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
For the quarterly period ended September 30, 2003
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 X No
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 October 31, 2003, there were 73,721,838 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 September 30, 2003 2
CONOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three and Nine Month Periods Ended September 30, 2003 and 2002 3
CONDENSED STATEMENT OF DEFICIT (UNAUDITED)
For the Three and Nine Month Periods Ended September 30, 2003 and 2002 4
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 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 27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 55
ITEM 4. CONTROLS AND PROCEDURES 56
PART II - OTHER INFORMATION 56
ITEM 1. LEGAL PROCEEDINGS 56
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 56
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 56
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 56
ITEM 5. OTHER INFORMATION 56
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 56
SIGNATURES
CERTIFICATION
ii
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 Registration Statement (the "Registration
Statement") which was declared effective with the Securities and Exchange
Commission on August 13, 2003.
APOLLO GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF CANADIAN DOLLARS)
- ----------------------------------------------------------------------------------------
SEPTEMBER 30, December 31,
2003 2002
--------------- --------------
ASSETS (UNAUDITED) (Audited)
CURRENT
Cash and cash equivalents $ 44,336 $ 13,293
Accounts receivable 5,925 5,093
Prepaids 778 840
Broken ore on leach pad - current 13,259 14,352
Materials and supplies 4,196 4,615
- ---------------------------------------------------------------------------------------
Total current assets 68,494 38,193
BROKEN ORE ON LEACH PAD - LONG TERM 2,526 2,533
PROPERTY, PLANT AND EQUIPMENT (Note 3) 46,525 47,920
DEFERRED STRIPPING COSTS 29,485 26,815
RESTRICTED CERTIFICATE OF DEPOSIT 8,636 8,365
- ---------------------------------------------------------------------------------------
TOTAL ASSETS $ 155,666 $ 123,826
=======================================================================================
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 11,031 $ 10,755
Notes payable 5,228 4,912
Property and mining taxes payable 1,099 1,562
- ---------------------------------------------------------------------------------------
Total current liabilities 17,358 17,229
NOTES PAYABLE 4,472 8,277
ACCRUED SITE CLOSURE COSTS 28,865 32,354
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES 50,695 57,860
- ---------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (DEFICIT)
Share capital (Note 4) 172,546 110,252
Issuable common shares 350 350
Special warrants (Note 4) - 9,768
Contributed surplus (Note 4) 10,782 10,998
Cumulative translation adjustment (8,377) 1,393
Accumulated deficit (70,330) (66,795)
- ---------------------------------------------------------------------------------------
Total shareholders' equity 104,971 65,966
- ---------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,666 $ 123,826
=======================================================================================
2
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- -----------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUE
Revenue from sale of minerals $ 27,738 $ 17,008 $ 64,976 $ 17,008
- -----------------------------------------------------------------------------------------
OPERATING EXPENSES
Direct operating costs 22,488 12,254 52,025 12,254
Depreciation and amortization 2,000 2,825 6,035 2,825
General and administrative 1,502 1,409 4,795 1,827
Share-based compensation 27 - 534 -
Accrued site closure costs -
accretion expense 442 609 1,373 609
Royalties 327 425 981 425
Exploration and development 72 1,140 2,977 1,140
- -----------------------------------------------------------------------------------------
26,858 18,662 68,720 19,080
- -----------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 880 (1,654) (3,744) (2,072)
OTHER INCOME (EXPENSES)
Interest income 14 - 73 -
Interest expense (175) (842) (629) (842)
Foreign exchange (loss) gain (191) - 765 -
- -----------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR
THE PERIOD $ 528 $ (2,496) $ (3,535) $ (2,914)
=========================================================================================
NET INCOME (LOSS) PER
SHARE, BASIC AND DILUTED $ 0.01 $ (0.08) $ (0.07) $ (0.24)
=========================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 49,843,353 33,022,537 48,480,820 12,356,666
=========================================================================================
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 Nine months ended
September 30, September 30,
------------------------ ----------------------
2003 2002 2003 2002
----------- ----------- ----------- ---------
Deficit, beginning of period $ (70,858) $ (62,432) $ (66,795) $(62,014)
Net income (loss) for
the period 528 (2,496) (3,535) (2,914)
- ------------------------------------------------------------------------------
Deficit, end of period $ (70,330) $ (64,928) $ (70,330) $(64,928)
==============================================================================
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 Nine months ended
September 30, September 30,
------------------------ ------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
OPERATING ACTIVITIES
Net income (loss) for the period $ 528 $ (2,496) $ (3,535) $ (2,914)
Items not affecting cash
Depreciation and amortization 2,000 2,825 6,035 2,825
Amortization of deferred stripping 4,577 - 6,758 -
Share-based compensation 27 - 534 -
Accrued site closure costs -
accretion expense 442 609 1,373 609
Gain on sale of property, plant and
equipment (57) - (57) -
Changes in non-cash operating
assets and liabilities (751) (987) (1,233) (536)
- ---------------------------------------------------------------------------------------------
Net cash flows from (used in)
operating activities 6,766 (49) 9,875 (16)
- ---------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Deferred stripping costs (5,193) - (13,914) -
Property, plant and equipment
expenditures (5,918) (22,577) (12,016) (22,577)
Proceeds from disposal of
property, plant and equipment 237 - 237 -
Acquisition of Nevoro - - - (16,756)
Restricted Certificate of Deposit (295) (1,513) (1,604) (1,513)
- ---------------------------------------------------------------------------------------------
Net cash flows used in investing
activities (11,169) (24,090) (27,297) (40,846)
- ---------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Capital lease repayments - (1,149) - (1,149)
Proceeds from exercise of warrants
and options 977 9,864 5,140 9,864
Proceeds on issuance of shares 46,450 - 46,450 -
Notes payable (1,292) 4,762 (1,548) 4,762
Proceeds on issuance of
convertible debentures, net - 12,907 - 32,820
- ---------------------------------------------------------------------------------------------
Net cash flows from financing
activities 46,135 26,384 50,042 46,297
- ---------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 122 1,684 (1,577) 1,685
- ---------------------------------------------------------------------------------------------
NET INCREASE IN CASH 41,854 3,929 31,043 7,120
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,482 3,321 13,293 130
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 44,336 $ 7,250 $ 44,336 $ 7,250
=============================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest $ 175 $ - $ 620 $ -
=============================================================================================
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
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
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 now considered a development
property.
Currently the Company is operating the Florida Canyon Mine at its designed
capacity (approximately 110,000 gold ounces per year). The Montana Tunnels
Mine recommenced commercial production in April 2003.
2. 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 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.
- --------------------------------------------------------------------------------
6
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
2. ACCOUNTING POLICIES (CONTINUED)
In April 2003 the Company recommenced 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 associated with open-pit deposits that have diverse ore grades
and waste-to-ore ton ratios are deferred and amortized over the mine life.
These mining costs arise from the removal of waste rock commonly referred
to as "deferred stripping costs". Amortization of amounts deferred is based
on a ratio, calculated as estimated total mining costs divided by the
current proven and probable reserves and mineral resources expected to be
converted into mineral reserves. This ratio is used to calculate the
current period production cost charged against earnings by multiplying the
ratio times the reserves mined during the period. Amortization of deferred
stripping costs is included within direct operating costs in our statement
of operations. This accounting method results in the smoothing of these
costs over the life of the mine, rather than expensing them as incurred.
