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 March 31, 2004
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, CANADA NOT APPLICABLE
----------------------- --------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4601 DTC BLVD., SUITE 750
DENVER, COLORADO 80237
(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 May 6, 2004, there were 79,494,342 common shares of Apollo Gold Corporation
outstanding.
TABLE OF CONTENTS
Page
----
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) -- As Of March 31, 2004 . . . . . . . . . . . . . . . 3
Consolidated Statement Of Operations and Defecit (Unaudited)
For The Three Month Periods Ended March 31, 2004 and 2003. . . . . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows (Unaudited)
For The Three Months Ended March 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . 5
Notes To Financial Statements (Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . 28
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Part II - Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 30
Item 3. Defaults upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 4. Submission of Matters to A Vote of Security Holders . . . . . . . . . . . . . . . . . 30
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Item 6. Exhibits and Reports On Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Exhibits
STATEMENTS REGARDING FORWARD LOOKING INFORMATION
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 under "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2003 (the "Annual
Report") 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.
ACCOUNTING PRINCIPLES, REPORTING CURRENCY AND OTHER INFORMATION
Apollo Gold Corporation prepares its consolidated financial statements in
accordance with accounting principles generally accepted in Canada and publishes
its financial statements in United States dollars. This Quarterly Report on
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, 2003 included
in our Annual Report 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 expressed in United States
dollars.
References to "we", "our", "us", the "Company" or "Apollo" mean Apollo Gold
Corporation and its consolidated subsidiaries, or to any one or more of them, as
the context requires.
1
NON-GAAP FINANCIAL INFORMATION
The cash operating, total cash and total production costs are non - GAAP
financial measures and are used by management to assess performance of
individual operations as well as a comparison to other gold producers.
The term "cash operating costs" is used on a per ounce of gold basis. Cash
operating costs per ounce is equivalent to direct operating expense, less
production royalties and mining taxes but includes by-product credits for
payable silver, lead and zinc. We have included cash operating costs
information to provide investors with information about the cost structure of
our mining operations.
The term "total cash costs" is inclusive of the above with the addition of
production royalties and mining taxes.
The term "total production costs" includes all total cash costs with the
addition of the non-cash portion of the costs including depreciation and
amortization.
This information differs from measures of performance determined in
accordance with generally accepted accounting principles (GAAP) in Canada and
the United States and should not be considered in isolation or a substitute for
measures of performance prepared in accordance with GAAP. These measures are
not necessarily indicative of operating profit or cash flow from operations as
determined under GAAP and may not be comparable to similarly titled measures of
other companies.
ITEM 1: FINANCIAL STATEMENTS
These consolidated financial statements should be read in conjunction with the
financial statements, accompanying notes and other relevant information included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003 filed with the Securities and Exchange Commission on March 30, 2004.
2
APOLLO GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF UNITED STATES DOLLARS)
====================================================================
MARCH 31, December 31,
2004 2003
------------ --------------
ASSETS (UNAUDITED) (Audited)
CURRENT
Cash and cash equivalents $ 23,767 $ 25,851
Short-term investments 7,912 5,855
Accounts receivable 4,779 4,647
Prepaids 404 552
Broken ore on leach pad 10,155 9,594
Inventories (Note 3) 3,048 2,839
- --------------------------------------------------------------------
50,065 49,338
BROKEN ORE ON LEACH PAD 1,934 1,827
PROPERTY, PLANT AND EQUIPMENT (Note 4) 40,662 38,519
DEFERRED STRIPPING COSTS 27,549 24,033
RESTRICTED CERTIFICATE OF DEPOSIT 6,938 6,893
- --------------------------------------------------------------------
$ 127,148 $ 120,610
====================================================================
LIABILITIES
CURRENT
Accounts payable $ 5,420 $ 5,848
Accrued liabilities 2,682 2,781
Notes payable 3,855 4,117
Property and mining taxes payable 1,052 1,080
- --------------------------------------------------------------------
13,009 13,826
NOTES PAYABLE 2,803 3,275
ACCRUED SITE CLOSURE COSTS 21,899 21,619
- --------------------------------------------------------------------
37,711 38,720
- --------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Share capital (Note 5) 130,181 120,624
Issuable common shares 231 231
Contributed surplus (Note 5) 12,006 7,172
Deficit (52,981) (46,137)
- --------------------------------------------------------------------
89,437 81,890
- --------------------------------------------------------------------
$ 127,148 $ 120,610
====================================================================
APPROVED ON BEHALF OF THE BOARD
G.W. Thompson, Director Robert Watts, Director
The accompanying notes are an integral part
of these interim consolidated financial statements.
3
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFECIT
(IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
=====================================================================
Three months ended
March 31,
--------------------------
2004 2003
------------ ------------
REVENUE
Revenue from sale of minerals $ 20,079 $ 8,816
- ---------------------------------------------------------------------
OPERATING EXPENSES
Direct operating costs 17,151 5,642
Depreciation and amortization 1,320 1,302
General and administrative expenses 1,730 1,272
Stock-based compensation 27 271
Accretion expense 345 320
Royalty expense 210 219
Exploration and business development 139 950
- ---------------------------------------------------------------------
20,922 9,976
- ---------------------------------------------------------------------
OPERATING LOSS (843) (1,160)
OTHER INCOME (EXPENSES)
Interest income 148 43
Interest expense (110) (149)
Foreign exchange (loss) gain and other (188) 494
- ---------------------------------------------------------------------
NET LOSS FOR THE PERIOD (993) (772)
- ---------------------------------------------------------------------
DEFICIT, BEGINNING OF PERIOD (46,137) (43,951)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (Note 2 (a)) (5,851) -
- ---------------------------------------------------------------------
ADJUSTED OPENING BALANCE (51,988) (43,951)
- ---------------------------------------------------------------------
DEFICIT, END OF PERIOD $ (52,981) $ (44,723)
=====================================================================
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.02)
=====================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 74,654,540 47,301,752
=====================================================================
The accompanying notes are an integral part
of these interim consolidated financial statements.
