TIMMINS, ONT. -- Long pincers clasp and pull a heavy rectangular object out of a shallow pool of water. It is carried over to a large table where a man with an electronic buffer waits. By the time it is dropped in front of him, it has cooled enough for its glimmer to begin to shine through, and once the buffer comes in contact with it, the unmistakable glint of the yellow metal catches all eyes.
This gold bar weighs in at close to 500 oz. -- roughly half the size that would normally be produced here. But this is the official opening of Apollo Gold's (APG-T, AGT-X) Black Fox mine, and what better way to mark the occasion than to have a doré bar poured, even if it means doing it a few days ahead of schedule.
Under normal circumstances, the company will be pouring two bars a week, each being in the 1,000-oz. range. Impressive, but Apollo will need to keep that level of production consistent to meet its upcoming payments on the debt it took on to build the project.
The company's ability to make those payments is one factor in the market's reluctance to fully embrace Apollo stock.
Located in the Timmins mining district, Apollo has the benefit of operating in one of the world's best mining jurisdictions. Added to this is the fact that the project is a low-cost and high-grade operation at a time when gold prices are strong.
Construction of the mine was financed mainly with debt, thus limiting share dilution, and management at Apollo did an exemplary job of bringing the mine into production on time and on budget.
By such criteria, the company ranks as a rare gem amidst the junior gold mining circuit, and yet Apollo has failed to gather the kind of market attention that many of its peers have.
Apollo's market cap of roughly $112 million pales in comparison with fellow junior gold producers, such as cross-town rivals Lake Shore Gold (LSG-T, LSGGF-O) at $565 million, Quebec producer Aurizon Mines (ARZ-T, AZK-X) at $630 million, West African producer Semafo (SMF-T, SEMFF-O) at $530 million, and Brazilian gold miner Jaguar Mining (JAG-T, JAG-N) with a market cap of around $725 million.
All of these companies, including Apollo, are slated to produce between 100,000 and 300,000 oz. of gold in 2010.
Trading in the low 30¢-range at the beginning of March, Apollo's shares managed to get up into the 50¢-range by late April, but have traded relatively flat since.
The much larger gains made over that period by Apollo's peers came with the rally behind gold producers that began in early March. With Apollo's first gold pour coming in May, it could be argued that the company was a victim of bad timing.
As for how much its debt is factoring into the market's stingy valuation, the company was an unfortunate victim of circumstance when it had to do a debt financing at one of the worst times in recent history.
Completed in February, the $70- million financing came by way of Macquarie Bank and RMB Australia Holdings.
While the rate on the four-year debt wasn't especially onerous given the condition of credit markets -- LIBOR plus 7% -- the amount of warrants it had to issue to Macquarie and RMB was tougher to swallow.
Apollo issued a total of 77.4 million warrants to the two banks with an average strike price of roughly 24¢. But even if all the in-the-money warrants were exercised, the dilution would be somewhat offset by the fact that Apollo would get roughly $27 million -- money that would go straight against its debt.
As it stands now, Apollo needs to pay back $15 million of the debt between September and December of this year. That amount is parsed out over varying monthly payments, but after December debt payments will be significantly lower. That milestone could coincide nicely with an expected increase in production.
Complicating matters slightly, however, is the gold hedge that came along with the financing. Fortunately for Apollo, high gold prices at the time mean the hedge isn't too cutting.
Apollo has monthly gold forward sales contracts of 250,400 oz. at a price of US$876 per oz. on roughly half of its gold production from 2009 until March 2013.
A long-term gold price of US$950 per oz. would give Apollo an average realized gold price of US$913 per oz. over that period.
But David Russell, Apollo's president and chief executive, says if production comes in higher than anticipated, and there are reasons to think it might, the hedge would be taken care of much earlier.
Hedges aside, the real key to Apollo's near-term success is its ability to ramp up production and bring about the corresponding drop in cash costs.
That simple relationship will widen margins, ease concerns over paying down debt and ultimately increase shareholder value.
Russell says the company is on track to have cash costs south of US$350 per oz. by the fourth quarter. And he expects life of mine cash costs to come in around US$380 per oz.
