UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-31593
APOLLO GOLD CORPORATION
(Exact name of Registrant as Specified in Its Charter)
YUKON TERRITORY NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
SUITE 300, 204 BLACK STREET
WHITEHORSE, YUKON TERRITORY, CANADA Y1A 2M9
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (720) 886-9656
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes No X
Indicate by check mark whether the registrant is an accelerated filer ( as
defined in Rule 12-b2 of the Exchange Act). Yes No X
At July 30, 2003, there were 48,536,376 shares of Apollo Gold Corporation
common stock outstanding.
APOLLO GOLD CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APOLLO GOLD CORPORATION
-------------------------
CONSOLIDATED BALANCE SHEET (UNAUDITED) -- as of June 30, 2003 2
CONOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three and Six Month Periods Ended June 30, 2003 and 2002 3
CONDENSED STATEMENT OF DEFICIT (UNAUDITED)
For the Three and Six Month Periods Ended June 30, 2003 and 2002 4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2003 and 2002. 5
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT RISK 51
ITEM 4. CONTROLS AND PROCEDURES 51
ii
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 52
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 52
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 52
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 52
ITEM 5. OTHER INFORMATION 53
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 53
SIGNATURES
CERTIFICATION
iii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared by Apollo Gold Corporation pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). In this document unless the context
otherwise requires, "we", "our", "us", the "Company" or "Apollo" mean Apollo
Gold Corporation and its subsidiaries. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations.
These consolidated financial statements should be read in conjunction with
the financial statements, accompanying notes and other relevant information
included in the Company's Form 10 which was declared effective with the
Securities and Exchange Commission on August 13, 2003.
1
APOLLO GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS)
JUNE 30, December 31,
2003 2002
---------- --------------
ASSETS (UNAUDITED) (Audited)
CURRENT
Cash and cash equivalents $ 2,482 $ 13,293
Accounts receivable 4,800 5,093
Prepaids 321 840
Broken ore on leach pad - current 12,982 14,352
Materials and supplies 3,856 4,615
- -------------------------------------------------------------------------
Total current assets 24,441 38,193
BROKEN ORE ON LEACH PAD - LONG TERM 2,473 2,533
PROPERTY, PLANT AND EQUIPMENT (Note 4) 42,805 47,920
DEFERRED STRIPPING COSTS 28,829 26,815
RESTRICTED CERTIFICATE OF DEPOSIT 8,332 8,365
- -------------------------------------------------------------------------
TOTAL ASSETS $ 106,880 $ 123,826
=========================================================================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 10,004 $ 10,755
Notes payable 5,149 4,912
Property and mining taxes payable 750 1,562
- -------------------------------------------------------------------------
Total current liabilities 15,903 17,229
NOTES PAYABLE 5,796 8,277
ACCRUED SITE CLOSURE COSTS 28,268 32,354
- -------------------------------------------------------------------------
TOTAL LIABILITIES 49,967 57,860
- -------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 9)
SHAREHOLDERS' EQUITY (DEFICIT)
Share capital (Note 5) 125,596 110,252
Issuable common shares 350 350
Special warrants (Note 5) - 9,768
Contributed surplus (Note 5) 10,278 10,998
Cumulative translation adjustment (8,453) 1,393
Accumulated deficit (70,858) (66,795)
- -------------------------------------------------------------------------
Total shareholders' equity 56,913 65,966
- -------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 106,880 $ 123,826
=========================================================================
The accompanying notes are an integral part of these interim financial
statements.
2
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
-------------- ---------------- ------------ ----------------
REVENUE
Revenue from sale of minerals $ 24,298 $ - $ 37,238 $ -
- --------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Direct operating costs 20,509 - 29,537 -
Depreciation and amortization 2,125 - 4,035 -
General and administrative 1,449 278 3,293 417
Share-based compensation 109 - 507 -
Accrued site closure costs -
Accretion expense 461 - 931 -
Royalties 332 - 654 -
Exploration and development 1,508 - 2,905 -
- --------------------------------------------------------------------------------------------------
26,493 278 41,862 417
- --------------------------------------------------------------------------------------------------
OPERATING LOSS (2,195) (278) (4,624) (417)
OTHER INCOME (EXPENSES)
Interest income 7 - 59 -
Interest expense (224) - (454) -
Foreign exchange gain 210 - 956 -
- --------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (2,202) $ (278) $ (4,063) $ (417)
==================================================================================================
NET LOSS PER SHARE,
BASIC AND DILUTED $ (0.05) $ (0.10) $ (0.09) $ (0.22)
==================================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 48,268,690 2,859,619 47,322,353 1,852,466
==================================================================================================
The accompanying notes are an integral part of these interim financial statements.
3
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
- --------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
-------------- ---------------- ------------ ----------------
Deficit, beginning of period $ (68,656) $ (62,154) $ (66,795) $ (62,015)
Net loss for the period (2,202) (278) (4,063) (417)
- --------------------------------------------------------------------------------------------------
Deficit, end of period $ (70,858) $ (62,432) $ (70,858) $ (62,432)
==================================================================================================
The accompanying notes are an integral part of these interim financial statements.
4
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF CANADIAN DOLLARS)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
-------------- ---------------- ------------ ----------------
OPERATING ACTIVITIES
Net loss for the period $ (2,202) $ (278) $ (4,063) $ (417)
Items not affecting cash
Depreciation and amortization 2,125 - 4,035 -
Amortization of deferred stripping 2,182 - 2,182 -
Share-based compensation 109 - 507 -
Accrued site closure costs -
Accretion expense 461 - 931 -
Changes in non-cash operating
Assets and liabilities (2,902) 373 (482) 451
- ---------------------------------------------------------------------------------------------------------
Net cash flows (used in) from
Operating activities (227) 95 3,110 34
- ---------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Deferred stripping costs (3,421) - (8,721) -
Property, plant and equipment
Expenditures (1,528) - (6,098) -
Notes receivable - Nevoro - 3,074 - (16,756)
Restricted Certificate of Deposit (263) - (1,309) -
- ---------------------------------------------------------------------------------------------------------
Net cash flows (used in) from
Investing activities (5,212) 3,074 (16,128) (16,756)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants 476 - 4,163 -
Notes payable (1,292) - (256) -
Proceeds on issuance of convertible
Debentures, net - 83 - 19,913
- ---------------------------------------------------------------------------------------------------------
Net cash flows (from) used by
financing activities (816) 83 3,907 19,913
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,498) - (1,700) -
- ---------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE
IN CASH (7,753) 3,252 (10,811) 3,191
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,235 69 13,293 130
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 2,482 $ 3,321 $ 2,482 $ 3,321
=========================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 216 $ - $ 445 $ -
=========================================================================================================
Income taxes $ - $ - $ - $ -
=========================================================================================================
During the quarter ended June 30, 2003, the Company issued 61,500 shares to acquire certain parcels of
land located in Nevada. Share capital and property, plant and equipment both increased by $187 as a
result of these transactions.
The accompanying notes are an integral part of these interim financial statements.
5
1. NATURE OF OPERATIONS
On June 25, 2002, pursuant to a statutory Plan of Arrangement, Apollo Gold
Corporation ("Apollo" or the "Company") acquired the business of Nevoro
Gold Corporation ("Nevoro"). This acquisition has been accounted for using
the purchase method of accounting. Prior to the acquisition of Nevoro, the
Company had interests in exploration projects in Indonesia and the
Philippines.
Apollo, through its acquisition of Nevoro, is engaged in gold mining
including extraction, processing and refining and the production of other
by-product metals, as well as related activities including exploration and
development. The Company currently owns and has rights to operate the
following facilities: the Florida Canyon Mine through Florida Canyon
Mining, Inc. ("FCMI") located in the State of Nevada, the Montana Tunnels
Mine through Montana Tunnels Mining, Inc. ("MTMI") located in the State of
Montana and the Diamond Hill Mine also located in the State of Montana.
Apollo Gold also purchased the Black Fox Project (former Glimmer Mine)
which is located in the Province of Ontario near the Township of Mattheson
in September of 2002. This project is an exploration property.
Currently the Company is operating the Florida Canyon Mine at its designed
capacity (approximately 120,000 gold ounces per year). The Montana Tunnels
Mine began commercial production in April 2003 and has experienced
operational problems (Note 2).
2. MONTANA TUNNELS MINE
The Montana Tunnels Mine has experienced pit wall problems over the past
year that has resulted in significant changes to the mine plan, including
an accelerated stripping schedule to remove 10 million tons of material
that sloughed off the southwest pit wall. The changes to the mine plan and
the accelerated stripping schedule require funding of an additional $15,000
over the next year to allow access to all reserves currently included in
the mine plan.
The Company does not currently have the funds to complete the revised mine
plan. The continuation of operations at the Montana Tunnels Mine is
dependent on the Company's ability to arrange additional financing.
If additional financing is not obtained, the Company would have to cease
operating at the Montana Tunnels Mine and write-off its investment.
Information regarding the carrying value of the Montana Tunnels Mine is
contained in Note 7.
6
3. ACCOUNTING POLICIES
These consolidated interim financial statements have been prepared in
accordance with Canadian generally accepted accounting principles. The
accounting policies followed in preparing these financial statements are
those used by the Company as set out in the audited financial statements
for the year ended December 31, 2002. Certain information and note
disclosure normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have been
omitted. These interim financial statements should be read together with
the Company's audited financial statements for the year ended December 31,
2002.
In April 2003 the Company began commercial production at the Montana
Tunnels Mine and now amortizes the deferred stripping costs in accordance
with the following accounting policy:
Deferred stripping costs
Mining costs incurred on development activities comprised of waste rock
removal at open pit operations commonly referred to as "deferred stripping
costs" are capitalized and amortized over the ore reserve that benefits
from the pre-stripping activity. This amortization is calculated based on
the units-of-production, based on estimated recoverable ounces of gold,
using a stripping ratio calculated as the ratio of total tons to be moved
to total gold ounces to be recovered over the life of mine, and results in
the recognition of the cost of these mining activities evenly over the life
of mine as gold is produced or sold. This amortization is charged to
operating expenses over the remaining life of the ore body. Deferred
stripping costs are included in the carrying amount of the Company's mining
properties for purposes of determining whether any impairment has occurred.
In the opinion of management, all adjustments considered necessary for fair
presentation have been included in these financial statements. Interim
results are not necessarily indicative of the results expected for the
fiscal year.
Certain of the comparative figures have been reclassified to conform with
the current period presentation.
7
4. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
JUNE 30, December 31,
2003 2002
-------------------------------------- ------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
------------ ------------- --------- ------------
Mine assets
Building, plant and equipment $ 14,164 $ 2,432 $ 11,732 $ 11,506
Mining properties and
development costs 27,421 6,131 21,290 25,207
- -----------------------------------------------------------------------------------------
41,585 8,563 33,022 36,713
Mineral rights 9,783 - 9,783 11,207
- -----------------------------------------------------------------------------------------
Total property, plant and equipment $ 51,368 $ 8,563 $ 42,805 $ 47,920
=========================================================================================
5. SHARE CAPITAL
(a) Authorized
Unlimited number of common shares with no par value.
(b) Issued and outstanding
Contributed
Shares Amount Surplus Total
----------- -------- -------------- --------
Balance, December 31, 2002 40,190,874 $110,252 $ 10,998 $121,250
Conversion of units 6,000,000 9,768 - 9,768
Warrants exercised 1,755,725 4,163 - 4,163
Nevoro acquisition, senior
executive share
compensation - - 244 244
Shares issued to supplier 50,000 262 - 262
Shares issued for land 61,500 187 - 187
Fiscal 2002 stock-based
compensation issued
in 2003 265,000 964 (964) -
- ---------------------------------------------------------------------------
Balance, June 30, 2003 48,323,099 $125,596 $ 10,278 $135,874
===========================================================================
8
5. SHARE CAPITAL (CONTINUED)
(c) Warrants
The following summarizes outstanding warrants as at June 30, 2003:
Number of Exercise Expiry
Warrants Shares Price Date
- --------- --------- --------------- -----------------
6,150,525 6,150,525 $2.16 (US$1.60) March 24, 2004
3,000,000 3,000,000 3.25 December 23, 2006
- --------------------------------------------------------
9,150,525 9,150,525
========================================================
(d) Share purchase options
(i) Fixed stock option plan
The Company has a stock option plan that provides for the
granting of options to directors, officers, employees and service
providers of the Company.
At June 30, 2003, there were 1,785,000 options outstanding with a
weighted-average price of $3.28 and expiry date of February 18,
2013.
(ii) Performance-based stock option plan
As part of the Nevoro acquisition, 2,780,412 options were granted
to certain directors, officers and employees, and are subject to
a reduction if certain performance criteria are not met.
Furthermore, certain senior executives are entitled to receive
530,000 common shares subject to a reduction if certain
performance criteria are not met.
In fiscal 2002, one-half of the options and common shares vested
based upon the established performance criteria. The balance of
the options vest based upon the established fiscal 2003
performance criteria. Furthermore, one half of the related common
shares were approved for issuance in 2003 based upon the fiscal
2002 performance and the balance of the shares vest based upon
the established fiscal 2003 performance criteria. An expense of
$244 has been recorded in the statement of operations relating to
the fair value expense of the common shares vesting in fiscal
2003 and credited to contributed surplus.
As at June 30, 2003, there were 2,780,412 performance-based
options outstanding with a weighted-average price of $1.08
(U.S.$0.80) and an expiry date of June 25, 2007. In addition,
there is an entitlement to 265,000 performance-based common
shares outstanding.
9
5. SHARE CAPITAL (CONTINUED)
(e) Stock-based compensation
The following pro forma financial information presents the net
loss for the period and the basic and diluted loss per common
share had the Company adopted the fair value method of accounting
for stock options as set out in CICA Handbook Section 3870,
Stock-Based Compensation and Other Stock-Based Payments:
THREE MONTHS Six months
ENDED JUNE 30, ended June 30,
2003 2003
---------------- ----------------
Net loss
As reported $ (2,202) $ (4,063)
Compensatory fair value of options 1,181 2,581
- ------------------------------------------------------------------------
Pro forma $ (3,383) $ (6,644)
========================================================================
Basic and diluted loss per share
As reported $ (0.05) $ (0.09)
Pro forma (0.07) (0.14)
========================================================================
Using the fair value based method for stock-based compensation,
additional costs of approximately $1,181 and $2,581 would have
been recorded for the three and six-month periods ended June 30,
2003, respectively. This amount was determined using an option
pricing model assuming no dividends were paid, a weighted-average
volatility of the Company's share price of 52%, a
weighted-average expected life of the options of 2 to 4 years,
and weighted-average annual risk free rate of 3.52%.