4
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF UNITED STATES DOLLARS)
(UNAUDITED)
==================================================================================
Three months ended
March 31,
------------------------
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss for the period $ (993) $ (772)
Items not affecting cash
Depreciation and amortization 1,320 1,302
Stock-based compensation 27 271
Accretion expense 345 320
Other (66) (51)
Net change in non-cash operating working capital items (1,416) 1,603
- ----------------------------------------------------------------------------------
(783) 2,673
- ----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures (3,123) (1,434)
Deferred stripping costs (3,515) (3,511)
Short-term investments (2,057) -
Restricted Certificate of Deposit (45) (696)
- ----------------------------------------------------------------------------------
(8,740) (5,641)
- ----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options 8,561 (2,330)
Acquisition and cancellation of shares (48) -
Payments of notes payable (1,074) (815)
- ----------------------------------------------------------------------------------
7,439 (3,145)
- ----------------------------------------------------------------------------------
NET DECREASE IN CASH (2,084) (6,113)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,851 8,426
- ----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,767 $ 2,313
==================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 110 $ 156
==================================================================================
Income taxes paid $ - $ -
==================================================================================
During the three months ended March 31, 2004, property, plant and equipment
totaling $340,000 was acquired under a non-cash financing arrangement.
During the three months ended March 31, 2003, property, plant and equipment
totaling $1,587,000 was acquired under capital lease obligations.
The accompanying notes are an integral part
of these interim consolidated financial statements.
5
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Apollo Gold Corporation ("Apollo" or the "Company") 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 Florida Canyon Mine, an open pit heap leach operation located
in the State of Nevada; the Montana Tunnels Mine, an open pit mine and
mill, producing gold dor and lead-gold and zinc-gold concentrates located
in the State of Montana; and the Diamond Hill Mine, currently under care
and maintenance, also located in the State of Montana.
Apollo has two development properties, Black Fox, which is located in the
Province of Ontario near the Township of Mattheson, and Standard Mine,
which is located near the Florida Canyon Mine. Apollo has four exploration
properties located near the Florida Canyon Mine.
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, 2003, except as described in Notes 2 (a)
and 2 (b). Certain information and note disclosure normally included in
consolidated financial statements prepared in accordance with Canadian
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, 2003.
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.
(a) Stock-based compensation
Effective January 1, 2004, the Company adopted the amended
recommendations of the CICA Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments. Under the amended
standards of this Section, the fair value of all stock-based awards
granted are estimated using the Black-Scholes model and are recorded
in operations over their vesting periods. The compensation cost
related to stock options granted to employees and directors after
January 1, 2004 is recorded in the consolidated statement of
operations.
6
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
2. ACCOUNTING POLICIES (CONTINUED)
(a) Stock-based compensation (continued)
Previously, the Company provided note disclosure of pro forma net loss
as if the fair value based method had been used on stock options
granted to employees and directors after January 1, 2002. The amended
recommendations have been applied using the retroactive method without
restatement and had the effect of increasing share capital,
contributed surplus and opening deficit as follows:
Increase as at
January 1,
2004
----------------
Share capital $ 257
Contributed surplus 5,594
Deficit (5,851)
(b) Hedging relationships
Effective January 1, 2004, the Company adopted the CICA Accounting
Guideline 13, Hedging Relationships ("AcG-13"). AcG-13 specifies the
conditions under which hedge accounting is appropriate and includes
requirements for the identification, documentation and designation of
hedging relationships, sets standards for determining hedge
effectiveness, and establishes criteria for the discontinuance of
hedge accounting. The adoption of AcG-13 had no impact on the
Company's results of operations and financial position.
3. INVENTORIES
Inventories consist of:
MARCH 31, December 31,
2004 2003
---------- -------------
Concentrate inventory $ 124 $ 98
Dore inventory 47 56
Materials and supplies 2,877 2,685
- -----------------------------------------------------------
$ 3,048 $ 2,839
===========================================================
7
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
MARCH 31, December 31,
2004 2003
--------------------------------- -------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
------- ------------- --------- -------------
Mine assets
Building, plant and equipment $15,000 $ 3,802 $ 11,198 $ 10,643
Mining properties and
development costs 27,911 5,914 21,997 20,412
-------------------------------------------------------------------------------------
42,911 9,716 33,195 31,055
Mineral rights 7,467 - 7,467 7,464
-------------------------------------------------------------------------------------
Total property, plant and equipment $50,378 $ 9,716 $ 40,662 $ 38,519
=====================================================================================
5. SHARE CAPITAL
(a) Authorized
Unlimited number of common shares with no par value.
(b) Issued and outstanding
Contributed
Shares Amount Surplus
----------- --------- -------------
Balance, December 31, 2003
as previously reported 73,539,790 $120,624 $ 7,172
Cumulative effect of change in
accounting policy (Note 2 (b)) - 257 5,594
---------------------------------------------------------------------------
Adjusted balance, December 31, 2003 73,539,790 120,881 12,766
Warrants exercised 5,227,875 8,335 -
Options exercised 248,844 602 (403)
Options exercised by agents 15,723 35 (8)
Shares reacquired and cancelled (20,500) (48) -
Shares issued for 2003 share-based
compensation 265,000 376 (376)
Stock-based compensation - - 27
---------------------------------------------------------------------------
Balance, March 31, 2004 79,276,732 $130,181 $ 12,006
===========================================================================
8
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
5. SHARE CAPITAL (CONTINUED)
(c) Warrants
As at March 31, 2004, 3,000,000 warrants with an exercise price of
$2.10 and an expiry date of December 23, 2006 remained outstanding.
