Aurizon Mines Q2 Results

Aurizon’s (ARZ) second quarter results demonstrated an encouraging recovery from Q112, with production increasing 11.9% compared to the previous quarter as a result of a 7.2% increase in tonnes milled and a 4.0% increase in the head grade to 7.27g/t. As a result, the company reported a 3.0% quarter-on-quarter increase in earnings per share, despite a 5.9% decrease in the realised gold price to US$1,592/oz.

Shotcrete and backfill provide future mining flexibility
While less so than in Q1, ground conditions remained challenging and some high grade ore was temporarily isolated. As a result, operations continued to be affected by a shortfall in shotcreting capacity, which resulted in unit operating costs that, at C$142/t, were higher than plan (although still 6.6% below Q1). To address this, additional shotcreting equipment has now been installed and a paste backfill plant will be commissioned in early 2013, which will improve flexibility in difficult ground conditions by reducing the mining cycle time and preventing the permanent loss of ore in failed stopes. As a result, grades are expected to rise to 7.5-7.6g/t in H2, while unit working costs are forecast to fall an additional 1.8% to C$139.45/t milled.

Encouraging exploration drilling
Aurizon’s exploration budget in FY12 is approximately C$30m. Based on results released in July, we estimate that the return on this investment may be c 140koz in Zone 123 at Casa Berardi (worth c US$10.7m at ARZ’s current rating of US$75.94 per resource ounce), 245koz at the Hosco West Extension (worth c US$18.6m), 403-894koz at Heva East (c US$30.6-67.9m) and 453koz at Heva West (c US$34.4m).

Valuation: 19.8% EV/EBITDA discount to HUI
ARZ’s historic P/E multiple to December 2011 is at a premium to the equivalent measure for the Arca Gold BUGS index (at its currently prevailing level of 428.87). However, if its balance sheet position (and in particular cash pile worth C$1.26/share as at end-June 2012) is taken into account, its EV/EBITDA ratio of 4.55x to December 2012 is at a 16.7% discount to that of the HUI of 5.46x and its ratio of 4.25x to December 2013 is at a 19.8% discount to the HUI on 5.30x.

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