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 June 30, 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 July 25, 2004, there were 79,619,461 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 June 30, 2004 . . . . . . . . . . . . . . . . 3
Consolidated Statement Of Operations and Deficit(Unaudited)
For The Three and Six Month Periods Ended June 30, 2004 and 2003. . . . . . . . . . . . . . 4
Consolidated Statement of Cash Flows (Unaudited)
For The Three and Six Months Ended June 30, 2004 and 2003 . . . . . . . . . . . . . . . . . 5
Notes To Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . 35
Item 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . 37
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 4. Submission of Matters to A Vote of Security Holders. . . . . . . . . . . . . . . . . . 37
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 6. Exhibits and Reports On Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
-i-
STATEMENTS REGARDING FORWARD LOOKING INFORMATION
This report, including the Notes to Unaudited Consolidated Financial Statements,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934,
as amended. Forward-looking statements include, without limitation, with
respect to our financial condition, results of operations, production, costs,
start-up of the Standard Mine, completing stripping at Montana Tunnels, business
prospects, plans, objectives, goals, strategies, future events, capital
expenditure, and exploration and development efforts. Forward-looking statements
can be identified by the use of forward-looking terminology, such as "may",
"will", "should", "expect", "anticipate", "estimate", "continue", "plans",
"intends", or other similar terminology. These forward-looking statements are
not guarantees of future performance and involve risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from what is anticipated or forecasted in these
forward-looking statements due to numerous factors, including, but not limited
to, the outcome of assays and additional exploration sampling and drilling
efforts, delay in permits or approvals, technical or permitting problems,
unanticipated drilling problems or costs, variations in ore grade, the market
price of gold and other minerals, unanticipated delays or costs for
construction, or start-up at our mines, unanticipated reclamation liabilities,
the availability and timing of external financing or acceptable terms and other
factors disclosed under the heading "Risk Factors" in Apollo Gold's 10-K for the
year ended December 31, 2003 as well as our 10-Q filing for the period ended
March 31, 2004 and elsewhere in Apollo Gold documents filed from time to time
with the Toronto Stock Exchange, The American Stock Exchange, The United States
Securities and Exchange Commission and other regulatory authorities. In
addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic and international economic
conditions. We undertake no obligation to update 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 ("Cdn GAAP")
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 for the fiscal year ended December 31,
2003 included in our Annual Report (the "Annual Report") filed with the SEC.
Certain reclassifications 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.
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, mining taxes and by-product credits for payable silver,
lead and zinc. We have included cash operating
1
costs information to provide investors with information about the cost structure
of our mining operations. The term "total cash costs" is cash operating costs
plus production royalties and mining taxes. The term "total production costs"
is total cash costs plus depreciation and amortization.
This information differs from measures of performance determined in accordance
with generally accepted accounting principles 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.
See Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations for a reconciliation of these non-GAAP measures to our
Statements of Operations.
2
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 report on Form 10-K for the year ended December 31, 2003.
APOLLO GOLD CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF UNITED STATES DOLLARS)
- --------------------------------------------------------------------------------
June 30, December 31,
2004 2003
------------ --------------
ASSETS (Unaudited) (Audited)
CURRENT
Cash and cash equivalents $ 5,053 $ 25,851
Short-term investments 7,446 5,855
Accounts receivable 3,295 4,647
Prepaids 418 552
Broken ore on leach pad 11,632 9,594
Inventories (Note 3) 3,168 2,839
- --------------------------------------------------------------------------------
31,012 49,338
BROKEN ORE ON LEACH PAD 2,216 1,827
PROPERTY, PLANT AND EQUIPMENT (Note 4) 47,252 38,519
DEFERRED STRIPPING COSTS 31,382 24,033
RESTRICTED CERTIFICATE OF DEPOSIT AND
OTHER ASSETS 8,603 6,893
- --------------------------------------------------------------------------------
$ 120,465 $ 120,610
================================================================================
LIABILITIES
CURRENT
Accounts payable $ 5,313 $ 5,848
Accrued liabilities 3,286 2,781
Notes payable 3,420 4,117
Property and mining taxes payable 1,053 1,080
- --------------------------------------------------------------------------------
13,072 13,826
NOTES PAYABLE AND LONG TERM LIABILITY 2,228 3,275
ACCRUED SITE CLOSURE COSTS 22,197 21,619
- --------------------------------------------------------------------------------
37,497 38,720
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY
Share capital (Note 5) 134,745 120,624
Issuable common shares 231 231
Contributed surplus (Note 5) 7,901 7,172
Deficit (59,909) (46,137)
- --------------------------------------------------------------------------------
82,968 81,890
- --------------------------------------------------------------------------------
$ 120,465 $ 120,610
================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- -------------------------------------------------------------------------------------------------
Three months ended Six months ended
June , 30 June , 30
---------------------------- --------------------------
2004 2003 2004 2003
-------------- ------------ ------------ ------------
REVENUE
Revenue from sale of minerals $ 13,105 $ 17,111 $ 33,184 $ 25,927
- -------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Direct operation costs 16,247 15,030 33,398 20,672
Depreciation and amortization 1,282 1,475 2,602 2,777
General and administrative expenses 1,508 983 3,238 2,272
Stock-based compensation 72 70 99 341
Accretion expense 346 320 691 640
Royalty expense 164 231 374 450
Exploration and business development 120 1,050 259 2,000
- -------------------------------------------------------------------------------------------------
19,739 19,159 40,661 29,152
- -------------------------------------------------------------------------------------------------
OPERATING LOSS (6,634) (2,048) (7,477) (3,225)
OTHER INCOME (EXPENSES)
Interest income 103 5 251 48
Interest expense (97) (168) (207) (317)
Foreign exchange (loss) gain and other (300) 144 (488) 655
- -------------------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD (6,928) (2,067) (7,921) (2,839)
- -------------------------------------------------------------------------------------------------
DEFICIT, BEGINNING OF PERIOD (52,981) (44,723) (46,137) (43,951)
CUMMULATIVE EFFECT OF CHANGE IN
ACCOUNTING POLICY (Note 2(a)) - - (5,851) -
- -------------------------------------------------------------------------------------------------
ADJUSTED OPENING BALANCE (52,981) (44,723) (51,988) (43,951)
- -------------------------------------------------------------------------------------------------
DEFICIT, END OF PERIOD $ (59,909) $ (46,790) $ (59,909) $ (46,790)
=================================================================================================
NET LOSS PER SHARE, BASIC AND
AND DILUTED $ (0.09) $ (0.04) $ (0.10) $ (0.06)
=================================================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 79,482,734 48,268,690 77,068,637 47,322,353
=================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
APOLLO GOLD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF UNITED STATES DOLLARS)
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------
2004 2003 2004 2003
----------- ----------- ---------- ----------
OPERATING ACTIVITIES
Net loss for the period $ (6,928) $ (2,067) $ (7,921) $ (2,839)
Items not affecting cash
Depreciation and amortization 1,282 1,475 2,602 2,777
Stock-based compensation 72 70 99 341
Accretion expense 346 320 691 640
Other (47) (118) (113) (169)
Net change in non-cash operating working
capital items 89 (2,169) (1,327) (566)
- ------------------------------------------------------------------------------------------------------
(5,186) (2,489) (5,969) 184
- ------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Property, plant and equipment expenditures (7,784) (1,011) (10,907) (2,445)
Deferred stripping costs (3,834) (886) (7,349) (4,397)
Short-term investments 466 - (1,591) -
Restricted Certificate of Deposit and other assets (1,665) (187) (1,710) (883)
- ------------------------------------------------------------------------------------------------------
(12,817) (2,084) (21,557) (7,725)
- ------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options 299 453 8,860 2,783
Acquisition and cancellation of shares - - (48) -
Payments of notes payable (1,010) (1,011) (2,084) (1,826)
- ------------------------------------------------------------------------------------------------------
(711) (558) 6,728 957
- ------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH (18,714) (5,131) (20,798) (6,584)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 23,767 6,973 25,851 8,426
- ------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
END OF PERIOD $ 5,053 $ 1,842 $ 5,053 $ 1,842
======================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 97 $ 141 $ 207 $ 297
======================================================================================================
Income taxes paid $ - $ - $ - $ -
======================================================================================================
During the three months ended June 30, 2004, the Company issued 48,978 shares to
meet the earn-in requirements of the Huizopa Joint Venture Agreement. Share
capital and property, plant and equipment both increased by $88 as a result of
this transaction.
