines, 95 km north of the small Quebec town of La Sarre, produced about 690,000 oz. of gold. The East mine opened in 1998 and the West mine followed two years later. The mines were closed in 1997 due to low gold prices and ground stability problems. Today, Aurizon is only mining the West mine.

Aurizon acquired a 100% stake in Casa Berardi in 1998 and spent about $103 million developing new underground infrastructure, building surface facilities and rehabilitating the milling facility and fleet of mining equipment.

It also began deep exploration drilling, discovering several new gold zones. Of particular importance was the discovery of Zone 113 in the West mine area, which contains high-grade gold mineralization in quartz veins and forms the core of Aurizon’s mining operation.

Ore feed from Casa Berardi’s West mine comes from three different zones: the 113 zone, the NW zone and the more recently developed Lower Inter-zone.

In the first quarter ended March 31, the mill reached a steady production rate of 1,860 tonnes per day. It has a capacity of 2,200 tonnes per day but is bottlenecked by the underground mining sequence due to poor ground conditions.

“Casa Berardi is famous for its ground problems,” Christian Bourcier, Aurizon’s superintendent of mining operations, told analysts during a slide presentation on the eve of a mine tour in early June. “The rock is not really solid, especially on the sediment. That’s why we have a lot of ground movement.”

The challenging conditions mean miners at Casa Berardi can only work on two stopes at one time, and on average each stope is no larger than about 15-20 metres in width by 20 metres deep.

Each stope must be drilled, blasted, mined and backfilled before moving on to the next one. On average, it takes four to five days to muck and four to five days to backfill each block, representing about 10,000 tonnes of material.

In addition, between 50% and 60% of the ore must be transported by truck. All ore blasted below the 690-metre level must be trucked to that level and hoisted to surface.

Aurizon considered implementing a conveyor belt system to move ore but ultimately decided against it due to maintenance issues and fire risks.

“It’s a nice mine but not an easy mine,” concedes Michel Gilbert, Aurizon’s executive vice-president operations. “Graphite is the worst. We have to be very careful.”

Despite the troubling ground conditions, mining superintendent Bourcier notes that efficiency is rising and said the company has recently started stockpiling two days worth of ore, or about 3,600 tonnes of material.

As of Dec. 31, 2008, Casa Berardi had total reserves of 3.84 million tonnes grading 7.8 grams gold per tonne for contained gold of 956,000 oz.

Measured and indicated resources tallied 4.96 million tonnes grading 5.9 grams gold for contained gold of 936,000 oz.

In the inferred category, the mine hosts 4.34 million tonnes grading 6.6 grams gold for 920,000 oz.

In the first three months of the year, Casa Berardi produced 38,966 oz. gold.

Total cash costs on the basis of gold sold were US$379 per oz., down from US$422 per oz. in the first quarter of 2008. That was largely due to the weakness of the Canadian dollar.

Aurizon forecasts total cash costs this year will be about US$390 per oz.

McClintock of Research Capital anticipates production costs will decline over time. Between 2009 and 2011, operating costs should fall to US$357 per oz., he argues.

In a recent research note to clients, he forecast Aurizon will recover 2.7 million oz. at an average cost of US$386 per oz. over a 15-year period.

Improvements to the liners in the mill (built in 1988 by previous owners for $90 million) have reduced the number of shutdowns and extended their lifespan to four months from two. Recovery rates currently average about 92% while costs in the mill average about $19.50 per tonne.

Hunting For More Gold

This year, Aurizon is allocating $15 million for exploration at Casa Berardi. Of that, $8 million is earmarked for about 66,000 metres of drilling and the remaining $7 million is to be spent on underground development and inf
rastructure.

The major focus will be to explore the deeper region of the West mine from the recently developed exploration drift at a depth of 810 metres. The company also wants to follow up on high-grade gold intersections discovered from surface drilling in zones 118 and 123.

Aurizon plans 40,000 metres of underground and surface drilling and 1,900 metres of underground exploration access drifting at the 810-metre level and south of the Lower Inter-zone.

In addition, it is preparing a feasibility study on developing an open-pit mine at the East Mine Crown Pillar by 2011 and a preliminary technical assessment for an open pit in the Principal zone between the East and West mines.

“There is exploration all over the place,” Aurizon’s Bourcier says during a presentation about Casa Berardi. “We’ll be here for a very, very, long time.”

The open-pit portion of the East mine has proven and probable reserves of 635,000 tonnes grading 4 grams gold for contained gold of 82,000 oz. Based on a prefeasibility study, the stripping ratio would stand at about 17.4:1.

Ore from the proposed open pit at the East mine could use up excess capacity at the Casa Berardi mill.

On other fronts, in 2007 Aurizon granted Lake Shore Gold (LSG-T, LSGGF-O) an option to earn a 50% interest in the company’s large land position west of Casa Berardi’s West mine and east of its East mine. Lake Shore can earn its interest by spending $5 million on exploration over five years and is expected to spend about $1 million in 2009.

Last year, Lake Shore’s drill program discovered a new gold zone with the best intercept cutting 13.03 grams gold over 6.5 metres within a broader intersection of 8.58 grams gold over 10.4 metres at a depth of 247 metres. The intercept is open at depth and laterally and is about 7.5 km east of Casa Berardi’s mill.

McClintock notes that “leveraging off Lake Shore’s in-house geological database of the region that was inherited from Inco is a cost-effective way to build ounces quickly.”

“We probably wouldn’t have done the deal with anyone else,” Hall says of Lake Shore Gold. “They have a lot of experience. We didn’t want to have a junior and spend a lot of time training them.”

Meanwhile, Aurizon plans to spend $3 million on exploration at its Joanna property this year and is on track to complete a prefeasibility study by the end of the third quarter.

The Joanna project is along the Cadillac Break in Joannes Township, 20 km east of Rouyn-Noranda.

The property extends east-west for more than 8 km and 3 km in width and lies 2.7 km from a 120-kilovolt power line, a major highway and is within a five-minute drive of the Rouyn-Noranda airport.

Two underground mines, Hosco and Heva, operated on the Joanna property from 1944 to 1949. The only infrastructure remaining on the property, however, is the shaft collar of the Hosco mine.

Mineralization at Joanna is closely related to the east-west Cadillac Fault and forms a 200-metre-wide corridor composed of different mineralized lenses parallel to the fault, dipping 55 to the north.

Mineralization takes the form of quartz veins networks a few millimetres to 15 centimetres wide inside finely disseminated sulphides. The mineralization is concentrated within two main sections, Hosco on the eastern side, and Heva on the western side.

As of March 2009, Aurizon has defined a measured and indicated resource at Joanna of 33.8 million tonnes grading 1.4 grams gold for contained gold of 1.53 million oz. and an inferred resource of 28.4 million tonnes grading 1.4 grams gold for 1.26 million oz.

“We could be in production at Joanna two years after the prefeasibility study,” Hall says.

McClintock of Research Capital says he expects Joanna could start producing 82,000 oz. gold annually at cash costs of US$418 per oz. over a mine life of 12 years starting in 2012.

Aurizon’s second exploration project called Kippiwa lies about 100 km south of Rouyn-Noranda. The early-stage gold-uranium-rare earth project is about halfway between the Elliot Lake uranium camp and the Abitibi gold belt camp.

“Kippiwa is low profile, but we are doing some quiet, behind-the-scenes work,” Hall says. “We have come up with some very good grades.”