The full amount of deferred stripping costs may not be expensed until the
end of the life of the mine. Some mining companies expense these costs as
incurred, which may result in the reporting of greater volatility in period
to period results of operations. Deferred stripping costs are included with
related mining property, plant and equipment for impairment testing
purposes.
3. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
SEPTEMBER 30, December 31,
2003 2002
-------------------------------------- ---------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
------------ ------------- --------- ---------------
Mine assets
Building, plant and equipment $ 16,142 $ 2,906 $ 13,236 $ 11,506
Mining properties and
development costs 31,049 7,560 23,489 25,207
- --------------------------------------------------------------------------------------------
47,191 10,466 36,725 36,713
Mineral rights 9,800 - 9,800 11,207
- --------------------------------------------------------------------------------------------
Total property, plant and equipment $ 56,991 $ 10,466 $ 46,525 $ 47,920
============================================================================================
- --------------------------------------------------------------------------------
7
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL
(a) Authorized
Unlimited number of common shares with no par value.
(b) Issued and outstanding
Contributed Special
Shares Amount Surplus Warrants
----------- -------- ------------- ----------
Balance, December 31, 2002 40,190,874 $110,252 $ 10,998 $ 9,768
Shares issued for cash 22,300,000 45,973 477 -
Conversion of units 6,000,000 9,768 - (9,768)
Warrants exercised 2,156,500 5,048 - -
Options exercised 83,412 92 - -
Nevoro acquisition, senior
executive share
compensation - - 271 -
Shares issued to supplier 50,000 262 - -
Shares issued for land 61,500 187 - -
Fiscal 2002 stock-based
compensation issued
in 2003 265,000 964 (964) -
- -----------------------------------------------------------------------------
Balance, September 30, 2003 71,107,286 $172,546 $ 10,782 $ -
=============================================================================
(c) Shares issued for cash
During the three months ended September 30, 2003, the Company issued
22,300,000 shares for proceeds of $50,175, net of agent's commissions
of $3,010, expenses of $715 and fair value of agent's options of $477.
The Company granted the agents 669,000 agent's options with an
exercise price of $2.25 per option in connection with this issuance.
These agent's options expire in two years and vest immediately. Using
the fair value based method for stock-based compensation, share
issuance costs of approximately $477 were recognized. This amount was
determined using an option pricing model assuming no dividends were
paid, a volatility of the Company's share price of 53%, an expected
life of the options of two years, and annual risk-free rate of 3.52%.
Subsequent to September 30, 2003, the agents exercised their
over-allotment option and the Company issued a further 2,132,300
shares at an offering price of $2.25 and granted a further 63,969
agent's options with similar terms to those previously granted.
- --------------------------------------------------------------------------------
8
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED)
(d) Warrants
The following summarizes outstanding warrants as at September 30,
2003:
Number of Exercise Expiry
Warrants Shares Price Date
---------- --------- ----------------- -----------------
5,749,750 5,749,750 $2.16 (U.S.$1.60) March 24, 2004
3,000,000 3,000,000 $ 3.25 December 23, 2006
-----------------------------------------------------------
8,749,750 8,749,750
===========================================================
(e) 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 September 30, 2003, there were 1,939,100 options outstanding
with a weighted average price of $3.38 and expiry dates ranging
from February 2013 to August 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
$271 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.
- --------------------------------------------------------------------------------
9
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED)
(e) Share purchase options (continued)
(ii) Performance-based stock option plan (continued)
As at September 30, 2003, there were 2,660,160 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.
(f) 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 Nine months
ENDED ended
SEPTEMBER 30, September 30,
2003 2003
--------------- ---------------
Net income (loss)
As reported $ 528 $ (3,535)
Compensatory fair value of options 826 3,407
----------------------------------------------------------------------------
Pro forma $ (298) $ (6,942)
============================================================================
Basic and diluted income (loss) per share
As reported $ 0.01 $ (0.07)
Pro forma (0.01) (0.14)
============================================================================
Using the fair value based method for stock-based compensation,
additional costs of approximately $826 and $3,407 would have been
recorded for the three and nine month periods ended September 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 5 years, and weighted average annual risk-free
rate of 3.52%.
- --------------------------------------------------------------------------------
10
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. SHARE CAPITAL (CONTINUED)
(g) Earnings (loss) per share
Basic earnings (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. Diluted earnings (loss) per share is
calculated by dividing net income (loss) by the sum of the weighted
average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common
shares had been issued. In periods for which there is a reported net
loss, potentially dilutive securities have been excluded from the
calculation, as their effect would be anti-dilutive.
The following table reconciles the number of shares utilized in the
earnings (loss) per common share calculations for the periods
indicated:
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic weighted
average shares
outstanding 49,843,353 33,022,537 48,480,820 12,356,666
Effect of dilutive
securities,
stock options 760,841 - - -
------------------------------------------------------------------
Diluted weighted
average shares
outstanding 50,604,194 33,022,537 48,480,820 12,356,666
==================================================================
5. INCOME TAXES
The Company did not record a recovery for income taxes for the period ended
September 30, 2003 due to the availability of net operating loss carry
forwards and the uncertainty of their future realization.
6. 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.
