A Gold Miner That's Looking Very Undervalued

Five years ago you couldn't get me to touch a mining stock with a 10-foot pole. Most of them were still in the exploratory stage of their existence and cash costs were still high enough to make many unprofitable. Five years later, these same companies are now turning brisk profits with gold and silver near record highs, and I can firmly say that there are some deep discounts to be had throughout the sector.

Today, I want to take a look at one particular gold miner and show you why its long-term prospects have me so excited. The company in question is Aurizon Mines (ASE: AZK) .

Aurizon is a company that I recommended you get on your watchlist last year, and it hasn't failed to disappoint me from an operational aspect. Its stock price, however, has left some investors shrugging their shoulders.

Aurizon's prize asset is the Casa Berardi mine in Canada, which helped the company produce record revenue and profit. The key to Aurizon's solid year was the strong increase in overall ore grade. From just the first quarter to its recently reported fourth quarter, ore grade increased from 6.85 grams/tonne to 9.13 grams/tonne. Put simply, higher yield equals better margins.

Those margins have allowed Aurizon to amass a healthy $213 million Canadian in cash on its balance sheet with no debt. This extra cash fully allows Aurizon the flexibility to seek out acquisitions and run exploratory mining operations to test the feasibility of their other properties. Apparently, Aurizon's strong cash balance is also attracting the attention of others, according to CEO George Paspalas. No formal bids have been made as of now, but the prospect for a buyout has always been at the forefront of my mind.

Keeping this strictly in the context of speculation, I feel IAMGOLD (NYS: IAG) or Agnico-Eagle Mines (NYS: AEM) could make a good fit. Since shutting down its Goldex Mine in October, Agnico-Eagle has been keeping its eye out for other sources of revenue, and Aurizon could be it. The only reason I think IAMGOLD would make a better fit is the company's premier cash position of nearly $1.1 billion with no debt. Agnico-Eagle would almost assuredly have to do a stock-swap deal or perhaps even take on more debt to purchase Aurizon. What both companies already share, though, is deep roots in the Abitibi Gold Belt of Canada (which is where Aurizon is located).

Continuing with the speculation, it's also possible Aurizon could turn the tables and acquire a company as large as Richmont Mines (ASE: RIC) . It's not clear yet whether Aurizon's Hosco development in the Joanna Gold Development property will be feasible to mine, so purchasing Richmont and its Beaufor mine which offers ore grades that are similar to Casa Berardi might make sense. The one deterrent, if I do see one here, is Richmont's high cash costs and low levels of proven reserves at Beaufor.

For 2012, Aurizon's outlook of 155,000-160,000 ounces of gold production disappointed many -- but I wasn't one of them. Aurizon is reinvesting in its business and expanding its operations. It's clear that Casa Berardi can yield high-grade ore, so a one-year hiatus of top-notch production is enough to scare me away from this stock.

According to the company's latest estimates, there are still 1.495 million ounces of gold in Casa Berardi, which gives the mine a life span of nine more years. Using Friday's closing price for gold, that means Aurizon is sitting on nearly $2.5 billion worth of gold (not including mining costs), yet its enterprise value is only $573 million. I definitely feel this is one undervalued miner you'd be foolish not to keep on your radar!

Do you think Aurizon has what it takes to be successful? Let me and your fellow Fools know in the comments section below and consider adding Aurizon Mines to your free and personalized watchlist. If you'd like to know which gold miner has piqued the interests of our own analysts at The Motley Fool, you can find out free by clicking here.

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. He loves gold, but would hardly consider himself to be a flake. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat's a gold mine of transparency.

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