During the six months ended June 30, 2004, property, plant and equipment
totaling $340 was acquired under a non-cash financing agreement.
During the three and six months 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 $134 as a result of this
transaction.
During the six months ended June 30, 2003, property, plant and equipment
totaling $1,587 was acquired under capital lease obligations.
The accompanying notes are an integral part of these consolidated financial
statements.
5
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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.
Apollo has entered into an agreement to earn up to a 71% interest in the
Huizopa project located in the Sierra Madre gold belt in Mexico.
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.
- --------------------------------------------------------------------------------
6
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
2. ACCOUNTING POLICIES (CONTINUED)
(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.
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.
- --------------------------------------------------------------------------------
7
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
3. INVENTORIES
Inventories consist of:
JUNE 30, December 31,
2004 2003
--------- -------------
Concentrate inventory $ 174 $ 98
Dore inventory 63 56
Materials and supplies 2,931 2,685
---------------------------------------------------------------------------
$ 3,168 $ 2,839
===========================================================================
4. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
JUNE 30, December 31,
2004 2003
--------------------------------- -------------
Accumulated Net Book Net Book
Cost Depreciation Value Value
------- ------------- --------- -------------
Mine assets
Building, plant and equipment $16,467 $ 4,569 $ 11,898 $ 10,643
Mining properties and
development costs 34,325 6,438 27,887 20,412
-------------------------------------------------------------------------------------
50,792 11,007 39,785 31,055
Mineral rights 7,467 - 7,467 7,464
-------------------------------------------------------------------------------------
Total property, plant and equipment $58,259 $ 11,007 $ 47,252 $ 38,519
=====================================================================================
- --------------------------------------------------------------------------------
8
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
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 (a)) - 257 5,594
---------------------------------------------------------------------------
Adjusted balance, December 31, 2003 73,539,790 120,881 12,766
Warrants exercised 5,384,125 12,660 (4,075)
Options exercised 311,272 753 (505)
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)
Shares issued for Huizopa interest 48,978 88 -
Stock-based compensation - - 99
---------------------------------------------------------------------------
Balance, June 30, 2004 79,544,388 $134,745 $ 7,901
===========================================================================
(c) Warrants
The following summarizes outstanding warrants as at June 30, 2004:
Number of Exercise Expiry
Warrants Shares Price Date
--------- --------- --------- ------------------
653,277 653,277 $ 1.67 September 26, 2005
63,969 63,969 $ 1.67 October 26, 2005
3,000,000 3,000,000 $ 2.10 December 23, 2006
---------------------------------------------------
3,717,246 3,717,246
===================================================
- --------------------------------------------------------------------------------
9
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
5. SHARE CAPITAL (CONTINUED)
(d) Share purchase options
(i) A summary of information concerning outstanding stock options at
June 30, 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 637,700 1.94 - -
Options exercised - - (311,272) 0.80
Options cancelled (193,200) 2.17 (192,373) 0.80
----------------------------------------------------------------------------
Balances, June 30, 2004 2,331,800 $ 2.13 1,996,509 $ 0.80
============================================================================
(ii) The following table summarizes information concerning outstanding
and exercisable fixed stock options at June 30, 2004:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Weighted Weighted
Average Average
Number Expiry Exercise Price Number Exercise Price
Outstanding Date per Share Exercisable per Share
----------- ----------------- --------------- ----------- ---------------
1,547,200 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 35,000 2.27
110,000 August 22, 2013 2.12 - -
100,000 November 13, 2013 1.67 - -
367,000 March 10, 2014 2.05
135,000 May 19, 2014 1.44 - -
-----------------------------------------------------------------------------
2,331,800 $ 2.13 832,000 $ 2.24
=============================================================================
(iii) As at June 30, 2004, the 1,996,509 performance-based stock
options were fully vested and have an expiry date of June 25,
2007.
- --------------------------------------------------------------------------------
10
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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:
Six months ended June 30,
-----------------------------
2004 2003
--------------- ------------
Risk free interest rate 3.0% 3.5%
Dividend yield 0% 0%
Volatility 54% 52%
Expected life in years 5 3
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 Six months
ended June 30, ended June 30,
2003 2003
---------------- ----------------
Net loss
As reported $ (2,067) $ (2,839)
Pro forma stock option expense (815) (1,769)
--------------------------------------------------------------------
$ (2,882) $ (4,608)
====================================================================
Basic and diluted loss per share
As reported $ (0.04) $ (0.06)
Pro forma $ (0.06) $ (0.10)
====================================================================
6. INCOME TAXES
The Company did not record a recovery for income taxes for the period ended
June 30, 2004 as the net loss carry forwards are fully offset by a
valuation allowance.
- --------------------------------------------------------------------------------
11
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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 June 30, 2004 there are
40,000 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 2,000 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 June 30, 2004, the fair
value of the contracts is a loss of approximately $2.2 million (December
31, 2003 - $5.9 million).
The contracts mature as follows:
Ounces of
Gold
---------
2004 26,000
2005 16,000
-----------------------------------
42,000
===================================
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.
