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Dave Russell- Apollo Gold (APG.TO, AGT) Interview Transcript

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Big Picture Speculator Podcast Interview with Dave Russell of Apollo Gold (APG.TO, AGT)

Jim:  Today is Monday,
December 17, 2007 and today we are speaking with the President of
Apollo Gold, Mr. Dave Russell, who has been kind enough to speak with
us today.  Dave, how are things where you are?


Dave:  Jim, I think the
picture looks pretty good for Apollo Gold and the gold mining
business and I appreciate you talking with me today about the


Jim:  Well, you know,
the precious metals have certainly turned the corner and it is a good
time to be looking at gold companies.  I guess one question that
people would have looking at your share price going back, say, five
years is, “What caused the price of your stock to drop down as
low as 25 cents and it has since bounced back?  What specific things
happened along the way there?”


Dave:  What happened is
one of the mines specifically Montana Tunnels which is near Helena,
Montana.  It is a very large open pit operation.  It operates at
about 60,000 tons of ore and waste movement on a daily basis.  The
ore through the mill was about 15,000 tons per day and we had a wall
collapse, a failure.  It was a fault failure that slips slowly down
and covered up the ore body.  Now, what we have to do in the last few
years is we have to come up with a plan and a capital to re-strip the
pit down and basically re-discover the ore body and the market, say,
ensuring the production which we were; they do not like to see a mine
come out of production due to failure or problems and that was a wall
failure but it was also a geotechnical engineering challenge to
actually put the mine back into production.  So, it took us several
years to do this and what I did is I said, “Look, we put a fair
amount of money into this mine.  I need a joint venture partner.”
So, in 2005, I started talking to a group called the Calim Private Equity Investments of Chicago.  They have a small little
property in Montana themselves that they would like to use in
conjunction with us.  We have a small mill right along beside our big
mill so we did an arrangement where they have an option on the mill
and then also brought in 15 million in capital to become our 50/50
joint venture partner on the mine.  So, during 2006, I re-strip our
west wall of our pit.  We put a new ramp system in and this was all
under the design of Knight Piesold,

more of an engineering construction group doing the engineering
force, a third party.  The plan worked very well.  By March of 2007,
we have the pit completely stripped, the new ramp system in, and we
have the mine back into production.  In doing so, we brought the mine
back online, not only in March but the second quarter of 2007, this
would be April, May, and June, we have projected that we break-even.
Well, we did better than that.  We actually made a very large cash
flow for the mine as well as a bound line profit for the company due
to this mine.  Now, the trick on this mine is its gold but it is also
silver, lead, and zinc.  The cash-cost started out at below 100
dollars per ounce of gold produced and how we arrived at that is it
is the revenues of the silver, the lead, and the zinc credit against
the cash cost of the gold.  We have produced a fair amount of silver,
lead, and zinc every month or every quarter at this mine.  Now, what
we make is a free gold product there and then we make a
lead-silver-gold and a zinc-silver-gold concentrate and that we
shipped that to Columbia.  So, really, turning your product into cash
is very quick for this mine and that is one of the beauties in the
mine that when the price of metals cooperate like gold, silver, lead,
and zinc, all four products of this mine, you are bound to make


Jim:  Though it is a
lot harder to start one up than it is to keep one running so you can
say it that way.


Dave:  Yes, so I guess
to sum it up is the market was not happy for several years with this
mine and they have penalized us.  You could say, “They put us
in a penalty box.”  And now that we have shown two quarters of
profitability at the mine and the fourth quarter looks like it is
shaping up the same, what we are hoping is the market is finally
saying so to speak the light at the end of the tunnel that this mine
is producing.  It is a cash flow generator.  It is helping keep the
company back on the bottom line and that leads us into other projects
but I cannot believe the market likes those projects, Black Fox
Project near Timmins, Ontario, Canada, the Huizopa Project up in the
Sierra Madres of Mexico.  I think they are looking forward to those
projects but they really wanted us to prove that we were an operator
and that this mine can function so our share price, I believe, hit
the bottom in the 20-cent range and now it has been pretty stable at
about 50 to 51 cents in the market.  What we are hoping for is the
market will realize as we bring these other projects up in front of
the market that their valuation justifies what double or triple in
the share price.


Jim:  Oh, very nice.
What can you tell us about the Black Fox Project?


Dave:  The Black Fox
Project, we bought in 2002 and what we felt that it was going to be a
great little underground mine but what we saw there back in 2002 was
that there was a potential to go back to rule the top of the ore body
and say, “Okay, how big can an open pit be here?”  You
know, right now, what we did is we drove it off.  We put initially
120,000 meters of drilling which is about 135 miles if we talk in
feet mileage and what we found was we did have an open pit and it
arcaded a prefeasiblity study for us that was completed in July and
then announced in August and in the prefeasibilty study, we have
million ounces of gold between the reserve and the small underground
reserve at that point in time.  We also had 1.2 million ounces of
resource and the resource was internal to the actual ore body.  So
what they asked us to do for the bankable feasibility is to upgrade
it by internal drilling.  You know, after you drill 135 miles of
core, they asked us to put it for 20 meters of drilling.


