Apollo Gold: Going to the Moon

Jan.13.10 | About: Apollo Gold (AGT)

Searching for value among precious metal miners isn't exactly the hardest thing to do, but this has been changing as money managers, mutual funds and retail investors begin to see value in this emerging industry. The fiat money house of cards is beginning to crumble, encouraging investors to return back to hard money.

This isn't just in the U.S, but worldwide. Not only are central banks in a race to debase their currency, but many of them hold trillions in U.S Treasuries. This has not only led to gold purchases by central banks around the world but to extreme concern by many government regimes. China for example, is encouraging their citizens to purchase silver and have made it available for purchase at commercial banks.

The implications of such actions are far reaching. I believe this is a huge inflection point before the next leg(s) up in precious metals. The US dollar index is currently at 77.09 or nearly 6.5% higher than the 2008 lows. I doubt anyone can put up a reasonable argument that the dollar won't recede back to the old lows, let alone making new lows until this inflationary episode is over. Granted there will be dollar strength from time to time, but the irrefutable fact is that the dollar will trend lower

I believe that buying futures is far and away the best way to play commodities for the next 5-8 years, but many individuals don't have a keen enough understanding and choose to avoid this instrument altogether. I hold this to be true except in the cace of finding equities which are grossly undervalued (as was the case from November 2008 - February 2008).

Although this is my philosophy given current conditions, I still believe that owning physical metals and equities in addition to futures is the way to go. That being said, I think the following company will be a multi-bagger. Apollo Gold (AGT), like many before it, sports an insanely low valuation because of debt concerns. Companies such as Coeur d'Alene (NYSE:CDR), Silver Wheaton (NYSE:SLW) and Teck Cominco (NYSE:TCK) have all had the same issue raised two or so years ago. Additionally, miners in general have had an easy time accessing credit facilities during the worst financial crisis in U.S history.

So getting to my point: Apollo Gold has enormous upside potential and has one of the highest potentials for capital appreciation relative to risk involved. The following is a brief description of the company, the issues currently overhanging the company and its stock price as well as the future of the company


  • Their flagship operation is Black Fox, which is currently in the ramp up stage, producing approx 62,000/oz in 2009 to 140-150k in 2012.
  • Additional exploration programs (Grey Fox and Pike River) provide tremendous upside potential, which has becoming increasingly more likely as drill results are released.
  • They own two other assets, Montana Tunnels (50% Interest) and Huizopa (20% interest), which like all of Apollo's assets, provide more upside potential
  • Declining cash costs to approx $450 in 2010 and $400 in 2011.


  • Apollo did make one enormous mistake which they will be paying for over the next 2-3 years unless their gold hedges are eliminated. They hedged approx 250k oz at $876/oz (from 2009-2013), with just under 200k remaining (at the end of Q3 ).Due to their schedule of debt repayments, Apollo prudently opened a hedge book to lock in some revenue.
  • Due to slower than expected ramp up, Apollo was unable to pay back the initial debt-repayment of 70m received from Maquarie Bank. This, however, has recently been negotiated such that it will be due by the end of February. This won't be a problem due to the higher gold prices realized over the last four months.
  • As soon as the debt problem is out of the way completely, Apollo could incrementally go long gold futures, especially during a temporary correction, in order to make up for their current hedges.


  • Though Apollo has 125% production growth on the Black Fox Project (2009-2012), the Montana Tunnels, of which a 50% interest was sold to reduce capital requirements for the planned expansion project, should put the mine back online (adding between 7-9 years of additional production) of approx 70-80k (GEO) per year, or 35-40k attributable to Apollo).
  • Intermediate term growth starting in (2012-2013) should be explosive with one or more of either the Grey Fox, Huizopa or Pike River coming online. My personal forecast for peak production is 225k oz by 2015, which is on the conservative side.


  • With Black Fox up an running, near record high gold prices and very encouraging drill results at two of their exploration properties, Apollo has everything going for it. A few more months of triple digit gold prices should eliminate any debt concerns and act as a catalyst to the stock price. With Apollo currently trading at only 42% of NAV, enormous growth in earnings and cash flow starting to take place, enormous upside potential with regards to resource/reserve base and attributable production, Apollo is a perfect takeover target. Apollo's projects in development more than make up for the 200k/oz hedged. Assuming a long term gold price of $1,300-1700, a 17% discount rate, Apollo is worth somewhere between $2.10-3.20/share.

*Additional analysis in the upcoming newsletter

Disclosure: Author holds a long position in AGT