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A Report on Apollo Gold

...the new kid on the block

Bob Moriarty
February 11, 2003

Those who have been coming to this site for the 18 months we have been posting know well my attitude toward the gold market. We are in the early stages of a roaring bull market which will take precious metals shares far beyond the wildest dreams of most investors. This is while we are in the midst of the worst investment climate in 70 years as most people remain hanging on to their tech stocks for dear life.

Two years ago, investing in gold and silver stocks was about as difficult as throwing darts or falling off a bike. It's a rare gold share today which isn't up a lot from the lows. But a slash and burn article on Silverado two weeks ago which promptly removed 50% of the shareholder equity served as a warning we all need to heed. Stocks have advanced so far that they now go down as well as up.

Writing articles about gold stocks is a bit of a burden. There are those who cannot fathom that someone would actually sit down and do an article without being bribed or without an ulterior motive. We do it without being bribed because we realize a giant number of new investors are going to be coming into the metals markets. You can like a stock without being a shill or a tout.

My belief is that markets are far too large to manipulate. I know of websites making a great living convincing people that every tick up or down in gold is the sole product of a conspiracy but it just ain't so. You can't manipulate markets across the grain. I can't make a gold stock go up. All I can do is educate people.

If the stock wants to go up, it will, if it wants to go down, it will. I've seen a lot of cases where a mention would drive the price of a stock up, but in a few days, it comes right back down. Don't chase stocks, no matter what is said about them by me or anyone else. And above all, remember it's your money. You are the sole beneficiary so take some responsibility upon yourself. Before you invest in anything do your due diligence. If a stock doesn't pass your sniff test, pass on the stock. It is a bull market, you have a lot of alternatives.

Steven Saville, one of the world's best commentators on things financial, wrote a great short piece recently which every investor should read titled "Why people fail to make money in bull markets." Making money in gold stocks is a lot more than just knowing which stocks to buy.

Once in awhile I come across a stock with management which plucks my strings. Remember, Management is My Thing. In general, I prefer the more risky exploration companies, they have the most leverage to gold. But you have to buy them right and many will fall over and die long before crossing the finish line. When the bull gets roaring, the tiny exploration companies will rocket the fastest. And when the bull sniffels, they will fall the fastest.

Every gold investor should have multiple stocks. I own about 30. Some are real dogs, don't for a minute think you are reading about one of those guys who does nothing but make money on every stock. Some of these puppies have keeled over and died and gold will have to go into four figures before they come to life. But a stock going to zip doesn't hurt me, I don't have enough in any one stock to get hurt. I've spread the risk around and over the last year and a half, have had dozens of stocks triple and more.

Below is a link to some information about a mutual fund called USERX used by our resident shrink Jeff Kern (SKI) in his frequent reports on 321Gold. If you go to this page, it lists all the stocks held by USERX and the percentage weighting. Almost 10% of the fund is in one stock, GoldCorp. Now if I were buying gold shares, GoldCorp would not be my choice if I wanted only one stock. But if I was buying only 10 stocks, it probably would be suitable as a core position. It's an unhedged company with low cash costs, high cash on hand, high profits and great management. That's why USERX uses it as a core position.

I'm going to suggest an even better stock for a core position, one that you retain through all the ups and downs in the gold market. For the same reasons USERX chose GoldCorp but with a bias in my belief that higher gold prices are here and now. If you want to beat GoldCorp, you need higher leverage. Actually, one major flaw Chairman Rob McEwen of GoldCorp is sorting out is their lack of leverage to an increase in the price of gold.

I'd go with a company called Apollo Gold which most investors have never even heard of. That's because while its mines have been productive for years, essentially it's a brand new company.

Here's the short version. Pegasus Gold went bankrupt in January of 1998 when gold prices crashed. A company called Nevoro Gold Corporation picked up the mining assets of Pegasus. Nevoro was formed by three former Getchell Gold company managers, David Russell, Don Robson and Dick Nanna. The total cost for Nevoro to buy the assets of Pegasus was about $5 million.

Nevoro merged with a dormant public company called International Pursuit Corporation and turned into Apollo Gold. It's a little confusing but basically meaningless. Apollo Gold began trading as a public company in the summer of 2002. It's a new company, it produces gold right now and expects to increase production in the future.