(d) Share purchase options
(i) A summary of information concerning outstanding stock options at
March 31, 2004 is as follows:
Performance-based
Fixed Stock Options Stock Options
----------------------- ----------------------
Weighted Weighted
Number of Average Number of Average
Common Exercise Common Exercise
Shares Price Shares Price
---------- ----------- ---------- ----------
Balances, December 31, 2003 1,887,300 $ 2.20 2,500,154 $ 0.80
Options granted 502,700 2.07 - -
Options exercised - - (248,844) 0.80
Options cancelled (34,000) 2.25 (190,602) 0.80
----------------------------------------------------------------------------
Balances, March 31, 2004 2,356,000 $ 2.17 2,060,708 $ 0.80
============================================================================
(ii) The following table summarizes information concerning outstanding
and exercisable fixed stock options at March 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted Weighted
Average Average
Number Expiry Exercise Price Number Exercise Price
Outstanding Date per Share Exercisable per Share
----------- ----------------- --------------- ----------- ---------------
1,591,400 February 18, 2013 $ 2.24 795,700 $ 2.24
2,600 March 28, 2013 2.34 1,300 2.34
70,000 May 21, 2013 2.27 - -
150,000 August 22, 2013 2.12 - -
100,000 November 13, 2013 1.67 -
442,000 March 10, 2014 2.05 - -
-----------------------------------------------------------------------------
2,356,000 $ 2.17 797,000 $ 2.24
=============================================================================
(iii) As at March 31, 2004, the 2,060,708 performance-based stock
options were fully vested and have an expiry date of June 25,
2007.
9
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
5. SHARE CAPITAL (CONTINUED)
(e) Stock-based compensation
The fair value of each option granted is estimated at the time of
grant using the Black-Scholes option pricing model with weighted
average assumptions for grants as follows:
Three months ended March 31,
--------------------------------
2004 2003
--------------- ---------------
Risk free interest rate 2.8% 3.5%
Dividend yield 0% 0%
Volatility 54% 79%
Expected life in years 5 5
As the Company has selected the retroactive without restatement method
for reporting the change in accounting policy related to stock
compensation expense (Note 2 (a)), the Company must disclose the
impact on net loss and net loss per share as if the fair value based
method of accounting for stock-based compensation had been applied in
2003.
Three months
ended March 31,
2003
-----------------
Net loss
As reported $ (772)
Pro forma stock option expense (954)
---------------------------------------------------
$ (1,726)
===================================================
Basic and diluted loss per share
As reported $ (0.02)
Pro forma $ (0.04)
===================================================
6. INCOME TAXES
The Company did not record a recovery for income taxes for the period ended
March 31, 2004 as the net loss carry forwards are fully offset by a
valuation allowance.
10
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Gold hedges
The Company 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 March 31, 2004 there are
52,000 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 $295 per
ounce and a call option strike price of $345 per ounce. The Company has
also entered into certain spot deferred forward contracts for the delivery
of 9,200 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 March 31, 2004, the fair
value of the contracts is a loss of approximately $5.2 million (December
31, 2003 - $5.9 million).
The contracts mature as follows:
Ounces of
Gold
---------
2004 45,200
2005 16,000
------------------------------
61,200
==============================
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.
11
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(c) Bank indebtedness
During the year ended December 31, 2003 the Company entered into a $5
million Revolving Loan, Guaranty and Security Agreement with Standard
Bank London Limited ("Standard Bank"). The Company must satisfy
certain requirements in order for Standard Bank to advance the maximum
amount of the loan. Until the commitment under the line of credit
expires or has been terminated, the Company must meet certain
covenants. As of March 31, 2004, the Company has no amount outstanding
under the revolving loan and is in compliance with the covenants.
9. SEGMENTED INFORMATION
Apollo operates the Montana Tunnels and Florida Canyon Mines in the United
States and the Black Fox development project in Canada. As the products and
services of the Company's largest segments, Montana Tunnels and Florida
Canyon, are essentially the same, the reportable segments have been
determined at the level where decisions are made on the allocation of
resources and capital and where performance is measured. The accounting
policies for these segments are the same as those followed by the Company
as a whole.
Amounts as at March 31, 2004 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------- ---------- --------
Cash and cash equivalents $ 109 $ 63 $ 16 $ 23,579 $ 23,767
Short-term investments - - - 7,912 7,912
Broken ore on leach pad - current - 10,155 - - 10,155
Other non-cash current assets 5,230 2,660 175 166 8,231
- --------------------------------------------------------------------------------------
5,339 12,878 191 31,657 50,065
Broken ore on leach pad - long-term - 1,934 - - 1,934
Property, plant and equipment 15,673 13,510 10,922 557 40,662
Deferred stripping costs 27,549 - - - 27,549
Restricted certificate of deposit 2,882 3,642 373 41 6,938
- --------------------------------------------------------------------------------------
Total assets $ 51,443 $ 31,964 $11,486 $ 32,255 $127,148
======================================================================================
Current liabilities $ 5,858 $ 5,892 $ 795 $ 464 $ 13,009
Notes payable 1,007 1,796 - - 2,803
Accrued site closure costs 9,189 12,710 - - 21,899
- --------------------------------------------------------------------------------------
Total liabilities $ 16,054 $ 20,398 $ 795 $ 464 $ 37,711
======================================================================================
12
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (CONTINUED)
Amounts as at December 31, 2003 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------ ---------- --------
Cash and cash equivalents $ 754 $ 19 $ 95 $ 24,983 $ 25,851
Short-term investments - - - 5,855 5,855
Broken ore on leach pad - current - 9,594 - - 9,594
Other non-cash current assets 5,345 2,263 71 359 8,038
-------------------------------------------------------------------------------------
6,099 11,876 166 31,197 49,338
Broken ore on leach pad - long-term - 1,827 - - 1,827
Property, plant and equipment 15,559 13,529 8,914 517 38,519
Deferred stripping costs 24,033 - - - 24,033
Restricted certificate of deposit 2,663 3,809 377 44 6,893
-------------------------------------------------------------------------------------
Total assets $ 48,354 $ 31,041 $9,457 $ 31,758 $120,610
=====================================================================================
Current liabilities $ 6,140 $ 6,515 $ 507 $ 664 $ 13,826
Notes payable 980 2,295 - - 3,275
Accrued site closure costs 9,148 12,471 - - 21,619
-------------------------------------------------------------------------------------
Total liabilities $ 16,268 $ 21,281 $ 507 $ 664 $ 38,720
=====================================================================================
