By hunting in the Canadian tundra, gold company Aurizon Mines Ltd. (AMEX: AZK) is developing projects to add new production to a starving market. After all, with world production declining and demand rising, there are a lot of hungry gold bugs to feed.

Aurizon is a potent combination for small-cap investors: an emerging company in a hot market. Based in Vancouver, B.C., Aurizon wants to exploit the rally in gold prices by developing its projects in the Abitibi region of northwest Quebec, which it views as one of the world’s greatest gold and base metal areas.

The company’s 100%-owned Casa Berardi mine began commercial production in the second quarter of 2007. Based on current mineral reserves, it is expected to produce about 165,000 ounces annually. Exploration still is going on at Casa Berardi, and it is in earlier stages at the company’s Joanna property. It’s at an even earlier stage at Aurizon’s gold and uranium project, Kipawa.

Like a good miner, Aurizon’s outlook is a gold bug’s grace: the U.S. dollar is going to decline further; there are more than enough dollars to go around; gold is cheap in terms of inflation, oil and financial assets; monetary reflation is at hand; mine output is declining, demand is increasing; and the political environment favors gold.

Not so great for many of us, but well and good for Aurizon. Global mine production has declined 1% to 2,447 tonnes in 2007 from 2006, according to the World Gold Council, and expectations are for similar flattish output for at least the next couple of years. Thin production is not matching demand, which the Council shows rising 4% in tonnage terms in 2007 from the previous year — led by a 6% gain in jewelry consumption.

But high and volatile gold prices took fourth quarter 2007 demand down 17% from the corresponding quarter in 2006. Demand declined the most in India, the world’s largest gold market, by 64% in the fourth quarter, following 40% growth in the first three quarters of 2007. And the weak economy and poor retail demand dented demand in the United States, which fell 14% in 2007 from 2006. Oh, those finicky bugs. Don’t they know how much it costs to put metal on their plates? 

Still, gold prices fixed at a record $858.85 per ounce in London on the first trading day of 2008, almost $9 higher than the previous record set in January of 1980.  That wasn’t the end of its advance: “The price continues to be driven by the behavior of investors, who have flocked to the gold market as a means of hedging against dollar weakness, rising inflation pressures and heightened geopolitical and financial risks,” the Council said. Brains not needed: equities fell in the fourth quarter, with the value of the S&P 500 down 3%, while the gold price rallied 12%.
 
Fade to Aurizon. As an emerging gold mining company, Aurizon is focused on becoming an intermediate gold producer by exploring and developing large land assets in favorable geological trends, close to infrastructure and in politically stable, pro-mining jurisdictions. Operating in Canada fits that bill, but Aurizon has lots to explore and develop before reaching intermediate status. 

The third quarter ended Sept. 30 was the first quarter of full commercial operations from Casa Berardi. Revenue from the mine was $36.1 million in the quarter, compared to revenues of $18.6 million from two months of commercial operations in the second quarter of 2007. Sustaining capital expenditures at Casa Berardi are estimated to be $15.4 million in 2008, and an additional $2.6 million is planned on infrastructure and equipment improvements.

Aurizon’s net earnings for the third quarter of 2007 were $3.8 million, or $0.03 per share, compared to earnings of $0.03 per share in the same period of 2006. Both quarters include non-cash gains and losses from commodity and currency derivative instruments.

As a work under study, Joanna’s production capability is estimated at 630,000 ounces of gold in the indicated mineral resource category and 1.42 million ounces in the inferred mineral category. At Joanna, approximately $3 million will be initially invested for drilling. 

Analyst Paul Burchell at Dundee Capital Markets said the ramp-up of production at Casa Berardi for the most part met expectations. “Nonetheless, the cost creep is affecting the whole industry in general,” he wrote in a note in November. But, considering the long-term production profile for the company and generally lower-than-industry cash costs, “we continue to believe ARZ will provide an attractive leverage in the current high gold price environment.”

Dundee Capital Markets has a 12-month target price of C$5.60 and continues to rate the stock “market outperform.” Burchell carries a 2008 earnings-per-share estimate at $0.25, and a 2009 forecast at $0.35. Shares closed on the AMEX at $4.82 on Thursday. Market capitalization is $707 million.

As an exploration company, Aurizon (AZK) — not to mention outsiders — doesn’t yet know its ultimate value. Some investors may want to ride along for the discovery. But those who lack gold fever may want to look elsewhere for more solid food for their portfolio.