No stock options were granted during the six month period ended
June 30, 2002.
(f) Loss per share
Loss per share has been calculated using the weighted monthly
average number of common shares outstanding during the period.
Had the Company not been in a loss position, 4,565,412 dilutive
outstanding stock options and 9,150,525 dilutive outstanding
warrants and 265,000 issuable common shares for the period ended
June 30, 2003 would have been added to compute diluted earnings
per share.
6. INCOME TAXES
The Company did not record a recovery for income taxes for the period ended
June 30, 2003 due to the availability of net operating loss carry forwards
and the uncertainty of their future realization.
10
7. SEGMENTED INFORMATION
Apollo operates the Montana Tunnels and Florida Canyon Mines in the United
States and the Black Fox exploration project in Canada. As the products and
services of the Company's largest segments, Montana Tunnels and Florida
Canyon, are essentially the same, the reportable segments have been
determined at the level where decisions are made on the allocation of
resources and capital and where performance is measured. The accounting
policies for these segments are the same as those followed by the Company
as a whole.
Amounts as at June 30, 2003 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------ ---------- --------
Cash and cash equivalents $ 21 $ 26 $2,026 $ 409 $ 2,482
Broken ore on leach pad -
current - 12,982 - - 12,982
Other non-cash current assets 5,298 3,200 113 366 8,977
- -----------------------------------------------------------------------------------
5,319 16,208 2,139 775 24,441
Broken ore on leach pad -
long-term - 2,473 - - 2,473
Property, plant and equipment 14,027 18,246 6,895 3,637 42,805
Deferred stripping costs 28,829 - - - 28,829
Restricted certificate of deposit 2,905 4,990 437 - 8,332
- -----------------------------------------------------------------------------------
Total assets $ 51,080 $ 41,917 $9,471 $ 4,412 $106,880
===================================================================================
Current liabilities $ 5,988 $ 9,074 $ - $ 841 $ 15,903
Notes payable 856 4,940 - - 5,796
Accrued site closure costs 11,866 16,402 - - 28,268
- -----------------------------------------------------------------------------------
Total liabilities $ 18,710 $ 30,416 $ - $ 841 $ 49,967
===================================================================================
11
7. SEGMENTED INFORMATION (CONTINUED)
Amounts for the three and six month periods ended June 30, 2003,
respectively, are as follows:
THREE MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- -------- ----------- --------
Revenue from sale of minerals $ 10,972 $ 13,326 $ - $ - $24,298
- ----------------------------------------------------------------------------------------
Direct operating costs 10,665 9,844 - - 20,509
Depreciation and amortization 740 1,273 - 112 2,125
General and administrative - - - 1,449 1,449
Share-based compensation - - - 109 109
Accrued site closure costs
- accretion expense - 461 - - 461
Royalties - 332 - - 332
Exploration and development - - 1,206 302 1,508
- ----------------------------------------------------------------------------------------
11,405 11,910 1,206 1,972 26,493
- ----------------------------------------------------------------------------------------
Operating (loss) income (433) 1,416 (1,206) (1,972) (2,195)
Interest income - - - 7 7
Interest expense (38) (125) - (61) (224)
Foreign exchange gain - - 210 - 210
- ----------------------------------------------------------------------------------------
Net (loss) income $ (471) $ 1,291 $ (996) $ (2,026) $(2,202)
========================================================================================
Investing activities
Property, plant and equipment
expenditures $ 866 $ 656 $ - $ 193 $ 1,715
Deferred stripping expenditures 3,421 - - - 3,421
12
7. SEGMENTED INFORMATION (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2003
-----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- -------- ----------- --------
Revenue from sale of minerals $ 10,972 $ 26,266 $ - $ - $37,238
- ----------------------------------------------------------------------------------------
Direct operating costs 10,338 19,199 - - 29,537
Depreciation and amortization 1,388 2,578 - 69 4,035
General and administrative - - - 3,293 3,293
Share-based compensation - - - 507 507
Accrued site closure costs
- accretion expense - 931 - - 931
Royalties - 654 - - 654
Exploration and development - - 2,324 581 2,905
- ----------------------------------------------------------------------------------------
11,726 23,362 2,324 4,450 41,862
- ----------------------------------------------------------------------------------------
Operating (loss) income (754) 2,904 (2,324) (4,450) (4,624)
Interest income - - - 59 59
Interest expense (117) (269) - (68) (454)
Foreign exchange gain - - 535 421 956
- ----------------------------------------------------------------------------------------
Net (loss) income $ (871) $ 2,635 $(1,789) $ (4,038) $(4,063)
========================================================================================
Investing activities
Property, plant and equipment
expenditures $ 1,286 $ 3,905 $ 211 $ 883 $ 6,285
Deferred stripping expenditures 8,721 - - - 8,721
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Gold hedges
The Company has entered into hedging contracts, with Standard Bank
London Limited, for gold in the aggregate amount of 100,000 ounces
involving the use of combinations of put and call options. As of July
1, 2003 there are 88,000 ounces remaining on these options. The
contracts give the holder the right to buy, and the Company the right
to sell, stipulated amounts of gold at the upper and lower exercise
prices, respectively. The contracts continue through April 25, 2005
with a put option strike price of two hundred and ninety-five U.S.
dollars per ounce and a call option strike price of three hundred and
forty-five U.S. dollars per ounce. As at June 30, 2003, the fair value
of the contracts is a loss of $1,604 (December 31, 2002 - $3,573).
13
8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
Gold hedges (continued)
The contracts mature as follows:
Ounces
of Gold
-------
2003 (as of July 1) 24,000
2004 48,000
2005 16,000
----------------------------
88,000
============================
9. COMMITMENTS AND CONTINGENCIES
(a) Environmental
The Company's mining and exploration activities are subject to
various federal, provincial and state laws and regulations
governing the protection of the environment. These laws and
regulations are continually changing and generally becoming more
restrictive. The Company conducts its operations so as to protect
public health and the environment and believes its operations are
materially in compliance with all applicable laws and
regulations. The Company has made, and expects to make in the
future, expenditures to comply with such laws and regulations.
(b) Litigation and claims
The Company is from time to time involved in various claims,
legal proceedings and complaints arising in the ordinary course
of business. The Company does not believe that adverse decisions
in any pending or threatened proceedings related to any matter,
or any amount which it may be required to pay by reason thereof,
will have a material effect on the financial conditions or future
results of operations of the Company.
10. BANK INDEBTEDNESS
In June 2003, the Company entered into a $6,700 (US$5,000)
Revolving Loan, Guaranty and Security Agreement with Standard
Bank London Limited ("Standard Bank"). The Company must satisfy
certain requirements in order for Standard Bank to advance the
maximum amount of the loan. Until the commitment under the line
of credit expires or has been terminated, the Company must meet
certain covenants. As of June 30, 2003, the Company has made no
borrowings under the revolving loan. As of June 30, 2003, the
Company was not in compliance with the net worth and current
ration covenants, and, therefore, could be subject to an event of
default. The Company is currently negotiating with the lender to
have this condition waived.
14
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP")
The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted in Canada.
The following adjustments and/or additional disclosures would be
required in order to present the financial statements in accordance
with U.S. GAAP and with practices prescribed by the United States
Securities and Exchange Commission for the three and six month periods
ended June 30, 2003 and 2002.
Material variances between financial statement items under Canadian
GAAP and the amounts determined under U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
Property, Deferred
Restricted Plant and Stripping Other Share Contributed
Cash Cash Equipment Costs Liabilities Capital Surplus Deficit
--------- ---------- ----------- --------- ------------ ------------- ----------- ----------
As at June 30, 2003 Canadian
GAAP $ 2,482 $ - $ 42,805 $ 28,829 $ - $ 125,596 $ 10,278 $ (70,858)
Convertible debenture (a) - - - - - - 32,666 (32,666)
Share-based compensation (b) - - - - - - 5,202 (5,202)
Gold hedge loss (c) - - - - 1,604 - - (1,604)
Impairment of property,
plant and equipment
capitalized deferred and
stripping costs (d) - - (8,608) (13,927) - - - (22,535)
Flow-through common
shares (e) (2,047) 2,047 - - 375 (375) - -
- ----------------------------------------------------------------------------------------------------------------------------------
As at June 30, 2003 U.S.
GAAP $ 435 $ 2,047 $ 34,197 $ 14,902 $ 1,979 $ 125,221 $ 48,146 $(132,865)
==================================================================================================================================
15
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002
Property, Deferred
Restricted Plant and Stripping Other Share Contributed
Cash Cash Equipment Costs Liabilities Capital Surplus Deficit
------------ ---------- ----------- --------- ------------ ------------- -------- ----------
As at December 31, 2002
Canadian GAAP $ 13,293 $ - $ 47,920 $ 26,815 $ - $ 110,252 $ 10,998 $ (66,795)
Convertible debenture (a) - - - - - - 32,666 (32,666)
Share-based compensation (b) - - - - - - 4,079 (4,079)
Gold hedge loss (c) - - - - 3,573 - - (3,573)
Impairment of property,
plant and equipment
and capitalized deferred
stripping costs (d) - - (8,608) (13,927) - - - (22,535)
Flow-through common
shares (e) (4,488) 4,488 - - 375 (375) - -
- ----------------------------------------------------------------------------------------------------------------------------------
As at December 31, 2002 U.S.
GAAP $ 8,805 $ 4,488 $ 39,312 $ 12,888 $ 3,948 $ 109,877 $ 47,743 $(129,648)
==================================================================================================================================
Under U.S. GAAP, the net loss and net loss per share would be adjusted as
follows:
2003 2002
-------- ---------
Net loss for the three month period ended June 30,
based on Canadian GAAP $(2,202) $ (278)
Convertible debenture (a) - (32,446)
Share-based compensation (b) (443) -
Gold hedge gain (c) 423 -
- ------------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $(2,222) $(32,724)
========================================================================
Other comprehensive income:
Currency translation adjustment $(5,895) $ -
- ------------------------------------------------------------------------
Comprehensive loss $(8,117) $(32,724)
========================================================================
Net loss per share - U.S. GAAP basic $ (0.05) $ (11.44)
========================================================================
16
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
2003 2002
--------- ---------
Net loss for the six month period ended June 30,
based on Canadian GAAP $ (4,063) $ (417)
Convertible debenture (a) - (32,666)
Share-based compensation (b) (1,123) -
Gold hedge gain (c) 1,969 -
- -----------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $ (3,217) $(33,083)
=======================================================================
Other comprehensive income:
Currency translation adjustment $ (9,846) $ -
- -----------------------------------------------------------------------
Comprehensive loss $(13,063) $(33,083)
=======================================================================
Net loss per share - U.S. GAAP basic $ (0.07) $ (17.86)
=======================================================================
(a) Convertible debenture
Under Canadian GAAP, the convertible debenture was recorded as an
equity instrument on issuance in March 2002. Under U.S. GAAP, on
issuance, the convertible debenture would have been recorded as a
liability and reclassified to equity only upon conversion.
Further, under U.S. GAAP, the beneficial conversion feature
represented by the excess of the fair value of the shares and
warrants issuable on conversion of the debenture, measured on the
commitment date, over the amount of the proceeds to be allocated
to the common shares and warrants upon conversion, would be
allocated to contributed surplus. This results in a discount on
the debenture that is recognized as additional interest expense
over the term of the debenture and any unamortized balance is
expensed immediately upon conversion of the debenture.
Accordingly, for U.S. GAAP purposes, the Company has recognized a
beneficial conversion feature and debenture issuance costs of
$32,666 for the year ended December 31, 2002 ($32,446 for the
three months ended June 30, 2002). Canadian GAAP does not require
the recognition of any beneficial conversion feature.
(b) Share-based compensation
In accordance with Canadian GAAP, the Company has not recorded
any expense with respect to stock options granted to employees.
Under U.S. GAAP, the Company has elected to continue to measure
its employee stock-based awards using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25").
17
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(b) Share-based compensation (continued)
In the fourth quarter of fiscal 2002, an expense of $4,079 has
been recorded under APB No. 25 with respect to the intrinsic
value of stock options granted in the year and for the three and
six month periods ended June 30, 2003, an expense of $443 and
$1,123, respectively, has been recorded under APB No. 25. In
addition, under APB No. 25, the performance shares granted during
2002 are accounted for as variable awards until the performance
targets are met.
(c) Gold hedge gain (loss)
Under U.S. GAAP, SFAS 133 requires that for hedge accounting to
be achieved, a company must provide detailed documentation and
must specifically designate the effectiveness of a hedge.
Furthermore, U.S. GAAP also requires fair value accounting to be
used for all types of derivatives. As the Company has chosen not
to meet these requirements for U.S. GAAP purposes, a charge of
$3,573 has been recorded in the fourth quarter of fiscal 2002 to
reflect the fair value loss on the contracts outstanding at
December 31, 2002, and a gain of $423 and $1,969 has been
recorded in the three and six month periods ended June 30, 2003,
respectively, to reflect the fair value gain on the contracts
between December 31, 2002 and June 30, 2003. The gold hedge loss
on outstanding hedge contracts amounted to $1,604 at June 30,
2003.
(d) Impairment of property, plant and equipment and capitalized
deferred stripping costs
Under Canadian GAAP, write-downs for impairment of property,
plant and equipment and capitalized deferred stripping costs are
determined using current proven and probable reserves and mineral
resources expected to be converted into mineral reserves. Under
U.S. GAAP, write-downs are determined using current proven and
probable reserves. In addition, under U.S. GAAP, future cash
flows from impaired properties are discounted. Accordingly, for
U.S. GAAP purposes, a reduction in property, plant and equipment
and capitalized deferred stripping costs of $22,535 has been
recorded as an impairment in the fourth quarter of fiscal 2002.
18
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(e) Flow-through common shares
Under Canadian income tax legislation, a company is permitted to
issue shares whereby the company agrees to incur qualifying
expenditures and renounce the related income tax deductions to
the investors. The Company has accounted for the issue of
flow-through shares using the deferral method in accordance with
Canadian GAAP. At the time of issue, the funds received are
recorded as share capital. For U.S. GAAP, the premium paid in
excess of the market value of $375 is credited to other
liabilities and included in income as the qualifying expenditures
are made.