- --------------------------------------------------------------------------------
11
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Amounts as at September 30, 2003 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------- ---------- --------
Cash and cash equivalents $ 12 $ 19 $ 825 $ 43,480 $ 44,336
Broken ore on leach pad -
current - 13,259 - - 13,259
Other non-cash current assets 7,069 3,267 183 380 10,899
------------------------------------------------------------------------------------
7,081 16,545 1,008 43,860 68,494
Broken ore on leach pad -
long-term - 2,526 - - 2,526
Property, plant and equipment 15,836 17,410 8,948 4,331 46,525
Deferred stripping costs 29,485 - - - 29,485
Restricted certificate of deposit 3,055 4,999 437 145 8,636
------------------------------------------------------------------------------------
Total assets $ 55,457 $ 41,480 $10,393 $ 48,336 $155,666
====================================================================================
Current liabilities $ 7,265 $ 9,425 $ 22 $ 646 $ 17,358
Notes payable 444 4,028 - - 4,472
Accrued site closure costs 11,992 16,873 - - 28,865
------------------------------------------------------------------------------------
Total liabilities $ 19,701 $ 30,326 $ 22 $ 646 $ 50,695
====================================================================================
- --------------------------------------------------------------------------------
12
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Amounts as at December 31, 2002 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------- ---------- --------
Cash and cash equivalents $ 139 $ 31 $ 4,439 $ 8,684 $ 13,293
Broken ore on leach pad -
current - 14,352 - - 14,352
Other non-cash current assets 5,632 4,470 23 423 10,548
------------------------------------------------------------------------------------
5,771 18,853 4,462 9,107 38,193
Broken ore on leach pad -
long-term - 2,533 - - 2,533
Property, plant and equipment 16,724 20,026 7,852 3,318 47,920
Deferred stripping costs 26,815 - - - 26,815
Restricted certificate of deposit 2,459 5,581 158 167 8,365
------------------------------------------------------------------------------------
Total assets $ 51,769 $ 46,993 $12,472 $ 12,592 $123,826
====================================================================================
Current liabilities $ 6,950 $ 7,571 $ - $ 2,708 $ 17,229
Notes payable 2,168 6,109 - - 8,277
Accrued site closure costs 13,691 18,663 - - 32,354
------------------------------------------------------------------------------------
Total liabilities $ 22,809 $ 32,343 $ - $ 2,708 $ 57,860
====================================================================================
- --------------------------------------------------------------------------------
13
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Amounts for the three and nine month periods ended September 30, 2003 and
2002, respectively, are as follows:
THREE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ 14,934 $ 12,804 $ - $ - $27,738
-----------------------------------------------------------------------------------
Direct operating costs 12,292 10,196 - - 22,488
Depreciation and amortization 750 1,203 - 47 2,000
General and administrative - - - 1,502 1,502
Share-based compensation - - - 27 27
Accrued site closure costs
- accretion expense 109 333 - - 442
Royalties - 327 - - 327
Exploration and development - - - 72 72
-----------------------------------------------------------------------------------
13,151 12,059 - 1,648 26,858
-----------------------------------------------------------------------------------
Operating income (loss) 1,783 745 - (1,648) 880
Interest income 4 - - 10 14
Interest expense (49) (112) - (14) (175)
Foreign exchange loss - - - (191) (191)
-----------------------------------------------------------------------------------
Net income (loss) $ 1,738 $ 633 $ - $ (1,843) $ 528
===================================================================================
Investing activities
Property, plant and
equipment
expenditures $ 2,831 $ 350 $2,086 $ 651 $ 5,918
Deferred stripping
expenditures 5,193 - - - 5,193
- --------------------------------------------------------------------------------
14
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- -------- ----------- --------
Revenue from sale of minerals $ 25,906 $ 39,070 $ - $ - $64,976
-------------------------------------------------------------------------------------
Direct operating costs 22,630 29,395 - - 52,025
Depreciation and amortization 2,138 3,781 - 116 6,035
General and administrative - - - 4,795 4,795
Share-based compensation - - - 534 534
Accrued site closure costs
- accretion expense 109 1,264 - - 1,373
Royalties - 981 - - 981
Exploration and development - - 2,324 653 2,977
-------------------------------------------------------------------------------------
24,877 35,421 2,324 6,098 68,720
-------------------------------------------------------------------------------------
Operating income (loss) 1,029 3,649 (2,324) (6,098) (3,744)
Interest income 4 - - 69 73
Interest expense (166) (381) - (82) (629)
Foreign exchange gain - - 535 230 765
-------------------------------------------------------------------------------------
Net income (loss) $ 867 $ 3,268 $(1,789) $ (5,881) $(3,535)
=====================================================================================
Investing activities
Property, plant and
equipment
expenditures $ 4,117 $ 4,255 $ 2,297 $ 1,534 $12,203
Deferred stripping
expenditures 13,914 - - - 13,914
- --------------------------------------------------------------------------------
15
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Three months ended September 30, 2002
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ - $ 17,008 $ - $ - $17,008
----------------------------------------------------------------------------------
Direct operating costs - 12,254 - - 12,254
Depreciation and amortization - 2,811 - 14 2,825
General and administrative - - - 1,409 1,409
Share-based compensation - - - - -
Accrued site closure costs
- accretion expense - 609 - - 609
Royalties - 425 - - 425
Exploration and development - - - 1,140 1,140
----------------------------------------------------------------------------------
- 16,099 - 2,563 18,662
----------------------------------------------------------------------------------
Operating (loss) income - 909 - (2,563) (1,654)
Interest income - - - - -
Interest expense (264) (516) - (62) (842)
Foreign exchange gain - - - - -
----------------------------------------------------------------------------------
Net (loss) income $ (264) $ 393 $ - $ (2,625) $(2,496)
==================================================================================
- --------------------------------------------------------------------------------
16
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
6. SEGMENTED INFORMATION (CONTINUED)
Nine months ended September 30, 2002
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ - $ 17,008 $ - $ - $17,008
- ----------------------------------------------------------------------------------
Direct operating costs - 12,254 - - 12,254
Depreciation and amortization - 2,811 - 14 2,825
General and administrative - - - 1,827 1,827
Share-based compensation - - - - -
Accrued site closure costs
- accretion expense - 609 - - 609
Royalties - 425 - - 425
Exploration and development - - - 1,140 1,140
- ----------------------------------------------------------------------------------
- 16,099 - 2,981 19,080
- ----------------------------------------------------------------------------------
Operating (loss) income - 909 - (2,981) (2,072)
Interest income - - - - -
Interest expense (264) (516) - (62) (842)
Foreign exchange gain - - - - -
- ----------------------------------------------------------------------------------
Net (loss) income $ (264) $ 393 $ - $ (3,043) $(2,914)
==================================================================================
- --------------------------------------------------------------------------------
17
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
7. 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 October 1, 2003 there
are 76,000 ounces remaining on these contracts. 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. The Company
has also entered into certain spot deferred forward contracts for the
delivery of 16,400 ounces of gold. Gains or losses on these spot deferred
forward contracts are recognized as an adjustment of revenue in the period
when the originally designated production is sold. As at September 30,
2003, the fair value of the contracts is a loss of $5,819 (December 31,
2002 - $3,573).
- --------------------------------------------------------------------------------
18
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)
Gold hedges (continued)
The contracts mature as follows:
Ounces
of Gold
----------------
2003 (as of October 1) 18,400
2004 58,000
2005 16,000
-------------------------------------------
92,400
===========================================
8. 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.
- --------------------------------------------------------------------------------
19
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. 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 nine month periods ended September 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
SEPTEMBER 30, 2003
Accounts
Property, Deferred Payable and
Restricted Plant and Stripping Accrued Other Share
Cash Cash Equipment Costs Liabilities Liabilities Capital
-------- ----------- ----------- ----------- ------------- ------------ ---------
As at September 30, 2003
Canadian GAAP $44,336 $ - $ 46,525 $ 29,485 $ 11,031 $ - $172,546
Convertible debenture (a) - - - - - - -
Share-based compensation (b) - - - - - - -
Gold hedge loss (c) - - - - (305) 5,819 -
Impairment of property,
plant and equipment
and capitalized deferred
stripping costs (d) - - (8,608) (13,927) - - -
Amortization of deferred
stripping costs (e) - - - (1,144) - - -
Flow-through common
shares (f) (825) 825 - - - 69 (375)
Black Fox development
costs (g) - - (1,943) - - - -
- ---------------------------------------------------------------------------------------------------------------------
As at September 30, 2003
U.S. GAAP $43,511 $ 825 $ 35,974 $ 14,414 $ 10,726 $ 5,888 $172,171
=====================================================================================================================
Contributed
Surplus Deficit
------------ ----------
As at September 30, 2003
Canadian GAAP $ 10,782 $ (70,330)
Convertible debenture (a) 32,666 (32,666)
Share-based compensation (b) 5,265 (5,265)
Gold hedge loss (c) - (5,514)
Impairment of property,
plant and equipment
and capitalized deferred
stripping costs (d) - (22,535)
Amortization of deferred
stripping costs (e) - (1,144)
Flow-through common
shares (f) - 306
Black Fox development
costs (g) - (1,943)
- ------------------------------------------------------
As at September 30, 2003
U.S. GAAP $ 48,713 $(139,091)
======================================================
- --------------------------------------------------------------------------------
20
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. 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 (f) (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 income (loss) for the three month period ended
September 30, based on Canadian GAAP $ 528 $(2,496)
Convertible debenture (a) - -
Share-based compensation (b) (63) -
Gold hedge loss (c) (3,910) -
Amortization of deferred stripping costs (e) (1,144) -
Flow through shares premium paid in excess of
market value (f) 306 -
Black Fox development costs (g) (1,943) -
-----------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $(6,226) $(2,496)
=======================================================================
Other comprehensive income:
Currency translation adjustment $ 76 $ -
-----------------------------------------------------------------------
Comprehensive loss $(6,150) $(2,496)
=======================================================================
Net loss per share - U.S. GAAP basic $ (0.12) $ (0.08)
=======================================================================
- --------------------------------------------------------------------------------
21
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
2003 2002
--------- ---------
Net loss for the nine month period ended
September 30, based on Canadian GAAP $ (3,535) $ (2,914)
Convertible debenture (a) - (32,666)
Share-based compensation (b) (1,186) -
Gold hedge loss (c) (1,941) -
Amortization of deferred stripping costs (e) (1,144) -
Flow through shares premium paid in excess of
market value (f) 306 -
Black Fox development costs (g) (1,943) -
--------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $ (9,443) $(35,580)
====================================================================
Other comprehensive income:
Currency translation adjustment $ (9,770) $ -
--------------------------------------------------------------------
Comprehensive loss $(19,213) $(35,580)
====================================================================
Net loss per share - U.S. GAAP basic $ (0.19) $ (2.88)
====================================================================
(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 $32,666 for the year ended December 31, 2002 ($Nil for the
three months ended September 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").