"For June, July and the first part of August, cash costs may be in the US$550-per-oz. range but as we ramp up to full speed, we'll have more tonnes and lower costs," Russell says. "Early months 1,450 tonnes per day, in July we were up to 1,600 and we're now starting to move up to the 1,800 number. We're targeting a consistent 1,800 tonnes per day by August and once we hit that then cash costs will be in the US$350-400 range."
In its June 25th report, Blackmont Capital estimated gold production at the mine will grow from 62,000 oz. gold in 2009 to 136,000 oz. by 2012. That massive 120% increase will come as the open pit hits its stride and the underground mine below it swings into production.
As for the current state of operations, mining from the open pit began on March 18 and fed the first gold pour in late May. Commercial production followed in early June -- a remarkable sequence of events considering work only swung into full gear last October.
"We did what Dave Russell asked us to do last September," Tim Smith, vice-president of operations said from the podium on the occasion of the official mine opening. "In one of the worst winters in twenty years, we had to strip and refurbish a mill and build a mine. And you know what? We did it."
Black Fox hosts probable open-pit reserves of 4.3 million tonnes grading 5.2 grams for 730,000 oz. gold. For the underground portion of the mine, reserves stand at 2.1 million tonnes grading 8.8 grams for 600,000 oz. Reserves were calculated using a US$650-per-oz. gold price and a cutoff grade of 0.88 gram gold for the open pit and 3 grams gold for the underground.
Indicated open-pit resources come in at 4.8 million tonnes grading 5.3 grams gold for 813,000 oz. gold with another 2.7 million inferred tonnes grading 4.7 grams gold for 408,000 oz.
The underground indicated resource currently stands at 1.7 million tonnes grading 11.4 grams gold for 622,000 oz. with inferred resources of 800,000 tonnes grading 13.1 grams gold for 329,000 oz.
The tonnage is to be pulled from the site in two distinct phases with phase one under way.
Besides underground operations -- for which a decline already exists courtesy of the previous owner -- phase two involves stripping the left side of the open pit. That endeavour, however, requires further permitting because of the proximity of Froome Lake, a body of water that sits entirely on the Black Fox property.
Apollo isn't anticipating any difficulties with the permit and expects it to be issued by year's end with stripping of overburden following directly.
The company has already received results from an independent study that allayed any concerns over water hydrology due to the existence of an impermeable clay layer enveloping the bottom of the pit area. Of additional insurance is the fact that mined ore in the pit tilts far over to the alkaline side of the pH balance scale, making acid drainage a non-issue.
In total, phase-one production is slated at 400,000 oz. gold, with 300,000 oz. coming out in phase two.
Russell points out, however, that those numbers only count reserves, and now that Apollo is in the pit and mining, it's finding that the areas delineated as indicated resources are maintaining grades consistent with reserve areas.
That means an additional 200,000 oz. that currently sits only in the indicated resource category will likely find its way to the mill, bolstering production numbers considerably.
As for dilution, the feasibility study outlined a 13:1 strip ratio.
"But now, with those resources falling into the reserve category, that strip goes to 6-or 8-to-1," Russell says. "Right now we're seeing a 6-to-1 ratio in the widest part of the pit and we don't expect it to go up."
Blackmont is also bullish on the prospect for more mineralization going into reserves. In his June report, Richard Gray writes: "We believe there is excellent potential to add to the underground reserve through deeper drilling and through the inclusion of lower-grade ore within the pit shell."
Once the ore is taken from the ground, it makes a half-hour trip along a paved highway to the Black Fox mill. Apollo bought the mill complex from St Andrew Goldfields (SAS-T, STADF-O) for $21.7 million last July and began extensive refurbishing and expansion almost immediately.
While the mill was built to handle 1,100 tonnes per day, Apollo always had a 2,000-tonne-per-day target and it pumped $22 million into the facility to get it there.
The Origins Of A Great Deal
Apollo acquired Black Fox in 2002 from Exall Resources for just $6 million in cash and 2.08 million common shares.
Exall operated and mined the deposit as the Glimmer mine and produced roughly 210,000 oz. gold before shuttering it in 2001.