- --------------------------------------------------------------------------------
12
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
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 June 30, 2004 are as follows:
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-------- -------- ------- ---------- --------
Cash and cash equivalents $ 289 $ 61 $ 127 $ 4,576 $ 5,053
Short-term investments - - - 7,446 7,446
Broken ore on leach pad - current - 11,632 - - 11,632
Other non-cash current assets 4,040 2,373 385 83 6,881
--------------------------------------------------------------------------------------
4,329 14,066 512 12,105 31,012
Broken ore on leach pad - long-term - 2,216 - - 2,216
Property, plant and equipment 15,484 15,773 15,162 833 47,252
Deferred stripping costs 31,382 - - - 31,382
Restricted certificate of deposit
and other assets 3,101 5,071 367 64 8,603
--------------------------------------------------------------------------------------
Total assets $ 54,296 $ 37,126 $16,041 $ 13,002 $120,465
======================================================================================
Current liabilities $ 5,562 $ 5,925 $ 1,063 $ 522 $ 13,072
Notes payable and long-term
liability 813 1,415 - - 2,228
Accrued site closure costs 9,230 12,967 - - 22,197
--------------------------------------------------------------------------------------
Total liabilities $ 15,605 $ 20,307 $ 1,063 $ 522 $ 37,497
======================================================================================
- --------------------------------------------------------------------------------
13
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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
and other assets 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 and long-term
liability 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
=====================================================================================
- --------------------------------------------------------------------------------
14
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (CONTINUED)
Amounts for the three and six month periods ended June 30, 2004 and 2003,
respectively, are as follows:
Three months ended June 30, 2004
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ 6,525 $ 6,580 $ - $ - $13,105
-------------------------------------------------------------------------------------------
Direct operating costs 9,639 6,608 - - 16,247
Depreciation and amortization 601 652 - 29 1,282
General and administrative expenses - - - 1,508 1,508
Share-based compensation - - - 72 72
Accretion expense 40 306 - - 346
Royalty expense - 164 - - 164
Exploration and business development - - - 120 120
-------------------------------------------------------------------------------------------
10,280 7,730 - 1,729 19,739
-------------------------------------------------------------------------------------------
Operating (loss) income (3,755) (1,150) - (1,729) (6,634)
Interest income - - - 103 103
Interest expense (39) (58) - - (97)
Foreign exchange (loss) gain and other - - - (300) (300)
-------------------------------------------------------------------------------------------
Net (loss) income $ (3,794) $ (1,208) $ - $ (1,926) $(6,928)
===========================================================================================
Investing activities
Property, plant and equipment
expenditures $ 412 $ 2,897 $4,242 $ 233 $ 7,784
Deferred stripping expenditures 3,834 - - - 3,834
Six months ended June 30, 2004
---------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------ ----------- --------
Revenue from sale of minerals $ 18,149 $ 15,035 $ - $ - $33,184
-------------------------------------------------------------------------------------------
Direct operating costs 19,839 13,559 - - 33,398
Depreciation and amortization 1,177 1,369 - 56 2,602
General and administrative expenses - - - 3,238 3,238
Share-based compensation - - - 99 99
Accretion expense 81 610 - - 691
Royalty expense - 374 - - 374
Exploration and business development - - - 259 259
-------------------------------------------------------------------------------------------
21,097 15,912 - 3,652 40,661
-------------------------------------------------------------------------------------------
Operating (loss) income (2,948) (877) - (3,652) (7,477)
Interest income - - - 251 251
Interest expense (83) (124) - - (207)
Foreign exchange (loss) gain and other - - - (488) (488)
-------------------------------------------------------------------------------------------
Net (loss) income $ (3,031) $ (1,001) $ - $ (3,889) $(7,921)
===========================================================================================
Investing activities
Property, plant and equipment
expenditures $ 762 $ 3,596 $6,249 $ 300 $10,907
Deferred stripping expenditures 7,349 - - - 7,349
- --------------------------------------------------------------------------------
15
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
9. SEGMENTED INFORMATION (CONTINUED)
Three months ended June 30, 2003
----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
--------- --------- ------- ----------- --------
Revenue from sale of minerals $ 7,847 $ 9,264 $ - $ - $17,111
--------------------------------------------------------------------------------------------
Direct operating costs 7,165 7,865 - - 15,030
Depreciation and amortization 945 495 - 35 1,475
General and administrative expenses 30 - - 953 983
Share-based compensation - - - 70 70
Accretion expense 79 241 - - 320
Royalty expense - 231 - - 231
Exploration and business development - - 871 179 1,050
--------------------------------------------------------------------------------------------
8,219 8,832 871 1,237 19,159
--------------------------------------------------------------------------------------------
Operating (loss) income (372) 432 (871) (1,237) (2,048)
Interest income - - - 5 5
Interest expense (26) (89) - (53) (168)
Foreign exchange (loss) gain and other - - 362 (218) 144
--------------------------------------------------------------------------------------------
Net (loss) income $ (398) $ 343 $ (509) $ (1,503) $(2,067)
============================================================================================
Investing activities
Property, plant and equipment
expenditures $ 619 $ 485 $ - $ 41 $ 1,145
Deferred stripping expenditures 886 - - - 886
Six months ended June 30, 2003
-----------------------------------------------------
Montana Florida Black Corporate
Tunnels Canyon Fox and Other Total
-----------------------------------------------------
Revenue from sale of minerals $ 7,847 $ 18,080 $ - $ - $25,927
---------------------------------------------------------------------------------------------
Direct operating costs 7,165 13,507 - - 20,672
Depreciation and amortization 945 1,783 - 49 2,777
General and administrative expenses 47 - - 2,225 2,272
Share-based compensation - - - 341 341
Accretion expense 157 483 - - 640
Royalty expense - 450 - - 450
Exploration and business development - - 1,638 362 2,000
---------------------------------------------------------------------------------------------
8,314 16,223 1,638 2,977 29,152
---------------------------------------------------------------------------------------------
Operating (loss) income (467) 1,857 (1,638) (2,977) (3,225)
Interest income - - - 48 48
Interest expense (80) (184) - (53) (317)
Foreign exchange (loss) gain and other - - 363 292 655
---------------------------------------------------------------------------------------------
Net (loss) income $ (547) $ 1,673 $(1,275) $ (2,690) $(2,839)
=============================================================================================
Investing activities
Property, plant and equipment
expenditures $ 896 $ 2,973 $ 140 $ 157 $ 4,166
Deferred stripping expenditures 4,397 - - - 4,397
- --------------------------------------------------------------------------------
16
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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 and six month periods ended June 30, 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
JUNE 30, 2004
Property, Deferred
Plant and Stripping Accounts Other Share Contributed
Equipment Costs Payable Liabilities Capital Surplus Deficit
----------- ----------- ---------- ------------ --------- ------------ ----------
As at June 30, 2004
Canadian GAAP $ 47,252 $ 31,382 $ 5,313 $ - $134,745 $ 7,901 $ (59,909)
Convertible debenture (a) - - - - - 20,675 (20,675)
Gold hedge loss (c) - - (75) 2,192 - - (2,117)
Impairment of property, plant and
equipment and capitalized
deferred stripping costs and
change in depreciation and
amortization (d) (5,246) (8,472) - - - - (13,718)
Flow-through common