Also, notwithstanding whether there is a specific requirement to
segregate the funds, the flow-through funds which are unexpended
at the consolidated balance sheet dates are considered to be
restricted and are not considered to be cash or cash equivalents
under U.S. GAAP.
As at June 30, 2003, unexpended flow-through funds were $2,047
(December 31, 2002 - $4,488).
STATEMENT OF CASH FLOWS
Under Canadian GAAP, expenditures incurred for deferred stripping
costs are included in cash flows from investing activities in the
consolidated statement of cash flows. Under U.S. GAAP, these
expenditures are included in cash flows from operating activities.
Accordingly, under U.S. GAAP, the consolidated statement of cash flows
for the period ended June 30, 2003 would reflect a reduction in cash
utilized in investing activities of $3,421 and $8,721 for the three
and six month periods ended June 30, 2003, respectively, and a
corresponding increase in cash utilized in operating activities.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income ("SFAS 130") establishes standards for
the reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS 130
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported
in a financial statement. For the Company, the only components of
comprehensive loss are the net loss for the period and the changes in
the foreign currency translation component of shareholders' equity as
reported in the consolidated balance sheet prepared in accordance with
Canadian GAAP.
19
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
SUPPLEMENTAL INFORMATION FOR U.S. GAAP PURPOSES ON STOCK-BASED
COMPENSATION
Pro forma information regarding net loss and net loss per share is
required by SFAS No. 123, Accounting for Stock-Based Compensation and
has been determined as if the Company had accounted for its employees
stock options under the fair value method. The fair value for these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions
for 2003 and 2002: risk-free interest rate of 3.55%, dividend yield of
0%, volatility factor of 90% and a weighted-average expected life of
the options of 2 to 4 years. The weighted average fair value per share
of options granted during 2003 and 2002 was $2.19 and $1.92,
respectively, and the expense is amortized over the vesting period.
The following table presents the net loss and net loss per share,
under U.S. GAAP, as if the Company had recorded compensation expense
under SFAS No. 123 with the estimated fair value of the options being
amortized to expense over the options' vesting period.
2003 2002
-------- ---------
Net loss for the three month period ended June 30,
2003, as reported $(2,222) $(32,724)
Stock option expense as reported 443 -
Pro forma stock option expense (1,181) -
- ---------------------------------------------------------------------------
Net loss - pro forma $(2,960) $(32,724)
===========================================================================
Net loss per share, basic - for the three month period
ended June 30, 2003 $ (0.05) $ (11.44)
Stock option expense as reported 0.01 -
Pro forma stock option expense (0.02) -
- ---------------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.06) $ (11.44)
===========================================================================
20
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
2003 2002
-------- ---------
Net loss for the six month period ended June 30,
2003, as reported $(3,217) $(33,083)
Stock option expense as reported 1,123 -
Pro forma stock option expense (2,581) -
- -------------------------------------------------------------------------
Net loss - pro forma $(4,675) $(33,083)
=========================================================================
Net loss per share, basic - for the six month period
ended June 30, 2003 $ (0.07) $ (17.86)
Stock option expense as reported 0.02 -
Pro forma stock option expense (0.05) -
- -------------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.10) $ (17.86)
=========================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION,
STATEMENTS REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES
THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES",
OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS,
UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF AND
SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE AMONG THOSE
FACTORS THAT IN SOME CASES HAVE AFFECTED OUR RESULTS AND COULD CAUSE THE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS.
Overview
The following presents a discussion of (i) the financial condition and
results of operations of the Company for the three and six months ended June
30, 2003 and 2002; and (ii) as compared to the results of operations of Apollo
Gold, Inc. ("AGI"), the business acquired by the Company through the acquisition
of Apollo Gold, Inc.'s parent company, Nevoro, for the period from January 1,
2002 through June 24, 2002. Subsequent to June 24, 2002, substantially all of
the gold mining and exploration business conducted by the Company consists
of the gold mining and exploration operations of Apollo Gold, Inc. The
Company believes that the comparison of the Company's financial condition and
results of operations for the six months ended June 30, 2003 to AGI's result of
operations for the period from January 1, 2002 through June 24, 2002 are the
most meaningful.
21
This Form 10-Q should be read in conjunction with our consolidated financial
statements and related notes included in this quarterly report, as well as our
annual financial statements for the fiscal year ended December 31, 2002 included
in our Registration Statement on Form 10 (the "Registration Statement") filed
with the SEC. Certain classifications have been made to the prior period
financial statements to conform with the current period presentation. Unless
stated otherwise, all dollar amounts are reported as Canadian dollars.
In this document, unless the context otherwise requires, "we", "our", "us", the
"Company" or "Apollo" mean Apollo Gold Corporation and its subsidiaries.
BACKGROUND
We are primarily engaged in the exploration, development and mining of gold. We
have focused our mining efforts to date on two principal properties: our Montana
Tunnels Mine, owned by one of our subsidiaries, Montana Tunnels Mining, Inc.
("Montana, Inc.") and our Florida Canyon Mine, owned by another one of our
subsidiaries Florida Canyon Mining, Inc. ("Florida, Inc."). Our exploration
activities involve our Pirate Gold, Nugget Field and Diamond Hill properties as
well as our Black Fox Property, acquired in September 2002.
We are the result of a June 2002 Plan of Arrangement ("Plan of
Arrangement") that resulted in the merger of International Pursuit Corporation
("Pursuit"), a public company previously traded on the Toronto Stock Exchange
under the ticker symbol IPJ, and Nevoro Gold Corporation ("Nevoro"), a privately
held corporation. Pursuant to the terms of the Plan of Arrangement, Pursuit
acquired Nevoro and continued operations under the name of Apollo Gold
Corporation. Through our wholly-owned subsidiary, Apollo Gold, Inc., a Delaware
corporation acquired by Nevoro in March 2002, we own the majority of our assets
and operate our business. We continued trading on the Toronto Stock Exchange
under our new name, Apollo Gold Corporation, and with a new ticker symbol,
APG.U, on July 3, 2002. On August 2, 2002, our ticker symbol changed to
APG.
In February 2003, we filed a registration statement on Form 10 with the SEC.
The Registration Statement was declared effective on August 13, 2003. On August
26, 2003, we began trading on the American Stock Exchange under the ticker
symbol AGT.
We own and operate the Florida Canyon Mine, a low grade heap leach gold mine
located approximately 42 miles southwest of Winnemucca, Nevada. The Florida
Canyon Mine employs approximately 175 full-time non-unionized employees and
produces approximately 125,000 ounces of gold annually.
We also own and operate the Montana Tunnels Mine, an open pit located near
Helena, Montana. When in full production, the Montana Tunnels Mine has
historically produced approximately 70,000 ounces of gold, 26,000 tons of zinc,
6,676 tons of lead and 1,200,000 ounces of silver annually. The Montana Tunnels
Mine produces approximately 15% of its annual gold production in the form of
dore, an unrefined material consisting of approximately 90% gold, which is then
further refined. The remainder of the mine's production is in the form of
concentrates, one a zinc-gold concentrate and the other a lead-gold concentrate
which are shipped to a smelter. We are paid for the metal content, net of
smelter charges. The Montana Tunnels Mine was idle for approximately four months
in 2002, while we made preparations to begin the removal of waste rock at the
22
Mine. Limited production resumed in October 2002, and full production on the
K-Pit resumed in April 2003. Since that time, the Montana Tunnels Mine has
experienced pit wall problems that have resulted in significant changes to the
mine plan, including an accelerated stripping schedule to remove 10 million tons
of material that sloughed off the southwest pit wall. Additional stripping will
be required at the Montana Tunnels Mine for production to continue past March
2004. The changes to our mine plan and the accelerated stripping schedule
require funding of an approximately US$15 million over the next year to allow
access to all reserves currently included in the mine plan. The Company does
not currently have the funds to complete the revised mine plan; and, therefore,
the continuation of operations at the Montana Tunnels Mine is dependent upon the
Company's receiving additional financing. If additional financing is not
obtained, the Company would have to cease operating at the Montana Tunnels Mine
and write-off its investment. The Montana Tunnels Mine employs
approximately 175 full-time non-unionized employees.
We have several exploration assets including Pirate Gold and Nugget Field,
each located in Nevada and owned by our wholly-owned subsidiary, Apollo Gold
Exploration, Inc., a Delaware corporation. In addition, we also own Diamond
Hill, which is located in Montana and Standard Mine, located in Nevada.
In September 2002, we completed the acquisition of certain assets known as our
Black Fox Property (near the site of the former Glimmer Mine) from two
unrelated third parties, Exall Resources Limited and Glimmer Resources, Inc. The
Black Fox Property is located east of Timmins, Ontario. We currently
anticipate that the development and commercialization of our Black Fox Property
will require three phases. The first phase commenced in early 2003, and
involved core drilling of approximately 177 core holes. In August 2003, we
undertook an exploration review, and currently anticipate confirming open pit
ore reserves in October 2003 and open pit/underground estimated resources in
December 2003. We believe that the first phase will cost approximately US $3.7
million.
Upon completion of the first phase, we will then begin the second phase of our
Black Fox project. The second phase will involve the development of underground
mining, with an anticipated cost of US $17.3 million for the period from
September 2003 through December 2004. We plan to develop an underground ramp
from existing structures and will construct a shaft, drill level and drill
stations and a ventilation shaft. We currently anticipate commencing the second
phase underground drilling in 2004. We also plan to begin the permitting
process for the third phase of the Black Fox project in September 2003, and
anticipate that this process will require approximately two years, based on a
plan for combined open pit and underground mine, with on-site milling, at a
capacity of 3,000 tons of ore per day. The third phase will include the
development of these capabilities, at an aggregate estimated cost of
approximately US $41 million.
APOLLO GOLD CORPORATION
Financial information of the Company for the three and six months ended June
30, 2002 is (i) the historical financial information of Pursuit, and (ii) the
historical financial information of Nevoro for the period from June 25, 2002
through June 30, 2002.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
We realized total revenue of approximately $37.2 million for the six months
ended June 30, 2003. We did not realize any revenue for the six months ended
June 30, 2002, as Pursuit was primarily engaged in seeking joint venture
partners for its existing operations and in negotiating the terms of its
acquisition of Nevoro. Sales of minerals from our Florida Canyon Mine
accounted for 71% of our revenues for the six months ended June 30, 2003, with
the remaining 29% of revenues being derived from sales of minerals from our
Montana Tunnels Mine. We received approximately 87% of our revenue in the six
months ended June 30, 2003 from sales of gold and the balance from sales of
silver, zinc and lead.
Revenues for the first six months of 2003 were impacted by mixed performances
from our mine operations. Our primary goal of bringing the Montana Tunnels Mine
back into production was completed during the first quarter of 2003; however,
east wall slippage and crusher installation scheduling problems limited our gold
production to 13,118 ounces for the first six months of 2003, 10,000 ounces
below our initial production expectations. However, production began to
accelerate during June 2003, when 5,377 ounces of gold were produced. We
completed the installation of our new crusher in August 2003, at a cost of US
$1.2 million. As a result, throughput at the Montana Tunnels Mine increased by
approximately 1,500 tons of ore per day. Based on this increased throughput, we
anticipate an annual 6,000 ounce increase in the gold produced by the Montana
Tunnels Mine. We believe that the open pit stripping of the west side of the
Montana Tunnels Mine in the second half of 2003 is a very important and integral
component of the Montana Tunnels production scheduled for the second quarter of
2004. This stripping was accelerated from our original timetable of late 2004 -
early 2005 due to the west wall slippage discussed above.
We currently plan to process 1.5 million tons of ore per quarter for the
remainder of 2003. In 2004, we plan to commence the second phase of production
at the Montana Tunnels Mine, which will require the removal of 17 million tons
from the west side, at an estimated cost of US $9.2 million. Upon completion of
this phase, we anticipate commencing the third phase, which will require
additional permits. We currently anticipate that the third phase will begin in
late 2005.
Our Florida Canyon Mine produced a total of 51,790 ounces of gold during the
first six months of 2003, approximately 5,000 ounces below our initial
production expectations due to lower than expected ore grades. Ore production
at Florida Canyon is expected to accelerate during the second half of the year
to an estimated total of 118,000 ounces for 2003, as the new Switchback Pit is
now in full production and two additional trucks have been added to the fleet to
increase volumes and reduce unit costs.
Assuming that the price of gold remains at approximately US $375 per ounce, we
currently anticipate that our Montana Tunnels and Florida Canyon Mines will
produce an aggregate of 190,000 ounces in 2004 and 185,000 ounces in each of
2005 and 2006, with heap gold recovery and reclamation occurring through 2009
(depending upon the price of gold).
Furthermore, we currently anticipate commencing development of our Standard Mine
(located south of the Florida Canyon Mine) in the fourth quarter of 2004, which
would involve development drilling and permitting at an anticipated cost of US
$7 million. We would then begin production at the Standard Mine in the first
quarter of 2005. Recent discoveries at our Standard Mine include a new gold ore
deposit with reserves of approximately 318,300 ounces and total resources of
approximately 500,000 ounces. Based on these discoveries, we currently
anticipate that the Standard Mine will produce approximately 75,000 ounces of
gold in each of 2005 and 2006, with additional resources after further drilling
is conducted.
Our direct operating costs equaled approximately $29.5 million for the six
months ended June 30, 2003, and included mining and processing costs. We are
continuing to attempt to reduce our direct operating costs focusing on cost
reductions at our mines. These cost reductions include lower payroll costs
(due to the elimination of one mining crew) and reduced maintenance
costs. As of June 30, 2003, our scheduled commitments include only our
operating leases, with minimum lease payments of $111,000 in 2003 and
$82,000 in 2004. We incurred depreciation and amortization expenses of
approximately $4.0 million for the six months ended June 30, 2003.