13
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (CONTINUED)
Amounts for the three month periods ended March 31, 2004 and 2003,
respectively, are as follows:
THREE MONTHS ENDED MARCH 31, 2004
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ 11,624 $ 8,455 $ - $ - $20,079
- ------------------------------------------------------------------------------------------
Direct operating costs 10,200 6,951 - - 17,151
Depreciation and amortization 576 717 - 27 1,320
General and administrative expenses - - - 1,730 1,730
Share-based compensation - - - 27 27
Accretion expense 41 304 - - 345
Royalty expense - 210 - - 210
Exploration and business development - - - 139 139
- ------------------------------------------------------------------------------------------
10,817 8,182 - 1,923 20,922
- ------------------------------------------------------------------------------------------
Operating income (loss) 807 273 - (1,923) (843)
Interest income - - - 148 148
Interest expense (44) (66) - - (110)
Foreign exchange loss and other - - - (188) (188)
- ------------------------------------------------------------------------------------------
Net income (loss) $ 763 $ 207 $ - $ (1,963) $ (993)
==========================================================================================
Investing activities
Property, plant and equipment
expenditures $ 350 $ 699 $2,007 $ 67 $ 3,123
Deferred stripping expenditures 3,515 - - - 3,515
14
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (CONTINUED)
Three months ended March 31, 2003
----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------- ----------- --------
Revenue from sale of minerals $ - $ 8,816 $ - $ - $ 8,816
- ---------------------------------------------------------------------------------------------
Direct operating costs - 5,642 - - 5,642
Depreciation and amortization - 1,288 - 14 1,302
General and administrative expenses - - - 1,272 1,272
Share-based compensation - - - 271 271
Accretion expense 78 242 - - 320
Royalty expense - 219 - - 219
Exploration and business development - - 767 183 950
- ---------------------------------------------------------------------------------------------
78 7,391 767 1,740 9,976
- ---------------------------------------------------------------------------------------------
Operating (loss) income (78) 1,425 (767) (1,740) (1,160)
Interest income - - - 43 43
Interest expense (income) (54) (95) - - (149)
Foreign exchange (loss) gain and other (17) - 1 510 494
- ---------------------------------------------------------------------------------------------
Net (loss) income $ (149) $ 1,330 $ (766) $ (1,187) $ (772)
=============================================================================================
Investing activities
Property, plant and equipment
expenditures $ 278 $ 2,487 $ 140 $ 116 $ 3,021
Deferred stripping expenditures 3,511 - - - 3,511
15
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. 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 month periods ended March 31, 2004 and 2003.
Material variances between financial statement items under Canadian GAAP
and the amounts determined under U.S. GAAP are as follows:
CONSOLIDATED BALANCE SHEET
MARCH 31, 2004
Property, Deferred
Plant and Stripping Accounts Other Share Contributed
Equipment Costs Payable Liabilities Capital Surplus Deficit
----------- ----------- ---------- ------------ --------- ------------ ---------
As at March 31, 2004
Canadian GAAP $ 40,662 $ 27,549 $ 5,420 - $130,181 $ 12,006 $(52,981)
Convertible debenture (a) - - - - - 20,675 (20,675)
Gold hedge loss (c) - - (220) 5,198 - - (4,978)
Impairment of property, plant and
equipment and capitalized
deferred stripping costs and
change in depreciation and
amortization (d) (5,401) (8,585) - - - - (13,986)
Flow-through common
shares (e) - - - - (238) - 238
Black Fox development
costs (f) (5,638) - - - - - (5,638)
--------------------------------------------------------------------------------------------------------------------------
As at March 31, 2004
U.S. GAAP $ 29,623 $ 18,964 $ 5,200 $ 5,198 $129,943 $ 32,681 $(98,020)
==========================================================================================================================
16
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
Property, Deferred
Plant and Stripping Accounts Other Share Contributed
Equipment Costs Payable Liabilities Capital Surplus Deficit
----------- ----------- ---------- ------------ --------- ------------ ---------
As at December 31, 2003,
Canadian GAAP $ 38,519 $ 24,033 $ 5,848 $ - $120,624 $ 7,172 $(46,137)
Convertible debenture (a) - - - - - 20,675 (20,675)
Share-based
compensation (b) - - - - - 4,343 (4,343)
Gold hedge loss (c) - - (551) 5,911 - - (5,360)
Impairment of property,
plant and equipment,
capitalized deferred
stripping costs and
change in depreciation
and amortization (d) (5,543) (8,740) - - - - (14,283)
Flow-through common
shares (e) - - - - (238) - 238
Black Fox development
costs (f) (3,643) - - - - - (3,643)
-----------------------------------------------------------------------------------------------------------------
As at December 31, 2003,
U.S. GAAP $ 29,333 $ 15,293 $ 5,297 $ 5,911 $120,386 $ 32,190 $(94,203)
=================================================================================================================
17
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
Under U.S. GAAP, the net loss and net loss per share would be adjusted as
follows:
2004 2003
-------- -------
Net loss for the three month period ended March 31,
based on Canadian GAAP $ (993) $ (772)
Cumulative effect of change in accounting policy (b) (1,508) -
Share-based compensation (b) - (450)
Gold hedge gain (c) 819 1,024
Impairment of property, plant and equipment and
change in depreciation (d) 142 -
Impairment of capitalized deferred stripping costs and
change in amortization (d) 155 -
Black Fox development costs (e) (1,995) -
--------------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $(3,380) $ (198)
==========================================================================
Other comprehensive loss
Unrealized loss on cash flow hedges $ (437) $ -
==========================================================================
Comprehensive loss $(3,817) $ (198)
==========================================================================
Net loss per share - U.S. GAAP basic and diluted $ (0.05) $(0.00)
==========================================================================
(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 $20,675,000 for the year ended December 31, 2002. Canadian
GAAP does not require the recognition of any beneficial conversion
feature.
18
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(b) Stock-based compensation
Under Canadian GAAP, effective January 1, 2004, the Company adopted
the amended recommendations of CICA Handbook Section 3870 (Note 2
(a)). Under U.S. GAAP, effective January 1, 2004, the Company adopted
the modified prospective method of accounting for stock-based
compensation recommended in SFAS 148, Accounting for Stock-Based
Compensation - Transition and Disclosure ("SFAS 148"). Prior to
January 1, 2004, the Company measured its employee stock-based awards
using the intrinsic value method prescribed by APB No. 25, Accounting
for Stock Issued to Employees. As required by SFAS 148, the Company
must disclose the impact on net income and basic and diluted loss per
share as if the fair value based method had been applied in the
comparative period.