"They were going in blind," Russell says of Exall's mine plan. "They were making money; the problems only started when the gold price went down. They never drilled it properly, and there was no feasibility study. They did a great job finding a gold system; it was the follow- through that was lacking."
That lack of follow-through was Apollo's opportunity -- an opportunity that was first spotted by the company's vice-president of exploration, Richard Nanna.
Russell had heard about the potential of Black Fox and had Nanna fly in to check it out. A phone call from Nanna telling Russell that they had an open pit and underground operation on their hands and to do whatever it took to buy it convinced Russell to make the investment.
Near-surface, high-grade operations don't come along that often -- especially one located in such a district.
The mining pedigree of the Timmins area is obvious when driving out to Black Fox. First, Goldcorp's (G-T, GG-N) Porcupine gold mine complex comes into view and a little later on, Xstrata's (XSRAF-O, XTA-L) Kidd Creek operations bellows smoke into the air.
The Black Fox open pit sits 75 km east of Timmins on the Destor-Porcupine Fault Zone (DPFZ) that has made the region a globally renowned mining district.
The DPFZ is a deep break in the Precambrian rocks of the Abitibi greenstone belt and the source of most of the deposits around Timmins.
Black Fox lies on the southern limb of a large fold in the DPFZ where the strike changes from east-west to southeast with mineralization hosted in ultramafic and mafic rocks altered by the folding action. Gold occurs as free gold in quartz veining and stockworks in altered ultramafics and associated with pyrite in altered tholeiitic basalts.
Apollo is hoping that similar geological conditions will bear more fruit just 3.5 km southeast of Black Fox.
In 2007, Apollo bought the property known as Grey Fox -- an area Hemlo Gold Mines drilled in the past, finding gold mineralization less than 200 metres deep.
In 2008, Apollo set its own drills to work, drilling 16 holes for 3,715 metres and returning a highlight intercept of 3.5 metres grading 455 grams gold -- indicating that Grey Fox could well turn into a high-grade resource that could be blended with Black Fox ore.
In all, 14 holes intercepted mineralization with grades higher than 1 gram gold per tonne.
With results that promising, Apollo is eager to explore more, but with funds tied up in mill construction and the need to meet debt repayments, the question of where the exploration dollars would come from was in the air.
Apollo answered that question by doing a $10-million bought deal of flow-through shares at the end of June that saw 13.9 million flow-through shares and 5.6 million common shares issued.
Ironically, the very project that has given Black Fox so much of the operational expertise that helped bring it into production in such an efficient manner, is the source of some market doubt about Apollo.
With its Montana Tunnels zinc, lead and gold project in Jefferson Cty., Mont., on care and maintenance, Apollo had a ready store of experienced operational managers that it brought in to get Black Fox moving in the right direction.
But a previous pit-wall failure at the Montana Tunnels created a perception that Apollo's team had operational problems.
While this perception has hung over the company, Russell says it is a misconception.
"It's rumours that plague you," Russell says. "The fact is we took over an operation that already had pit-wall problems, we used someone else's money to rebuild the walls and then operated successfully for three straight years, with no pit-wall problem. We made money on the project."
Shortly after acquiring Montana Tunnels, Apollo cut a deal whereby the company Elkhorn Tunnels contributed $13 million to be put toward rebuilding the pit in exchange for a 50% stake in the mine.
In 2008, the mine produced 52,700 oz. gold, 661,000 oz. silver, 16.5 million lbs. lead and 47.2 million lbs. zinc.
Apollo mined out the producing L Pit last November and stockpiled ore was processed until the end of April this year, after which the mine was put on care and maintenance.
While a plan to expand the pit could take out more known tonnage in the ground, Russell says the company has no plans to do so in 2009. He did say the company would revisit the issue next year.
"Zinc prices need to be over US$1 (per lb.), lead needs to be over US85¢, and then we might decide to do another push-back on the pit wall," he says.
Apollo's share of the care and maintenance costs amounts to US$60,000 per month, but Russell points out that the company is still getting residual payments from the smelter on concentrate that was shipped out last year and through the first part of this year. That cash will cover care and maintenance costs through 2009, Russell says.
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