The Florida Canyon and Montana Tunnels mines, in production since 1986 and 1987 respectively, are the two primary producing assets, Apollo Gold also has the Diamond Hill mine in Montana and in the last year Apollo also added another prospective mine in Canada, what was formerly the Glimmer mine.

Apollo expects to produce 125,000 ounces of gold from Florida Canyon this year and is developing additional reserves and resources allowing mining to continue at least through 2008 and gold production through 2010. The Montana Tunnels mine produces an additional 70,000 to 80,000 ounces of gold per year with byproducts of lead, zinc and silver. Since the prices of those metals are at near record lows, any increase in commodity prices should significantly lower the cost of production at Montana Tunnels.

The Glimmer mine, located about 80 km east of Timmins, Ontario, began production in early 1998 but was put in a care and maintenance basis in May of 2001. When they closed the mine, the existing resources totaled about 430,000 ounces of gold. Apollo intends to prove enough additional resources to put the mine back into production within two years.

The Diamond Hill mine near Helena, Montana, went into production in 1996 and produced about 60,000 ounces of gold per year until it was put into care and maintenance in 2001 due to low gold prices. Diamond Hill is fully permitted and production will resume depending on the price of gold and an increase in resources outlined.

And in conclusion of all the boring stuff, Apollo Gold has additional assets in the form of early exploration projects in Nevada called Pirate Gold and Nugget Field.

What Apollo Gold really has, far better than such great companies as GoldCorp, is a high degree of leverage to the price of gold.

One concept very hard for new gold investors to understand is that you want those companies with the highest costs of production if you expect higher prices for gold in the future. For example, Apollo gold is expected to have a total cost of production of about $248 per ounce of gold this year. Let's round that off to $250 an ounce for simplicity sake.

If the price of gold is at $250 an ounce, as it was two years ago, and your total costs are $250 an ounce, you can't produce gold at a profit. So you put your projects into care and maintenance. And that's just what happened with several of the projects owned by Apollo. So the stock has some value, of course the projects still are worth something even if they are not in production.

When the price of gold goes up, from $250 an ounce to $300 an ounce, the company with the high degree of leverage goes from losing money to making money. A lot of money in this case. Should gold go up again by $50, to $350, the profit doubles again.

In the most simple of terms, if you believe the price of gold is going higher, you want gold companies with leverage. Apollo has leverage to the price of gold. And though you would have to look quite closely at the numbers, Apollo produces so much silver, lead and zinc that as those metals go up from record low prices, their overall cost of production of gold will automatically come down. (When producing gold, the profit from the by-products, eg: silver, is applied to the cost of producing the gold).

Apollo has gotten little coverage from other mining analysts, primarily because it's a new company. As time passes, I expect their visibility to improve considerably. In comparison to its peers, Apollo looks especially attractive. It has yet to sink in with gold investors that a sustained price of gold above $350 is going to make the earnings of the intermediate gold producers soar.

Apollo Gold should produce over 200,000 ounces of gold this year. With a stock price on 2/10/03 of $2.34 (All figures are in US dollars), Apollo has a market cap of about $90 million. Randgold (RANGY) expects to produce 200,000 ounces yet has a market cap of $180 million. Agnico-Eagle expects to produce 285,000 ounces and has a market cap of $971 million. Glamis Gold has a market cap of $1.3 billion and will produce 250,000 ounces this year.

Clearly if you are willing to accept the risk that owning a leveraged gold share brings, Apollo offers high potential for consistent returns and can reasonable be expected to outperform other similar gold stocks in an advancing gold market but even in a declining gold market, the fact that it is selling for such a discount to its peers offers safety.

Apollo Gold [website] trades on the TSX as APG.T and on the OTCBB as APGUF. There are about 38,000,000 shares outstanding. They expect to produce 200,000 ounces this year increasing to 300,000 in 2005.

Bob Moriarty
February 11, 2003

We own under $5,000 of the stock, are not paid for writing articles about gold stocks, and Apollo is an advertiser at 321gold. We are not investment advisers and do not wish to become investment advisers. Before making any investment, the investor should do his own due diligence.

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