2004 2003
-------- -------
Net loss for the three month period ended
March 31, as reported $(3,380) $ (198)
Stock option expense as reported 27 450
Pro forma stock option expense (27) (954)
------------------------------------------------------------------
Net loss - pro forma $(3,380) $ (702)
==================================================================
Net loss per share, basic - for the three month
period ended March 31 $ (0.05) $(0.00)
Stock option expense as reported 0.00 0.01
Pro forma stock option expense (0.00) (0.02)
------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.05) $(0.01)
==================================================================
(c) Gold hedge gain (loss)
Under U.S. GAAP, the Company's put and call option contracts are
designated as cash flow hedges. To the extent they provide effective
offset, changes in fair value arising from these derivative
instruments are deferred in other comprehensive loss and recognized in
the consolidated statement of operations when the hedged transaction
has occurred. The ineffective portion of the change in fair value of
the contracts is recorded in the consolidated statement of operations.
Prior to January 1, 2004, the Company had not designated these
contracts as hedges and all changes in fair value during prior periods
was recorded in the consolidated statement of operations.
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. Changes in fair value of these contracts
are recorded in the consolidated statement of operations.
19
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(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.
Accordingly, for U.S. GAAP purposes, an impairment of property, plant
and equipment and capitalized deferred stripping costs and an
adjustment to the related depreciation and amortization expense has
been recorded.
(e) Flow-through common shares
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and
renounce the related income tax deductions to the investors. The
Company has accounted for the issue of flow-through shares using the
deferral method in accordance with Canadian GAAP. At the time of
issue, the funds received are recorded as share capital. For U.S.
GAAP, the premium paid in excess of the market value of $238,000 is
credited to other liabilities and included in income as the qualifying
expenditures are made.
(f) 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 $5,638,000 has been recorded as at
March 31, 2004.
(g) 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 three month periods ended March 31, 2004 and 2003 would
reflect a reduction in cash utilized in investing activities of
$3,515,000 and $3,511,000, respectively, and a corresponding increase
in cash utilized in operating activities.
20
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(h) 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 change in
fair value of the effective portion of the cash flow hedges (Note 10
(c)).
(i) Recently issued accounting pronouncements
In March 2004, the Emerging Issues Task Force issued EITF 04-2,
Whether Mineral Rights are Tangible or Intangible Assets ("EITF
04-2"). The Task Force reached a consensus that mineral rights are
tangible assets. In April 2004, the FASB issued proposed FASB Staff
Positions ("FSPs") FAS 141-1 and FAS 142-1, Interaction of FASB
Statements No. 141, Business Combinations ("SFAS 141"), and No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"), and EITF Issue No.
04-2, Whether Mineral Rights are Tangible or Intangible Assets. The
proposed FSPs amend SFAS 141 and 142 to conform them to the Task Force
consensus. The FSPs are effective for the first reporting period
beginning after April 29, 2004. The Company does not anticipate that
the adoption of EITF 04-2 and FSPs 141-1 and 142-1 will have a
material effect on the Company's results of operations, financial
position or disclosures.
In March 2004, the EITF issued EITF 04-3, Mining Assets: Impairment
and Business Combinations. EITF 04-3 requires mining companies to
consider cash flows related to the economic value of mining assets
(including mineral properties and rights) beyond those assets' proven
and probable reserves, as well as anticipated market price
fluctuations, when assigning value in a business combination in
accordance with SFAS 141 and when testing the mining assets for
impairment in accordance with SFAS 144. The consensus is effective for
fiscal periods beginning after March 31, 2004.
11. SUBSEQUENT EVENT
Subsequent to March 31, 2004, the Company entered into an earn-in joint
venture agreement to explore the Huizopa Gold project located in the Sierra
Madre Gold Belt in the State of Chihuahua, Mexico. The Company has the
option to earn a 51% interest through the issuance of 48,978 shares of the
Company, incurring approximately $3 million in an exploration and drilling
program and $2.2 million in land payments over the next four years. The
Company may increase its share to 71% in the project through the completion
of a feasibility study and the commencement of commercial production.
21
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents a discussion of the financial condition and results
of operations of the Company for the three months ended March 31, 2004 and 2003.
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. and our Florida Canyon Mine, owned by another one of our subsidiaries,
Florida Canyon Mining, Inc. Our mine development activities involve our Black
Fox property, located in Ontario, Canada and our Standard Mine property, owned
by one of our subsidiaries, Standard Mining Inc. During 2003, Standard Mining
Inc. acquired and incorporated into its Standard Mine property additional
adjacent land positions in Buffalo Canyon. Our exploration activities involve
our Pirate Gold, Nugget Field and Diamond Hill properties along with our
recently acquired claims staked and land acquired by Apollo Gold Exploration
Inc. at the Willow Creek property (which is located in the vicinity of the
Florida Canyon operation).
We own and operate the Florida Canyon Mine, a low grade heap leach gold
mine located approximately 42 miles southwest of Winnemucca, Nevada. On
average, the Florida Canyon Mine has produced approximately 125,000 ounces of
gold and approximately 80,000 ounces of silver annually since 1985.
We also own and operate the Montana Tunnels Mine, an open pit located near
Helena, Montana. When in full production, over the last five years, the Montana
Tunnels Mine has historically produced approximately 78,000 ounces of gold,
26,000 tons of zinc, 8,700 tons of lead and 1,200,000 ounces of silver annually.
The Montana Tunnels Mine was idle for approximately three months in 2003, while
we made preparations to begin the removal of waste rock at the Mine. Limited
production resumed in April 2003. In October of 2003, a second waste stripping
project ("Phase II") known as the L-Pit project was initiated, and we intend to
pre-strip approximately 17 million tons of waste from the south and west high
walls of the open pit after which the L-Pit should add an additional three to
four years to the mine life.