shares (e) - - - - (238) - 238
Black Fox development
costs (f) (9,893) - - - - - (9,893)
---------------------------------------------------------------------------------------------------------------------------
As at June 30, 2004
U.S. GAAP $ 32,113 $ 22,910 $ 5,238 $ 2,192 $134,507 $ 28,576 $(106,074)
===========================================================================================================================
- --------------------------------------------------------------------------------
17
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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)
=================================================================================================================
- --------------------------------------------------------------------------------
18
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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 June 30,
based on Canadian GAAP $(6,928) $(2,067)
Share-based compensation (b) - (318)
Gold hedge gain (c) 1,431 302
Impairment of property, plant and equipment and
change in depreciation (d) 155 -
Impairment of capitalized deferred stripping costs and
change in amortization (d) 113 -
Black Fox development costs (f) (4,255) -
------------------------------------------------------- -------- --------
Net loss for the period based on U.S. GAAP $(9,484) $(2,083)
===========================================================================
Other comprehensive gain (loss)
Unrealized gain on cash flow hedges $ 1,430 $ -
===========================================================================
Comprehensive loss $(8,054) $(2,083)
===========================================================================
Net loss per share - U.S. GAAP basic and diluted $ (0.12) $ (0.04)
===========================================================================
2004 2003
--------- --------
Net loss for the six month period ended June 30,
based on Canadian GAAP $ (7,921) $(2,839)
Cumulative effect of change in accounting policy (b) (1,508) -
Share-based compensation (b) - (768)
Gold hedge gain (c) 2,250 1,326
Impairment of property, plant and equipment and
change in depreciation (d) 297 -
Impairment of capitalized deferred stripping costs and
change in amortization (d) 268 -
Black Fox development costs (f) (6,250) -
----------------------------------------------------------------------------
Net loss for the period based on U.S. GAAP $(12,864) $(2,281)
============================================================================
Other comprehensive gain (loss)
Unrealized gain on cash flow hedges $ 993 $ -
============================================================================
Comprehensive loss $(11,871) $(2,281)
============================================================================
Net loss per share - U.S. GAAP basic and diluted $ (0.17) $ (0.05)
============================================================================
- --------------------------------------------------------------------------------
19
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(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.
(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
June 30, as reported $(9,484) $(2,083)
Stock option expense as reported 72 318
Pro forma stock option expense (72) (815)
----------------------------------------------------------------------
Net loss - pro forma $(9,484) $(2,580)
======================================================================
Net loss per share, basic - for the three month
period ended June 30 $ (0.12) $ (0.04)
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 $ (0.12) $ (0.05)
======================================================================
- --------------------------------------------------------------------------------
20
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 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 (continued)
2004 2003
--------- --------
Net loss for the six month period ended
June 30, as reported $(12,864) $(2,281)
Stock option expense as reported 99 768
Pro forma stock option expense (99) (1,769)
----------------------------------------------------------------------
Net loss - pro forma $(12,864) $(3,282)
======================================================================
Net loss per share, basic - for the six month
period ended June 30 $ (0.17) $ (0.05)
Stock option expense as reported 0.00 0.02
Pro forma stock option expense (0.00) (0.04)
----------------------------------------------------------------------
Net loss per share, basic - pro forma $ (0.17) $ (0.07)
======================================================================
(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.
(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.
- --------------------------------------------------------------------------------
21
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(e) Flow-through common shares
Under Canadian income tax legislation, a company is permitted to issue
shares whereby the company agrees to incur qualifying expenditures and
renounce the related income tax deductions to the investors. The
Company has accounted for the issue of flow-through shares using the
deferral method in accordance with Canadian GAAP. At the time of
issue, the funds received are recorded as share capital. For U.S.
GAAP, the premium paid in excess of the market value of $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 $9,893,000 has been recorded as at
June 30, 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 six month periods ended June 30, 2004 and 2003 would reflect a
reduction in cash utilized in investing activities of $7,349,000 and
$4,397,000, respectively, and a corresponding increase in cash
utilized in operating activities.
(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)).
- --------------------------------------------------------------------------------
22
APOLLO GOLD CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2004
(STATED IN UNITED STATES DOLLARS; TABULAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
- --------------------------------------------------------------------------------
10. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES ("GAAP") (CONTINUED)
(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.
- --------------------------------------------------------------------------------
23
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements and related notes. The financial
statements have been prepared in accordance with accounting principles generally
accepted in Canada. For a reconciliation to accounting principles generally
accepted in the United States, see Note 10 to the attached consolidated
financial statements.
In this Form 10-Q, the terms "total cash cost" and "cash operating cost" are
used on a per ounce of gold basis. Total cash cost per ounce is equivalent to
mining operations expense for the period as found on the Consolidated Statements
of Operations, divided by the number of ounces of gold sold during the period.
Cash operating cost per ounce is equivalent to mining operations expense for the
period less production royalties and production taxes, divided by the number of
ounces of gold sold during the period.
RECONCILIATION OF
CASH OPERATING AND TOTAL PRODUCTION COSTS PER OUNCE Three months ended June 30, Six months ended June 30,
($IN THOUSANDS) ------------------------------ -----------------------------
2004 2003 2004 2003
------------- --------------- ------------- --------------
Gold Ounces Sold 24,345 39,852 57,515 64,909
Direct Operating Costs 16,247 15,030 33,398 20,672
Less: Mining Taxes 283 107 665 319
By-Product Credits 4,439 3,301 11,809 3,364
Cash Operating Cost 11,525 11,622 20,924 16,989
Cash Operating Cost per Ounce $ 474 $ 290 $ 364 $ 261
Cash Operating Cost 11,525 11,622 20,924 16,989
Add: Mining Taxes 283 107 665 319
Royalty Expense 164 231 374 450
Total Cash Operating Costs 11,960 21,963 17,758
Total Cash Operating Cost per Ounce $ 492 $ 299 $ 382 $ 273
Total Cash Operating Costs 11,972 11,960 21,963 17,758
Add: Depreciation & Amortization 1,254 2,012 2,547 3,778
(operations only)
Total Production Costs 13,226 13,972 24,510 21,536
Total Production Cost per Ounce $ 543 $ 352 $ 426 $ 333
We have included total cash cost and cash operating cost information to provide
investors with information about the cost structure of our mining operations. We
use this information for the same purpose and for monitoring the performance of
our operations. This information differs from measures of performance determined
in accordance with GAAP in Canada and the United States and should not be
considered in isolation or as 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.