- --------------------------------------------------------------------------------
22
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. 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 nine month periods
ended September 30, 2003, an expense of $63 and $1,186, 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 Canadian GAAP, gains or losses on spot deferred forward
contracts are recognized as an adjustment of revenue in the period
when the originally designated production is sold. 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 an additional loss of $3,910 and
$1,941 has been recorded in the three and nine month periods ended
September 30, 2003, respectively, to reflect the fair value loss on
the contracts between December 31, 2002 and September 30, 2003. The
gold hedge loss on outstanding hedge contracts amounted to $5,819 at
September 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.
- --------------------------------------------------------------------------------
23
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(e) Amortization of deferred stripping costs
Under Canadian GAAP, amortization of deferred stripping costs is based
on a stripping ratio calculated as estimated total mining costs
divided by the current proven and probable reserves and mineral
resources expected to be converted into mineral reserves. Under U.S.
GAAP, current proven and probable reserves are used in determining the
stripping ratio. Accordingly, for U.S. GAAP purposes, a reduction in
capitalized deferred stripping costs of $1,144 has been recorded as at
September 30, 2003.
(f) 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 September 30, 2003, unexpended flow-through funds were $825
(December 31, 2002 - $4,488).
(g) Black Fox Project
Under Canadian GAAP, mining development costs at the Black Fox Project
have been capitalized. Under U.S. GAAP, these expenditures are
expensed as incurred. Accordingly, for U.S. GAAP purposes, a reduction
in property, plant and equipment of $1,943 has been recorded as at
September 30, 2003.
- --------------------------------------------------------------------------------
24
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
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 September 30,
2003 would reflect a reduction in cash utilized in investing activities of
$5,193 and $13,914 for the three and nine month periods ended September 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.
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 3.52%, dividend yield of 0%, volatility factor of 52% and
a weighted average expected life of the options of 2 to 5 years. The
weighted average fair value per share of options granted during 2003 and
2002 was $2.01 and $1.92, respectively, and the expense is amortized over
the vesting period.
- --------------------------------------------------------------------------------
25
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
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
September 30, 2003, as reported $ (6,226) $ (2,496)
Stock option expense as reported 63 -
Pro forma stock option expense (826) -
---------------------------------------------------------------------
Net loss - pro forma $ (6,989) $ (2,496)
=====================================================================
Net loss per share, basic - for the three month
period ended September 30, 2003 $ (0.12) $ (0.08)
Stock option expense as reported - -
Pro forma stock option expense (0.02) -
---------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.14) $ (0.08)
=====================================================================
2003 2002
--------- ---------
Net loss for the nine month period ended
September 30, 2003, as reported $ (9,443) $(35,580)
Stock option expense as reported 1,186 -
Pro forma stock option expense (3,407) -
---------------------------------------------------------------------
Net loss - pro forma $(11,664) $(35,580)
=====================================================================
Net loss per share, basic - for the nine month
period ended September 30, 2003 $ (0.19) $ (2.88)
Stock option expense as reported 0.02 -
Pro forma stock option expense (0.07) -
---------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.24) $ (2.88)
=====================================================================
- --------------------------------------------------------------------------------
26
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 the financial condition and results
of operations of the Company for the three and nine months ended September 30,
2003 and 2002. Prior to June 24, 2002, the Company's operations were those of
International Pursuit Corporation ("Pursuit"), a public company previously
trading on the Toronto Stock Exchange under the ticker symbol "IPJ." In June
2002, Pursuit entered into a Plan of Arrangement ("Plan of Arrangement") that
resulted in the merger of Pursuit and Nevoro Gold Corporation ("Nevoro"), a
privately held corporation and the parent of Apollo Gold, Inc., a Delaware
corporation ("AGI").
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 Form 10 Registration Statement (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 AND RECENT DEVELOPMENTS
We are principally engaged in the exploration, development and mining of
gold. We have focused our 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 the Plan of Arrangement that resulted in the
merger of Pursuit and Nevoro. 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, AGI
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.
27
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 the Company began trading on the American 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 168 full-time non-unionized employees and
produces approximately 110,000 ounces of gold annually. In addition to the
mining activities being conducted at the Florida Canyon Mine, we are continuing
a drilling program which is directed at confirmation and expansion of additional
mineralization, and we are conducting a study to determine if areas in some of
the mine walls may be used for additional mining.
Operating highlights at the Florida Canyon Mine include moving 4.882
million tons during the quarter. While less than forecasted, we anticipate
increasing our mine tonnage at the Florida Canyon Mine in the fourth quarter
with the addition of two additional haul trucks.
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
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 slid off the southwest pit wall. Additional stripping is
currently underway and adequate funding is in place. The Montana Tunnels Mine
employs approximately 162 full-time non-unionized employees.
Operating highlights for the quarter at the Montana Tunnels Mine include
the completion of the primary crusher. While the crusher ran for about one half
of the quarter, the mill processed 1,267,973 tons, or an average of 13,934 tons
per day. Stripping on the west wall began towards the end of the quarter.
Noticeable progress was made as 4.35 million waste tons were moved.
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 which is located in
Nevada.
In the third quarter of 2003, we received three operating permits for the
Standard Mine from the State of Nevada, and we have begun drafting preliminary
operating and production plans for mine production set to begin in 2005. At the
Standard Mine, drilling began in October 2003, and we expect to drill at
numerous targets
28
through several phases of drilling. All but two of our drilling sites require
additional permitting, and we have submitted an exploration drill planning map
to the State of Nevada for these additional permits. At Pirate Gold we have
solicited drilling bids and we expect to drill approximately 14 holes in 2004 to
explore the mineralization of this property.