Jim:  Just to make


Dave:  Just to make
sure but actually it is the conversion process of density of drilling
to move from the inferred and indicated categories to actually get
the mood into what can be called reserve and actually run through the
model.  But, one of the interesting things is on the one million
ounces depending on the gold price you want to use like NPV, we will
say at a zero discount rate which usually does what you look at most
of the gold project.  Let us say at 790 or 800 dollar gold today, the
economic show that the valuation is 420 million dollars and if you
are bull on gold
, it is going to 1000.  It would be about 600
million.  So, it speaks to the robust economics of this project.  Now
that is just on the 1 million ounces.  When they run the economics,
they did not use any resources until we converted them to reserves so
what we feel in the bankable feasibility study that it would be out
March of 2008 toward the end of March that the robust nature of these
economics are going to improve substantially.  You know the actual
cash cost that they have come up with per ounce of gold is about 250
dollars per ounce that if you have the capital and you are probably
looking at 60 to 70 dollars.  So, we may be in the 320 to 325 range
with capital and operating cost.  So your margin is going to be
pretty substantial.  You are going to be 475 to 500 dollar range of
margin on this project.  So, I will be one of the better ones that
will come along in Canada that this is far developed.  So,
essentially, we spent the last 3-1/2 to 4 years drilling, developing,
putting property package together, doing prefeasibility work.  A lot
of underground development work has been done.  We have actually got
the underground developed down on the ramp system to the 235 meter
level or about 700 feet below the surface.  Last week, we announced
that some of the drill date of internal drilling will be also
announced that we put some drill holes down roughly about 900 meters.
We will say about 2700 to 2800 vertical feet down and what this was
to do is to check.  Is this project in the future going to go to
depth? And the answer was yes.  We hit the structure at above the 860
to 900 meter level and the gold grades were within range anywhere
from say a couple of grams out to about 34 grams per tonne.  So, it
has got some pretty good robust economics to be looking forward to in
the future and the ore reserve has we have got to drill to define
right now is roughly down to about 350 meter level.  So, we have got
about 550 meters roughly to look at between where we have drilled and
where the actual resource reserve base is sitting right now.


Jim:  Okay.  So, just
to back up a little bit here, your market cap you know as of today is
roughly in Canadian dollars 80 million?


Dave:  Yeah, roughly 78
to 80 million, yeah.


Jim:  What is net
present value of Black Fox?


Dave:  The net present
value at 800 dollar gold is 420 million.


Jim:  Well, people
could see some upside there.


Dave:  That definitely
includes capital but if you look at Montana Tunnels, say the NPV
value is about we will say 250 million of which 125 million would be
to our credit.  And then if you want to discount that and maybe you
could say that it is worth about 80 million directly to our share as
being the operator in our 50%.


Jim:  So, your Montana
Tunnels project pretty much justifies your market cap right now.


Dave:  Right and I
think that is just what I was going to say as the market is paying us
about 50 cents a share and that is about what the Montana Tunnels
project is worth.  But now, as we bring out a roll of bankable
feasibility, I think the market should say, “Okay, well those
guys now had produced; in all, they gone through three quarters in
2007.  They are in the lead in the first quarter of 2008.  The mine
is running well supplying cash flow.  Now, let us give them credit
for what they have got in Black Fox.”  You know I do not expect
420-million value right away but maybe a dollar a share is even,
discount even the gold price to 525 dollars an ounce, you will come
up with about 155 million in NPV value.  So, that really gives you
the sensitivity that you are still going to have real good value at
the Black Fox Project depending on what gold price you are going to
use and the valuation after share basis should be anywhere from say a
dollar to 3 dollars depending on where you want to look say within
the NPV value of this project.


Jim:  And then you also
have a third project in Mexico, right?


Dave:  Right, we have
been working.  We are always a type of group that takes assets.  We
develop the reserve, resource base to reserve base and we are an
operator-developer going from Montana Tunnels to Black Fox but we are
also pretty good at exploring what we call green fields.  And the
Huizopa is what I call a green field and where the location is, it is
in the Sierra Madres.  It is right on the border between Sonora and
Chihuahua, most of the land packages in Chihuahua.  The major
projects are within the district on our west side of the Mulatos
where it is Alamos Gold there in production.  And then on our east
side is Dolores which is MineFinders Project that is in construction
right now.  Now within that, our properties abut either side west to
east to both projects but we have a land package of 170 square
kilometers in that area.  Say, 3-1/2 years ago, we started at 22
square kilometers.  We kept moving out as we state concessions.  So,
we ended up with a large land package and the reason we put such a
large one together is the 22 square kilometer area package was two
concessions.  We went in and we did the sampling.  We did the
geophysics.  And even though we call it green fields, there are upper
ground workings. There are shafts.  There is a lot of things that you
can actually sample and say, okay, this is a gold-silver district but
it is probably a lot bigger so as we started doing the geophysics
mapping and say these its structures, there are very big shears that
run anywhere from 100 to 300 feet wide and run for anywhere from 2 to
4 kilometers in length.  So, if you are following these shears, we
are picking up bigger land packages.  It does not mean that
everything is going to run gold and silver but within certain areas
of the sampling and what we have seen of old workings from we will
say dating back from the 1890s through maybe about 1920s, you know
you can sample these areas and then you will get 20 to 40 gram of
gold and you will get anywhere from 700 to 1200 gram of silver.  You
know those are pretty good showings.


