Apollo Pays Hefty Price For Black Fox Funds

Apollo Gold (APG-T, AGT-X) now has the money it needs to push ahead with the construction of its Black Fox gold mine near Timmins, Ont., but at what cost?

The Denver, Colo.-based company closed a deal with Macquarie Bank and RMB Australia Holdings that secures US$70 million, but to get the funds Apollo had to agree to terms that would have been considered obscene before the credit crisis struck.

Chief among the concerns investors will have with the deal is the amount of dilution it entails.

Combined with a bridge loan landed in December with the same two lenders, Apollo has issued 77.4 million warrants to the two banks — the first set was for 42.6 million shares at a strike price of 22.1¢ and the most recent is for 34.8 million shares with a strike price of 25.2¢.

If Macquarie exercises all of its warrants, it would own 50.5 million shares or 18.54% of Apollo, and if RMB exercises all its warrants, it would have 38.6 million shares or 14.88% of the company.

David Whetham, a resource portfolio manager with Toronto-based Scotia Cassel, says in a tight credit market, small juniors have little choice but to accept tougher terms. And Apollo, he says, had a further restriction.

“It comes back to being in the process of building a mine,” Whetham says. “If this deal was done before construction began, the company would have had more room to negotiate. But when you are well into building a mine, you have bills that need to be paid today.”

Whetham said that other financing options such as issuing equity or selling off royalties would have also entailed severe dilution.

Beyond issuing a hefty block of warrants, Apollo will also have to pay interest on the $70 million to the tune of LIBOR plus 7% with payments starting at the end of September.

Six-month LIBOR is currently at 1.77%. Apollo has agreed to have the principal paid off by March 31, 2013 — putting considerable pressure on it to generate quick and steady cash flows.

With gold prices at their current high levels, it would seem that so long as the mine produces on schedule and on target there would be little to worry about. But there is a catch here, too.

Most lending institutions require hedging gold sales before they part with their dollars, and Macquarie and RMB are no exception.

The lenders required hedging on both gold sales and Canadian dollar operating costs.

Apollo has agreed to sell 250,420 oz. gold over the four-year term of the loan at an average price of US$876.063 per oz.

The foreign-exchange hedge program will be for the Canadian dollar equivalent of US$60 million over the same four-year period.

Additionally, the deal sees Apollo saddled with a US$3.5-million arrangement fee charge that works out to 5% of the total amount it is borrowing.

And while that covers the conditions of the US$70-million loan, on the dilution side of things, the story is far from over.

More dilution comes by way of a previous deal with Haywood Securities that requires Apollo to issue 2.2 million shares and 2.6 million warrants with a strike price of 25.6¢.

And if that weren’t enough, on Feb. 19, the company announced it had to renegotiate its convertible debt with its largest bondholder.

RAB Special Situations Fund, which holds $4.3 million of debt that was due this month, agreed to give Apollo another year to pay back the principal and accrued interest.

But for its trouble, Apollo had to issue RAB 2 million shares, extend the expiration date of the warrants associated with the bonds to March 2010, and most notably, reduce the strike price on the warrants to 25¢ from 50¢.

With Apollo shares recently trading at 41¢, that puts those warrants in the money.

The debt was issued as a private placement back in February 2007 and raised Apollo US$8.6 million.

Apollo agreed to pay interest of 12% per year for the first year and 18% for the second year. Principal repayment and accrued interest were to be paid a year from the date of issuance. The company says it is paying the principal and interest to its other bondholders.

With all the financial commotion, it comes as little surprise that Apollo’s board of directors concluded the company was in “serious financial difficulty” and applied to the TSX for a financial hardship exemption so that it wouldn’t need shareholder approval for its recent debt-financing deal.

Because the deals with Macquarie, RMB and Haywood result in the issuance of shares in excess of 25% its outstanding shares, shareholder approval would, under normal circumstances be required.

But while freeing the company from shareholder approval, declaring financial hardship triggered a TSX review to see if the company meets its continued listing requirements. The TSX announced the review on Feb. 17 and said the company has 210 days to regain compliance.

With the closing of the $70-million financing, Apollo says it will be able to meet the TSX compliance requirements.

Getting back into compliance will be the first step, but what will truly signal the company’s rejuvenation is the opening of the Black Fox mine.

And that, understandably, is where the company’s focus is.

“I now look forward to the commencement of mining in the Black Fox open pit in March and the commissioning of the mill in April 2009.” David Russell, president and chief executive of Apollo said in a statement.

Black Fox has proven and probable reserves of 4.4 million tonnes grading 5.2 grams gold per tonne for 730,000 oz. gold in an outlined open pit, and another 2.1 million tonnes grading 8.8 grams gold for 600,000 oz. that is to be mined via underground methods.

In April last year, Apollo released a feasibility study on the project. The report calculated a net present value of US$302 million using a gold price of US$750 an oz., an internal rate of return of 62% and a payback period of two years.

Gold production is projected at over 150,000 oz. annually over the nine-year life of the project, with average total cash costs for first three years of production estimated at US$326 per oz.

The company closed a deal last July with St Andrew Goldfields (SAS-T) to buy a mill, related infrastructure, a laboratory and tailings facilities that lie near the property for $20 million.

Apollo also put some money in its treasury by way of a private placement in December. It was able to raise $900,000 by issuing 3 million flow-through shares at 30¢ apiece and said the money would be used for exploration at Black Fox.

At presstime, the company had not returned multiple calls from The Northern Miner.