23
We incurred approximately $3.3 million in general and administrative expenses
for the six months ended June 30, 2003, as compared to approximately $417,000 in
general and administrative expenses incurred by Pursuit for the comparable
period in 2002. General and administrative expenses for the first six months
ended June 30, 2003 consisted of increased legal and accounting expenses
incurred in the preparation of our Registration Statement for the registration
of our common stock in the United States, and increased investor relations
costs, including exchange listing fees. In 2002, these expenses consisted
primarily of salaries and legal and accounting expenses for maintaining Pursuit
as a publicly traded company in Canada. In the six months ended June 30, 2003,
we also incurred share-based compensation of approximately $507,000, resulting
from the issuance of stock in lieu of certain cash compensation. We do not
currently intend to continue to use share-based compensation for the
foreseeable future, except for the possible issuance of shares pursuant to the
balance of the arrangement options granted to certain of our officers and
directors in 2002. These shares would be issued in February 2004, based on
fiscal 2003 performance, if earned pursuant to the terms of those options.
In the six months ended June 30, 2003, we accrued accretion expense of
approximately $931,000, relating to accrued site closure costs at our Florida
Canyon and Montana Tunnels Mines. This expense represents our estimation of the
fair value of the increase in our site closure and reclamation costs in the
first six months of 2003. We incurred $654,000 in royalty expenses for the six
months ended June 30, 2003, attributed to royalties on production from our
Florida Canyon Mine. Our expenses for exploration and development, consisting of
drilling and related expenses at our exploration properties, totaled
approximately $2.9 million for the six months ended June 30, 2003. Given that
Pursuit was focused upon the Nevoro acquisition in the first six months of 2002,
it did not incur exploration or development costs during that period.
As a result of these expense components, our operating expenses for the six
months ended June 30, 2003 equaled approximately $41.9 million compared to
approximately $417,000 of operating expenses for Pursuit in the comparable
period in 2002.
We realized interest income of approximately $59,000 during the six months
ended June 30, 2003. We incurred interest expense of approximately $454,000
in the six months ended June 30, 2003, primarily for equipment leases and bridge
loans. We did not realize interest income or incur interest expense during the
comparable period in 2002.
We realized foreign exchange gains of approximately $956,000 during the six
months ended June 30, 2003, from cash balances not held in United States
dollars, and our currency of measurement (i.e. our functional currency is in US
dollars but we report currency in Canadian dollars). We did not realize any
foreign exchange gains during the six months ended June 30, 2002.
Based on these factors, we incurred a loss of approximately $4.1 million, or
$0.09 per share, for the six months ended June 30, 2003, as compared to a loss
of approximately $417,000, or $0.22 per share, for the six months ended June
30, 2002.
Differences Between Canadian and US GAAP
In accordance with Canadian GAAP, we have not recorded any expense for the six
months ended June 30, 2003 with respect to stock options granted to
employees. Under US GAAP, we have elected to continue to measure our employee
stock-based awards using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
24
("APB No. 25"). For the six months ended June 30, 2003, an expense of
approximately $1.1 million has been recorded under APB No. 25 with respect to
the intrinsic value of stock options granted during that period.
Under US GAAP, SFAS 133 requires that for hedge accounting to be achieved, a
company must provide detailed documentation and must specifically designate
the effectiveness of a hedge. Furthermore, US GAAP also requires fair value
accounting to be used for all types of derivatives. As we have chosen not to
meet these requirements for the six months ended June 30, 2003, a gain of
approximately $2.0 million has been recorded in that period to reflect the
fair value gain on our hedge contracts between December 31, 2002 and June 30,
2003. The cumulative gold hedge loss on outstanding hedge contracts amounted
to approximately $1.6 million at June 30, 2003.
Under US GAAP, the convertible debenture issued in June 2002 requires that the
beneficial conversion feature and debenture issuance costs be amortized over the
term of the debenture. Accordingly, an expense of approximately $32.7 million
was recorded in the six month period ended June 30, 2002 representing the
amortization of these costs.
Under US GAAP, the foreign currency component of shareholders' equity is
required to be recognized as a component of comprehensive income and reported in
the financial statements. Canadian GAAP does not recognize the concept of
comprehensive income. The only components of our comprehensive loss are the net
loss for the period and the foreign currency translation component of
shareholders' equity as reported in our consolidated balance sheet prepared in
accordance with Canadian GAAP.
The net loss per share for the six months ended June 30, 2003 was $0.09 and
$0.07 under Canadian GAAP and US GAAP, respectively, and $0.22 and $17.86,
respectively for the six months ended June 30, 2002.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
We realized total revenue of approximately $24.3 million for the three months
ended June 30, 2003. We did not realize any revenue for the three months ended
June 30, 2002, as Pursuit was primarily engaged in seeking joint venture
partners for its existing operations and in negotiating the terms of its
acquisition of Nevoro. Sales of minerals from our Florida Canyon Mine account
for 55% of our revenues for the three months ended June 30, 2003, with the
remaining 45% of revenues being derived from sales of minerals from our Montana
Tunnels Mine. Since we capitalized costs at our Montana Tunnels received
approximately 76% of our revenue in the three months ended June 30, 2003 from
sales of gold and the balance from sales of silver, zinc and lead.
While we continued to experience an impact on our production during the second
quarter of 2003 from the challenges presented by our mine operations, the pace
of production began to accelerate at the end of the second quarter. Our Montana
Tunnels Mine produced 13,118 ounces of gold during the three months ended June
30, 2003; 5,377 ounces of which were produced during June 2003. We believe that
the open pit stripping of the west side of the Montana Tunnels Mine in the
second half of 2003 is a very important and integral component of the Montana
Tunnels production scheduled for the second quarter of 2004. This stripping was
accelerated from our original timetable of late 2004 - early 2005 due to the
west wall slippage discussed above.
Our Florida Canyon Mine produced a total of 26,733 ounces of gold during the
three months ended June 30, 2003, again reflecting an accelerated production
rate during the second quarter. Ore production at Florida Canyon is expected to
accelerate during the second half of the year, as the new Switchback Pit is now
in full production and two additional trucks have been added to the fleet to
increase volumes and reduce unit costs.
Our direct operating costs equaled approximately $20.5 million for the three
months ended June 30, 2003, and included mining and processing costs. We are
continuing to attempt to reduce direct operating costs in 2003, focusing on
cost reductions at our mines. These cost reductions include lower payroll costs
(due to the elimination of one mining crew) and reduced maintenance
costs. However our direct operating costs increased significantly from the
first quarter of 2003 due to increasing production at the Montana Tunnels Mine.
As of June 30, 2003, our scheduled commitments include only our operating
leases, with minimum lease payments of $111,000 in 2003 and $82,000 in
2004. We realized depreciation and amortization expenses of approximately
$2.1 million for the three months ended June 30, 2003.
We incurred approximately $1.4 million in general and administrative expenses
for the three months ended June 30, 2003, as compared to approximately $278,000
in general and administrative expenses incurred by Pursuit for the comparable
25
period in 2002. General and administrative expenses for the second quarter of
2003 consisted of increased legal and accounting expenses incurred in the
preparation of our Registration Statement for the registration of our common
stock in the United States, and increased investor relations costs, including
exchange listing fees. In 2002, these expenses consisted primarily of salaries
and legal and accounting expenses for maintaining Pursuit as a publicly traded
company in Canada. In the three months ended June 30, 2003, we also incurred
share-based compensation of approximately $109,000, resulting from the issuance
of stock in lieu of certain cash compensation. We do not currently intend to
continue to use share-based compensation for the foreseeable future, except
for the possible issuance of shares pursuant to the balance of the arrangement
options granted to certain of our officers and directors in 2002. These shares
would be issued in February 2004, based on fiscal 2003 performance, if earned
pursuant to the terms of those options.
In the three months ended June 30, 2003, we accrued accretion expense of
approximately $461,000, relating to accrued site closure costs at our Florida
Canyon and Montana Tunnels Mines. This expense represents our estimation of the
fair value of the increase in our site closure and reclamation costs in the
second quarter of 2003. We incurred $332,000 in royalty expenses for the three
months ended June 30, 2003, attributed to royalties on production from our
Florida Canyon Mine. Our expenses for exploration and development, consisting of
drilling and related expenses at our exploration properties, totaled
approximately $1.5 million for the three months ended June 30, 2003. Given
that Pursuit was focused upon the Nevoro acquisition in the first quarter of
2002, it did not incur exploration or development costs during that
period.
As a result of these expense components, our operating expenses for the
three months ended June 30, 2003 equaled approximately $26.5 million, compared
to approximately $278,000 of operating expenses for Pursuit in the comparable
period in 2002.
We realized interest income of approximately $7,000 during the three
months ended June 30, 2003. We incurred interest expense of approximately
$224,000 in the three months ended June 30, 2003, primarily for equipment leases
and bridge loans. We did not realize interest income or incur interest expense
during the comparable period in 2002.
We realized foreign exchange gains of approximately $210,000 during the three
months ended June 30, 2003, from cash balances not held in United States dollars
and our currency of measurement (i.e. our functional currency is in US dollars
but we report currency in Canadian dollars).
Based on these factors, we incurred a loss of approximately $2.2 million, or
$0.05 per share, for the three months ended June 30, 2003 as compared to a loss
of approximately $278,000, or $0.10 per share, for the three months ended June
30, 2002.
Differences Between Canadian GAAP and US GAAP
In accordance with Canadian GAAP, we have not recorded any expense for the
three months ended June 30, 2003 with respect to stock options granted to
employees. Under US GAAP, we have elected to continue to measure our employee
stock-based awards using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"). For the three months ended June 30, 2003, an expense of
approximately $443,000 has been recorded under APB No. 25 with respect to the
intrinsic value of stock options granted during that period.
26
Under US GAAP, SFAS 133 requires that for hedge accounting to be achieved, a
company must provide detailed documentation and must specifically designate
the effectiveness of a hedge. Furthermore, US GAAP also requires fair value
accounting to be used for all types of derivatives. As we have chosen not to
meet these requirements for the three months ended June 30, 2003, a gain of
$423,000 has been recorded in that period to reflect the fair value gain on
our hedge contracts between March 31, 2003 and June 30, 2003. The cumulative
gold hedge loss on outstanding hedge contracts amounted to approximately $1.6
million at June 30, 2003.
Under US GAAP, the convertible debenture issued in June 2002 requires that the
beneficial conversion feature and debenture issuance costs be amortized over the
term of the debenture. Accordingly, an expense of approximately $32.4 million
was recorded in the three month period ended June 30, 2002 representing the
amortization of these costs.
Under US GAAP, the foreign currency component of shareholders' equity is
required to be recognized as a component of comprehensive income and reported in
the financial statements. Canadian GAAP does not recognize the concept of
comprehensive income. The only components of our comprehensive loss are the net
loss for the period and the foreign currency translation component of
shareholders' equity as reported in our consolidated balance sheet prepared in
accordance with Canadian GAAP.
The net loss per share for the three months ended June 30, 2003 was $0.05 and
$0.05 under Canadian GAAP and US GAAP, and $0.10 and $11.44, respectively, for
the three months ended June 30, 2002.
FINANCIAL CONDITION AND LIQUIDITY
To date, we have funded our operations primarily through issuances of debt and
equity securities and cash flow from operations. At June 30, 2003, we had
cash of approximately $2.5 million, compared to cash of approximately $13.3
million at December 31, 2002. The decrease in cash from December 31, 2002 is
primarily the result of proceeds of approximately $4.2 million received from the
exercise of warrants in the six months ended June 30, 2003, offset by cash
being utilized for deferred stripping costs ($8.7 million), property plant
and equipment expenditures ($6.1 million) and funds contributed to restricted
certificate of deposit ($1.3 million), offset by cash influx from operating
activities ($3.1 million) and cash repayments on notes payable ($0.3 million)
and cash received from the exercise of warrants ($4.2 million).
Approximately $2.0 million of our cash available at June 30, 2003 has been
allocated to be spent pursuant to the terms and conditions of a $4.5 million
private placement of flow-through common shares (as defined in sub-section
66(15) of the Income Tax Act (Canada)) conducted in November 2002. In June
2003, we entered into a US$5,000,000 Revolving Loan, Guaranty and Security
Agreement with Standard Bank London Limited ("Standard Bank"). Although
there is a US$5,000,000 commitment, we must satisfy certain requirements in
order for Standard Bank to advance the maximum amount of the loan. Until
the commitment under the line of credit expires or has been terminated, we
have to meet certain covenants. As of June 30, 2003, we were not in compliance
with the net worth and current ratio covenants, and therefore, could be subject
to an event of default. We are currently negotiating with Standard Bank to have
this condition waived. As of August 20, 2003, we have the ability to borrow
approximately US$4.0 million under the revolving loan and as of that date, we
have borrowed approximately US$1 million from Standard Bank.
27
As discussed in "Background" above, our Montana Tunnels Mine has experienced pit
wall problems over the past year that will require funding of an additional $15
million over the next year. We currently do not have the funds to complete the
revised Montana Tunnels Mine mining plan. If we are unable to raise these funds,
we may have to shut down the Montana Tunnels Mine and write off the balance of
our investment.
We believe our cash requirements for 2003 will be funded through a combination
of current cash, future cash flows from operations, and/or future debt or equity
security issuances. As of August 28, 2003, we began an offering to raise
additional money in each of the provinces of Canada, excluding Quebec. Our
ability to raise capital is highly dependent upon the commercial viability of
our projects and the associated prices of the metals we produce. Because of the
significant impact that changes in the prices of silver, gold, lead and zinc
have on our financial condition, declines in these metals prices may negatively
impact short-term liquidity and our ability to raise additional funding for
long-term projects. In the event that cash balances decline to a level that
cannot support our operations, our management will defer certain planned capital
expenditures and exploration expenditures as needed to conserve cash for
operations. There can be no assurance that we will be successful in generating
adequate funding for planned capital expenditures, environmental remediation and
reclamation expenditures and for exploration expenditures.
All of our operations are subject to reclamation and closure requirements. We
have obtained bonds to provide coverage for reclamation, severance and
closure liabilities at our Florida Canyon and Montana Tunnels Mines. Florida
Canyon Mining, Inc. ("Florida, Inc.") is the principal under two reclamation
bonds totaling US$17,456,130 issued by Safeco. One of these bonds, in the
amount of US$16,936,130, has been cancelled by Safeco and is the subject
of certain litigation. We maintain the second bond, in the amount of
US$520,000 and an expiration date of May 1, 2004, with an annual fee of
US$6,500. We also have obtained a reclamation bond in the amount of
US$14,987,688 from CNA for our Montana Tunnels Mine. This bond is the
subject of a Term Bonding Agreement dated as of August 1, 2002. Under
that Agreement, (i) CNA is committed to furnish the bond for a 15-year term,
ending on July 31, 2017; (ii) Montana Tunnels Mining, Inc. ("Montana, Inc.) will
deposit US$75,000 per month into a collateral trust account until the
balance in the trust account is equal to the penal sum of the bond; (iii) we
have guaranteed Montana, Inc.'s obligations under the Agreement; (iv)
payment of premium is deferred until the balance in the collateral trust
account is equal to the penal sum of the bond; and (v) Montana, Inc. may
terminate the Agreement at any time by obtaining release of the bond through
posting a substitute bond.