The following presents a discussion of the financial condition and results of
operations of the Company for the three and six months ended June 30, 2004 and
2003.
BACKGROUND
We are principally engaged in the exploration, development and mining of gold.
We have focused our efforts to date on two principal operating properties: our
Montana Tunnels and Florida Canyon Mines.
The Florida Canyon Mine is 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 are
currently pre-stripping approximately 25 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.
24
Our mine development activities involve our Black Fox property, located in
Ontario, Canada and our Standard Mine property. During 2003, we acquired and
incorporated into the 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 at the Willow Creek property (which is located in the vicinity
of the Florida Canyon operation).
OVERVIEW
Production was substantially reduced and production costs were substantially
increased during the third quarter, resulting primarily from lower grade ore at
both Montana Tunnels and Florida Canyon. At Montana Tunnels, we are completing
a 25 million ton stripping program, which we expect to finish late in the third
quarter. During the second quarter, we mined lower grade ore, or mineralized
material, from the outer limits of the pit wall, much of which was not included
in our ore reserves. We expect to begin mining from our higher grade reserve
ore in the fourth quarter. At Florida Canyon, we changed our mining sequence in
the second quarter due to safety concerns at one of the pits. This resulted in
our mining lower grade ore than we had anticipated. In addition, we are
experiencing longer leach times as the pad reaches its maximum height of 300
feet.
During the quarter, we continued development of the Standard mine, expected to
commence production in the fourth quarter, and development drilling at the Black
Fox project, as well as commenced initial activities at Huizopa. As a result of
our lower production, higher production costs and development costs, our cash
and cash equivalent balances were reduced from approximately $31.7 million at
March 31, 2004, to $12.5 million at June 30, 2004, and subsequently to
approximately $5.4 million at July 31, 2004.
We have previously announced that our available cash is not sufficient for the
remainder of 2004, without curtailment of some of our capital activities. We
are engaged in advanced discussions regarding various external financing
transactions. If we are unable to raise approximately $10 to $15 million on
acceptable terms, we plan to focus our efforts on completing the stripping at
Montana Tunnels and the development of the Standard Mine. Depending on our
available cash, we could defer further mining at our Florida Canyon operation,
while generating cash by recovering gold from the leach pad. We also would
defer most expenditures at Black Fox and Huizopa.
RECENT DEVELOPMENTS
In the first six months of 2004, we focused our development 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.
Upon completion of the first phase, we began the second phase of our Black Fox
Project development in February 2004. The second phase was the development of
an underground access for further exploratory drilling. An underground ramp
from the existing structures was developed of 152 meters in length and a 920
meter drift was completed in June 2004. Currently
25
there are four underground electric drills working from this drift and as of
June 30, 2004, 17,000 meters of core has been drilled from 101 holes.
In addition to the underground work mentioned above, this year 80 surface holes
drilled 35,000 meters. To date a total of 374 surface holes have yielded
approximately 118,000 meters of core.
We plan to produce a "bankable" feasibility study for the continued development
and production of this project in the first quarter 2005.
The permitting process, part of the third phase of the Black Fox project, began
in 2004 and it is anticipated that this process will require approximately two
years, based on a plan for a combined open pit and underground mine, with
on-site milling, at a capacity of approximately 1,500 metric tons of ore per
day. The third phase would include construction of the mine and processing
facilities.
During the first six months at the Standard Mine we have made significant
progress. Final permitting was received on May 5, 2004 and construction
commenced immediately. By the end of the second quarter, the solution and storm
event ponds were completed except for the perimeter berms and collection
ditches. All primary grading on the leach pad was completed and surface grooming
is in progress for liner installation which commenced in mid-July, 2004. We have
continued exploration drilling at the Standard Mine and have drilled
approximately 174 holes in 2004.
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,
and plan to conduct further follow-up drilling in late 2004. The second phase
of drilling has been completed at Buffalo Canyon. This drilling is intended to
help determine the orientation and thickness of sporadic high-grade veins within
the system trending in a southward direction.
During 2004 drilling has continued in the South Pit area of the Standard mine
property. At the Star deposit our drilling databases will be updated with
reserve calculations in the second half of 2004.
In April of 2004, Apollo announced an earn-in joint venture agreement with
Argonaut Mines LLC of Reno, Nevada. Under this agreement, we can earn an
interest in the Huizopa exploration project, contained in an area of 22 square
kilometers near the Chihuahua border with the state of Sonora, Mexico,
approximately 146 miles due east of the city of Hermosillo and between the
advanced stage multi-million ounce gold/silver deposits of Mulatos and Dolores.
Apollo's initial earn-in cost was $125,000 plus 48,978 common shares of Apollo
Gold Corporation stock. The agreement also includes a commitment to expend $3.0
million for exploration over a four year period and $2.2 million in land
payments over this same time frame. Once complete, Apollo will own 51% of the
project.
The table below summarizes our production for gold, silver and other metals, as
well as average metals prices, for each period indicated:
26
APOLLO GOLD CORPORATION
PRODUCTION & METALS PRICE AVERAGES
YEARS
2004 2003 2002 2001
----------- ----------- ----------- -----------
JUNE 04
-----------
Gold (Ounces) 57,515 145,935 148,173 192,887
Silver (Ounces) 380,883 471,241 275,925 963,050
Lead (Pounds) 4,867,228 10,843,184 5,481,230 13,759,579
Zinc (Pounds) 15,014,586 21,792,452 15,328,392 40,158,321
AVERAGE METAL PRICES:
Gold - London Bullion $ 401 $ 364 $ 310 $ 271
Mkt. ($/ounce)
Silver - London Bullion $ 6.47 $ 4.88 $ 4.59 $ 4.37
Mkt. ($/ounce)
Lead - LME ($/pound) $ 0.39 $ 0.23 $ 0.20 $ 0.22
Zinc - LME ($/pound) $ 0.50 $ 0.38 $ 0.35 $ 0.40
Note: Includes the operations of Nevoro Gold Corporation and its wholly-owned
subsidiary Apollo Gold Inc., prior to June 25, 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Our revenues for the three months ended June 30, 2004 were approximately $13.1
million derived primarily from the sale of 24,345 ounces of gold. This compares
to approximately $17.1 million derived primarily from the sale of 39,852 ounces
of gold for the same period in 2003. The average price received for gold for
the second quarter of 2004 and 2003 was $356 and $347 per ounce, respectively.