In September 2002, we completed the acquisition of certain assets known as
our Black Fox Property 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 215 core holes. As a
result of the core drilling, we have identified proven and probable reserves at
the Black Fox Property. We are conducting a study to confirm the reserves and
the study should be complete by December 2003. We believe that the first phase
will cost approximately US $3.5 million.
Upon completion of the first phase, we will then begin the second phase of
our Black Fox project. The second phase will provide for the development of
underground access for further exploratory drilling with an anticipated cost of
US $11.7 million for the period from January, 2004 through December, 2004. We
plan to develop an underground ramp from existing structures. We currently
anticipate commencing the second phase underground drilling in January, 2004. We
also plan to begin the permitting process for the third phase of the Black Fox
project, and anticipate that this process will require approximately 2 years,
based on a plan for combined open pit and underground mine, with on-site
milling, at a capacity of 1500 metric tons of ore per day. The third phase will
include the development of these capabilities, at an aggregate estimated cost of
approximately US $45.0 million.
APOLLO GOLD CORPORATION
The results of operations of the Company for the nine months ended
September 30, 2002 includes the results of operations of Pursuit for the nine
months ended September 30, 2002, and Nevoro for the period from June 25, 2002
through September 30, 2002.
RESULTS OF OPERATIONS:
- ----------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Our revenues for the nine months ended September 30, 2003 were
approximately $65.0 million derived primarily from the sale of 107,604 ounces of
gold. This compares to approximately $17.0 million derived primarily of the sale
of 34,147 ounces of gold for the same period in 2002. The average price received
for gold for the first nine months of 2003 and 2002 was $489.48 and $493.53 per
ounce, respectively. Our revenues for silver, zinc and lead for the nine moths
ended September 30, 2003 were $11.2 million compared to $0.2 million during the
same period 2002. The growth in revenue in 2003 was due in part to an increase
in mining activity in that year. For the first six months of 2002, Pursuit was
primarily engaged in seeking joint venture partners for its existing operations
and in negotiating the terms of its acquisition of Nevoro. In addition, during
the three months ended September 30, 2002, the mill at the Montana Tunnels Mine
was placed on a care and maintenance basis; therefore, the only revenues for
this period came from the Florida Canyon Mine.
29
Sales of minerals from our Florida Canyon Mine accounted for 60% of our
revenues for the nine months ended September 30, 2003, with the remaining 40% of
revenues derived from sales of minerals from our Montana Tunnels Mine. In the
nine months ended September 30 2003, we received approximately 82% of our
revenue from sales of gold and 18% from sales of silver, zinc and lead compared
to 99% from the sales of gold and 1% from the sales of silver, zinc and lead for
the same period in 2002.
Our 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, wall slippage at the mine and problems with our crusher
installation limited our gold production to 13,118 ounces at the Montana Tunnels
Mine for the first six months of 2003 which was 10,000 ounces below our initial
production expectations. 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 $1.5 million.
These improvements led to the increased production at Montana Tunnels Mine.
We produced 16,538 ounces of gold at the Montana Tunnels Mine for the three
months ended September 30, 2003, an increase over the first six months of 2003
when we produced 13,118 ounces of gold. We expect to be in the center of the ore
body by August 2004. The east side walls have stabilized and the stripping
program has begun on the west side of the pit with 4.5 million waste tons moved
in the most recent quarter. Once the stripping process is complete, we expect to
produce between 65,000 to 72,000 ounces of gold per year together with the
associated silver, lead, and zinc by-products.
At Florida Canyon, we produced 77,948 ounces of gold for the nine months
ended September 30, 2003 as compared to 34,147 ounces of gold for the same
period in 2002. At September 30, 2003, production was 8,000 ounces less than
anticipated for gold due to lower than expected ore grades. Our operation at
Florida Canyon is expected to accelerate during the last quarter to an estimated
total production of 110,000 ounces for 2003.
We anticipate commencing operations at the Standard Mine in 2005. We will
operate this mine as a satellite of the Florida Canyon Mine. We currently
project production rates of 100,000 to 130,000 ounces of gold on an annual basis
for the combined operation of the Florida Canyon Mine and Standard Mine.
Assuming a gold price range of approximately US$375.00 ounce, we look
forward to the Montana Tunnels Mine, the Florida Canyon Mine and the Standard
Mine, collectively, producing approximately 180,000 ounces of gold next year,
with output potentially increasing to approximately 185,000 to 190,000 ounces a
year thereafter.
Our direct operating costs equaled approximately $52.0 million and $12.3
million for the nine months ended September 30, 2003 and 2002, respectively.
These amounts include mining and processing costs. As explained above, the
lower direct operating costs in 2002 reflect the operating cost of AGI from and
after June 25, 2002. We have focused on reducing our direct operating costs in
2003 focusing on cost reductions at our mines. As of September 30, 2003, our
scheduled commitments include only our operating leases, with minimum lease
payments of $27,000 in 2003 and $111,000 in 2004. We incurred depreciation
and amortization expenses of approximately $6.0 million for the nine
months ended September 30, 2003 as compared to $2.8 million for the same period
2002. The difference is the result that Pursuit had limited operations in 2002
and was focused upon the Nevoro acquisition for the first six months of 2002.
30
We incurred approximately $4.8 million and $1.8 million for the nine months
ended September 30, 2003 and 2002, respectively, in general and administrative
expenses. General and administrative expenses for the nine months ended
September 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, general and administrative
expenses consisted primarily of salaries and legal and accounting expenses for
maintaining Pursuit as a publicly traded company in Canada for the first six
months of the year (approximately $417,000). Subsequent to that time the costs
included organization costs and maintenance of a Denver corporate office. In the
nine months ended September 30, 2003, we also incurred share-based compensation
of approximately $534,000, 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 nine months ended September 30, 2003 and 2002, we accrued accretion
expense of approximately $1,373,000 and $609,000 respectively, relating to
accrued site closure costs at our Florida Canyon Mine and Montana Tunnels Mines.
This expense represents our estimation of the fair value of the increase in our
site closure and reclamation costs. We incurred $981,000 in royalty expenses for
the nine months ended September 30, 2003 as compared to $425,000 during the same
period 2002. These amounts are attributable 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 $3.0 million and $1.1 million for the nine months ended September
30, 2003 and 2002, respectively. 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, and in the third quarter of 2002, our
exploration and development expenses were primarily focused on the Black Fox
project.
As a result of these expense components, our operating expenses totaled
approximately $68.7 million for the nine months ended September 2003, as
compared to approximately $19.1 million for the same period in 2002. The
difference is the result that Pursuit had limited operations in 2002 and was
focused upon the Nevoro acquisition for the first six months of 2002.
We realized interest income of approximately $73,000 during the nine months
ended September 30, 2003. We incurred interest expense of approximately $629,000
in the nine months ended September 30, 2003, primarily for equipment leases and
bridge loans. We did not realize interest income but incurred net interest
expense of approximately $842,000 during the comparable period in 2002.
We realized foreign exchange gains of approximately $765,000 during the
nine months ended September 30, 2003, from cash balances not held in United
States dollars. Although we report currency in Canadian dollars, we utilize
United States dollars as our functional currency. We did not realize any
foreign exchange gains during the nine months ended September 30, 2002.
