Apollo and Linear to merge to form mid-tier gold miner

Vancouver – Apollo Gold (APG-T, AGT-X) and Linear Gold (LRR-T) are set to merge into a company with an active gold mine in Ontario, an advanced gold project in Saskatchewan, and a solid cash balance.

In a binding letter of intent Apollo agreed to acquire all outstanding Linear shares for 5.474 Apollo shares a piece, which represent a 20% premium to Linear’s share price based on both companies’ 20-day volume-weighted average share prices. The implied price per share is $2.30, valuing Linear at $102 million based on outstanding shares.

The merger is still subject to approval from the shareholders of both companies.

Following the merger Apollo will be owned 52.2% by current Apollo shareholders and 47.8% by current Linear shareholders, or 57.1% to 42.9% for Apollo on a fully diluted basis. The boards of directors of both companies have approved the deal, while both management and directors of both companies have entered into support agreements representing approximately 3.7 Apollo shares and 3.4 million Linear shares.

The board of the new company is to consist of four existing Apollo directors, two Linear directors, and one new director to be mutually agreed upon. The name of the company will also be changed following the deal.

Wade K. Dawe, president and CEO of Linear said in a statement “This merger allows Linear shareholders to rapidly transition from a development and exploration company to an established gold producer while continuing to participate in the exploration and development upside of the combined assets of the merged company.”

In a separate deal that is not contingent on the merger, Linear will tap into its $44.6-million bank account to purchase 62.5 million Apollo common shares in a private placement at a price of 40¢ per share for gross proceeds of $25 million. It is funding that Apollo needs to pay down a looming US$70-million debt facility incurred in developing its new mine.

Now, because of the merger, Apollo’s creditors have agreed to not call in repayment of any of the amount owed on the Black Fox mine prior to Sept. 30, 2010. Apollo plans to put US$10 million of the proceeds from the Linear private placement towards repayment of the debt and then pay a further US$10 million once the merger is complete. Using cash flow from the mine the company plans to reduce the principal to US$35 million by the end of 2010.

Linear brings the late-stage Goldfields project in the northwest corner of Saskatchewan to the new company’s portfolio, as well as exploration properties in Mexico and the Dominican Republic.

Linear acquired the Goldfields project just last year, spending $5 million to pick up two defined deposits. The Box deposit at Goldfields contains 14.9 million tonnes of proven and probable reserves grading 1.43 grams gold per tonne, for 685,900 oz. A feasibility study on the site found a 5,000-tonne-per-day, open-pit operation could produce 70,000 oz. gold annually. The mine would carry an average strip ratio of 3.4 to 1 and the mill is expected to recover 93% of the ore’s contained gold. Linear planned to have the mine operational by 2013. The Box mine carries a net present value of US$105.6 million, using a 5% discount rate and a gold price of SU$850 per oz., and is expected to generate a 42.2% internal rate of return.

Two kilometres from the Box deposit lies the Athona deposit, which Linear plans to mine after the Box deposit. A pre-feasibility study finished in 2009 estimated Athona could extend the mine life at Goldfields from 8.4 years to 14.3 years, by simply feeding the same mill.

Apollo Gold, meanwhile, offers the producing Black Fox mine in northern Ontario, as well as exploration properties. The company acquired the old mine in 2002 and set itself on the path to redevelopment with a feasibility study in 2008. The project hosts open-pittable reserves totaling 4.35 million proven and probable tonnes grading 5.2 grams gold and underground reserves of 2.1 million tonnes grading 8.8 grams gold, for a total of 1.33 million oz. gold.

Apollo started open-pit mining at Black Fox one year ago and expects to produce approximately 100,000 oz. of gold this year at an estimated cost of US$500 to US$550 per oz. The company deferred the decision to develop an underground operation at the site until a later date.

Apollo is also currently exploring its Grey Fox and Pike River properties, which are adjacent to the Black Fox mine, and an early stage gold-silver exploration project in Chihuahua, Mexico.

Apollo’s share price fell 4¢ on the news to close at 38¢. The company’s 52-week share price range is between 31¢ and 62¢; the company has 264.5 million shares outstanding.

Linear’s share price was down 10¢ on the day to close at $1.90. The company’s 52-week share price range is between 95¢ and $2.77; it has 44 million shares outstanding.