We have two development stage properties, the Black Fox Property ("Black
Fox"), located near Timmins, Ontario, and the Standard Mine Project (including
the new Buffalo Canyon component), owned by our wholly-owned subsidiary Standard
Gold Mining Inc., located in Nevada. We also own several exploration assets
including the Willow Creek claim block, the Pirate Gold Project, and Nugget
Fields, each located in Nevada and owned by our wholly-owned subsidiary, Apollo
Gold Exploration, Inc., a Delaware corporation.
In 2003, we focused our exploration efforts on our Black Fox and Standard
Mine properties. The Black Fox Property is located east of Timmins, Ontario,
and was acquired in September 2002. 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 a drilling
program to test the open pit potential and core drilling of 297 core holes from
100 to 500 meters in depth. As a result of the core drilling, we have
identified proven and probable reserves at the Black Fox Property.
22
Upon completion of the first phase, we began the second phase of our Black
Fox Project development in February 2004. The second phase will provide for the
development of underground access for further exploratory drilling. We are
developing an underground ramp from the existing structures. 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 two years, based on a
plan for combined open pit and underground mining, with on-site milling, at a
capacity of 1500 metric tonnes of ore per day. The third phase would include
construction of the mine and processing facilities.
We have continued drilling at the Standard Mine and drilled approximately
80 holes in 2003. The Buffalo Canyon portion of our Standard Mine property is
located immediately south of and contiguous to the pre-existing Standard Mine
property. We acquired Buffalo Canyon in 2003 and completed our Phase I drilling
in December 2003. We believe that the northern portion of Buffalo Canyon has
the highest potential for commercialization, and plan to conduct follow-up
drilling in 2004. Because of our 2003 drilling program at the Standard Mine, we
were able to add to the proven and probable reserves at the property.
Construction of the facilities is scheduled to begin in the second half of 2004
with an expected total cost of $7.5 million.
The table below summarizes our production for gold, silver and other
metals, as well as average metals prices, for each period indicated:
APOLLO GOLD CORPORATION
PRODUCTION & METALS PRICE AVERAGES
2003 2002 2001 2000
----------- ----------- ----------- -----------
Gold (Ounces) 145,935 148,173 192,887 259,863
Silver (Ounces) 471,241 275,925 963,050 1,257,972
Lead (Pounds) 10,843,184 5,481,230 13,759,579 12,141,771
Zinc (Pounds) 21,792,452 15,328,392 40,158,321 31,689,125
AVERAGE METAL PRICES:
Gold - London Bullion $ 364 $ 310 $ 271 $ 279
Mkt. ($/ounce)
Silver - London Bullion $ 4.88 $ 4.59 $ 4.37 $ 5.00
Mkt. ($/ounce)
Lead - LME ($/pound) $ 0.23 $ 0.20 $ 0.22 $ 0.21
Zinc - LME ($/pound) $ 0.38 $ 0.35 $ 0.40 $ 0.51
Note: Includes the operations of Nevoro Gold Corporation and its wholly-owned
subsidiary Apollo Gold Inc., prior to June 25, 2002
23
APOLLO GOLD CORPORATION
RESULTS OF OPERATIONS
- -----------------------
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
Our revenues for the three months ended March 31, 2004 were approximately
$20.1 million derived primarily from the sale of 33,170 ounces of gold. This
compares to approximately $8.8 million derived primarily from the sale of 25,057
ounces of gold for the same period in 2003. The average price received for gold
for the first three months of 2004 and 2003 was $383 and $349 per ounce,
respectively. Our revenues for silver, zinc and lead for the three months ended
March 31, 2004 were $7.4 million compared to $0.1 million during the same period
2003. The growth in revenue in 2004 was due to an increase in mining activity
in that year. During the three months ended March 31, 2003, the Montana Tunnels
Mine was in the development stage whereby all revenues and production was
accounted for as an offset to the deferred mining costs, therefore, the only
revenues for this period came from the Florida Canyon Mine.
Sales of minerals from our Florida Canyon Mine accounted for 42.1% of our
revenues for the three months ended March 31, 2004, with the remaining 57.9% of
revenues derived from sales of minerals from our Montana Tunnels Mine. In the
three months ended March 31, 2004, we received approximately 63% of our revenue
from sales of gold and 37% 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 2003.
We sold 33,170 ounces of gold in the first quarter 2004 at a total cash
cost of $302 per ounce, compared to 25,057 ounces at a total cash cost of $231
in the first quarter 2003. The increase is primarily attributable to increased
production at Montana Tunnels, which commenced production in April 2003.
Montana Tunnels
- ----------------
During the first quarter of 2004, 7.4 million tons of waste were removed at
Montana Tunnels. This is in addition to the 6.5 million tons of waste removed
in the fourth quarter of 2003, bringing the Phase II total to 13.9 million tons
removed. Revenues at Montana Tunnels are slightly behind our projections as the
gold ore grades are slightly less than planned. In addition the coarse ore
handling system continues to plug up leading to lower mill throughputs. Mill
throughput should improve as modifications are completed in the second quarter
to the crushing circuit.
Following are the key statistics for the Montana Tunnels operation for the first
quarter of 2004. There are no comparatives for the first quarter of 2003 as the
mine commenced production in April of 2003.
2004
FIRST
QUARTER
--------------
Tons Mined 8,932,282
Tons Milled 1,108,589
Production:
Gold Ounces 10,783
Silver Ounces 118,758
Lead Pounds 3,143,393
Zinc Pounds 9,040,272
Total cash costs $ 278
Total production costs $ 332
24
2004
FIRST
QUARTER
--------------
Total Revenue ($millions) $ 11.6
Capital Expenditures ($millions) $ 3.8
Florida Canyon
- ---------------
At Florida Canyon, we produced 22,387 ounces of gold at a total cash cost
of $314 per ounce for the three months ended March 31, 2004 as compared to
25,057 ounces of gold at a total cash cost of $231 per ounce for the same period
in 2003. This lower production and higher total cash cost was a direct result
of lower ore grades and longer recovery time.