Operating Activities. Operating activities provided approximately $3.1
million of cash during the six months ended June 30, 2003. Substantially all of
the operating cash flow consisted of noncash elements; principal noncash
elements included charges for depreciation, depletion and amortization of
approximately $4.0 million, amortization of deferred stripping costs of $2.2
million, share-based compensation of approximately $507,000, an increase in the
provision for accrued site closure costs of approximately $931,000, and
changes in non-cash operating assets and liabilities of approximately
$482,000. Operating activities provided approximately $34,000 of cash during
the six months ended June 30, 2002. Substantially all of the net cash flow
resulted form changes in non-cash operating assets and liablilities of
approximately $451,000.
Investing Activities. Investing activities utilized approximately $16.1
million of cash during the six months ended June 30, 2003. The major uses of
cash were for additions to deferred stripping costs (approximately $8.7
28
million), property, plant and equipment (approximately $6.1 million), and
for the investment in a restricted certificate of deposit (approximately
$1.3 million). Investing activities used approximately $16.8 million of cash
during the six months ended June 30, 2002, all of which was used in a loan to
Nevoro to acquire Apollo Gold, Inc.
Financing Activities. During the six months ended June 30, 2003, financing
activities provided approximately $3.9 million in cash, primarily from proceeds
of approximately $4.2 million from the exercise of special warrants issued
in 2002, and repayment of notes payable of approximately $256,000. Financing
activities provided approximately $19.9 million in cash during the six months
ended June 30, 2002, from the issuance and sale of convertible debentures.
APOLLO GOLD, INC. ("AGI")
The financial statements of the Company prior to June 25, 2002, as set
forth above, do not include the financial condition and results of operations of
Apollo Gold, Inc. ("AGI"), which was acquired by the Company through its
merger with AGI's parent, Nevoro, on that date. Substantially all of the gold
mining and exploration business conducted by the Company subsequent to June 25,
2002 consists of the gold mining and exploration operations of AGI.
Period from January 1, 2002 Through June 24, 2002
AGI realized sales of approximately US$33.3 million in the period from January
1, 2002 through June 24, 2002. Sales reflected a continuing decline in world
gold prices throughout the period. This decline in gold prices also caused AGI
to reduce gold production, which led to a decrease in cost of sales to
approximately US$26 million in the period from January 1, 2002 through June 24,
2002. Depreciation, depletion and amortization expenses equaled approximately
US$2.7 million in the period from January 1, 2002 through June 24, 2002, based
on carrying values of AGI's mining properties and equipment consistent with
those in 2001.
During the period from January 1, 2002 through June 24, 2002, AGI paid royalties
of approximately US$438,000. These royalties were consistent, on an annualized
basis, with aggregate royalties paid in the year ended December 31, 2001 and
reflected the decline in gold production due to depressed world gold prices.
Based on these factors, AGI earned a gross profit of approximately US$4.1
million for the period from January 1, 2002 through June 24, 2002.
AGI incurred general and administrative expenses of approximately US$1.6 million
in the period from January 1, 2002 through June 24, 2002. General and
administrative expenses increased due to additional legal and accounting expense
from the pending acquisition of AGI by Nevoro and the subsequent acquisition of
Nevoro by Apollo Gold Corporation. Exploration expenses were approximately
US$634,000 during the period from January 1, 2002 through June 24, 2002,
reflecting a continued increase in exploration activities on AGI's properties.
During the period from January 1, 2002 through June 24, 2002, AGI incurred
interest expense of approximately US$413,000, indicating a decrease in
borrowings from 2001. It also incurred a gold hedging loss of approximately
US$1.5 million, resulting from spot deferred forward sales contracts entered
into in 2001.
Based on these elements, AGI realized a net loss of US$760,000 during the period
from January 1, 2002 through June 24, 2002.
29
ENVIRONMENTAL
All of our operations are subject to reclamation and closure requirements. We
monitor these costs on a regular basis, and together with third party
engineers we prepare internal estimates to evaluate our bonding requirements.
These estimates are then reconciled with requirements of state and federal
authorities. As of June 30, 2003, we have accrued approximately $28.3
million related to reclamation, severance and other closure requirements. As of
June 30, 2003, our total reclamation, severance and other closure requirements
are estimated to be US$20,977,000. This liability is covered by a
combination of surety bonds, totaling US$31,959,316, and cash bonds
totaling US$6,183,479, for a total reclamation surety, at June 30, 2003,
of US$38,142,795. Our reclamation liability coverage exceeds our estimated
requirements because the federal and state authorities estimate reclamation
based upon wages in excess of what we would have to pay if we are required to
conduct the reclamation and closure requirements on our own; however, the
federal and state authorities assume we will not have the capability to
complete the reclamation and closure requirements on our own. Therefore,
liability coverage is increased to account for the increased overhead and other
costs necessary for mobilization and demobilization of workers, time
delays and numerous other contingencies if the state or federal authorities
were forced to conduct the reclamation project. We have accrued what
management believes is the present value of our best estimate of the liability
as of June 30, 2003; however, it is possible that our obligation may change in
the near or long term depending on a number of factors, including finalization
of settlement terms, ruling from the courts and other factors. In addition,
any adverse ruling against us regarding any environmental matter could have
a material adverse effect on us.
30
NEW ACCOUNTING PRONOUNCEMENTS
We report under Canadian GAAP and reconcile the financial statements to US
GAAP.
NEW CANADIAN GAAP ACCOUNTING PRONOUNCEMENTS
The CICA issued Handbook Sections 1581, "Business Combinations", and 3062,
"Goodwill and Other Intangible Assets". Effective July 1, 2001, the standards
require that all business combinations be accounted for using the purchase
method. Additionally, effective January 1, 2002, goodwill and indefinite life
intangible assets will no longer be required to be amortized but will be
subjected to an annual impairment test. Upon adoption of Section 3062 a
transitional impairment test is required to be performed within six months, and
a loss is required to be charged to opening retained earnings. This standard has
been adopted by the Company.
In addition, the CICA issued amendments to Handbook Section 1650, "Foreign
Currency Translation". Effective January 1, 2002, the standards require that all
unrealized translation gains and losses on assets and liabilities denominated in
foreign currencies be included in earnings for the year, including gains and
losses on long-term monetary assets and liabilities, such as long term debt,
which were previously deferred and amortized on a straight-line basis over the
remaining lives of the related items. These amendments will be applied
retroactively with restatement of prior periods. The adoption of this standard
did not have a material effect on the financial statements.
The CICA also issued Handbook Section 3870, "Stock-based Compensation and
Other Stock-based Payments". This Section establishes standards for the
recognition, measurement and disclosure of stock-based compensation and other
stock-based payments made in exchange for goods and services and applies to
transactions, including non-reciprocal transactions, in which an enterprise
grants shares of common stock, stock options, or other equity instruments, or
incurs liabilities based on the price of common stock or other equity
instruments. This Section sets out a fair value based method of accounting and
is required for certain stock-based transactions, effective January 1, 2002
and is applied to awards granted on or after that date. This standard has
been adopted by the Company.
The CICA has also issued Accounting Guideline 13, AcG-13, "Hedging
Relationships", which requires that in order to apply hedge accounting, all
hedging relationships must be identified, designated, documented and effective.
Where hedging relationships cannot meet these requirements, hedge accounting
must be discontinued. AcG-13 is applicable for fiscal years beginning on or
after July 1, 2003. Management is currently evaluating the effect of the
adoption of the new guideline on its financial statements.
The CICA has issued a revised Handbook Section 3475, "Disposal of Long-Lived
Assets and Discontinued Operations". The revised standard establishes criteria
for the classification of long-lived assets as "held for sale" and requires that
long-lived assets that are to be disposed of by sale be measured at the lower of
carrying value or fair value less cost to sell. It eliminates the previous
recommendation that enterprises include under "discontinued operations" in the
financial statements amounts for operating losses that have not yet occurred.
31
Additionally, the revised standard expands the scope of discontinued operations
to include all components of an enterprise with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. The new Section 3475
is effective for disposal activities initiated by the enterprise's commitment to
a plan on or after May 1, 2003. Management does not expect the adoption of the
new standard to have a material impact on its financial statements.
In 2002, the CICA Handbook Sections 3063 - "Impairment of Long Lived
Assets" and 3475 - "Disposal of Long Lived Assets and Discontinued Operations"
were amended to harmonize with SFAS 144. The standards will require an
impairment loss to be recognized when the carrying amount of an asset held for
use exceeds the sum of the undiscounted cash flows. The impairment loss would be
measured as the amount by which the carrying amount exceeds the fair value of
the asset. An asset held for sale is to be measured at the lower of carrying
cost or fair value less cost to sell. In addition, this guidance broadens the
concept of a discontinued operation and eliminates the ability to accrue
operating losses expected between the measurement date and the disposal date.
Section 3063 is effective for fiscal years beginning on or after April 1, 2003
and Section 3475 applies to disposal activities initiated by an enterprise's
commitment to a plan on or after May 1, 2003. The sections will be applied
prospectively with early adoption encouraged. Management is currently evaluating
the effect of the adoption of the new standard on its financial statements.
NEW US GAAP ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 was amended in June 2000 with the
issuance of SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." SFAS 133, which we adopted effective January 1, 2001,
requires that derivatives be recognized as assets or liabilities and be measured
at fair value. Gains or losses resulting from changes in the fair value of
derivatives in each period are to be accounted for either in current earnings or
other comprehensive income (loss) depending on the use of the derivatives and
whether they qualify for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in the fair value or cash flows of the hedging
instruments and the hedged items. We may from time to time enter into metals
hedging contracts (principally for gold and zinc). The contracts may involve
outright forward sales contracts, spot-deferred sales contracts, the use of
options which may involve the sale of call options and the purchase of all these
hedging instruments.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations," which amends SFAS No. 19. This statement addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement required that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The requirements of this statement must be
implemented for fiscal years beginning after June 15, 2002. We adopted these
standards in January 1, 2002.
The FASB also issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. It supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
32
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of a business. It also amends APB No. 51, "Consolidated Financial
Statements," to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
application encouraged. The provisions of this statement generally are to be
applied prospectively. The adoption of this statement did not have a material
effect on our statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"). SFAS No. 145 updates, clarifies and simplifies
existing accounting pronouncements, by rescinding SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Accounting Principles Board Opinion No. 30 will now be
used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The provisions of SFAS No. 145 that amend SFAS No. 13 are effective for
transactions occurring after May 15, 2002 with all other provisions of SFAS No.
145 being required to be adopted by us in our consolidated financial statements
for the first quarter of fiscal 2003. Our management currently believes that the
adoption of SFAS No. 145 will not have a material impact on our statements.
On July 30, 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 replaces the prior guidance that was provided by EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Our management currently believes that the adoption of
SFAS No. 146 will not have a material impact on our statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." This statement amends SFAS 123,
"Accounting for Stock-Based Compensation," to provide for alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The disclosure requirements of this statement are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
provisions of this recently issued accounting pronouncement are currently
being assessed by management.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). The Statement
33
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. In particular, it (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in SFAS 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to the
language used in FASB Interpretation No. 45, Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others and (4) amends certain other existing pronouncements. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, except as
stated below and for hedging relationships designated after June 30, 2003. The
provisions of SFAS 149 that relate to SFAS 133 Implementation Issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. In
addition, certain provisions relating to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to existing contracts as well as new contracts entered into after June
30, 2003. SFAS 149 should be applied prospectively. SFAS 149 is required to be
adopted by the Company on July 1, 2003. The Company has not yet determined the
impact of SFAS 149 on its financial statements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 modifies the accounting for certain financial instruments
that, under previous guidance, issuers could account for as equity. The
Statement requires that those instruments be classified as liabilities in
statements of financial position.
SFAS 150 affects an issuer's accounting for three types of freestanding
financial instruments, namely:
- mandatory redeemable shares, which the issuing company is obligated to
buy back in exchange for cash or other assets.
- Instruments, other than outstanding shares, that do or may require the
issuer to buy back some of its shares in exchange for cash or other
assets. These instruments include put options and forward purchase
contracts.
- obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the issuers'
shares.
SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle for
financial instruments created before the issuance date of the Statement and
still existing at the beginning of the interim period of adoption. Restatement
is not permitted. The Company is currently evaluating the impact of SFAS 150 on
its results of operations and financial position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
disclosures that must be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002 and its
34
recognition requirements are applicable for guarantees issued or modified after
December 31, 2002. Our management currently believes that the adoption of FIN45
will not have a material impact on our statements.
In January 2003, the FASB issued FIN 46 - "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 clarifies the application of Accounting
Research Bulletin No. 51 - Consolidated Financial Statements to those entities
defined as "Variable Interest Entities" (more commonly referred to as special
purpose entities) in which equity investors do not have the characteristics
of "controlling financial interest" or do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 applies immediately to all
Variable Interest Entities created after January 31, 2003 and by the
beginning of the first interim or annual reporting period commencing after
June 15, 2003 for Variable Interest Entities created prior to February 1,
2003. The Company does not conduct any transactions through special purposes
entities and does not expect FIN 46 to have an impact on its financial
statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make a variety of
estimates and assumptions that affect (i) the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and (ii) the reported amounts of revenues
and expenses during the reporting periods covered by the financial statements.
Our management routinely makes judgments and estimates about the effect of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the future resolution of the uncertainties increase, these
judgments become even more subjective and complex. We have identified certain
accounting policies that are most important to the portrayal of our current
financial condition and results of operations. Our significant accounting
policies are disclosed in Note 4 to the Consolidated Financial Statements
included in our Registration Statement on Form 10 filed with the SEC.
Revenue Recognition. Sales of metals products sold directly to smelters are
recorded when title and risk of loss transfer to the smelter at current spot
metals prices. We must estimate the price at which our metals will be sold in
reporting our profitability and cash flow. Recorded values are adjusted monthly
until final settlement at month-end metals prices. Sales of metal in products
tolled, rather than sold to smelters, are recorded at contractual amounts when
title and risk of loss transfer to the buyer.