31
Based on these factors, we incurred a loss of approximately $3.5 million or
$0.07 per share for the nine months ended September 30, 2003, as compared to a
loss of approximately $2.9 million or $0.24 per share, for the nine months ended
September 30, 2002.
Differences Between Canadian and US GAAP
In accordance with Canadian GAAP, we have not recorded any expense for the
nine months ended September 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 nine months ended September 30, 2003,
an expense of approximately $1.2 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 US GAAP purposes for the nine months ended
September 30, 2003, an additional loss of approximately $1.9 million has been
recorded in that period to reflect the fair value loss on the contracts
outstanding between December 31, 2002 and September 30, 2003. The cumulative
gold hedge loss on outstanding hedge contracts amounted to approximately $5.8
million at September 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 nine month period ended September 30, 2002
representing the amortization of these costs.
In accordance with Canadian GAAP, we have determined the amortization of
deferred stripping costs using a ratio calculated using proven and probable
reserves and mineral resources expected to be converted into reserves. Under US
GAAP the ratio would be calculated using only proven and probable reserves. For
the nine months ended September 30, 2003, an additional amortization of deferred
stripping costs of approximately $1.1 million is recognized under US GAAP.
Under Canadian GAAP, we capitalize costs associated with the Black Fox
project as we have identified proven and probable reserves. Under US GAAP these
costs are expensed. For the nine months ended September 30, 2003, approximately
$1.9 million has been expensed under US GAAP in relation to the Black Fox
project.
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 nine months ended September 30, 2003 was
$0.07 and $0.19 under Canadian GAAP and US GAAP, respectively, and $0.24 and
$2.88, respectively for the nine months ended September 30, 2002.
32
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Our revenues for the three months ended September 30, 2003 were
approximately $27.7 million derived primarily from the sale of 42,695 ounces of
gold. This compares to approximately $17.0 million derived primarily from the
sale of 34,147 ounces of gold for the same period in 2002. The average price
received for gold during the same period was $504.29 and $493.53 per ounce,
respectively. Our revenues for silver, zinc and lead were $6.5 million for the
nine months ended September 30, 2003, as compared to $0.2 million during the
same period in 2002. The growth in revenue in 2003 was due in part to an
increase in mining activity for that year. During the three months ended
September 30, 2002, the mill at the Montana Tunnels Mine was placed on a care
and maintenance basis; therefore the only revenues for this period came from the
Florida Canyon operation. For the three months ended September 30, 2003 we
produced 16,538 ounces of gold at the Montana Tunnels Mine and 26,157 ounces of
gold at the Florida Canyon Mine. We received approximately 76% of our revenue in
the three months ended September 30, 2003 from sales of gold and 24% from sales
of silver, zinc and lead compared to 99% from the sales of gold and 1% from the
sales of silver, zinc and lead for the same period in 2002.
Our direct operating costs equaled approximately $22.5 million and $12.3
million for the three months ended September 30, 2003 and 2002, respectively.
These amounts include mining and processing costs. The primary difference is
during the three months ended September 30, 2002, the Montana Tunnels Mine was
on a care and maintenance basis. We have focused on reducing our direct
operating costs in 2003, focusing on cost reductions at our mines. However, our
direct operating costs increased significantly from the first quarter of 2003
due to increasing production at the Montana Tunnels Mine. As of September 30,
2003, our scheduled commitments include only our operating leases, with minimum
lease payments of $27,000 in 2003 and $111,000 in 2004. We incurred depreciation
and amortization expenses of approximately $2.0 million for the three months
ended September 30, 2003 as compared to $2.8 million for the same period 2002.
We incurred approximately $1.5 million and $1.4 million for the three
months ended September 30, 2003 and 2002, respectively, in general and
administrative expenses. General and administrative expenses for the three
months ended September 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, the general and
administrative expenses were primarily organization costs and maintenance of a
Denver corporate office. In the three months ended September 30, 2003, we also
incurred share-based compensation of approximately $27,000, 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 September 30, 2003 and 2002, we accrued accretion
expense of approximately $442,000 and $609,000 respectively, relating to accrued
site closure costs at our Florida Canyon Mine and Montana Tunnels Mine. This
expense represents our estimation of the fair value of the increase in our site
closure and reclamation costs for the third quarter of the respective years. We
incurred $327,000 in royalty expenses for the quarter ended September 30, 2003
as compared to $425,000 during the same period 2002.
33
These amounts are attributable 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 were approximately
$0.1 million and $1.1 million for the three months ended September 30, 2003 and
2002, respectively, largely the result of the Black Fox project which we
transitioned from an exploration (expensed) to a development (capitalized)
category. The expenses during 2002 were focused mainly on the Black Fox project.
As a result of these expense components, our operating expenses totaled
approximately $26.9 million for the quarter ended September 2003, as compared to
approximately $18.7 million for the same period in 2002.
We realized interest income of approximately $14,000 during the three
months ended September 30, 2003. We incurred interest expense of approximately
$175,000 in the three months ended September 30, 2003, primarily for equipment
leases and bridge loans. We did not realize interest income but incurred net
interest expense of approximately $842,000 during the comparable period in
2002.
We realized foreign exchange losses of approximately $191,000 during the
quarter ended September 30, 2003, from cash balances not held in United States
dollars. Although we report currency in Canadian dollars, we utilize United
States dollars as our functional currency. We did not realize any foreign
exchange gains during the three months ended September 30, 2002.
Based on these factors, we realized income of approximately $0.5 million or
$0.01 per share for the three months ended September 30, 2003, as compared to a
loss of approximately $2.5 million or $0.08 per share, for the three months
ended September 30, 2002.
Differences Between Canadian and US GAAP
In accordance with Canadian GAAP, we have not recorded any expense for the
three months ended September 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 September 30, 2003, an expense of
approximately $63,000 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 US GAAP purposes for the three months ended
September 30, 2003, an additional loss of approximately $3.9 million has been
recorded in that period to reflect the fair value loss on the contracts
outstanding between June 30, 2003 and September 30, 2003. The cumulative gold
hedge loss on outstanding hedge contracts amounted to approximately $5.8 million
at September 30, 2003.
In accordance with Canadian GAAP, we have determined the amortization of
deferred stripping costs using a ratio calculated using proven and probable
reserves and resources. Under US GAAP the ratio would be calculated using only
proven and probable reserves. For the three months ended September 30, 2003, an
additional amortization of deferred stripping costs of approximately $1.1
million is recognized under US GAAP.
34
Under Canadian GAAP, we capitalize costs associated with the Black Fox
project. Under US GAAP these costs are expensed. For the three months ended
September 30, 2003, approximately $1.9 million has been expensed under US GAAP
in relation to the Black Fox project.
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 income (loss) per share for the three months ended September 30,
2003 was $0.01 and $(0.12) under Canadian GAAP and US GAAP, respectively, and
$(0.08) and $(0.08), respectively for the three months ended September 30,
2002.
FINANCIAL CONDITION AND LIQUIDITY:
- -------------------------------------
At September 30, 2003 we had cash balances of approximately $44.3 million
compared to cash of approximately $13.3 million at December 31, 2002. The
increased cash resulted from our recent equity offering. On September 26, 2003,
we completed an equity offering of 22,300,000 shares for gross proceeds of
approximately $50.2 million. We incurred commissions and expenses of
approximately $3.0 million and $0.7 million, respectively, for net proceeds
received of $46.45 million. 669,000 Agent's Options were also granted at this
time with an expiration date of September 26, 2005 and an exercise price of
$2.25 per share.