Following are key operating statistics at Florida Canyon for the first quarter
of 2004 compared to 2003:
2004 2003
FIRST FIRST
QUARTER QUARTER
---------- ----------
Tons Mined 6,389,682 5,289,332
Gold Production 22,387 25,057
Silver Production 22,756 13,763
Total cash costs $ 314 $ 231
Total production costs $ 346 $ 313
Total Revenue ($millions) $ 8.5 $ 8.8
Capital Expenditures:
Florida Canyon $ 0.2 $ 1.8
Standard Mine $ 0.6 $ 0.7
We anticipate commencing construction at the Standard Mine in the second
quarter 2004. 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.
Based on gold reserves, priced at approximately US$350.00 per ounce, we
expect the Montana Tunnels Mine, the Florida Canyon Mine and the Standard Mine,
collectively, to produce approximately 170,000 ounces of gold at a total cash
cost of approximately $260 per ounce in 2004.
Our direct operating costs equaled approximately $17.2 million and $5.6
million for the three months ended March 31, 2004 and 2003, respectively. These
amounts include mining and processing costs. The lower direct operating costs
in 2003 reflect the operating costs at the Florida Canyon Mine only as Montana
Tunnels was in development. We incurred depreciation and amortization
expenses of approximately $1.3 million for the three months ended March 31,
2004 as compared to $1.3 million for the same period 2003.
We incurred approximately $1.7 million and $1.3 million for the three
months ended March 31, 2004 and 2003, respectively, in general and
administrative expenses. As of January 2004 the Company has 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. As a result, we
incurred share-based compensation of
25
approximately $0.03 million in 2004 compared to $0.3 million in the same period
of 2003. We also show the cumulative effect of the change for the share based
compensation in 2003 of approximately $5.9 million. This cumulative effect of
the change in share-based compensation includes the original stock options
issued upon the amalgamation of the Company with International Pursuit in 2002
as well as our employee stock option incentive plan.
Our expenses for exploration and development, consisting of drilling and
related expenses at our exploration properties, totaled approximately $0.1
million and $1.0 million for the three months ended March 31, 2004 and 2003,
respectively. The reduction in expenditures is due to 2003 expenses on the
Black Fox Project being expensed, whereas currently these projects are
classified as development projects and therefore their expenses are capitalized
for accounting purposes.
As a result of these expense components, our operating expenses totaled
approximately $20.9 million for the three months ended March 2004, as compared
to approximately $10.0 million for the same period in 2003. The difference is
attributable to the addition of Montana Tunnels operating expenses for the first
quarter of 2004 following its development in 2003.
We realized interest income of approximately $148,000 during the three
months ended March 31, 2004. We incurred interest expense of approximately
$110,000 in the same period, primarily for equipment leases. We realized $43,000
in interest income but incurred net interest expense of approximately $149,000
during the comparable period in 2003. The interest income increase is due to
the investment of the equity funds that were raised in the fall of 2003.
Interest expense is going down due to the equipment lease accounts being paid
down.
We recognized foreign exchange losses of approximately $188,000 and foreign
exchange gains of approximately $494,000 during the three months ended March 31,
2004 and 2003, respectively, from cash balances held in Canadian dollars. We
utilize United States dollars as our functional and reporting currency.
Based on these factors, we incurred a loss of approximately $1.0 million or
$0.01 per share for the three months ended March 31, 2004, as compared to a loss
of approximately $0.8 million or $0.02 per share, for the three months ended
March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
At March 31, 2004 and December 31, 2003 we had cash and cash equivalents
(including short-term investments) of approximately $31.7 million.
Operating activities used $0.8 million of cash during the three months
ended March 31, 2004. Net cash used by operating activities was impacted by
higher operating and administrative charges during the first quarter of 2004
when compared to 2003. These charges included higher fixed costs at the mine
sites as well as salaries, legal and accounting costs at the corporate office.
Investing activities used $8.7 million of cash during the three months
ended March 31, 2004. The significant increase in the amount of cash used in
investing activities was primarily due to increased spending on property, plant
and equipment relating to the development at the Standard Mine and Black Fox
Project. The Company also increased its short term investments during the
quarter by $2.1 million. These short term investments are cash equivalents that
are invested in terms longer than 90 days.
Financing activities for the three months ending on March 31, 2004 included
the exercise of warrants and options in the amount of $8.5 million. On March
21, 2004, the original Apollo Gold Corporation warrants expired. During the
first quarter of 2004, 5.3 million of these warrants were exercised, leaving
140,625 unexercised and expired.
We believe our cash requirements for the development of the Black Fox Mine
and the Standard Mine
26
will total approximately $70.0 million over the next three years. We expect to
spend $10.8 million on Black Fox development and $7.5 million on Standard Mine
construction in 2004. Assuming a successful feasibility study at Black Fox, we
expect to spend approximately $52 million on Black Fox construction and
development during 2005 and 2006. We expect these expenditures to be funded
through a combination of cash on hand ($31.7 million at March 31), future cash
flows from operations, and external financing which may include bank loans and
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.
During the year ended December 31, 2003 the Company entered into a $5
million Revolving Loan, Guaranty and Security Agreement with Standard Bank
London Limited. The Company must satisfy certain requirements in order for
Standard Bank to advance the maximum amount of the loan. Until the commitment
under the line of credit expires or has been terminated, the Company must meet
certain covenants. As of March 31, 2004, $2.8 million was available under the
loan agreement, and the Company has no amount outstanding under the revolving
loan and is in compliance with the covenants.
DIFFERENCES BETWEEN CANADIAN AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- --------------------------------------------------------------------------------
(GAAP)
- ------
The Company reports under Canadian Generally Accepted Accounting Principles
and reconciles to US Generally Accepted Accounting Principles. The application
of US GAAP has a significant effect on the net loss and net loss per share. For
a detailed explanation see Note 10 of our interim financial statements.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
- ----------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make a variety of
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting periods covered by the financial statements.
Our significant accounting policies are disclosed in Note 2 to the
Consolidated Financial Statements included in our Form 10-K for the year ended
December 31, 2003.