Our revenues for silver, zinc and lead for the three months ended June 30, 2004
were $4.4 million compared to $3.3 million during the same period 2003. Gold
revenues decreased as production ounces fell short of projections due primarily
to the processing of lower grade ores at both operations. Base metal revenues
increased as a result of higher metal prices partly offset by lower production
levels.
Sales of minerals from our Florida Canyon Mine accounted for 50.2% of our
revenues for the three months ended June 30, 2004, with the remaining 49.8% of
revenues derived from sales of minerals from our Montana Tunnels Mine. In the
three months ended June 30, 2004, we received approximately 66% of our revenue
from sales of gold and 34% from sales of silver, zinc and lead compared to 81%
from the sales of gold and 19% from the sales of silver, zinc and lead for the
same period in 2003. This change is due primarily to higher base metal
production and prices in the 2004 period.
Total cash costs for the quarter were $492 per ounce compared to $299 for the
quarter ended June 30, 2003. The second quarter of 2004 was a transition
quarter for the Company. Lower ore grades were processed at the Montana Tunnels
operation as well as at Florida Canyon. At Montana Tunnels, ores or
"mineralized materials" were mined and processed from the outer limits of the
pit wall and much of it was not included in the ore reserves. The ore grades
were lower than our reserve grades, but high enough to more than pay for the
processing costs. At Florida Canyon, production from the "Switchback Pit" has
been delayed for safety reasons. This ore was what was expected to be mined
currently however an updated mine plan design shows the reserve being mined from
the "Upper Switchback Pit" next year
27
Montana Tunnels
- ----------------
During the three months ended June 30, 2004, total tonnage moved was 8.9 million
tons of which 7.5 million tons of waste was removed from the west side of the
pit at Montana Tunnels. Revenues at Montana Tunnels were $6.5 million. Gold
production for the quarter was 5,903 ounces, less than expected as the gold
grades processed during quarter were much less than expected. Higher metal
prices (gold, silver, lead and zinc) could not offset the shortfall in
production. The second quarter of 2004 is a "transition" period for Montana
Tunnels with mining concentrating on the capitalized stripping process, meaning
that mineralized materials not included in our ore reserves were processed
through our mill. For the quarter the gold ore grades of these mineralized
materials were less than expected but high enough to economically run the
processing facility. Mill modifications have been completed during the second
quarter to add throughput to help alleviate this metal shortfall. However, the
mine will continue into a "transition" period until the main reserves are
reached later this year (projected in the fourth quarter of the year).
Following are the key statistics for the Montana Tunnels operation for the three
months ended June 30, 2004 and 2003.
2004 2003
THREE MONTHS THREE MONTHS
Tons Mined 8,856,053 4,371,420
Tons Milled 1,157,512 1,179,408
Production:
Gold Ounces 5,903 13,118
Silver Ounces 224,911 129,523
Lead Pounds 1,723,835 3,407,222
Zinc Pounds 5,974,314 5,563,276
Total Revenue (US $ millions) $ 6.5 $ 7.8
Capital Expenditures (US $ millions) $ 4.2 $ 1.5
Total cash costs for the quarter were $899 per ounce compared to $343 per ounce
for the second quarter of 2003. Total production costs were $1,001 compared to
$379 for the same period of 2003. As stated, the second quarter was a
transition quarter for the mine as we work through the mineralized material in
the outer fringes of the reserve. These materials are of lower grade than the
reserves, but have enough mineralization to more than pay for the processing
costs.
Florida Canyon
- ---------------
At Florida Canyon, we produced 18,442 ounces of gold for the three months ended
June 30, 2004 as compared to 26,733 ounces of gold for the same period in 2003.
This lower production was a direct result of lower ore grades being processed
and a longer recovery time due to the leach pad reaching its maximum height of
300 feet.
The following are key operating statistics at Florida Canyon for the three
months ended June 30, 2004 compared to the same period June 30, 2003:
28
2004 2003
THREE MONTHS THREE MONTHS
Tons Mined 6,477,132 5,029,696
Ore tons to Leach Pad 2,090,826 2,526,659
Gold Production 18,442 26,733
Silver Production 17,160 13,477
Total Revenue ($US millions) $ 6.6 $ 9.3
Capital Expenditures:
Florida Canyon $ 0.2 $ 0.3
Standard Mine $ 2.8 $ 0.1
Total cash costs for the quarter were $361 per ounce compared to $275 per ounce
for the same period of 2003. Total production costs were $397 per ounce for the
current quarter compared to $326 per ounce for the second quarter of 2003. The
leach pad at Florida is reaching is maximum height of 300 feet. The leach time
is slowing as this height is reached, which reduces production. The mine is
experiencing lower ore grades due to a rescheduling of the mining plan. This
rescheduling was done for safety reasons at the Switchback pit. This pit will
be mined next year from a higher elevation.
We commenced construction at the Standard Mine in the second quarter 2004. The
mine is expected to be completed during the third quarter and produce
approximately 10,000 ounces in the fourth quarter of this year. Construction
costs are on schedule and within budget. Total expenditures are expected to be
approximately $9.5 million. This total will include the reclamation bonding,
development drilling, construction costs and internal management allocations. We
will operate this mine as a satellite of the Florida Canyon Mine. We currently
project production rates of approximately 100,000 ounces of gold on an annual
basis for the combined operation.
General
- -------
Our direct operating costs equaled approximately $16.2 million and $15.0 million
for the three months ended June 30, 2004 and 2003, respectively. These amounts
include mining and processing costs from both mines as Montana Tunnels commenced
production in April 2003. We incurred depreciation and amortization
expenses of approximately $1.3 million for the three months ended June 30,
2004 as compared to $1.5 million for the same period 2003.
We incurred approximately $1.5 million and $1.0 million for the three months
ended June 30, 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 approximately $0.1 million in 2004 and
2003, respectively.
Our expenses for exploration and development, consisting of drilling and
related expenses at our exploration properties, totaled approximately
$0.1 million and $1.1 million for the three months ended June 30, 2004 and
2003, respectively. The reduction in expenditures is due to
29
2003 expenditures on the Black Fox and Standard Mines being expensed, whereas
currently these projects are classified as development projects and therefore
their expenditures are capitalized for accounting purposes.
As a result of these expense components, our operating expenses totaled
approximately $19.7 million for the three months ended June 2004, as compared to
approximately $19.2 million for the same period in 2003.