Mining Costs. In general, mining costs are charged to cost of sales as
incurred. However, certain mining costs associated with open-pit deposits that
have diverse grades and waste-to-ore ratios over the mine life are deferred.
These mining costs are incurred on mining activities that are normally
associated with the removal of waste rock at open-pit mines and which is
commonly referred to as "deferred stripping." Amortization, which is calculated
using the unit-of-production method based on estimated recoverable ounces of
proven and probable gold reserves, is charged to operating costs as gold is
produced and sold, using a stripping ratio calculated as the ratio of total tons
to be moved to total gold ounces to be recovered over the life of the mine, and
result in the recognition of the costs of these mining activities over the life
of the mine as gold is produced and sold. The application of the accounting for
deferred stripping costs and the resulting differences in timing between costs
capitalized and amortization generally results in an asset on the balance sheet
(capitalized mining costs), although it is possible that a liability could arise
if amortization exceeds costs capitalized.
35
The average remaining life of the open-pit mine operations where we
capitalize mining costs is five years, which represents the time period over
which the capitalized mining balance will be amortized. The amortization of
these capitalized costs is reflected in the income statement in a pro-rata
manner over the remaining life of the open-pit mine operations so that no
unamortized balance remains at mine closure. Cash flows from our individual
mining operations are reviewed regularly, and at least annually, for the purpose
of assessing whether any write downs to the capitalized mining cost balances are
required.
The life-of-mine weighted average waste-to-ore ratio is calculated based on tons
mined during the period and is calculated as the ratio of waste tons mined to
total ore tons mined. For the six-month periods ended June 30, 2003 the
waste-to-ore ratio was 3.31 to 1.
Depreciation and Depletion. Depreciation is based on the estimated useful
lives of the assets and is computed using straight-line and unit-of-production
methods. Depletion is computed using the unit-of-production method. The
units-of-production method is based on proven and probable ore reserves. As
discussed above, our estimates of proven and probable ore reserves may change,
possibly in the near term, resulting in changes to depreciation, depletion,
amortization and reclamation accrual rates in future reporting periods.
Impairment of Long-Lived Assets. We review the net carrying value of all
facilities, including idle facilities, on a periodic basis. We estimate the net
realizable value of each property based on the estimated undiscounted future
cash flows that will be generated from operations at each property, the
estimated salvage value of the surface plant and equipment and the value
associated with property interests. These estimates of undiscounted future cash
flows are dependent upon the estimates of metal to be recovered from proven and
probable ore reserves (see discussion above), future production cost estimates
and future metals price estimates over the estimated remaining mine life. If
undiscounted cash flows are less than the carrying value of a property, an
impairment loss is recognized based upon the estimated expected future cash
flows from the property discounted at an interest rate commensurate with the
risk involved.
Environmental Matters. When it is probable that such costs will be incurred and
they are reasonably estimable, we accrue costs associated with environmental
remediation obligations at the most likely estimate. Accruals for estimated
losses from environmental remediation obligations generally are recognized no
later than completion of the remedial feasibility study for such facility and
are charged to provision for closed operations and environmental matters. We
periodically review our accrued liabilities for such remediation costs as
evidence becomes available indicating that our remediation liability has
potentially changed. Costs of future expenditures for environmental remediation
are not discounted to their present value unless subject to a contractually
obligated fixed payment schedule. Such costs are based on our current estimate
of amounts that are expected to be incurred when the remediation work is
performed within current laws and regulations. Recoveries of environmental
remediation costs from other parties are recorded as assets when their receipt
is deemed probable.
Broken Ore on Leach Pad. Mining, engineering and crushing related costs are
charged to the broken ore on leach pad account and matched to the ounces added
and removed. The gold ounces are shipped to the refinery and revenues are
recorded, in accordance with our revenue recognition policy, and matched in the
current period against the costs.
36
When the ore is delivered to the leach pad it is sprinkled with a dilute
solution containing cyanide and lime. This solution seeps through the leach
pile until it reaches the plastic liner at the bottom. This process is aided by
drainage systems (pipes and trenches) throughout the leach pad. From the liner,
the gold bearing solution is captured in a pond and pumped to a series of tanks
containing granular activated carbon, where the gold is absorbed onto the
carbon's porous surfaces. Removal of carbon from the tanks facilitates the
stripping or removal of gold from the carbon surfaces. The solution used in the
stripping process is then passed through an electrical plating (electro-winning)
circuit where the gold is deposited on electrodes. The electro-winning process
is a method of using positive and negative electricity to extract the metals
from the solutions. This process creates a sludge material that is then refined
into a dore product at the mine site. Dore is a metal bar that consists of
50-65% gold, 10-20% silver and various levels of other metals that may occur in
the ore. An additional refining process occurs offsite in which the bar is
converted into marketable or .9999 fine gold and .9000 fine silver.
Our drawdown calculations for current and long term asset valuation
determination suggest that it will take approximately 18 months to deplete the
leach pad inventory. For production purposes, because we continually add new
production ounces, we use a five month period in which we determine that 20% of
any given production will be taken off of the pad in a months time.
The leach pad valuation process is based on management's best estimates. When
the leach pad is finally closed and all gold and silver ounces removed are
counted we will be able to determine the actual quantity of metal that was
contained in the leach pad. Estimates begin at the start of the process as tons
and metal content are estimated. Tonnage is estimated using ground surveys and
truck counts. Metal content is calculated using fire assaying techniques that
involve averaging the mining areas and comparing to the daily blast hole assays
which are done using the Atomic Absorption Hot Cyanide Leach assaying
techniques. The gold recovery curve is then estimated using the design of the
leach pad, the composition of run of mine and crushed ores, the estimated ore
grades and the drawdown timing. All calculations are based on mining rules and
processes, however, only the total amounts of metals removed from the pad is
truly known at any given time. The ounces removed from the pad are measured and
used as a check and balance to the integrity of the calculation to ensure that
we are reasonably assured that our estimates are close. The leach pad
inventories at the Florida Canyon Mine are built and processed in stages and
accordingly at the close of any given portion or stage of the process it is
possible to assess the effectiveness of all assumptions by comparing them to
what actually occurred. The mine has been in production since 1986 and all
historical records are used for comparative purposes.
Based on this historical information, it is expected that we will recover
approximately 73% of all gold ounces crushed and delivered to the pad. Our
expected recovery for run of mine or uncrushed ounces delivered to the pad is
58% for the life of the leach pad. However these are estimates based on
historical data and the ultimate recovery rate will only be known at the end of
the leach pad life cycle.
With the current mine plan at the Florida Canyon Mine operation, the current
leach pad operation is expected to deliver materials through 2006.
Changes in our assumptions will or could have the effect of changing the value
of the broken ore on the leach pad. Circumstances that may lead to changes in
our assumptions include but are not limited to the following: as the ore grades
fluctuate the recovery assumptions may change, the higher the ore grade the
higher the recovery is on those ounces, the weather may affect the leaching of
the ores on the pads such as a strong freeze may slow down recoveries and a very
wet spring may speed up the recovery of ounces.
37
The most critical area which could affect the leach pad process would be the
make up of the actual ore bearing material. For example, sulphide or
carbonaceous bearing ores are harder to leach than pure oxide ores. Other
minerals or chemical compounds may also affect the leachability of the ores on
the pad.
Currently, there is an estimated 61,800 ounces of gold in the broken ore on
leach pad with a carrying value of $15,455,000 or $250 per ounce of gold. Each
1% change in the estimated recovery rate is 618 ounces of gold. If the recovery
is estimated to be lower than expected this is a permanent loss of gold ounces
and if the recovery is estimated to be higher the reverse is true. Each 1%
change in this estimate will change the broken ore on leach pad by $154,500.
HEDGING ACTIVITIES
In the past, we have not used hedging techniques to reduce our exposure to
price volatility; however, on November 15, 2002, we entered into a hedging
contract with the Standard Bank London Limited ("Standard Bank") for gold in the
aggregate amount of 100,000 ounces involving the use of put and call options.
Beginning in April 2003, we are obligated to deliver 4,000 ounces of gold per
month, for 25 months, under the following conditions: We purchased put options
to cover the floor price of gold at US$295 per ounce. Therefore, if the price of
gold decreases to a level below US$295 per ounce, Standard Bank is obligated to
purchase the 4,000 ounces for US$295 per ounce. We also sold call options to
Standard Bank. Therefore, if the price of gold increases to over US$345 per
ounce, then we must sell 4,000 ounces to Standard Bank, thereby leaving any
excess of the US$345 ceiling for Standard Bank. We have engaged in hedging
activities to minimize the effect of declines in metals prices on our operating
results. As a result, we may be prevented from realizing possible revenues in
the event that the market price of a metal exceeds the price stated in a forward
sale or call option contract.
Our senior management, with approval of our board of directors, makes all
decisions regarding our hedging techniques, and we have no formal corporate
policy concerning such techniques. We have no current plans to use hedging
techniques in the future.
RISK FACTORS
Any of the following risks could materially adversely affect our business,
financial condition, or operating results and could negatively impact the value
of our common stock. These risks have been separated into two groups: risks
relating to our operations and risks related to the metals mining industry
generally.
RISKS RELATING TO OUR OPERATIONS
DUE TO OUR CURRENT CHALLENGES AT OUR MONTANA TUNNELS MINE, OUR CURRENT
AND FUTURE CASH POSITION MAY NOT PROVIDE US WITH SUFFICIENT LIQUIDITY TO
SUSTAIN OUR OPERATIONS.
At June 30, 2003, we had unrestricted cash and cash equivalents of less
than $2.5 million, compared to cash of approximately $13.3 million at December
31, 2002. The decrease in cash during this six-month period is due in large part
to our expenditure of approximately $9 million in April and May 2003 to address
the pit wall problems at our Montana Tunnels Mine.
38
Approximately $2.0 million of our unrestricted cash at June 30, 2003 has
been allocated to be spent pursuant to the terms and conditions of our Canadian
flow-through financing. In addition, the pit wall problems at our Montana
Tunnels Mine will require funding of an additional $15 million over the next
year. We believe our cash requirements for 2003 will be funded through a
combination of current cash, future cash flows from operations, loans and lines
of credit, and/or future debt or equity security issuances. As of August 28,
2003, we began an offering to raise additional money in each of the provinces in
Canada, except Quebec. In the event that we raise funding from the issuance and
sale of equity securities, any such issuances of securities could dilute the
ownership percentages of current investors, and any new securities could have
rights, preferences and privileges superior to those of our common stock. Our
ability to raise capital is highly dependent upon the commercial viability of
our projects and the associated prices of the metals we produce. Because of the
significant impact that changes in the prices of gold, silver, lead and zinc
have on our financial condition, declines in these metals prices may negatively
impact short-term liquidity and our ability to raise additional funding for
long-term projects. In the event that cash balances decline to a level that
cannot support our operations, our management will defer certain planned capital
expenditures and exploration expenditures as needed to conserve cash. If our
plans are not successful, operations and liquidity may be adversely affected.
WE MAY NOT BE IN COMPLIANCE WITH STANDARD BANKS REVOLVING LOAN LINE OF
CREDIT COVENANTS.
On June 25, 2003, we entered into a $5,000,000 Revolving Loan, Guaranty and
Security Agreement with Standard Bank London Limited ("Standard Bank"). Although
there is a $5,000,000 commitment, we must satisfy certain requirements in order
for Standard Bank to advance the maximum amount of the loan. As of August 7,
2003, we have the ability to borrow approximately US$2,500,000 under the
revolving loan. As of August 7, 2003 we have borrowed approximately US$1,000,000
from Standard Bank. Until the commitment under the line of credit expires or has
been terminated, we have to meet certain covenants. As of August 28, 2003, we
will likely not be in compliance with our net worth and current ratio covenants,
and, therefore, we could subject to an event of default.
WE ARE THE PRODUCT OF A RECENT MERGER, AND HAVE A LIMITED OPERATING HISTORY
ON WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS.
We were formed as a result of an merger of two separate companies, Nevoro
and Pursuit, in June 2002, and to date have only three fiscal quarters of
combined operations. While both Nevoro's wholly-owned subsidiary, Apollo Gold,
Inc., and Pursuit had a prior operating history, we have only a limited
operating history as a combined company, upon which you can evaluate our
business and prospects, and we have yet to develop sufficient experience
regarding actual revenues to be received from our combined operations. Pursuit
had net losses of $703,238, $623,498, and $2,281,142 for the respective years
ended December 31, 2001, 2000 and 1999. The operations of Apollo Gold, Inc.
were profitable in 2001, prior to the Plan of Arrangement. For the six months
ended June 30, 2003 we had a loss of approximately $4,063,000 and for the year
ended December 31, 2002, we had a loss of $4,780,000.
You must consider the risks and uncertainties frequently encountered by
companies in situations such as ours, including but not limited to the ability
to integrate our operations and eliminate duplicative costs. If we are
unsuccessful in addressing these risks and uncertainties, our business, results
of operations and financial condition will be materially and adversely affected.
39
WE ARE CURRENTLY INVOLVED IN ONGOING LITIGATION WHICH MAY ADVERSELY AFFECT
US.
We are engaged in litigation from time to time. On May 29, 2003 we
defended an appeal involving a mining reclamation bond in the amount of
US$16,936,130 issued by Safeco Insurance Company of America ("Safeco"). The
purpose of the bond is to provide financial guarantees to the United States to
ensure that our Florida Canyon Mine in Pershing County, Nevada, will be
reclaimed in the event we fail to do so. The provision of such financial
guarantee is a condition of our operating permit. Loss of the litigation would
have required us to find replacement bonding in a material amount. If any
claims results in a judgment against us or are settled on unfavorable terms, our
results of operations, financial condition and cash flows could be materially
adversely affected. See Item 8 - "Legal Proceedings."
WE ARE DEPENDENT ON CERTAIN KEY PERSONNEL.