Subsequent to September 30, 2003, the Agents exercised their over allotment
option and we issued an additional 2,132,300 shares for net proceeds of
approximately $4.5 million. An additional 63,969 Agent's Options were also
granted at this time with an expiration date of October 27, 2005 and an exercise
price of $2.25 per share.
The proceeds from this offering are to be used for the following:
- Standard Mine - The Standard Mine is currently in the permitting stage. We
are receiving permits currently and expect to be permitted in 2004 with
enough time to build a leach pad and start production in 2005. We expect to
spend approximately $7 million on the project.
- Black Fox Property - The development team is preparing an RFP (Request for
Proposal) for the development plan at Black Fox, and the drilling will
continue there as well. The team is working toward an audited ore
reserve/resource which should be complete at year end, bringing the project
to the feasibility stage. We expect to spend US $17.3 million on the
project.
- Montana Tunnels - The west wall stripping project has commenced at Montana
Tunnels, six additional trucks have been added to the fleet. We expect to
be mining the west side ores by August 2004. However, we also expect to
keep the mill operating during this development time frame. We expect to
spend approximately US $11 million, net of revenues from development ores,
on the project.
35
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 of 2002, the funds have been expended at the
Black Fox project. Some of the expenses will not qualify for flow through
treatment therefore the Company has added $700,000 to the fund to bring the
total expected expenditures at year end to $5.2 million.
In June 2003 we entered into a Revolving Loan, Guaranty and Security
Agreement with Standard Bank London Limited ("Standard Bank"). Although there
is a commitment of US $5 million, 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 September 30, 2003 we do not owe any amount under
this arrangement and all covenants have been met.
We believe our cash requirements for future development of the Black Fox
Mine, Standard Mine and for operating our other mines, will be funded through a
combination of future cash flows from operations, and/or future debt or equity
security issuances. 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 impact that significant changes in the prices of silver,
gold, lead and zinc have on our financial condition, declines in these metals
prices may negatively impact our ability to raise additional funding for
long-term projects. There can be no assurance that we will be successful in
generating adequate funding for anticipated capital expenditures related to this
property.
Operating Activities
Operating activities provided approximately $9.9 million of cash during the
nine months ended September 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 $6.0 million,
amortization of deferred stripping costs of $6.8 million, share-based
compensation of approximately $0.5 million, an increase in the provision for
accrued site closure costs of approximately $1.4 million, offset by the use,
through the change in non-cash operating assets and liabilities, of
approximately $1.2 million. Operating activities used approximately $16,000 of
cash during the nine months ended September 30, 2002.
Investing Activities
Investing activities utilized approximately $27.3 million of cash during
the nine months ended September 30, 2003. The major uses of cash were for
additions to deferred stripping costs (approximately $13.9 million), property,
plant and equipment (approximately $12.0 million) including but not limited to
development at the Standard Mine and the Black Fox project, the completion of an
additional crusher at Montana Tunnels and purchase of additional haul trucks at
Montana Tunnels, and for the investment in a restricted certificate of deposit
(approximately $1.6 million). Investing activities used approximately $40.9
million of cash during the nine months ended September 30, 2002, including a
loan to Nevoro to acquire Apollo Gold Inc. and subsequent property, plant and
equipment additions following this acquisition.
36
Financing Activities
During the nine months ended September 30, 2003, financing activities
provided approximately $50.0 million in cash, primarily from proceeds of the
equity issuance on September 26, 2003 discussed above and approximately $5.1
million from the exercise of warrants and options net of the repayment of notes
payable of approximately $1.5 million. Financing activities provided
approximately $46.3 million in cash during the nine months ended September 30,
2002, from the issuance and sale of convertible debentures and an issuance of
special warrants (approximately $42.7 million) and form refinancing of leases
(approximately $4.8 million proceeds from notes payable and approximately $1.1
million of capital lease repayments).
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 September 30, 2003, we have accrued US$21.3 million related
to reclamation, severance and other closure requirements. This liability is
covered by a combination of surety bonds, totaling US$31,959,316, and cash bonds
totaling US$6,397,280, for a total reclamation surety, at September 30, 2003, of
over US $38 million. Our reclamation liability coverage exceeds our estimated
requirements since the federal and state authorities estimate reclamation based
upon wages in excess of what we would have to pay if we to conduct the
reclamation and closure requirements and the federal and state authorities
assume we will not have the capability to complete the reclamation and closure
requirements. 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 September 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.
Each of our mines operate under a permit granted by the state in which each
mine is located. Mining operations are usually governed by applicable state
environmental policies which are usually regulated by statute. For instance, in
Montana, the Montana Department of Environmental Quality administers the
majority of permits under which our mine operates.
We strive to conduct our operations in an environmentally responsible
manner by, among other things, implementing sound work methods, completing
concurrent reclamation (where practicable), handling materials carefully and
monitoring wildlife.
All aspects of our mining operations are regulated by operating permits.
Applications are submitted to appropriate regulating agencies to obtain new
authorizations, make changes to the existing plan of operations or to renew
permits on a periodic schedule. Applications submitted for operating permits are
reviewed by the appropriate regulatory agencies with occasional third party
review of complex issues. Regulatory agencies can, and do, request additional
explanations or information in the review process before granting a permit. All
permits contain compliance measures and require periodic monitoring and
reporting to regulating agencies and routine inspections are conducted by
permitting agencies.
37
Geochemical breakdown of ores or waste rock, water quality and stability of
constructed structures are the areas that receive the most attention for
environmental concern at mines. The characteristics of our mine ores and waste
rock show good chemical stability. We have conducted tests at our mines which
support our belief that adverse chemical breakdown should not occur and the
potential for acid rock drainage is low. Consequently, water quality issues are
minimized as a result of the favorable characteristics of the mine rock. Several
studies, models and reports have been provided to the permitting agencies to
assess our environmental risks at our mines.
Our mines use minimal amounts of regulated toxic substances in the mining
and milling operations. Most of the chemicals which we use to collect the
minerals are not regulated as toxic substances. Standard fuels and oils are used
in our mining operations and used oils and coolants are marketed or recycled.
There are no regulated cleaning solvents used at our mines. The milling
operations use a small amount of sodium cyanide as an inhibitor in the flotation
recovery process. We also use a cyanide compound which becomes complexed with
metals or is degraded by bacteria and sunlight in the tailings water rendering
any residual cyanide harmless. Our milling operations recover and reuse all of
the process water from the tailings impoundment recovery system with fresh water
makeup added as necessary. There is no water discharge to the environment from
the mining or milling operations. All storm water at our mines is captured
either in the open pit mine or in the tailings impoundment or in fresh water
makeup ponds and is subsequently used for makeup water in the milling
process.
Reclaiming areas that have been disturbed by mining activity to produce
original or natural conditions is the focus of our operating permits. Our mines
maintain a closure plan with associated costs to complete final reclamation at
the property following the cessation of mining operations. Waste rock dumps and
some other disturbance areas are reclaimed concurrent with active mining
operations. The tailings impoundment open pit mine and mine facilities will be
reclaimed after mining and milling operations have been completed.