Except as described in Note 2 of our interim financial statements for the
three months ended March 31, 2004 our accounting policies did not differ from
the policies used in the preparation of the financial statements at December 31,
2003.
CONTRACTUAL OBLIGATIONS
- ------------------------
The Company has several outstanding equipment leases and financings. As of
March 31, 2004, there are no material changes from the information presented in
the Company's Annual Report.
ENVIRONMENTAL
- -------------
As of March 31, 2004, we have accrued $21.9 million related to reclamation,
severance and other closure requirements, an increase from December 31, 2003 of
$0.3 million. This liability is covered by a combination of surety bonds,
totaling $32.0 million, and cash bonds totaling $6.8 million, for a total
reclamation surety, at March 31, 2004 of $38.8 million. We have accrued what
management believes is the present value of our best estimate of the liability
as of March 31, 2004; 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.
27
SUBSEQUENT EVENTS
- ------------------
Subsequent to March 31, 2004 the Company entered into an earn-in joint
venture agreement to explore the Huizopa Gold project located in the Sierra
Madre Gold Belt in the State of Chihuahua, Mexico. The Company has the option
to earn a 51% interest through the issuance of 48,978 shares of the Company,
incurring approximately $3 million in an exploration and drilling program and
$2.2 million in land payments over the next four years. The Company may
increase its share to 71% in the project through the completion off a
feasibility study and the commencement of commercial production.
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 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 March, 2004, we have put and call options for 52,000
ounces of gold and forward sales contracts for 9,200 ounces of gold.
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.
The following table sets forth the average daily closing prices of the
following metals for 1980, 1985, 1990, 1995, 1998 and each year thereafter
through December 31, 2003.
1980 1985 1990 1995 1998 1999 2000 2001 2002 2003
--------- --------- --------- --------- --------- --------- --------- --------- --------- --------
Gold (1) US$612.56 US$317.26 US$383.46 US$384.16 US$294.16 US$278.77 US$279.03 US$271.00 US$309.73 US363.58
(per ounces)
Silver (2) US$20.63 US$6.14 US$4.82 US$5.19 US$5.53 US$5.25 US$5.00 US$4.39 US$4.60 US$4.88
(per ounces)
Lead (3) US$0.41 US$0.18 US$0.37 US$0.29 US$0.24 US$0.23 US$0.21 US$0.22 US$0.21 US$0.26
(per lb.)
Zinc (4) US$0.34 US$0.36 US$0.69 US$0.47 US$0.46 US$0.49 US$0.51 US$0.40 US$0.37 US$0.42
(per lb.)
- --------------------------
(1) London Final
(2) Handy & Harman
(3) London Metals Exchange -- Cash
(4) London Metals Exchange -- Special High Grade - Cash
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, and 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, 2003, the
average annual market price has fluctuated between $271 per ounce and $364 per
ounce. During the first quarter of 2004, the spot price for gold improved and
experienced highs in excess of US$420.
There is 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
28
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 March
31, 2004, the fair value of the contracts is a loss of $5,198,000 (December 31,
2003 - $5,911,000).
FOREIGN CURRENCY
- -----------------
While the Company does currently conduct exploration activities in Canada,
the price of gold is denominated in U.S. dollars, and the Company's gold
production operations are in the United States. Therefore, the Company has
minimal, if any foreign currency exposure.
ITEM 4: CONTROLS AND PROCEDURES
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 as defined in Exchange Act Rules 13a-15(e) and 15d - 15(e) as
of the end of the period covered by this report. 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.
29
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
SALES OF UNREGISTERED SECURITIES
On various dates during the quarter ended March 31, 2004, the Company
issued 5,227,875 common shares upon the exercise of warrants at an exercise
price of $1.60 per common share. The warrants exercised expired on March 26,
2004 and were originally issued by the Company to 35 purchasers in the United
States and Canada in connection with the 2002 plan of arrangement pursuant to
which the Company was formed. The common shares were issued in reliance upon
the exemption from the registration requirements of the Securities Act provided
by Section 4(2) of the Securities Act and Regulation S promulgated under the
Securities Act.
On various dates during the quarter ended March 31, 2004, the Company
issued to 11 individuals, 248,844 common shares upon the exercise of options
granted under the Company's Stock Option Incentive Plan at an exercise price of
$0.80 per common share. The common shares were issued in reliance upon the
exemption from the registration requirements of the Securities Act provided by
Section 4(2) of the Securities Act.
During the quarter ended March 31, 2004, the Company issued 15,723 common
shares upon the exercise of warrants granted to Canaccord Capital for services
rendered relating to the Company's private placement in September 2003 at an
exercise price of Cdn$2.25 per common share. The common shares were issued in
reliance upon the exemption from the registration requirements of the
Securities Act provided by Regulation S promulgated under the Securities Act.
The Company intends to used the total net proceeds of $8.5 million from the
above-described issuances of securities for advanced exploration and feasibility
work on the Black Fox project, to advance our other mineral properties including
the Montana Tunnels Mine and the Florida Canyon Mine, and for general corporate
purposes.
ISSUER PURCHASES OF EQUITY SECURITIES
MAXIMUM
NUMBER OF
SHARES THAT
TOTAL NUMBER OF MAY YET BE
AVERAGE SHARES PURCHASED PURCHASED
TOTAL NUMBER OF PRICE PAID AS PART OF PUBLICLY UNDER THE
SHARES PURCHASED PER SHARE ANNOUNCED PLAN(1) PLAN(1)
January 1 - 31, 2004 - - - -
February 1 - 29, 2004 - - - -
March 1 - 31, 2004 20,500(1) Cdn$3.00 0 0
---------------- --------------------
Total 20,500 0 0
(1) Represents common shares purchased by the Company in a privately negotiated transaction related to the acquisition
of property.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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 March 31, 2004:
None
30
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
APOLLO GOLD CORPORATION
Date: May 14, 2004 /s/ R. David Russell
-----------------------------------
R. David Russell, President and
Chief Executive Officer
Date: May 14, 2004 /s/ R. Llee Chapman
-----------------------------------
R. Llee Chapman,
Chief Financial Officer
31