We are currently dependent upon the ability and experience of R. David
Russell, our President and Chief Executive Officer; R. Llee Chapman, our Vice
President, Chief Financial Officer, Treasurer and Controller; Richard F. Nanna,
our Vice President of Exploration; David K. Young, our Vice President of
Business Development; Donald W. Vagstad, our Vice President, Legal, Secretary
and General Counsel; and Wade Bristol, Vice President, U.S. Operations. There
can be no assurance that we will be able to retain any or all of such
officers. We currently do not carry key person insurance on any of these
individuals, and the loss of one or more of them could have a material adverse
effect on our operations. We have entered into employment agreements with each
of Messrs. Russell, Chapman, Nanna, Young, Vagstad and Bristol, which provide
for certain payments upon termination or resignation resulting from a change of
control (as defined in such agreements). We compete with other companies both
within and outside the mining industry in connection with the recruiting and
retention of qualified employees knowledgeable in mining operations.
RISKS RELATING TO THE METALS MINING INDUSTRY
OUR EARNINGS MAY BE AFFECTED BY METALS PRICE VOLATILITY, SPECIFICALLY THE
VOLATILITY OF GOLD AND ZINC PRICES.
We derive all of our revenues from the sale of gold, silver, lead and zinc
and, as a result, our earnings are directly related to the prices of these
metals. Changes in the price of gold significantly affect our profitability.
Gold prices historically have fluctuated widely, based on numerous industry
factors including:
- industrial and jewelry demand;
- central bank lending, sales and purchases of gold;
- forward sales of gold by producers and speculators;
- production and cost levels in major gold-producing regions; and
- rapid short-term changes in supply and demand because of speculative
or hedging activities.
- Gold prices are also affected by macroeconomic factors, including:
40
- confidence in the global monetary system;
- expectations of the future rate of inflation (if any);
- the strength of, and confidence in, the U.S. dollar (the currency in
which the price of gold is generally quoted) and other currencies;
- interest rates; and
- global or regional political or economic events, including but not
limited to acts of terrorism.
The current demand for, and supply of, gold also affects gold prices. The
supply of gold consists of a combination of new production from mining and of
existing stocks of bullion held by government central banks, public and private
financial institutions, industrial organizations and private individuals. As
the amounts produced by all producers in any single year constitute a small
portion of the total potential supply of gold, normal variations in current
production do not usually have a significant impact on the supply of gold or on
its price. Mobilization of gold stocks held by central banks through lending
and official sales may have a significant adverse impact on the gold price. If
revenue from gold sales declines for a substantial period below the cost of
production at any or all of our operations, we could be required to reduce our
reserves and make a determination that it is not economically feasible to
continue either the commercial production at any or all of our current
operations or the exploration at some or all of our current projects.
Price volatility also appears in the silver, zinc and lead markets. In
particular, our Montana Tunnels Mine has historically produced approximately 45
million pounds of metal annually, and therefore we are subject to factors such
as world economic forces and supply and demand.
All of the above factors are beyond our control and are impossible for us
to predict. If the market prices for these metals fall below our costs to
produce them for a sustained period of time, we will experience additional
losses and may have to discontinue exploration and/or mining at one or more of
our properties.
The following table sets forth the average daily closing prices of the
following metals for 1980, 1985, 1990, 1995, 1997 and each year thereafter
through December 31, 2002.
41
1980 1985 1990 1995 1997 1998 1999 2000 2001 2002
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Gold (1) US$612.56 US$317.26 US$383.46 US$384.16 US$331.10 US$294.16 US$278.77 US$279.03 US$271.00 US309.73
(per ounces)
Silver (2) US$20.63 US$6.14 US$4.82 US$5.19 US$4.90 US$5.53 US$5.25 US$5.00 US$4.39 US$4.60
(per ounces)
Lead (3) US$0.41 US$0.18 US$0.37 US$0.29 US$0.28 US$0.24 US$0.23 US$0.21 US$0.22 US$0.21
(per lb.)
Zinc (4) US$0.34 US$0.36 US$0.69 US$0.47 US$0.60 US$0.46 US$0.49 US$0.51 US$0.40 US$0.37
(per lb.)
- --------------------------
(1) London Final
(2) Handy & Harman
(3) London Metals Exchange -- Cash
(4) London Metals Exchange -- Special High Grade - Cash
On June 30, 2003, the closing prices for gold, silver, zinc and lead were
US$346 per ounce, US$4.50 per ounce, US$783.50 per tonne and US$484 per tonne,
respectively.
THE VOLATILITY OF METALS PRICES MAY ALSO ADVERSELY AFFECT OUR
EXPLORATION EFFORTS.
Our ability to produce gold, silver, zinc and lead in the future is
dependent upon our exploration efforts, and our ability to develop new ore
reserves. If prices for these metals decline, it may not be economically
feasible for us to continue our exploration of a project or to continue
commercial production at some or all of our properties.
OUR ORE RESERVE ESTIMATES MAY NOT BE REALIZED.
We estimate our reserves on our properties as either "proven reserves" or
"probable reserves". Our ore reserve figures and costs are primarily estimates
and are not guarantees that we will recover the indicated quantities of these
metals. We estimate proven reserve quantities through extensive sampling and
testing of sites containing the applicable ore that allow us to have an
established estimate as to the amount of such ore that we expect to extract from
a site. Such sampling and tests are conducted by us and by an independent
company hired by us. Probable reserves are computed with information similar to
that used for proven resources, but the sites for sampling are less extensive,
and the degree of certainty as to the content of a site is less. Reserves are
estimates made by our technical personnel and no assurance can be given that the
estimate of the amount of metal or the indicated level of recovery of these
metals will be realized. Reserve estimation is an interpretive process based
upon available data. Further, reserves are based on estimates of current costs
and prices. Our reserve estimates for properties that have not yet started may
change based on actual production experience. In addition, the economic value
of ore reserves may be adversely affected by:
- declines in the market price of the various metals we mine;
- increased production or capital costs; or
- reduced recovery rates.
42
Reserve estimates will change as existing reserves are depleted through
production, as well as changes in estimates caused by changing production cost
and/or metals prices. Changes in reserves may also reflect that grades of ore
fed to process may be different from stated reserve grades because of variation
in grades in areas mined, mining dilution, recoveries and other factors.
Reserves estimated for properties that have not yet commenced production may
require revision based on actual production experience.
Declines in the market price of metals, as well as increased production or
capital costs reduced recovery rates, may render ore reserves uneconomic to
exploit unless the utilization of forward sales contracts or other hedging
techniques is sufficient to offset such effects. If our realized price for the
metals we produce, including hedging benefits, were to decline substantially
below the levels set for calculation of reserves for an extended period, there
could be material delays in the exploration of new projects, increased net
losses, reduced cash flow, restatements or reductions in reserves and asset
write-downs in the applicable accounting periods. Reserves should not be
interpreted as assurances of mine life or of the profitability of current or
future operations. No assurance can be given that the estimate of the amount of
metal or the indicated level of recovery of these metals will be realized.
WE MAY NOT ACHIEVE OUR PRODUCTION ESTIMATES.
We prepare estimates of future production for our operations. We develop
our plans based on, among other things, mining experience, reserve estimates,
assumptions regarding ground conditions and physical characteristics of ores
(such as hardness and presence or absence of certain metallurgical
characteristics) and estimated rates and costs of mining and processing. Our
actual production may vary from estimates for a variety of reasons, including:
- risks and hazards of the types discussed in this section;
- actual ore mined varying from estimates of grade, tonnage, dilution
and metallurgical and other characteristics;
- short-term operating factors relating to the ore reserves, such as the
need for sequential development of ore bodies and the processing of
new or different ore grades;
- mine failures, pit wall cave-ins or equipment failures;
- natural phenomena such as inclement weather conditions, floods and
earthquakes;
- unexpected labor shortages or strikes and
- restrictions or regulations imposed by government agencies.
Each of these factors also applies to sites not yet in production and to
operations that are to be expanded. In these cases, we do not have the benefit
of actual experience in our estimates, and there is a greater likelihood that
the actual results will vary from the estimates.
THE SUCCESS OF OUR EXPLORATION PROJECTS IS UNCERTAIN.
43
From time to time we will engage in the exploration of new ore bodies. Our
ability to sustain or increase our present level of production is dependent in
part on the successful exploration of such new ore bodies and/or expansion of
existing mining operations. The economic feasibility of such exploration
projects is based upon many factors, including:
- estimates of reserves;
- metallurgical recoveries;
- capital and operating costs of such projects; and
- future gold/metal prices.
Exploration projects are also subject to the successful completion of
feasibility studies, issuance of necessary governmental permits and receipt of
adequate financing.
Exploration projects have no operating history upon which to base estimates
of future cash flow. Our estimates of proven and probable ore reserves and
cash operating costs are, to a large extent, based upon detailed geologic and
engineering analysis. We also conduct feasibility studies which derive
estimates of capital and operating costs based upon many factors, including:
- anticipated tonnage and grades of ore to be mined and processed;
- the configuration of the ore body;
- ground and mining conditions;
- expected recovery rates of the gold from the ore; and
- anticipated environmental and regulatory compliance costs.
It is possible that actual costs and economic returns may differ materially
from our best estimates. It is not unusual in the mining industry for new
mining operations to experience unexpected problems during the start-up phase
and to require more capital than anticipated.
ORE EXPLORATION IN GENERAL, AND GOLD EXPLORATION IN PARTICULAR, ARE
SPECULATIVE.
Exploration for ore is speculative, and gold exploration is highly
speculative in nature. Exploration projects involve many risks and frequently
are unsuccessful. There can be no assurance that our future exploration efforts
for gold or other metals will be successful. Success in increasing our reserves
will be the result of a number of factors, including the following:
- quality of management;
- geological and technical expertise;
- quality of land available for exploration; and
- capital available for exploration.
44
If we discover a site with gold or other mineralization, it may take
several years from the initial phases of drilling until production is possible.
Mineral exploration, particularly for gold and silver, is highly speculative in
nature, involves many risks and frequently is nonproductive. There can be no
assurance that our mineral exploration efforts will be successful. Once
mineralization is discovered, it may take a number of years from the initial
phases of drilling until production is possible, during which time the economic
feasibility of production may change. Substantial expenditures are required to
establish ore reserves through drilling, to determine metallurgical processes to
extract the metals from the ore and, in the case of new properties, to construct
mining and processing facilities. As a result of these uncertainties, no
assurance can be given that our exploration programs will result in the
expansion or replacement of existing ore reserves that are being depleted by
current production.
WE ARE DEPENDENT UPON OUR MINING PROPERTIES.
All of our revenues are currently derived from our mining and milling
operations at the Montana Tunnels and Florida Canyon Mines which are low grade
mines. If operations at either of these mines or at any of our processing
facilities are reduced, interrupted or curtailed, our ability to generate future
revenues and profits could be materially adversely affected.
POSSIBLE HEDGING ACTIVITIES COULD EXPOSE US TO LOSSES.
We recently entered into hedging contracts for gold in the aggregate amount
of 100,000 ounces involving the use of put and call options. The contracts give
the holder the right to buy and us the right to sell stipulated amounts of gold
at the upper and lower exercise prices, respectively. The contracts continue
through April 25, 2005 with a put option of $295 per ounce and a call option of
$345 per ounce. In the future, we may enter into additional hedging contracts
which may involve outright forward sales contracts, spot-deferred sales
contracts, the use of options which may involve the sale of call options and the
purchase of all these hedging instruments. See "Item 2 - Selected Financial
Information - Hedging Activities."
WE FACE SUBSTANTIAL GOVERNMENTAL REGULATION.
Safety. Our U.S. mining operations are subject to inspection and regulation
by the Mine Safety and Health Administration of the United States Department of
Labor ("MSHA") under the provisions of the Mine Safety and Health Act of 1977.
The Occupational Safety and Health Administration ("OSHA") also has jurisdiction
over safety and health standards not covered by MSHA. Our policy is to comply
with applicable directives and regulations of MSHA and OSHA.
Current Environmental Laws and Regulations. We must comply with
environmental standards, laws and regulations that may result in greater or
lesser costs and delays depending on the nature of the regulated activity and
how stringently the regulations are implemented by the regulatory authority.
The costs and delays associated with compliance with such laws and regulations
could stop us from proceeding with the exploration of a project or the operation
or future exploration of a mine. Laws and regulations involving the protection
and remediation of the environment and the governmental policies for
implementation of such laws and regulations are constantly changing and are
generally becoming more restrictive. We have made, and expect to make in the
future, significant expenditures to comply with such laws and regulations.
These requirements include regulations under many state and U.S. federal laws
and regulations, including:
45
- the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA" or "Superfund") which regulates and establishes
liability for the release of hazardous substances;
- the U.S. Endangered Species Act;
- the Clean Water Act;
- the Clean Air Act;
- the U.S. Resource Conservative and Recovery Act ("RCRA");
- the Migratory Bird Treaty Act;
- the Safe Drinking Water Act;
- the Emergency Planning and Community Right-to-Know Act;
- the Federal Land Policy and Management Act;
- the National Environmental Policy Act; and
- the National Historic Preservation Act.
The United States Environmental Protection Agency continues the development
of a solid waste regulatory program specific to mining operations such as ours,
where the mineral extraction and beneficiation wastes are not regulated as
hazardous wastes under RCRA.
Some of our partially owned properties are located in historic mining
districts with past production and abandoned mines. The major historical mine
workings and processing facilities owned (wholly or partially) by us are being
targeted by the Montana Department of Environmental Quality for publicly-funded
cleanup, which reduces our exposure to financial liability. We are
participating with the Montana Department of Environmental Quality under
Voluntary Cleanup Plans on those sites. Our cleanup responsibilities have been
substantially completed at the Corbin Flats CERCLA Facility and at the Gregory
Mine site, both located in Jefferson County, Montana, under programs involving
cooperative efforts with the Montana Department of Environmental Quality. The
Corbin Flats CERCLA Facility was the Montana Department of Environmental
Quality's number one priority site in Jefferson County. The Montana Department
of Environmental Quality has reimbursed us for more than half of our cleanup
costs at the Corbin Flats CERCLA Facility under two Montana State public
environmental cleanup funding programs. However, there can be no assurance that
we will continue to resolve disputed liability for historical mine and ore
processing facility waste sites on such favorable terms in the future. We
remain exposed to liability, or assertions of liability that would require
expenditure of legal defense costs, under joint and several liability statutes
for cleanups of historical wastes that have not yet been completed.
Environmental laws and regulations may also have an indirect impact on us,
such as increased costs for electricity due to acid rain provisions of the
United States Clean Air Act Amendments of 1990. Charges by refiners to which
we sell our metallic concentrates and products have substantially increased over
the past several years because of requirements that refiners meet revised
environmental quality standards. We have no control over the refiners'
operations or their compliance with environmental laws and regulations.
