Apollo gets the money, but at what price?

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 Ontario, but at what cost?

The company closed a deal with Macquarie Bank and RMB Australia Holdings that secures US$70 million for Denver-based Apollo, but to get the funds the company 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 from December of last year agreed to with 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 the company and if RMB exercises all of the warrants it hold 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 being a small junior in a tight credit market leaves companies with 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 all the principle 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 over. 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. of gold over the 4 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 4 year period.

Additionally the deal sees Apollo saddled with a US$3.5 million arrangement fee charge which 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 prior deal with Haywood which 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 re-negotiate its convertible debt with its largest bond holder.

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

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

With Apollo shares currently trading at 41¢, that puts those warrants in the money.
The debt was issued as a private placement back in Feb. of 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. Principle re-payment and accrued interest were to be paid a year from the date of issuance. The company says it is paying the principle 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 is where, understandably, 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 prepared statement.

Black Fox has proven and probable reserves of 4.4 million tonnes grading 5.2 grams gold for 730,00 oz. of 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.

The company closed a deal in July of last year with St Andrew Goldfields (SAS-T, SASXF-O) to acquire it’s 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 of last year. It was able to raise $900,000 by issuing 3 million flow-throughs at 30¢ per share and said the money would be used for exploration at Black Fox.

At press time, the company had not returned calls from The Northern Miner.