We realized interest income of approximately $0.1 million during the three
months ended June 30, 2004. We incurred interest expense of approximately $0.1
million in the same period, primarily for equipment leases. We realized $5,000
in interest income but incurred net interest expense of approximately $0.2
million 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 $0.3 million and foreign
exchange gains of approximately $0.1 million during the three months ended June
30, 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 $6.9 million or
$0.09 per share for the three months ended June 30, 2004, as compared to a loss
of approximately $2.1 million or $0.04 per share, for the three months ended
June 30, 2003.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Our revenues for the six months ended June 30, 2004 were approximately $33.2
million derived primarily from the sale of 57,515 ounces of gold. This compares
to approximately $25.9 million derived primarily from the sale of 64,909 ounces
of gold for the same period in 2003. The average price realized for gold for
the first six months of 2004 and 2003 was $372 and $348 per ounce, respectively.
These amounts are lower than the spot price for both periods because the Company
has been delivering gold ounces into the hedge book entered into in 2002. The
revenues from silver, zinc and lead, included in the above revenue numbers, for
the six months ended June 30, 2004 were $11.8 million compared to $3.4 million
during the same period 2003. The growth in revenue results primarily from six
months production from Montana Tunnels in 2004 compared to three months in 2003.
Total cash costs for the period were $382 per ounce and total production costs
were $426 per ounce. This compares with a total cash cost of $273 per ounce and
a total production cost of $333 per ounce for the first six months of 2003. A
higher gold price in the 2004 period was offset by higher production costs and
lower gold production for the six months ended June 30, 2004. The lower gold
production and higher costs result primarily from processing lower ore grades
at both mines during the second quarter.
Sales of minerals from our Montana Tunnels Mine accounted for 54.7% of our
revenues for the six months ended June 30, 2004, with the remaining 45.3% of
revenues derived from sales of minerals from our Florida Canyon Mine. In the
six months ended June 30, 2004, we received approximately 64% of our revenue
from sales of gold and 36% from sales of silver, zinc and lead compared to 87%
from the sales of gold and 13% from the sales of silver, zinc and lead for the
same period in 2003. This change is due primarily to higher base metal
production and prices in the 2004 period.
30
Montana Tunnels
- ----------------
During the first six months of 2004, 14.9 million tons of waste was 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 21.4 million tons
removed. Revenues at Montana Tunnels are behind our projections as the gold
ore grades in the mineralized materials that we are milling are less than
expected. In addition the coarse ore handling system continues to plug up
leading to lower mill throughputs. Mill throughput per day has improved during
the second quarter 2004 as modifications have been completed to the crushing
circuit.
Following are the key statistics for the Montana Tunnels operation for the first
six months of 2004. Information for the first six months of 2003 only include
production from April 2003 when commercial production commenced.
2004 2003
SIX MONTHS SIX MONTHS
Tons Mined 17,788,333 10,815,510
Tons Milled 2,266,101 1,179,408
Production:
Gold Ounces 16,686 13,118
Silver Ounces 343,669 129,523
Lead Pounds 4,867,228 3,407,222
Zinc Pounds 15,014,586 5,563,276
Total Revenue (US $millions) $ 18.1 $ 7.8
Capital Expenditures (US $millions) $ 8.5 $ 5.3
For the six months ended June 30, 2004 total cash costs at Montana Tunnels were
$496 per ounce and total production costs were $566 per ounce. These costs
compare to a total cash cost of $297 per ounce and a total production cost of
$399 for the same period ended in 2003. However for the first three months of
2003, Montana Tunnels was in development and there were no commercial ounces
produced. The higher cash costs are a direct reflection of the lower ore grades
processed during the second quarter of 2004. These ores or non-reserve grade
materials were mined and processed from the outer limits of the pit wall and
much of it was not included in the ore reserves. The ore grades processed were
lower than our reserve grades, but high enough to more than pay for the
processing, transport and smelting costs.
Florida Canyon
- ---------------
At Florida Canyon, we produced 40,829 ounces of gold for the six months ended
June 30, 2004 as compared to 51,790 ounces of gold for the same period in 2003.
This lower production was a direct result of lower ore grades (due to a change
in mining plans) and longer recovery time (the leach pad is reaching its maximum
height of 300 feet).
Following are key operating statistics at Florida Canyon for the first six
months of 2004 compared to the same period of 2003:
31
2004 2003
SIX MONTHS SIX MONTHS
Total Tons Mined 12,866,814 10,319,328
Ore to Leach Pad
3,699,964 4,817,295
Gold Production 40,829 51,790
Silver Production 37,215 27,240
Total Revenue ($US millions) $ 15.0 $ 18.1
Capital Expenditures:
Florida Canyon $ 0.4 $ 2.6
Standard Mine $ 3.3 $ 0.4
For the six months ended June 30, 2004 total cash costs were $335 per ounce and
total production costs were $369 per ounce. These costs compare to a total cash
cost of $267 per ounce and a total production cost of $316 per ounce for the
same period ending June 30, 2003. The higher per ounce costs are due to lower
production rates experienced in the first half of 2004 due to the processing of
lower grade ores and longer leach times.
We commenced construction at the Standard Mine during the second quarter of
2004. This mine will be operated in conjunction with the Florida Canyon Mine. We
currently project production sales of approximately 100,000 ounces of gold on an
annual basis for the combined operation.
Financial Performance
- ----------------------
Based on gold reserves we expect the Montana Tunnels Mine, the Florida Canyon
Mine and the Standard Mine, collectively, to produce approximately 128,000
ounces of gold in 2004.
Our direct operating expense was $33.4 million and $20.7 million for the six
months ended June 30, 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 and three months at Montana Tunnels
as it was in development for the first three months of 2003. We incurred
depreciation and amortization expenses of approximately $2.6 million for
the six months ended June 30, 2004 as compared to $2.8 million for the 2003
period.
We incurred approximately $3.2 million and $2.3 million for the six months ended
June 30, 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 approximately $0.1 million for the first six months ended in
June 30, 2004 compared to $0.3 million in the same period of 2003. We also show
the cumulative effect on opening deficit 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 as well
as our employee stock option incentive plan.
32
Our expenses for exploration and development, consisting of drilling and
related expenses at our exploration properties, totaled approximately
$0.3 million and $2.0 million for the six months ended June 30, 2004 and 2003,
respectively. The reduction in expenditures is due to 2003 expenditures on the
Black Fox and Standard Mines being expensed, whereas currently these projects
are classified as development projects and therefore their expenditures are
capitalized for accounting purposes.
As a result of these expense components, our operating expenses totaled
approximately $40.7 million for the six months ended June 2004, as compared to
approximately $29.2 million for the same period in 2003. The difference is
primarily attributable to the addition of Montana Tunnels operating expenses for
the full six months of 2004 compared to three months in the 2003 period.
We realized interest income of approximately $0.3 million during the six months
ended June 30, 2004. We incurred interest expense of approximately $0.2 million
in the same period, primarily for equipment leases. We realized $48,000 in
interest income but incurred net interest expense of approximately $0.3 million
during the comparable period in 2003. The interest income increase is due to
the investment of the equity funds that were raised in the third quarter of
2003. Interest expense is reduced due to the equipment lease accounts being
paid down.