46
Potential Legislation. Changes to the current laws and regulations
governing the operations and activities of mining companies, including changes
in permitting, environmental, title, health and safety, labor and tax laws, are
actively considered from time to time. We cannot predict such changes, and
such changes could have a material adverse impact on our business. Expenses
associated with the compliance with such new laws or regulations could be
material. Further, increased expenses could prevent or delay exploration
projects and could therefore affect future levels of mineral production.
WE ARE SUBJECT TO ENVIRONMENTAL RISKS.
Environmental Liability. We are subject to potential risks and
liabilities associated with pollution of the environment and the disposal of
waste products that could occur as a result of our mineral exploration and
production. To the extent that we are subject to environmental liabilities,
the payment of such liabilities or the costs that we may incur to remedy
environmental pollution would reduce funds otherwise available to us and could
have a material adverse effect on our financial condition or results of
operations. If we are unable to fully remedy an environmental problem, we might
be required to suspend operations or enter into interim compliance measures
pending completion of the required remedy. The potential exposure may be
significant and could have a material adverse effect on us. We have not
purchased insurance for environmental risks (including potential liability for
pollution or other hazards as a result of the disposal of waste products
occurring from exploration and production) because it is not generally available
at a reasonable price.
Environmental Permits. All of our exploration, development and production
activities are subject to regulation under one or more of the various state,
federal and provincial environmental laws and regulations in Canada and the U.S.
Many of the regulations require us to obtain permits for our activities. We
must update and review our permits from time to time, and are subject to
environmental impact analyses and public review processes prior to approval of
the additional activities. It is possible that future changes in applicable
laws, regulations and permits or changes in their enforcement or regulatory
interpretation could have a significant impact on some portion of our business,
causing those activities to be economically reevaluated at that time. Those
risks include, but are not limited to, the risk that regulatory authorities may
increase bonding requirements beyond our financial capabilities. The posting of
bonding in accordance with regulatory determinations is a condition to the right
to operate under all material operating permits, and therefore increases in
bonding requirements could prevent our operations from continuing even if we
were in full compliance with all substantive environmental laws.
WE FACE STRONG COMPETITION FROM OTHER MINING COMPANIES FOR THE ACQUISITION
OF NEW PROPERTIES.
Mines have limited lives and as a result, we may seek to replace and expand
our reserves through the acquisition of new properties. In addition, there is a
limited supply of desirable mineral lands available in the United States and
other areas where we would consider conducting exploration and/or production
activities. Because we face strong competition for new properties from other
mining companies, some of whom have greater financial resources than we do, we
may be unable to acquire attractive new mining properties on terms that we
consider acceptable.
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THE TITLES TO SOME OF OUR UNITED STATES PROPERTIES MAY BE DEFECTIVE.
Certain of our mineral rights consist of "unpatented" mining claims created
and maintained in accordance with the U.S. General Mining Law of 1872.
Unpatented mining claims are unique U.S. property interests, and are generally
considered to be subject to greater title risk than other real property
interests because the validity of unpatented mining claims is often uncertain.
This uncertainty arises, in part, out of the complex federal and state laws and
regulations under the General Mining Law. Also, unpatented mining claims are
always subject to possible challenges by third parties or contests by the
federal government. The validity of an unpatented mining claim, in terms of
both its location and its maintenance, is dependent on strict compliance with a
complex body of federal and state statutory and decisional law. In addition,
there are few public records that definitively control the issues of validity
and ownership of unpatented mining claims.
In recent years, the U.S. Congress has considered a number of proposed
amendments to the General Mining Law. Although no such legislation has been
adopted to date, there can be no assurance that such legislation will not be
adopted in the future. If ever adopted, such legislation could, among other
things, impose royalties on gold production from currently unpatented mining
claims located on federal lands. If such legislation is ever adopted, it could
have an adverse impact on earnings from our operations, could reduce estimates
of our reserves and could curtail our future exploration and development
activity on federal lands.
While we have no reason to believe that the existence and extent of any of
our properties are in doubt, title to mining properties are subject to potential
claims by third parties claiming an interest in them. The failure to comply
with all applicable laws and regulations, including failure to pay taxes, carry
out and file assessment work, may invalidate title to portions of the properties
where the mineral rights are not owned by us.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY RISKS AND HAZARDS ASSOCIATED
WITH THE MINING INDUSTRY.
Our business is subject to a number of risks and hazards including:
- environmental hazards;
- political and country risks;
- industrial accidents;
- labor disputes;
- unusual or unexpected geologic formations;
- cave-ins;
- slope failures; and
- flooding and periodic interruptions due to inclement or hazardous
weather conditions.
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Such risks could result in:
- damage to or destruction of mineral properties or producing
facilities;
- personal injury or death;
- environmental damage;
- delays in mining;
- monetary losses; and
- legal liability.
For some of these risks, we maintain insurance to protect against these
losses at levels consistent with our historical experience and industry
practice. However, we may not be able to maintain this insurance, particularly
if there is a significant increase in the cost of premiums. Insurance against
environmental risks is generally too expensive for us and other companies in our
industry, and, therefore, we do not maintain environmental insurance. Recently
we have experienced several slides at our Montana Tunnels Mine which has
affected our milling operations causing us to lose valuable production time and
consequently reducing our revenues. To the extent we are subject to
environmental liabilities, we would have to pay for these liabilities.
Moreover, in the event that we are unable to fully pay for the cost of remedying
an environmental problem, we might be required to suspend operations or enter
into other interim compliance measures.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO INHERENT RISKS.
Prior to the Plan of Arrangement, we conducted a portion of our operations
outside of the United States. Pursuit had interests in two mineral exploration
properties located in the Republic of Indonesia. However, due to the political
uncertainty and the economic climate of Indonesia, Pursuit placed its Indonesian
properties on a care and maintenance basis in 1999. Pursuit subsequently wrote
off the value of such properties and no exploration is currently planned with
respect thereto. Efforts to joint venture such properties were also terminated
due to the general lack of exploration interest in Indonesia. We are currently
attempting to recover the balance of security deposits paid to acquire our
interests in the Indonesian properties in the amount of approximately US$200,000
and bank guarantees aggregating approximately US$37,960 of which US$100,000 was
recovered in 2002. Despite making all reasonable efforts, there is no guarantee
that the balance of such security deposits or any portion thereof will be
recovered.
In addition, Pursuit had interests in a project in the Philippines known as
the Hinoba-an property. Since 1999, we had been actively seeking a sale or joint
venture of our Philippines property. The ultimate recovery from the Hinoba-an
property was dependent on the price of copper which has been at low levels. In
December of 2001, we executed an agreement with Hinoba Holdings Limited ("HL")
whereby we granted HL the option to acquire all of our rights to the Hinoba-an
copper project. Under the terms of the agreement, Apollo was to receive 7.5%
of HL's treasury shares as consideration for the option, and HL was to assume
all operating expenses relating to the Hinoba-an project in addition to
receiving full operating control of the project. In the event that HL exercised
the option to acquire all of our interest in the project, HL was to pay us
additional consideration of US$5,000,000 within 18 months of having achieved
commercial production. In 2002, HL defaulted on this agreement.
49
We have discontinued pursuing our interests, if any, in the Philippines and
Indonesia. We are no longer financing our subsidiaries that own the underlying
title to the properties.
We may conduct mining operations in Canada and we currently have
exploration projects in Canada. We anticipate that we will conduct significant
international operations in other nations in the future. Because we conduct
operations internationally, we are subject to political, economic and other
risks such as:
- legislative or other governmental requirements concerning the mining
industry;
- the effects of local political and economic developments;
- exchange controls;
- currency fluctuations; and
- taxation and laws or policies of foreign countries and the United
States affecting trade, investment and taxation.
Consequently, our exploration, development and production activities
outside of the United States may be substantially affected by factors beyond our
control, any of which could materially adversely affect our financial position
or results of operations.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This registration statement includes forward-looking statements that
reflect our current expectations and projections about our future results,
performance, prospects, and opportunities. We have tried to identify these
forward-looking statements by using words such as "may," "expect," "anticipate,"
"believe," "intend," "plan," "estimate," and similar expressions. These
forward-looking statements are based on information currently available to us
and are subject to a number of risks, uncertainties, and other factors that
could cause our actual results, performance, prospects, or opportunities to
differ materially from those expressed in, or implied by, these forward-looking
statements. These risks, uncertainties, and other factors include, but are not
limited to:
- metal prices and price volatility;
- amount of metal production;
- costs of production;
- remediation, reclamation, and environmental costs;
- regulatory matters;
- the results or settlement of pending litigation;
- cash flow;
- revenue calculations;
50
- the nature and availability of financing; and
- project risks.
See "Risk Factors" for a description of these factors. Other matters,
including unanticipated events and conditions, also may cause our actual future
results to differ materially from these forward-looking statements. We cannot
assure you that our expectations will prove to be correct. In addition, all
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
cautionary statements mentioned above. You should not place undue reliance on
these forward-looking statements. All of these forward-looking statements are
based on our expectations as of the date of this periodic filing. Except as
required by federal securities laws, we do not intend to update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK
Market Price of Gold
The Company's earnings and cash flow are significantly impacted by changes in
the market price of gold. Gold prices can fluctuate widely and are affected by
numerous factors, such as demand, production levels, economic policies of
central banks, producer hedging, and the strength of the U.S. dollar relative to
other currencies. During the last five years, the average annual market price
has fluctuated between $271 per ounce and $331 per ounce.
There are certain market risks associated with the hedging contracts utilized by
the Company. If the Company's counterparties fail to honor their contractual
obligation to purchase gold at agreed-upon prices, the Company may be exposed to
market price risk by having to sell gold in the open market at prevailing
prices. Similarly, if the Company fails to produce sufficient quantities of gold
to meet its forward commitments, the Company would have to purchase the
shortfall in the open market at prevailing prices. At June 30, 2003, the fair
value of the contracts is a loss of $1,604,000 (December 31, 2002 - $3,573,000).
Interest Rate Risk
At June 30, 2003, we had borrowed US$1 million under our line of credit with
Standard Bank. Each loan under the line of credit bears interest during each
interest period for such loan at a rate per annum equal to the LIBOR Rate for
such Interest Period plus 2.75%.
Foreign Currency
While the Company does currently conduct exploration activities in Canada, the
price of gold is denominated in U.S. dollars, and the Company's gold production
operations are in the United States. Therefore, the Company has minimal, if any
foreign currency exposure.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
51
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports filed with
the SEC. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of certain events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all future conditions, regardless of how remote. In addition, we
reviewed our internal controls, and there have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We have defended an appeal following litigation involving a mining
reclamation bond in the amount of US$16,936,130 (the "Bond") issued by Safeco
Insurance Company of America ("Safeco"), which was recently concluded in our
favor. The purpose of the bond is to provide financial guarantees to the United
States to ensure that our Florida Canyon Mine in Pershing County, Nevada, will
be reclaimed in the event we fail to do so. The provision of such financial
guarantee is a condition of our operating permit. Loss of the litigation would
require us to find replacement bonding in a material amount.
The parties negotiated a form of final judgment implementing an August 10,
1999, summary judgment order, an August 14, 2000, reconsideration denial
order, and a February 15, 2002, area-disturbed stipulation, which
included a statement that final judgment was entered "at the request and
consent of all parties." The form of judgment omitted any reservation of any
right to appeal by any party. The Court entered final judgment in the form
requested by the parties on March 8, 2002.
Notwithstanding that the final judgment was entered "at the request and
consent of all parties," on April 5, 2002, Safeco filed a notice of appeal from
the final judgment and all underlying orders. On May 12, 2003 the Ninth Circuit
Court of Appeals heard oral arguments of Safeco's appeal and underlying orders,
and on May 29, 2003, a not for publication memorandum decision was delivered by
a three-judge panel affirming the U.S. District Court judgment in our favor.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual and special meeting (the "Meeting") of shareholders held
on May 21, 2003, the following items of business were voted upon by the
shareholders:
1. to elect directors of the Company; the directors and the votes cast for,
against or withheld are as follows: 21,682,176, 0 and 21,207 respectively.
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2. to appoint auditors and to authorize the directors to fix their
remuneration; the votes cast for, against or withheld are as follows:
20,301,026, 0 and 5,859 respectively.
3. to consider a special resolution (the "Continuance Resolution") authorizing
the Company to apply for a Certificate of Continuance under the Business
Corporations Act (Yukon) (the "YBCA") thereby continuing the Company as if
it had been incorporated under the YBCA; the votes cast for, against or
withheld are as follows: 15,707,961, 101,871 and 0, respectively.
4. to consider and, if deemed advisable, confirm an amendment to the By-Law of
the Company (the "By-law Resolution"), being a by-law governing the
business and affairs of the Company generally, which by-law by its terms
repeals all previous by-laws governing the business and affairs of the
Company generally and all governing by-laws of the Company; the votes cast
for, against or withheld are as follows: 15,803,124, 4,918 and 0,
respectively.
5. to consider and, if thought appropriate, pass a resolution with or without
variation, (the "Private Placement Resolution"), authorizing the board of
directors of the Company to enter into additional private placements of
securities of the Company during the 12 month period ending May 21, 2004;
the votes cast for, against or withheld are as follows: 14,608,540,
1,052,589 and 0, respectively.
6. to consider and, if thought appropriate, pass a resolution with or without
variation, (the "Stock Option Plan Resolution"), authorizing the amendment
of the Company's existing incentive stock option plan (the "Incentive Stock
Option Plan") to authorize the issuance of up to 4,805,904 common shares
upon the exercise of options granted under the plan and to conform it to
certain United States tax and securities laws; the votes cast for, against
or withheld are as follows: 14,685,124, 980,344 and 0, respectively.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Title of Exhibit
(a) Exhibits:
31.1 - Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 - Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act
32.1 - Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
32.2 - Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
99.1 - Apollo Gold Inc. Financial Statements
(b) Reports filed on Form 8-K during the quarter ended June 30, 2003:
Not applicable.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
APOLLO GOLD CORPORATION
Date: September 8, 2003 /s/ R. David Russell
-----------------------
R. David Russell, President and
Chief Executive Officer
Date: September 8, 2003 /s/ R. Llee Chapman
----------------------
R. Llee Chapman,
Chief Financial Officer
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