Following mining and milling operations, our mines will be closed and
reclaimed to former or new beneficial use criteria in accordance with their
respective mine operating permit and reclamation plan. Each mine's closure plan
details the tasks and schedules that will be required to reclaim the different
areas of the mines. We intend that all mine closure plans will be consistent
with requirements in our operating permits.
In the past several years, there have been corporate level environmental
audits and third party audits. The audits are comprehensive and include review
of the environmental aspects of the mining operations. Individual areas of the
operation have also been reviewed by third party consultants. Geotechnical
requirements such as construction of the tailings embankment and stability or
hydrogeology analyses at the mine are conducted by qualified consultants who do
extensive studies, designs, construction oversight and reports on these projects
for us and the applicable regulatory agencies.
We try to conduct our operations in an environmentally responsible manner.
Since our merger no notices of violation have been received from any
environmental regulatory agency.
Generally, our mines are a significant part of the tax base of the
community and our mines are usually strongly supported by the community's
residents and schools. There have been no community protests against our mines
during their period of operations.
38
NEW ACCOUNTING PRONOUNCEMENTS
We report under Canadian GAAP and reconcile the financial statements to US
GAAP.
NEW CANADIAN GAAP ACCOUNTING PRONOUNCEMENTS
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. 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 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.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). The Statement
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
39
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.
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.
40
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 S-1 Registration Statement 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 ton ratios over the mine life are deferred and amortized. 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 of amounts deferred is based on a stripping
ratio, calculated as estimated total mining costs divided by the current proven
and probable reserves and mineral resources expected to be converted into
mineral reserves. This ratio is used to calculate the current period production
cost charged against earnings by multiplying the stripping ratio times the
reserves mined during the period. 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.
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. Deferred
stripping costs are included with related mining property, plant and equipment
for impairment testing purposes.
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
41
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.
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
42
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 Florida Canyon 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 operation, the current
leach pad operation is expected to deliver ounces 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.
The most critical area that 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 63,402 ounces of gold in the broken ore on
leach pad with a carrying value of $15,785,000 or $249 per ounce of gold. Each
1% change in the estimated recovery rate is 634 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 $157,850.
HEDGING ACTIVITIES
In the past, we have not used hedging techniques to reduce our exposure to
price volatility; however, we have entered into hedging contracts 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 and forward
contracts. The hedging contracts were a requirement of our working capital
commitment facility. 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
whereby 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 whereby 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 the
ability to roll forward the call options into forward sales contracts. At
September 30, 2003, we have put and call options for 76,000 ounces of gold and
forward sales contracts for 16,400 ounces of gold. 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.
43
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 shares. 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
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 five 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 nine months
ended September 30,,2003 we had a loss of approximately $3,535,000 and for the
year ended December 31, 2002, we had a loss of approximately $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.
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
successfully defended Safeco Insurance Company of America ("Safeco's") appeal
involving a mining reclamation bond in the amount of US$16,936,130 issued by
Safeco. The purpose of the bond is to provide financial guarantees to the
United States Government 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 "Legal Proceedings."
44
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:
- 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.
45
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.
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 November 3, 2003, the closing price for gold, silver, zinc and lead were
US$383.25 per ounce, US$5.00per ounce, US$929.00 per tonne and US$620.00 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.
46
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.
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;
47
- natural phenomena such as inclement weather conditions, floods and
earthquakes;
- unexpected labor shortages or strikes;
- restrictions or regulations imposed by government agencies; and
- litigation pursued by governmental agencies or environmental groups.
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.
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.
48
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.
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, capital intensive, 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.
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 US$295 per ounce and a call option
of US$345 per ounce. As at October 31, 2003, 89,800 ounces remained outstanding
on these contracts. 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.
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.
49
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:
- 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.
50
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.
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.
51
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.
Such risks could result in:
- damage to or destruction of mineral properties or producing
facilities;
- personal injury or death;
- environmental damage;
- delays in mining;
52
- 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 PRIOR INTERNATIONAL OPERATIONS ARE SUBJECT TO RISK
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.
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. In
November 2003, we reached an agreement whereby we received $100,000 to settle
all claims and liabilites that have been asserted or that may at any time arise
or exist among the parties with respect to the Hinoba-an Project.
Except as described above, we have discontinued pursuing our interests, if
any, in Indonesia, and we are no longer financing our subsidiaries that
own the underlying title to the properties.
We may conduct mining operations internationally in the United States and
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;
53
- 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 periodic report 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;
- 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.
54
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the past, we have not used hedging techniques to reduce our exposure to
price volatility; however, we have entered into edging contracts 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 and forward
contracts. 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 whereby 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 whereby 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 the
ability to roll forward the call options into forward sales contracts. At
September 30, 2003, we have put and call options for 76,000 ounces of gold and
forward sales contracts for 16,400 ounces of gold. 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.
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 five year period ended December 31, 2002, the
average annual market price has fluctuated between $271 per ounce and $331 per
ounce. During the third quarter of 2003, the spot price for gold improved and
experienced highs in excess of US$390.
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 September 30,
2003, the fair value of the contracts is a loss of $5,918,000 (December 31, 2002
- - $3,573,000).
Interest Rate Risk
- --------------------
During the three months ended September 30, 2003, we borrowed US$1.0
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%. We repaid in
full the outstanding balance upon receipt of net proceeds from the September
2003 issuance of common shares.
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.
55
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, 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.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In September of 2003, in connection with a public offering of 14,988,025
common shares of the Company in Canada and other foreign jurisdictions by a
syndicate of agents, we completed a brokered private placement in the United
States of 7,311,975 common shares at an issue price of $2.25 per common share.
We intend to use the proceeds (i) for advanced exploration and feasibility work
on the Black Fox project, (ii) to advance our other mineral properties including
the Montana Tunnels Mine and the Florida Canyon Mine in such amounts as may be
determined by management of the Company, and (iii) for general corporate
purposes. The syndicate of agents were also granted non-transferable warrants
to acquire such number of common shares as is equal to 3% of the total number of
commons shares purchased in total in the offering in Canada and certain other
foreign jurisdictions and in the private placement in the United States at the
offering price. These warrants are exercisable at any time prior to September
26, 2005. The offering in Canada and certain other foreign jurisdictions were
made by way of an offering prospectus filed in Canada in the province of
Ontario. The U.S. private placement was made in the U.S. in reliance upon the
exemption from registration provided in Section 4(2) of the United States
Securities Act of 1933, as amended, and/or Rule 506 of Regulation D promulgated
thereunder. The private placement was made without general solicitation or
advertising. The purchasers were sophisticated institutional investors with
access to all relevant information necessary to evaluate the investment, and who
represented to us that the shares were being acquired for investment.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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
(b) Reports filed on Form 8-K during the quarter ended September 30, 2003:
On August 22, 2003, we filed a Form 8-K to announce our results of
operations for the second quarter ended June 30, 2003, and to announce a
conference call with for Monday, August 25, 2003 to discuss such results with
senior management of the Company.
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: November 14, 2003 /s/ R. David Russell
-----------------------
R. David Russell, President and
Chief Executive Officer
Date: November 14, 2003 /s/ R. Llee Chapman
----------------------
R. Llee Chapman,
Chief Financial Officer
56