We recognized foreign exchange losses of approximately $0.5 million and foreign
exchange gains of approximately $0.7 million during the six months ended June
30, 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 $7.9 million or
$0.10 per share for the six months ended June 30, 2004, as compared to a loss of
approximately $2.8 million or $0.06 per share, for the six months ended June 30,
2003.
FINANCIAL CONDITION AND LIQUIDITY:
- -------------------------------------
At June 30, 2004 we had cash and cash equivalent balances of approximately $12.5
million as compared to approximately $31.7 million at December 31, 2003 and
March 31, 2003.
Operating activities used $6.0 million of cash during the six months ended June
30, 2004. Net cash used by operating activities was impacted by higher
operating and administrative charges during the first six months of 2004 when
compared to 2003. These charges included higher fixed costs at the mine sites
and miscellaneous costs at the corporate office.
Investing activities used $21.6 million of cash during the six months ended June
30, 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 investment in short term investments
during the quarter by $1.6 million. These short term investments are cash
equivalents that are invested in terms longer than 90 days.
Financing activities for the six months ended June 30, 2004 included the
exercise of warrants and options in the amount of $8.9 million. On March 21,
2004, the original Apollo Gold Corporation warrants expired.
33
We believe our cash requirements for the development of the Black Fox Mine and
the Standard Mine will be approximately $60.0 million. We expect these
expenditures to be funded through a combination of cash on hand, short term
investments one or more of, future cash flows from operations and 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 ("Standard Bank"). The Company had to satisfy certain requirements in
order for Standard Bank to advance the maximum amount of the loan. As of June
30, 2004, this agreement was terminated by the Company. The "hedge position" of
42,000 ounces will remain and be delivered into at a rate of 4,000 ounces per
month at a price of $345 per ounce until April of 2005 (assuming that the gold
price stays above that price) as agreed to.
The Company has previously announced that the $12.5 million in cash and
short-term investments, as noted above, would not be sufficient, without
curtailment of some of our capital and development activities. External
financing would be needed to carry out the following plans: a). progressing
Black Fox through Feasibility and continue to add reserves b). commence
drilling at the Huizopa project c). finish the stripping at program at Montana
Tunnels and bring this mine into a cash positive situation and d). complete the
construction of the Standard mine.
The Company is pleased to report that it is well advanced in discussions
regarding various financing opportunities and expects to be able to raise
$10-$15 million in September 2004.
The above mentioned financing would be used for capital and development programs
at Montana Tunnels of up to approximately $8.0 million, the Standard Mine of up
to approximately $2.0 million, the Black Fox project of up to approximately $4.2
million and Huizopa exploration of up to approximately $1.5 million. There can
be no assurance that the required financing will be available on acceptable
terms or at all.
If all or any portion of the contemplated financing is not available on
acceptable terms, we plan to focus our efforts on completing the stripping at
Montana Tunnels and the development of the Standard Mine. Depending on our
available cash, we could defer further mining at our Florida Canyon operation,
while generating cash by recovering gold from the leach pad. We also would defer
most expenditures at Black Fox and Huizopa.
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 affect 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.
34
Except as described in Note 2 of our interim financial statements for the three
and six months ended June 30, 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 June
30, 2004, nothing material has changed since the details released in the
Company's 10-K Annual Report.
ENVIRONMENTAL
As of June 30, 2004, we have accrued $22.2 million related to reclamation,
severance and other closure requirements, an increase from December 31, 2003 of
$0.6 million. This liability is covered by a combination of surety bonds,
totaling $34.4 million, and cash bonds totaling $8.5 million, for a total
reclamation surety, at June 30, 2004 of $42.9 million. We have accrued what
management believes is the present value of our best estimate of the liability
as of June 30, 2004; however, it is possible that our obligation may change in
the near or long term depending on a number of other factors.
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. We have
the ability to roll forward the call options into forward sales contracts. At
June 30, 2004, we have put and call options for 40,000 ounces of gold and
forward sales contracts for 2,000 ounces of gold.
Our senior management, with approval of our board of directors, makes all
decisions regarding our hedging 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
35
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 half 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 Company may be exposed to
market price risk by having to sell gold in the open market at prevailing
prices. Similarly, if the Company fails to produce sufficient quantities of gold
to meet its forward commitments, the Company would have to purchase the
shortfall in the open market at prevailing prices. At June 30, 2004, the fair
value of the contracts is a loss of $2,192,000 (December 31, 2003 the loss
calculation was - $5,911,000).
FOREIGN CURRENCY
- -----------------
The Company currently conducts development activities in Canada, while 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 13(a)-15(e) and 15(d) - 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.
36
PART II: -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2004 218,678 common shares were issued as a
result of warrants exercised at a price of $1.60 per common share and stock
options exercised at a price of $0.80. An additional 218,678 shares were issued
in total. The net proceeds from this activity was $0.3 million for the quarter.
An additional 48,978 shares were issued for a portion of the Company's initial
contribution for its share in the Huizopa project.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were voted upon at the annual meeting of shareholders
held on May 20, 2004:
(a) Election of seven directors.
(b) Authority for issuance of up to 79,017,575 common shares in private
placements within 12 months.
(c) Retention of Deloitte and Touche LLP Chartered Accountants as external
auditing until the next annual general meeting.
All matters voted on at the annual general meeting were approved. The
voting results were as follows:
ELECTION OF DIRECTOR FOR AGAINST ABSTAIN
- --------------------------------
G. Michael Hobart 33,865,742 51,037 0
R. David Russell 33,865,742 51,037 0
Gerald J. Schissler 33,865,742 51,037 0
Charles E. Stott 33,865,742 51,037 0
G.W. (Bill) Thompson 33,865,742 51,037 0
W.S. (Steve) Vaughan 33,865,742 51,037 0
Robert A. Watts 33,865,742 51,037 0
Authority to Issue Shares 11,600,205 9,878,301 7
Retention of Deloitte and Touche 33,860,410 33,144 0
37
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 June 30, 2004:
A report on Form 8-K was furnished to the Securities and Exchange Commission on
May 12, 2004 pursuant to Item 12 to announce financial results for the first
quarter of 2004.
A report on Form 8-K was furnished to the Securities and Exchange Commission on
June 30, 2004 pursuant to Item 5 to announce the termination of the loan
agreement with Standard Bank.
38
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: August 13, 2004 /s/ R. David Russell
-----------------------
R. David Russell, President and
Chief Executive Officer
Date: August 13, 2004 /s/ R. Llee Chapman
----------------------
R. Llee Chapman,
Chief Financial Officer
39
EXHIBIT INDEX
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
40