Timmins - Montana - Mexico

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Message: Haywood gave AGT a sector outperform rating with a C$1.00 target

Haywood gave AGT a sector outperform rating with a C$1.00 target

posted on Sep 23, 2009 12:42PM

Resourcestockguide.com about Apollo Gold two weeks ago:

Apollo’s stock faced some selling pressure in August as the Company announced that lower than expected July production has triggered a ‘review event’ with the bank. Some analysts have gone as far as to erroneously claim that Apollo was in technical default on its $70 million debt. This is simply untrue.

A review event is a way for the bank to force the borrower to provide information on any substantial negative developments. Upon a review event, the bank could decide to start to play a greater role in management’s decision process or look at rescheduling debt repayments.

Apollo’s mining grades were lower than expected in July which caused production for the month to be 61% of the projected amount. Apollo is not in breach of any debt covenants. What has the market worried is that the Company will be unable to make its scheduled debt payment of $9.3 million this month. We also believe that it will be difficult for Apollo to make that payment, but it can be expected that in the next couple of weeks, the Company will announce a deal with the bank where the payment will be reduced or deferred.

Apollo’s lender holds around 88 million shares and warrants of the stock. All of the warrants are now in the money (if they were to be exercised, Apollo would receive over $20 million in cash and lenders would own around 30% of the Company), so the lender has a direct interest in keeping the shares at a high level. Its interests are closely aligned to the interests of Apollo’s shareholders.

The bigger problem for Apollo’s management is to learn how to control the grade. A number of improvements to mining processes are now being made which should improve Q3 operations substantially. Already, the first half of August looked much better than July. The good news is that the mill is operating very well - between 1,800 and 2,000 tonnes per day. Once grades are better controlled, production should rise to 100,000 to 120,000 ounces annual rate. We think this could happen by Q4 of this year.

40% of Apollo’s production for the next three and a half years is hedged at $876/oz. As production increases, more gold will be sold at the spot price, increasing cash flow even further. In addition, projected capital expenditures are expected to be only $2 million to $4 million over the next 12 months. By the year end, Apollo should have plenty of cash being generated from operations. As grade issues are resolved over the next couple of months, the stock should move higher. We have confidence in Apollo’s management. They are trustworthy people who have been very open and forthcoming to investors and analysts.

We have previously stated that Apollo’s shares can be accumulated in the upper $0.30s. There were plenty of opportunities to buy Apollo between $0.37 and $0.39 over the past two weeks and we did so, on a number of occasions. The stock is very cheap and we have to be patient as the first few months of production are always difficult. We are confident that patience will be richly rewarded.

The Company should provide the latest production update on September 14 for the Denver Gold Forum. This could give a much needed catalyst for the stock.

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