Jim:  Yeah, you can
have a lot of confidence if you can key off of old workings.  How
many roughly do you think there are on the property?


Dave:  On the showings,
we found six different specific mining areas that are completely
separate from each other that all have very good grades and again
everything dates back to the 1890s to 1930s say and what it tells us
is that it is the right area to be and obviously the geophysics
actually mirrors a lot of these.  The old timers knew where the
deposits were.  They were just after the high grade not the lower
grade, disseminating deposits and that is what we were really after,
both the high grade and the disseminated deposits.  So, that was good
confirmation that okay you do your mapping sampling and geophysics
and then you follow it up with further exploration and drilling and
that is where we are right now.  We have done the agreements with the
Ejidos, the ranchers in the areas, and we are ready to drill.  About
a month ago, we announced that we have contracted Falcon Drilling out
of British Columbia to bring in a rig that it is not a big core rig.
It is one you can fly in pieces.  So we are going to helicopter that
in up into a couple of these target areas starting the first or
second week of January so by the third week of January, we should be
setting up on at least one if not two of these target areas and start
drilling them.  One of our keys, Jim, is that the investor looks at
the Montana Tunnels mine is doing well.  You are bringing Black Fox
on and then we are going to tell everybody that once these are in
full production, we are going to be producing maybe up towards 70 to
80 million in cash flow a year off the Black Fox.  What are you going
to do with the cash and what we are going to do with it is we are
going to actually take some of it to Huizopa and advance that
project.  So, we have always got something new for the investor.


Jim:  I guess you
probably know investors have pretty short attention span sometimes so
it is nice that you can…


Dave:  They are always
looking for the newest project, the Holy Grail, and that is what they
are going to invest in so we are going find it for them.


Jim:  That is a very
solid approach.  I guess in the short term, what do you think is the
next piece of news or the next catalyst that you are expecting that
would kind of get people’s attention?


Dave:  One thing is we
have a convertible that we were paying off this week and you are
going to see a press release later on in the week that says that we
just paid off an 8.7 million dollar convertibles so that would not
convert to stocks so that will be very pleasant from the shareholders
that it was not converted and they are not getting deluded.  Okay,
the next one is that all the infield drilling we have done with Black
Fox is we owe the market a lot of the data.  We are done with the
drilling program; the blabs were a bit backed up.  So, probably the
first, second, or third week, you are going to see a lot of data
coming out of Black Fox on the internal drilling and we put one short
press release out on the data that we had last week but you will see
a whole lot more between say the first and the third week of January.


Jim:  You would not
expect big surprises in that kind of drilling, right?


Dave:  Oh, I think that
would be, you know, from what I have seen so far, it is very
systematic drilling.  It is confirming everything that we thought on
the infield part for the resources to reserves.  The next big target
areas will be for the market to look at will be mid February sometime
may be the third week of February you will see a release where we
have actually defined resource to reserve given we had a million
ounces in reserve of 1.2 million resource and what we are expecting
probably another 300,000 maybe up toward half a million ounces.  That
would be on the high side that will be added to the picture.  So, the
SRK consultants out of Denver were drawn out here and who are in
charge of the bankable feasibility.  They will actually be putting
out the press release along with this.  It says we have now converted
this to reserves and then we have got 45 days so that will be ready
at the end of March.  The worst case would be the first week of April
I think as far as that 45 day period.  It just depends on when you
actually did the release on the reserve and then the bankable
feasibility comes out and the new 43 one-on-one on Black Fox.


Jim:  Wow.  Okay, so
you got lots coming down the pipe.  You have got a producing mine.
You have got one that is heading into a feasibility, prefeasibility,
and exploration projects in Mexico so pretty solid trio of things for
investors to look at especially when you are producing mine pretty
much justifies your value right now.


Dave:  You know I think
the valuation… Every company says they are undervalued but we
have spent the last two years redeveloping the company, getting it
set for the market, and I think we can safely say right now that we
are undervalued with probably a factor of two to three fairly easily.
You know as far as an investment for the market but that is a safe
investment where the company is making money.  I have got the next
project is coming online and they have got something for the
shareholder into the future to track and follow.


Jim:  That is very
good.  We have been speaking with Dave Russell, the president of
Apollo Gold.  Thank you very much for your time today, Dave.


Dave:  Well, thank you
very much for having me on your talk here, Jim.