Apollo Gold, one of my holdings, posted their quarterly results yesterday. I look at Apollo Gold as a value investment, specifically as a speculative turn-around play. The story is as follows:
- Apollo Gold was a reasonably successful mining company with a gold/zinc mine in Montana which became depleted.
- Apollo Gold has a nice property (Black Fox) in Canada with good, but not fantastic gold grades and they have opened a mine which starts as an open pit mine which is to be supplemented with underground production starting next year. By the way, they have excellent exploration upside (with some drill results that are comparable to Black Fox) immediately adjacent to Black Fox.
- Apollo Gold had to get financing for the new mine around this time last year at the heart of the credit lockup. The stock price fell to around 1/5th its current value. They managed to get financing without too much dilution, but with pretty hefty interest rate payments (around 8% interest) and hedging 1/4 of the next four year's production at $875 gold. CAD$ / USD$ currency risk is also hedged.
So, the key part about the turn-around play is, Apollo Gold must get Black Fox working well enough to pay off that debt or bad things happen (initially in the form of hefty dilution) to stockholders. The thing to watch, in my view, is the amount of gold being produced, the cost of production, the cost of gold (of course) and the balance sheet's current assets.
During Q3, there was a production hiccup, where the grade of ore run thru the mill did not match expectations. The reason why I'm an Apollo Gold investor is because I was very impressed by the way management handled the hiccup. They were very straight-forward about what happened, provided a tonne of technical detail in a way that showed that they loved mining and know it backwards and forwards and that they knew what the problem was and how to fix it. Quite a contrast to many other companies. New Guinea Gold (NGG.V) comes to mind as the exact opposite.
So, that brings us to the 10Q. I'm not a finance / accounting guy. I'm a software engineer who is trying hard to spin up on his investing skills. I realize that a major step forward in increasing my stock-picking skills is to be better able to interpret financial filings. Here's what I see.
Total Current Assets: 22.6M$, Total Current Liabilities: 53.2M$... Yikes, that's why this is a speculative stock. But of the current liabilities, 8.6M$ is derivatives (gold hedges). That's not a problem. The big hitter is "Current portion of debt (25.8M$)". Leaving those aside, Apollo Gold is in reasonably good shape.
Digging into "Currrent portion of debt (25.8M$)" in note 8a, we see that the project facility (the debt) has to make monthly interest payments and "repayment of the principal amount in unqeual quarterly payments". Apollo Gold missed the first principal repayment (yes, this is a speculative investment). The banks have agreed to defer payments to allow the banks to "complete an ongoing technical review of the Black Fox project with the object of rescheduling quarterly repayment installments". The entire debt is to be repaid by Mar 2013.
So, as far as the balance sheet is concerned, I conclude that the banks are happy getting the Libor plus 7% payments on the debt (with decent principal repayment) and things will get the financing worked out provided the mine produces relatively ok.
The total debt is 67.65 and interest payments at 8% / year is 1.35M$/quarter.
Income Statement, Etc.:
Black fox produced 19,848 oz in Q3 and is guiding for 20K oz in Q4. With this in mind, let's look at the income statement.
Revenue was 19.1M$ or 962$/oz. That sounds right. Summing Direct operating costs, General and administrative expenses, we get a "cash-cost, including G&A" of $630/oz.
This means that going forward into Q4 with gold averaging, say $1050/oz and 1/4 hedged at $875, Apollo Gold should have an average sales price of gold of $1,006 /oz.
So, at 20K oz for Q4 with the above sales price and the same "cash cost", Apollo Gold should net 7.5M$ operating cash flow. This would allow them to easily make the 1.35M$ interest payment on the debt as well as make a substantial principal payment. Production is expected to increase by 11% in Q1 2010 (or more with increasing gold grade). Equal quarterly principal payments to complete principal paydown in Mar 2013 (14 payments) would be 4.83M$/quarter. Together with interest, debt repayment (with equal payments) for Q4 is = 6.19M$, leaving = 1.34M$ for exploration, misc and contingencies.
Factoring in a falling cash-cost (as the mine is optimized) and increased production (with mill thruput increases and with higher-grade underground ore), Apollo Gold should be able to have greater margin against debt repayment going forward.
CONCLUSION: Apollo Gold should be able to make its rescheduled debt payments, but there is little margin for error for the next couple of quarters. Apollo Gold is a speculative investment that depends on management competence. It should be highly leveraged to the price of gold and to meeting (or missing) management guidance. I don't think that exploration success is that significant over the next two or three quarters.
I'm not really that expert at this kind of analysis, but I'm trying to improve. Tell me what I'm missing. There could be out and out mistakes. Do your own due-diligence.